Archive - Feb 2014 - Story

Trying to force simplistic results out of complex systems inevitably generates unintended consequences. Liquidity and credit expansion act like pressure in a closed system; central planners look at the site of the last financial break and see no leaks, so they assume they've got the system under control. But the next failure in the system will occur where no one is looking--the points in the system that everyone assumes are "safe." The system is doomed if central banks continue creating trillions of dollars in new leveraged credit and liquidity to keep the system from imploding, and it is also doomed if they cease creating new leveraged credit (i.e. taper their geometric expansion of credit). Doomed if you do taper, doomed if you don't taper.

Ordinarily we would ignore the news of another banker's death - after all these sad events happen all the time - if it wasn't for several contextual aspects of this most recent passage. First, the death in question, as reported by the Stamford Daily Voice is that of Ryan Henry Crane, a Harvard graduate, who is survived by his wife, son and parents at the very young age of 37. Second, Ryan Henry Crane was formerly employed by JPMorgan - a bank which was featured prominently in the news as recently as two weeks ago when another of its London-based employees committed suicide by jumping from the top floor of its Canary Wharf building. Third: Crane was an Executive Director in JPM's Global Program Trading desk, founded in 1999 by an ex-DE Shaw'er, a function of the firm which is instrumental to preserving JPM's impeccable and (so far in 2013) flawless trading record of zero trading losses.

Despite being told by Bullard, Yellen (and numerous other Federal Reserve thinkers) that quantitative easing was aimed at improving the housing market, the data suggests that - somewhat predictably - it did very little for mom-and-pop organic real home-buyer but stoked speculation and fervor among fast-money cheap-funding investors (and as Marc Faber noted actually hurt the average homebuyer via un-affordability). The week-to-week ebbs and and flows in mortgage applications are notable  (this week saw purchase applications drop 5% and back near recent lows) but a bigger picture glance at just where this "recovery" has been tells a very different story about confidence among home-buyers.

UPDATE: Trannies and Industrials are now red...

Gold has pressed up to almost $1,295 this morning - fresh 3-month highs - as silver and WTI crude also rise notably. The S&P 500 continues its inexorable USDJPY-inspired levitation (and is set for 1,900 by Monday morning at this rate) though remains negative year-to-date (for now) and a small roll-over in JPY is dragging stocks off their highs for now. US Treasuries are offered with the belly underperforming as 5Y reached 2-week highs at 1.56%.

As Deutsche Bank revealed in a note overnight, the GCC may have, quite deliberately, opened a Pandora's Box with its decision which according to Europe's largest bank, and the one whose derivatives exposure makes that of JPM pale by comparison, (i) made it clear it regards OMT as exceeding the competences granted to the ECB by the European Treaty and that (ii) would not consider itself bound by a positive ruling of the European Court of Justice. And while in DB's opinion this action does not have any immediate market consequences, the report's authors think that it "alters substantially the level of insurance we could expect from the ECB against any return of sovereign turmoil."

Yesterday's apparent Yellen un-taper-driven strength in gold broke some key technical levels and Goldman Sachs sees upside.

The growing tensions between Italian Prime Minister Enrico Letta (and his fragile coalition) and Matteo Renzi - the head of parliament's largest (center-left Democratic) party are intensifying this morning. Calls for Letta's resignation, sparked by a junior coalition party head "hoping he was ready to step down," have escalated into more open speculation that the Italian government could collapse within days. Following the failure today of a 'strategy meeting' with center-right coalition partners, Renzi's pro-job-creation and electoral law reforms agenda is gaining consensus. While Letta has stated he will move ahead with his government (and address the public later today), Renzi warned, via Twitter, that he will talk tomorrow afternoon on the way forward.

While the Fukushima nuclear disaster and its 'clean-up' remain oddly missing from most mainstream media headlines, the farce continues to unfold. As Reuters reports, Japan's nuclear regulator has criticized TEPCO for incorrectly measuring radiation levels in contaminated groundwater. The NRA blasted, "something like this cannot happen ... This (data) is what becomes the basis of various decisions, so they must do their utmost to avoid mistakes in measuring radiation."

Here comes the latest one - Pax. Weather.com's description of what is about to be unleashed on Atlanta and the entire Eastern Seaboard is nothing short of a review of the movie The Day After Tomorrow: "Potentially "catastrophic" Winter Storm Pax began unfolding before dawn Wednesday in the Atlanta area as temperatures dropped below freezing and sleet and freezing rain began to fall." The National Weather Service's warning was not exactly cheery: "Let’s just start by saying this winter storm may be of historic proportions for the area,” the agency said in a forecast analysis. “We’re looking at significant snowfall totals north and significant, crippling ice totals, especially along the Interstate 20 corridor.” Eli Jacks, a meteorologist with National Weather Service, said forecasters use words such as "catastrophic" sparingly. Not in this case. "Sometimes we want to tell them, 'Hey, listen, this warning is different. This is really extremely dangerous, and it doesn't happen very often,'" Jacks said. The service's memo early Wednesday called the storm "an event of historical proportions." It continues: "Catastrophic ... crippling ... paralyzing ... choose your adjective."

• Anti-Euro Party’s Le Pen Gains Supporters, French Poll Shows (BBG)
• Carney Renews BOE Low-Rate Pledge to Fight Slack in Economy (BBG)
• Bank of England hints at 2015 rate rise (Reuters)
• ECB bond-buying intact and ready after court decision-Coeure (Reuters)
• Canada scraps millionaire visa scheme, dumps 46,000 Chinese applications (SCMP)
• Scrap this then? Vancouver facing an influx of 45,000 more rich Chinese (SCMP)
• China's January Exports Power Higher, Up 10.6% (WSJ) ... and nobody believes the number
• Emerging-Market Shakeout Putting Reserves Into Focus (BBG)
• Wall Street's most eligible banker Fleming waits for suitor (Reuters)
• Kazakh Devaluation Shows Currency War Stirring as Ruble Dips (BBG)

After initially sending the all important USDJPY carry pair - and thus all risk assets - into rally mode, the initial euphoria over manipulated Chinese trade data (see China Trade Puzzle Revived as Hong Kong Data Diverge), has all but fizzled and at last check the USDJPY was sliding to its LOD, approaching 102 from the wrong side. That, and a statement by the ECB's Coeure that the ECB is "very seriously" considering a negative deposit rate (and that the OMT is ready to be used even though it obviously isn't following the latest brewhaha from the German top court) have so far defined the overnight session, the latter having sent the EUR sliding across all major pairs.

Today, more than 10,000 Baby Boomers will retire.  This is going to happen day after day, month after month, year after year until 2030.  It is the greatest demographic tsunami in the history of the United States, and we are woefully unprepared for it.  We have made financial promises to the Baby Boomers worth tens of trillions of dollars that we simply are not going to be able to keep.  Even if we didn't have all of the other massive economic problems that we are currently dealing with, this retirement crisis would be enough to destroy our economy all by itself.  During the first half of this century, the number of senior citizens in the United States is being projected to more than double.  As a nation, we are already drowning in debt.  So where in the world are we going to get the money to take care of all of these elderly people?

U.S. foreign policy is aggressive, reckless, belligerent, and meddling. It sanctions the destabilization and overthrow of governments, the assassination of leaders, the destruction of industry and infrastructure, the backing of military coups, death squads, and drug traffickers, and imperialism under the guise of humanitarianism. It supports corrupt and tyrannical governments and brutal sanctions and embargoes. It results in discord, strife, hatred, and terrorism toward the United States. The question, then, is simply this: Can U.S. foreign policy be fixed? We propose a four-pronged solution from the following perspectives: Founding Fathers, military, congressional, libertarian.

The bailing out of the much-watched 'Credit equals Gold #1' wealth management product and safe liquidity-strewn (CNY375 billion from the PBOC) survival of the lunar new year liquidity crunch has many believing the worst is over. Though we discussed this fallacy in great depth here, the following chart of the total collapse in the largest Chinese coal producers says this is far from over. Trading at or below book values, investors are clearly signaling concerns about the quality of assets summed up perfectly by one local analyst - China's coal industry (whose loans back a massive amount of the wealth management products) is "dead."