Archive - Feb 2014 - Story

When it comes to complex systems and unintended consequences, the key phrase is "be careful what you wish for." A lot of people are remarkably certain that their understanding of how systems will respond in the future is correct. Alan Greenspan was certain there was no housing bubble in 2007, for example (or he did a great job acting certain). Some are certain the U.S. stock market is going to crash this year, while others are equally certain that stocks will continue lofting higher on central bank tailwinds. Being wrong about the way systems responded in the past doesn't seem to deter people from being certain about the future. Complex systems don't act in the linear way our minds tend to work.

CBOE's short-term VIX product (which tracks the implied volatility in stock options for a 9-day maturity) dropped to its lowest since inception this morning at 10.16%. The spread to the more 'usual' maturity VIX index is over 3.3 vols which isthe most inverted on record and thus the most short-term complacent equity investors have been since the lows in 2009. The exuberance of the last few days is equally and oppositely matched by the sheer lack of enthusiasm in volumes. S&P futures volume is 33% below recent averages today and as the chart below shows, it is clear where the volume in this "market" remains.

Chinese capital markets are quietly turmoiling as debt issues are delayed and demand for "Trust" products - the shadow-banking-system's wealth management 'investments' - is tumbling. As Nikkei reports, since January, 9 companies have postponed or canceled issuance plans (around $1 billion) and is most pronounced in privately-owned companies (who lack an implicit government guarantee). This, of course, is exactly what the PBOC wanted (to instill some fear into these high-yield investors - demand - and thus slow the supply of credit to the riskiest over-capacity compenies) but as non-performing loans in China surge to post-crisis highs, fear remains prescient that they will be unable to "contain" the problem once real defaults begin (as opposed to 'delays of payment' that we have seen so far).

Now that absolutely everyone is laser-focused more on the participation print, recently at 35 year lows, than the actual unemployment number which even the Fed has implied is meaningless in the current context, one thing to note is that while the overall number is a blended average across the US, it certainly differs on a state by state basis. 4In order to get a sense of which states are the winners and losers in the payroll to participation ratio, we go to Gallup, which conveniently has broken down this number on a far more granular basis. Gallup finds that Washington, D.C., had the highest Payroll to Population (P2P) rate in the country in 2013, at 55.7%. A cluster of states in the Northern Great Plains and Rocky Mountain regions -- North Dakota, Nebraska, Minnesota, Wyoming, Iowa, Colorado, and South Dakota -- all made the top 10. West Virginia (36.1%) had the lowest P2P rate of all the states.

Silver's 4.4% rise today - back above $21 for the first time in 3 months - is the largest single-day surge in 5 months. While gold has been making the headlines, silver has risen 11.9% with no down days in the last 11. This is the best 2-week run in 6 months as the Gold-to-Silver ratio has collapsed from over 65x to 61x today.

Bill Gates’ Texas energy company has filed for bankruptcy protection as the depressed power market results in untenable financial losses... "The current depressed economic environment of the electric power industry – particularly with respect to coal-fired plants – and the debtors' liquidity constraints have resulted in continuing losses that, simply put, have left the debtors without alternatives." But what about the recovery?!

Just as we saw yesterday, US equities have decoupled from FX carry but not long after POMO started something very odd happened... at 1035ET, shorts started piling on...

"Our bearish view on the S&P 500 is wrong," remarks BofAML's Macneil Curry, as yesterday's close above 1,823 points to the larger uptrend resuming. However, despite the equity strength, Curry says "stay bullish Treasuries" as price action points to further gains. The USD's bullish trend is at risk and pressured by silver strength.

Those of our readers focused on the state of the housing market will undoubtedly remember this chart we compiled using the data from the largest mortgage originator in the US, Wells Fargo. In case there is some confusion, as a result of rising interet rates (meaning the Fed is stuck in its attempts to push rates higher), the inability of the US consumer to purchase houses at artificially investor-inflated levels (meaning housing is now merely a hot potato flipfest between institutional investors A and B), and the end of the fourth dead-cat bounce in housing (meaning, well, self-explanatory), the bank's primary business line - offering mortgages - is cratering. So what is a bank with a limited target audience for its primary product to do? Why expand the audience of course. And in a move that is very much overdue considering all the other deranged aspects of the centrally-planned New Normal, in which all the mistakes of the last credit bubble are being repeated one after another, Reuters now reports that the California bank "is tiptoeing back into subprime home loans again."

While the Federal Reserve's interventions continue to create a wealth effect for market participants, it is something only enjoyed primarily by those at the upper end of the pay scale.  For the rest of the country, the key issue is between the "have and have nots" - those that have a job and those that don't. While it is true that the country is creating jobs every month, the data may be suggesting it is "as good as it gets."  Of course, this is a very disappointing statement when you consider that roughly 1 in 3 people sit outside of the workforce, 20% of the population uses food stamps, and 100 million people access some form of welfare assistance.  The good news is, we aren't in a recession? Yet...

Days before Tokyo won its bid to host the 2020 Olympics last September, Japanese PM Shinzo Abe stated that Fukushima contaminated water was "under control." Now, as Reuters reports,  the nation's nuclear watchdog has uncovered that, following  "uncertainty about the reliability and accuracy of the September strontium reading," which prompted a re-examination of samples, levels of Strontium-90 were five times the levels previously recorded. The Japanese NRA blasted TEPCO, “We did not hear about this figure when they detected it last September. We have been repeatedly pushing TEPCO to release strontium data since November. It should not take them this long to release this information." One can only wonder why - when the promise of $500 million of government support is on the line... and new cracks are appearing.

Despite the promise that it's different this time, that this time the growth rebound is "sustainable", that we we have finally reached "escape velocity", the dismal truth - as we noted last night courtesy of Mr Santelli - is that it is anything but different this time. On the back of disappointing retail sales (among others) and likely further weakened by this morning's drop and downward revisions in Industrial Production, the herd of sheep-like sell-side strategists have taken the knife to their hope-filled GDP growth expectations. Of course, this is all weather-related and the hockey-stick will revert to a new normal self-sustaining recovery any day now.

Of course, the internet can not freeze - at least not in the Old Normal world - however that is the only logical explanation we can offer in a world in which yesterday's atrocious retail sales were blamed on the weather - supposedly people stay at home, don't drive, don't go to the mall, don't shop because they have never had to engage in such activities in the winter when it snows outside - and yet online retail sales.... dropped even more? Because we know that in said world, consumption weakness can not possibly be explained by a tapped out US consumer who actually has little disposable cash left, and so we have to assume, correctly, that the weather was so bad in January, that even the Internet and online retail websites, must have frozen. There is no other explanation.

Take your pick of which "confidence" measure you choose to watch to confirm your previous "common knowledge" meme. Unsurprisingly, the government's own Conference Board indicator provides the highest level of confidence relative to recent months but today's beat by UMich (81.2 flat from last month but above 80.2 expectations) is the highest overall level among the indices. It seems not even the weather can dampen the enthusiasm of the US consumer (who is retail spending at a dismally low level?) Hardly surprising is the fact that the tumble in the current conditions index was entirely dissolved by the hope for the economic outlook which stands at 6 month highs! Short-dated inflation expectations also ticked up. Of course what really matters is keeping the dream alive that multiple-expanding confidence will cover up any and all missed expectations in macro and micro data.