Archive - Feb 2014 - Story

If an ice storm can cause this much panic in our major cities, what will a real crisis look like?  The biggest news story in the United States right now is the "historic ice storm" that is hammering the South.  Travel will be a nightmare, schools and businesses will be closed, and hundreds of thousands of people will lose power.  In fact, it is being projected that some people could be without power for up to a week.  But at the end of the day, the truth is that this ice storm is just an inconvenience.  Yes, the lives of millions of Americans will be disrupted for a few days, but soon the ice will melt and life will be back to normal.  Unfortunately, it doesn't take much for people to start behaving like crazed lunatics.  As you will see below, the winter weather is causing average Americans to ransack grocery stores, fight over food items and even pull guns on one another.  If this is how people will behave during a temporary weather emergency, how will they behave when we are facing a real disaster?

A month ago we explained in gory detail the growth of "click farms" where nothing is what it seems, and where social networking participants spend millions of dollars to appear more important, followed, prestigious, cool, or generally "liked" than they really are. The following excellent walk-through of just how the fraud works is concerning when the entire US stock market appears propped up by an ever-shrinking layer of "social media" and "cloud" faith that this time it's different and no Friendster or MySpace.

... our default is a Goldilocks scenario between now and the next FOMC meeting in mid-March. It means that bad macro news is good market news, and vice versa. If the next ISM manufacturing number (no one cares about ISM services) is a big jump upwards, the market goes down. Ditto for the February jobs number. If they’re weak, though, that’s more pressure on the Fed and another leg up for markets. Place your bets, ladies and gentlemen, the croupier is about to spin the roulette wheel. Pardon me if I sit this one out, though. My crystal ball is broken. If I’m right, what does this mean for the real world? It means an Entropic Ending to the story … disappointing, slow and uneven growth as far as the eye can see, but never negative growth, never an honest assignment of losses to clear the field or cull the herd. That’s not my vision of a good investment world, but who cares? I’ve got to live in the world as it is, even if it’s a long gray slog.

At the heart of the European debt crisis is the euro, the currency that ties together 17 countries in an intimate manner. So when one country teeters on the brink of financial collapse, the entire continent is at risk. The following excellent mini-documentary visually explains how such a flawed system came to be... and what's next?

While Europe, and the bulk of the Developed World is struggling to dig out of its unprecedented credit crunch (in which central banks are the only source of credit money which instead of entering the economy is stuck in the capital markets via the reserve pathway) and resulting deflation, the rest of the Emerging Market world is doing just fine. If by fine one means inflation at what Goldman calls, bordering on "extreme levels." This is shown in the chart below which breaks down the Y/Y change in broad prices across the main DM and EM countries, and which shows that when talking about inflation there are two worlds: the Emerging, where inflation is scorching, and Developing, where inflation is in a state of deep freeze.

It would appear there is one thing the USA is still exceptional at (given snowboarding is off the table)...

The story of how JPMorgan, Goldman and the rest of the Too Big To Fails and Prosecutes, cornered, monopolized and became a full-blown cartel - with the Fed's explicit blessing - in the physical commodity market is nothing new to regular readers: to those new to this story, we suggest reading of our story from June 2011 (over two and a half years ago),  "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly." That, or Matt Taibbi's latest article written in his usual florid and accessible style, in which he explains how the "Vampire Squid strikes again" courtesy of the "loophole that destroyed the world" to wit: "it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally." Complementary to a financial activity. What the hell did that mean?... Fifteen years later, in fact, it now looks like Wall Street and its lawyers took the term to be a synonym for ruthless campaigns of world domination."

It seems Janet has some work to do on her "communications". Judging by today's follow-through on dismal retail sales data (and a miss for claims), stocks, bonds, and gold screamed higher (and the USD lower) suggesting an increasing crowd does not believe the QEeen's "stay the taper course" meme. The S&P 500 rallied 25pts off early lows - practically in a straight-line, dislocated from JPY-carry, dislocated from bonds, and coupled almost perfectly with gold after Europe close. Nasdaq is up 6 days in a row and back near multi-year highs (+1.5% in 2014) as "most shorted" stocks were ripped 2.5% higher intraday. Gold closed back above $1,300 (outperforming on the week and since Taper); Treasury yields tumbled 6-7bps; and the USD Index dropped 0.5% led by EUR and GDP strength. VIX traded under 14% briefly. Bad news is great news once again. This is the Nasdaq's best 6-day run in 27 months.

The ongoing exodus from Mt.Gox - a major Bitcoin exchange - amid withdrawal halts, has seen a massive $150 spread open up between it and other exchanges. Having tumbled by over 50% in the last 2 weeks, Mt. Gox pricing is back at levels first seen 3 months ago. This chaos (and the ongoing 'finger-pointing' over who is to blame) had led Mt.Gox CEO Mark Karpeles to come out swinging in the following interview...

From budget projections released by the Congressional Budget Office (CBO) last week:

CBO now expects that output will fall slightly short of its potential, on average, even after the economy has largely recovered from the recent economic downturn.

Translation:

We’ve thrown in the towel on our long-time assumption that the economy never again falls into recession.

Shocker: the business cycle lives!

Following the 20% devaluation of Kazakhstan's currency on Tuesday, the nation has quietly drifted into a very un-safe scenario. As the following clip shows, tanks and Humvees are lining the streets around Almaty as stores are closed and food is running desperately short. Local accounts note that the people are growing increasingly indignant. At a mere 192bps, the cost of protecting Kazakhstan sovereign debt from default (or further devaluation) seems cheap in light of this.

Yields on United States 10-year bonds rose above 3% at the beginning of January.  The yield on the 10-year had reached its lowest point in history in July 2012 at 1.43% as a result of the Fed’s policy of Quantitative Easing.  Since then yields have doubled as markets have incorporated the impact of the Fed tapering their purchase of U.S. Government securities. This raises the question, how high could interest rates go from here?  Could interest rates move up to 3% per quarter? U.S. interest rates were that high back in 1981 when the yield on US 10-year Treasuries hit 15.84% and 30-year mortgage rates hit 18.63%. What about 3% per month?

Not Bonds (which are rallying to their low yields of the day - and have almost removed the entire post-Yellen move)... Not USDJPY (which entirely disconnected from stocks when Europe closed)... but Gold... ding ding ding... is your new correlation pair du jour...

President Maduro and his ministers have stated (fully supported by Argentina):

*PEOPLE BEHIND YESTERDAY'S VIOLENCE WILL BE PUNISHED: ORTEGA
*VENEZUELA ISSUED ARREST ORDER FOR LEOPOLDO LOPEZ: VOLUNTAD
*VENEZUELA IN ABSOLUTE CALM, ORTEGA SAYS
*ARGENTINA SAYS IT FIRMLY SUPPORTS VENEZUELA'S GOVERNMENT

However, between armed groups reportedly firing shots (see clip below) into the Students Assembly and the disappearance of the protest leader, the protests appear to be anything but "calm."

TARP Recipient BNP Paribas got $4.9bn of bailouts from the U.S. Taxpayer - Today, as the WSJ reports we learn BNP Paribas has been funding transactions in Iran, Syria and other countries subject to U.S. Sanctions since 2002. The bank set aside $1.1 billion to settle investigations by the Department of Justice and the Federal Reserve but as the NY Times reports, investigations are playing out on multiple fronts - centering on whether the firm did "a significant amount" of business in "blacklisted" countires (and routed the deals through the US financial system).