Archive - Mar 14, 2014 - Story

Earlier today we reported that according to weekly Fed data, a record amount - some $105 billion - in Treasurys had been sold or simply reallocated (which for political reasons is the same thing) from the Fed's custody accounts, bringing the total amount of US paper held at the Fed to a level not seen since December 2012. While China was one of the culprits suggested to have withdrawn the near USD-equivalent paper, a far likelier candidate was Russia, which as is well-known, has had a modest falling out with the West in general, and its financial system in particular. Turns out what Russian official institutions may have done with their Treasurys (and we won't know for sure until June), it was merely the beginning. In fact, as the FT reports, in silent and not so silent preparations for what will be near-certain financial sanctions (which would include account freezes and asset confiscations following this Sunday's Crimean referendum) the Russians, read oligarchs, have already pulled billions from banks in the west thereby essentially making the biggest western gambit - that of going after the wealth of Russia's 0.0001% - moot.

The whole story about how private equity firms and hedge funds have steamrolled into the residential home market to become this decade’s slumlords is a story we covered long before mainstream media even knew it was happening. We first identified the trend in January of last year in one of my most popular posts of 2013: America Meet Your New Slumlord: Wall Street. Since then, we've done my best to cover the various twists and turns in this fascinating and disturbing saga. With all that in mind, let’s now take a look at the latest article from Bloomberg, which points out that Blackstone’s home purchases have plunged 70% from their peak last year. Perhaps they overestimated the rental cash flow potential of indebted youth living in their parents’ basements?

You can't get blood out of a rock.  Traditionally the United States has had a consumer-driven economy, but now years of declining incomes and rising debts are really starting to catch up with us.  In order to have an economy that is dependent on consumer spending, you need to have a large middle class.  Unfortunately, the U.S. middle class is steadily shrinking, and unless that trend is reversed we are going to see massive economic changes in this country.  Incomes are going down, the cost of living is going up, and debts are skyrocketing.  The following are 19 signs that the U.S. consumer is tapped out...

Thanks to the repression of the world's central banks, investors have exited cash and piled into "everything else," but while this is no surprise to most, Citi's Matt King warns of the possibility of an "entrance with no exit" as investors reach for yield has distorted primary and secondary markets, forced risk-averse investors into alternative asset classes, distorted markets beyond any fundamentals, and left markets incredibly illiquid. This, he concludes, sets up a problem that we are already seeing as investors are disillusioned one asset at a time...

“The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it.”

The core elements of this Fourth Turning continue to propel this Crisis: debt, civic decay, global disorder. Central bankers, politicians, and government bureaucrats have been able to fashion the illusion of recovery and return to normalcy, but their “solutions” are nothing more than smoke and mirrors exacerbating the next bloodier violent stage of this Fourth Turning. The emergencies will become increasingly dire, triggering unforeseen reactions and unintended consequences. The civic fabric of our society will be torn asunder.   

With Interfax reporting that Belarus has begun full-scale military drills in a "readiness check", and despite Lavrov's comments that:

RUSSIA HAS HAD AND CAN HAVE NO PLANS TO INVADE SOUTHEAST OF UKRAINE - LAVROV

Images from Russia and Ukraine suggest anything but with reports are pouring in from across Russia of even more firepower on the move.

We are sure it is just coincidence - and awkward combination of luck and suspicious timing - but Vedomosti reports that Viktor Zubkov, the Chairman of Russia's massive energy monopoly Gazprom, dumped his entire stake in the company just a few weeks before Vladimir Putin crossed the red line. Gazprom shares have dropped 25% in the last 3 weeks so his timing was impeccible.

One of the key lessons we can take away from history is that the global financial system changes… frequently. Since the end of World War II, the US dollar has been the dominant currency in the world. And even though Richard Nixon ended the dollar’s convertability to gold and unilaterally abandoned the US government’s obligations under the Bretton Woods system back in 1971, the world has still clung to the dollar for the past 43-years. But this is changing rapidly...

Just out from the State Department, which in the aftermath of the most recent failure by John Kerry to resolve the Ukraine situation, appears to be escalating to populism and engaging the general public. The best part in the warning is the following clarification: "all U.S. citizens located in or considering travel to the border region, specifically the regions bordering Ukraine in Bryansk, Kursk, Belgorod, Voronezh, and Rostov Oblasts and Krasnodar Krai, should be aware of the potential for escalation of tensions, military clashes (either accidental or intentional)." Somehow we have a feeling we may be seeing a spike in "accidental military clashes" over the next week.

"Had the thing been armed it would have let out a 200-metre blast...You could be talking about a major loss of life," one source noted as The Telegraph reports British military chiefs have launched a major investigation after a Royal Navy warship accidentally fired a torpedo at a nuclear dockyard. Workers watched in disbelief as the tube-shaped projectile flew through the air before blasting a hole in a security fence and slamming into a storage container. "Someone has obviously pushed the button, presumably by accident - the big question is who," as the Royal Navy stiff-upper-lippedly stated "during a training exercise, an inert Test Variant Torpedo unexpectedly jettisoned onto the wharf. There was no explosion and no casualties." Perhaps they should stay away from the Black Sea for a while - just in case.

This past week has seen the market struggle due to continued weak economic data, rising tensions between Russia and the Ukraine and an extended bull market run.  Market internals are showing some early signs of deterioration even though the longer term bullish trajectory remains intact.  Therefore, this week's "Things To Ponder" wades through some broader macro investment thoughts, from the safety of your investments to how market tops are made.

If anyone ever said John Kerry - arguably the worst Secretariat of State in recent US history - didn't know how to look regal in photo ops of failure after epic failure, they obviously have never this picture. Such majesty, such posture, such a shiny coat. Just don't look him in the mouth.

We started the week exuberant wearing the cleanest dirty shirt scoffing at the weakness of 'foreign' markets. By the end of the week, the Dow has dropped 5 days in a row in a week for the first time since May 2012 and the Nasdaq had its worst week in 9 months. The S&P dropped back into the red for 2014 - despite a late-day ramp effort - tracking AUDJPY all day long once again (and financials also red for 2014). VIX surged above 18% (and its term structure steepest since US downgrade) as credit spreads blew wider. Treasury yields tumbled 10-14bps on the week - the biggest drop since June 2012. Gold prices rose over 3% on the week to 6-month highs. Copper saw its biggest 2-week drop in 30 months. The USD slipped lower on EUR and JPY strength (JPY +1.9% - biggest surge in 7 months). YTD Gold +14.7%, S&P 500 -0.07%.

An American scout-attack drone, "almost invisible at a height of 4000 meters" has, according to AFP, been intercepted in the Crimean sky. Reports from the Russian state arms and technology group Rostec stated, judging by side-markings it was an MQ-5B drone - which is likely part of the 66th US Recon Brigade based in Bavaria. It was possible to break the drone’s link with its American operators with the help of the EW (electronic warfare) complex Avtobaza. As a result, the device made an emergency landing and passed into the possession of the self-defense forces almost unbroken." It is perhaps ironic that the US is complaining abouit Russia's military presence in Ukraine even as its own equipment is reportedly operating in the country.

Precious metals (gold in particular) continue to push higher and along with copper (to the downside) hold 'center-stage' among world commodity markets. As Citi's FX Technicals group notes gold has traded above very strong resistance on the $1,350 to $1,362 range suggestng a test up to $1,434 and the next level at the 200-week moving average at $1,493. Gold is also getting close to the "golden cross" where the 50DMA will cross above the 200DMA. Such a move, if seen, would strongly suggest that the corrective low is in (at $1,182) and that a re-test of the all-time highs at $1,921 and beyond is highly likely.