Archive - Feb 2014 - Story

Two pieces of business news announced this week provide a convenient frame through which to view our dysfunctional and distorted economy. The first (which has attracted tremendous attention), is Facebook's blockbuster $19 billion acquisition of instant messaging provider WhatsApp. The second (which few have noticed) is the horrific earnings report issued by Texas-based retail chain Conn's. While these two developments don't seem to have much in common, together they shed some very unflattering light on where we stand economically.

As we warned last week, stockpiles of iron-ore have reached record levels in China as end-demand slumps but, as Bloomberg notes, this is potentially creating massive dislocations in other markets. Record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. A stunning 40 percent of the iron ore at China’s ports are part of finance deals (having replaced copper after China's last shadow-banking crackdown) and with the glut, prices drop (driving down the value of collateral on loans) and "borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle."

Inflation is always somebody else’s fault. Ludwig von Mises called out finger pointing central bankers and politicians decades ago in his book, Economic Policy. “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.” Don’t expect the printing to stop any time soon. Central bankers believe they are doing God’s work. “To ensure that my people survive, I had to print money,” Zimbabwe's Gideon Gono told Newsweek. “I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. The whole world is now practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”

"We are not clueless," Kevin Warsh notes in this September 16th 2008 Federal Reserve transcript (as the entire financial system was imploding around them); but it is the final 'debate' in this brief section that sums up what Marc Faber has feared all along. Adjective or Abverb?

Across 5.2 million books and 500 billion words, Google's Ngram allows a deep sociological dive into the mood of the world. It would appear that starting around the mid -60s, the world shifted to a "me, me, me" society and that's not "fair".

This week saw the continuation of the "bad news is good news" theme as one economic report after another came in far below expectations. The question remains whether it is actually all just a function of the weather? Of course, there is something inherently wrong with driving asset prices higher based on hopes that a weaker economy will keep the Fed's "liquidity fix" flowing to drug addicted Wall Street traders. Under that theory, we should be rooting for an outright "depression" to double our portfolio values. But, when put into that context, it suddenly doesn't make much sense. Yet that is the world in which we live in...for now. Therefore, as we wind down the week on this "options expiry" Friday, here is a list of things to think about over the weekend.

Step aside long-time hedge fund hotel darlings Apple and AIG, and make room for...

While The Russell 2000 briefly regained positive territory for 2014 (up 1.5% on the week), the Dow, S&P, and Trannies ended the shortened and low volume week practically unchanged (and the Dow -2.6% YTD). Treasury yields oscillated as bad-news-good-news played out but ended the week practcically unchanged (10Y -1bps, 5Y +1bps). The USD drifted lower today to end the week very modestly positive (+0.1%) as EUR strangeth dominated JPY and CAD weakness). VIX went higher all week (admittedly OPEX-impacted) as underlying stocks remained bid. Credit markets ended the week wider than they opened on Tuesday (despite equity strength). Depsite the USD, commodities rose on the week with Silver and WTI crude up almost 2% and gold up 0.5%. For an options-expiration day, today's volume was very weak. And 2014's best performing S&P 500 sectors... Healthcare and Utilities.

"When the market is in the depressive phase of what President Lockhart referred to as a bipolar disorder, crafting policy to satisfy it is like feeding Jabba the Hutt—doing so is fruitless, if not dangerous, because it simply will insist upon more." - Fed's Dick Fisher

Yes, a tentative settlement has been reached, following mediation by European Union foreign ministers, with a promise of early elections. But such settlements have been proposed before, and no agreement is likely to gain broad acceptance unless it includes the immediate departure of President Viktor Yanukovich. The vast majority of demonstrators on the Maidans across the country are ordinary people angry about abuse of power, state violence, official impunity, and corruption. For the venal and vicious elites who have taken control of Ukraine, the real threat is these demonstrators’ perseverance, not the provocations of a radical fringe. "Indeed, while I refuse to believe that Ukraine’s march to civil war is unstoppable, I also know that our citizens will never be silenced again."

Having thrown in his bearish towel in December, the self-proclaimed "last bear standing" has had a tough January. His plan, to "just be long pretty much anything" appears to have back-fired (for now) as Eclectica reports a 3.6% loss in January - the worst month since the Fund's inception. His largest loss was on a long Japan theme (leveraged) and that was somewhat offset by gains in his short emerging markets and short China themes. It appears nothing hs changed from Hendry's December perspective of the inexorable melt-up in developed markets thanks to central bank largesse (247% of NAV exposed to stocks) though he does note "renewed turmoil" which, we suppose, merely supports his thesis longer term.

The "common knowledge" meme among the uber-paid economists and talking-heads os Wall Street remains that if data is bad, it's the weather's fault; but if data is good, that's the recovery. However, as Lance Roberts explains in this brief clip, the deterioration in US fundamental macro data is not a one-month blip and in fact "the trend of economic growth has clearly been on the decline rather than gaining strength as has been hoped by the majority of economists". Furthermore, he notes (and shows in simple chart form) that the trend of consumer weakness, which makes up 70% of economic growth, has declined to levels that are more normally associated with very slow growth economies. Simply put, it's not the weather stupid, it's the economy.

The following exchange between then-Kansas Fed president (and current FDIC director) Thomas Hoenig and the Chairsatan, uttered during the historic Sept 16, 2008 FOMC meeting, is of particular importance for four reasons: 1) it appears to be the first instance in the Fed records, where the phrase "too big to fail" is memorialized; 2) it highlights something that has become all too clear by now: in giving to a culture of moral hazard, the Fed is now being openly "played" by the market (read the big banks); 3) it confirms that the Fed has learned zero lessons from the crisis and 4) the thinking behind the "Bernanke (global) Put" is laid out for all to see.

The entire banking sector is based on two illusions: 1) Thanks to modern portfolio management, bank debt is now riskless; and 2) Technology only enhances banks' tools to skim profits; it does not undermine the fundamental role of banks. The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. It's not just that banks are no longer needed - they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

"The CNN team was informed that their correspondent credentials were revoked," Venezuela's Information Ministry vice-president Francisco Perez stated. Ironically, for CNN, the decision was announced vis Perez' Twitter account, following Maduro's proclamations last night that "Enough! I won't accept war propaganda against Venezuela." Interestingly, given the opposition's need to raise the awareness among the 'poor' in Venezuela if they are to succeed, local television networks have provided almost no live coverage of the protests against Maduro. While just one "journalist" has his credentials revoked, Maduro has threatened, to expel the whole network from the country if it did not "rectify" the way it has covered deadly political protests.