Archive - Mar 2014 - Story

China, Japan and the US are the three largest economies in the world. Each country is currently in the midst of highly-significant policy maneuvers. The Fed is bringing QE to an end. China is dealing with the credit bubble issues outlined above. Japan is lifting its consumption tax from 5% to 8%. Japan’s hike in 1997 from 3% to 5% pushed the economy into a recession. In addition, Russian sanctions could magnify and potentially take a large bite out of global economic growth. Portfolios will need to adapt to this changing environment. Just about everyone is anticipating higher Treasury yields. Most PM’s are short duration. However, the term premium is falling quickly. The technical chart looks outstanding on the long end. Macro factors are also beginning to align. I believe the next 50bps in the 30year (yield) is shaping up to be a move toward lower (not higher) yields. Portfolios are ill-prepared.

It’s evident that the economy isn’t growing strongly because of conditions that central bankers themselves created, by encouraging excessive borrowing and disregarding moral hazard. In other words, the problem isn’t so much that the Fed can’t deliver another debt-fueled boom, but that it shouldn’t be trying to cure a credit bust with more borrowing in the first place. Sadly, though, this idea falls in the same category as the notion that the Fed’s balance sheet isn’t the right tool for job creation. It’s too damning a thought to be accepted by central bankers who’ve shackled themselves to a philosophy of ceaseless intervention. It’s also too basic for economists who prefer abstract theories and mathematical models over reality-based thinking.

While Naftogaz (Ukraine's gas pipeline operator) states that all gas transportation from Russia to Europe is running normally, Bloomberg reports that Russian natgas exports to Europe are declining. Shipments are down over 4% from the prior week and also lower to Ukraine. This 'adjustment' follows increased sanctions by the West as Medvedev's notable statement this morning that Ukraine owes Russia $16bn. Furthermore, Gazprom has cut its Diesel output by the most in 7 months... and just to rub some Black Sea salt into the wound, NY Times reports that Russia's asking price for natgas to Europe is soaring.

It was almost ten years ago when, before the House International Relations Committee, Ron Paul objected to the US Government funding NGOs to meddle in the internal affairs of Ukraine. At the time the “Orange Revolution” had forced a regime change in Ukraine with the help of millions of dollars from Washington. He was worried about millions of dollars that the US government-funded National Endowment for Democracy (NED) and its various related organizations spent to meddle in Ukraine’s internal affairs. But it turns out that was only the tip of the iceberg. Sadly, matters are even worse now. To promote democracy overseas, NED and all other meddling US government funded NGOs should be disbanded immediately.

Friday was an extremely volatile day with new record highs being achieved miraculously at the open only to be followed by free-fall in the market's most-loved momentum names into the close. It seems that the quad-witching was of particular interest to the algos as Nanex notes, a new record was set for most trades in a 1-second interval. What was even more unusual was the record number of 'unusual' price changes that occurred in the 3 seconds before the market opened and index futures expired. "Efficient" markets indeed...

Despite dismal PMIs from China and USA, stocks managed a miraculous 'pump' into the US open only to be unceremoniously dumped very soon after as MoMos and Biotechs had the rug pulled out. Weakness continued down to Nasdaq's 50DMA (and Biotech's 100DMA) and stabilized into the European close when soon after, via the magic of EURJPY, stock rebounded back to VWAP. Alas, it was not be the day for the bulls as VWAP-selling hit hard in the last hour... until the good fairy 330RAMP CAPITAL came along, and punched VIX in the mouth in a desperate attempt to regain green and get the Dow positive post-FOMC. Unlike many fairy tales though, this one ended sadly ever after. Stocks down, USD down, Gold down, VIX up, Yield Curve down to 2009 levels.

In order to enforce the fading Pax Americana in the Ukraine, and to keep the funding to the otherwise insolvent Ukraine flowing, which as everyone knows will be first and foremost used to pay Russia's Gazprom. So when it comes to priorities, whom does Putin have to thank for the billions in Western funds he is about to receive? Maybe he can start in Detroist where the local utility is planning mass water shutoffs over $260M in delinquent bills. In other words, while the US is enforcing some odd international law, according to which a democratic vote is not credible but a violent coup is, US citizens are about to have no drinking water over a paltry $260 million.

While Angela Merkel has publicly threatened that Russia risks "massive economic and political harm" if it doesn't change course, Germany's envoy to Russia, Gernot Erler, has more realistic concerns. As Bloomberg reports, Erler warned that US sanctions are counterproductive and probably won't make Putin bow to Western demands. The sudden German show of restraint is hardly surprising given their exposure to Russian energy provision and the fact that a stunning 54% of Germans believe the EU and US should accept Russia's annexation of Crimea.

As promised, the Johnson/Crapo bill has finally arrived. There are 442 pages of legal mumbo jumbo, guaranteed to cure all forms of insomnia and those suffering from low blood pressure. The agencies have been providing cheap financing to borrowers, courtesy of the Fed. The agencies have been providing cheap and bullet proof insurance for bond investors, courtesy of the Treasury. The Bill somehow expects some mysterious private capital will come in to insure the first loss position and the Government (including the FOMC) can gracefully exit its role in the mortgage monopoly. That is more than overly optimistic. Can anyone quantify that in dollars as well as mortgage rates? In summary, the Bill is going to increase mortgage compliance costs. It will confuse, rather than clarify, the mortgage application and approval process. It is a disaster. Fortunately, we suspect the Bill has no chance of passing in its present form.

Venezuela's exchange rate is a Gordian Knot of rules and regulations meant to baffle onlookers with bullshit and, we suspect, hide the hyperinflation from prying eyes just a little longer. Today's launch of SICAD II, a new currency market which allows the free-market to bid for USD (in Bolivars), appears to be an effort to provide liquidity to a black-market for dollars. SICAD II priced at 55 Bolivars today - an 88% devaluation from the official rate of 6.29.

Trading desks are awash with chatter over which FX desk just got a tap on the shoulder as it appears beaking 141.00 in EURJPY soon after the European close sparked a mini-avalanche of sell USD orders and sent stocks ramping briefly. Some talk of US term strcuture bets gone awry (as the EUR move occurred as 5s30s broke to 2009 lows) There is little if any fundamental news to pin to this move - but when has there ever been - and gold and bonds hardly budged on the ramp.

When the profits from financializing collateral and leveraging those bets to the hilt far exceed generating wealth by creating products and services, the economy is soon hollowed out as the perverse incentives of financialization start driving every business decision and strategy. Fed-funded financialization creates a perverse set of incentives: talent and capital flow to unproductive skimming operations because that's what generates the outsized profits, effectively starving the real economy of talent and capital.

After a month ago a leaked phone call between US assistant secretary of state Victoria Nuland and the US envoy to the Ukraine, Geoffrey Pyatt confirmed that it was the US that was pulling the strings in what was about to be a violent coup overthrowing Ukraine's president Yanukovich, "someone" has just leaked another phone conversation, this time between parliamentarian Nestor Shufrych and former PM and ideological leader of the Ukraine "revolution" Yulia Tymoshenko and most probable future president of West Ukraine, in which Tymoshenko makes several new threats but the the smoking gun, and where Putin once again shows just how masterful of a chess player he is, is the following statement by Tymoshenko, after asked, rhetorically, by her counterparty, "what should we do now with the 8 million Russians that stayed in Ukraine. They are outcasts"... to which she replies: "They must be killed with nuclear weapons." And just like that Putin has his provocation carte blanche - because the second something, anything happens to any ethnic Russian in east Ukraine, Putin can point to precisely this conversation as proof of how Ukraine's "government" feel toward the ethnic minorities in the east, and why "they deserve to be protected." Which has been precisely Putin's ploy all along.

"When you bundle bots, clicks fraud, viewability and the lack of transparency [in automated ad buying], the total digital-media value equation is being questioned and totally challenged," warns one advertising group executive as the WSJ reports about 36% of all Web traffic is considered fake, the product of computers hijacked by viruses and programmed to visit sites. This means, simply put, that marketers, who are pouring billion of dollars into online advertising, are confronting an uncomfortable reality: rampant fraud... and the fraud is only going to get worse...

Sprinkled in between Herbalife promotion and eBay board decimation, CNBC's favorite crowd-pleaser Carl Icahn offered a few pearls of wisdom that the TV anchors were un-prepared for:

• *ICAHN SEES MAJOR SELL DOWN OF MARKET COMING
• *ICAHN CALLS MARKET ARTIFICIAL BECAUSE OF FED POLICY

Of course, Icahn did not specify the timing which provided just enough cover for the talking heads to confirm their "but stocks are a buy" perspective. We wonder whether the "sell-down" is as big a "no-brainer" as many of Carl's other ideas.