Archive - Mar 2014 - Story

While the sight of Russian flags, pro-Russian troops, and Russian navy ships in Crimea is now a day-to-day thing; this morning brings a new normal for the eastern Ukraine region - long lines at bank ATMs as the bank runs have begun. We noted last night the dreaded inversion of Ukraine's yield curve, the greater-than-50% yields on 3-month Ukraine government debt, and the pressures on local bank debt maturities as the ability to garner dollars cost-effectively was becoming a problem but on the heels of concerns by the head of the central bank that moving cash in Crimea was difficult, ATM withdrawal limits have been cut. People in long ATM lines are reported to be concerned because "banks are closing" but it is Deutsche Bank's comments this morning that raised many an eyebrow as they suggest that Ukraine's debt is pricing in a "burden-sharing" haircut for bondholders (which as we have seen in the past - in Cyprus - can quickly ripple up the capital structure and become a depositor haircut).

We wonder just what hedonic adjustments the BLS will use to explain away the implied inflation from this 25% increase in Amazon Prime membership fees. Prefunding the cost of friendly drone deliveries (which Tesla may soon desperately need if it wants to sell its cars direct)? We also wonder, just what the impact on Prime membership will be considering the disastrous results that Netflix suffered when it did a comparable price hike a little over two years ago, which it promptly reversed when people started abandoning the service in droves. Just how elastic is Amazon pricing? We are about to find out.

When retail sales last month came in far weaker than expected, it was the weather's fault. A month later, we find that the January retail sales were even weaker than expected, with the headline number revised from a -0.4% drop to -0.6%, the ex autos number revised from unchanged to -0.3%, and the ex autos and gas whose drop more than doubled from -0.2% to -0.5%. Oh well: one can't go back in time and force the algos to soar even more (since everyone knows bad news is great news). So how about February? Well, apparently it warmed up because despite expectations of a 0.2% increase in headline and ex auto and gas retail sales, the actual prints were 0.3% for both, beating by the tiniest of margins, yet net lower when adding the January revision. Of course, what happens in April, when the March data too is revised lower, is irrelevant - all that will matter is the current month numbers all of which recently seem to get an odd "optimism" boost that promptly fades away in no time.

On the heels of last week's surprise beat in jobless claims (amid all the weather turmoil), this week's initial claims beat by the most since November. Down 9,000 to 315,000, this is the best (lowest) claims data in over three-and-a-half months providing the Fed cover to continue Tapering as the number of people of benefits rolls overall dropped 48,000 to 2.86 million (lowest since December). In the big picture the trend of decreasing layoffs has stalled but shows no sign of improvement in the last 6 months.

For a market that is flirting with all time highs on a daily basis, the recent banker and trader suicide epidemic seems oddly out of place. And yet, it continues to claim even more victims, with the latest casuality being Edmund Reilly, 47, a trader at Midtown's Vertical Group, who as the Post reported, jumped in front of an LIRR train station yesterday at 6 am near the Syosset train station and was pronounced dead at the scene.

• China premier warns on economic slowdown as data fans stimulus talk (Reuters)
• Li says China defaults ‘unavoidable’ (FT)
• Russia Said to Ready for Iran-Style Sanctions in Worst Case (BBG)
• Rescue the tapes from the Bank of England’s dustbins  (FT)
• Obama Warns Putin of Cost to Russia for Annexing Ukraine (BBG)
• The TVIX is back: Credit Suisse VIX Note That Ran Amok in 2012 Back on Top (BBG)
• U.S. Risks National Blackout From Small-Scale Attack (WSJ)
• U.S. Investigators Suspect Missing Airplane Flew On for Hours (WSJ)
• Malaysia says no evidence missing plane flew hours after losing contact (Reuters)
• Missed Alarms and 40 Million Stolen Credit Card Numbers: How Target Blew It (BBG)
• Death Toll in NYC Building Blast Rises to Six; Search Continues (BBG)

It was another day of ugly overnight macro data, all of it ouf of China, with industrial production (8.6%, Exp. 9.5%, Last 9.7%), retail sales (11.8%, Exp. 13.5%, Last 13.1%) and fixed asset investment (17.9% YTD vs 19.4% expected) all missing badly and confirming that in a world of deleveraging, the Chinese economy will continue to sputter. Which is precisely what the "bad news is good news" algos needs and why futures levitated overnight: only this time instead of latching on to the USDJPY correlation pair, it was the AUDJPY which surged after Australia - that Chinese economic derivative - posted its third best monthly full-time jobs surge in history! One can be certain that won't last. But for now it has served its purpose and futures are once again green. How much longer will the disconnect between deteriorating global macro conditions and rising global markets continue, nobody knows, but sooner rather than later the central planner punch bowl will be pulled and the moment of price discovery truth will come. It will be a doozy.

The latest piece from Greenwald and company on the unconstitutional spy practices of the NSA may represent the most dangerous and disturbing revelations yet. It’s hard for shadiness at the NSA to surprise me these days, but there was only one word that kept repeating over and over in my head as I read this: EVIL. As Mikko Hypponen, an expert in malware stated: “The NSA’s surveillance techniques could inadvertently be undermining the security of the Internet.” Move along serfs, nothing to see here.

"Europe faces 25 years of Japan-style stagnation," warns George Soros in this brief Bloomberg TV interview, adding that without deeper integration, "it’s an incomplete association of nations and it may not survive." While claiming that the financial crisis may be over they now "face a political crisis," with the voluntary association cracking due to the creditors (Germany) being in charge. However, he hopes "Ukraine is a wake-up call to Europe, because Russia has emerged as a rival to the European Union." Putin, Soros worries, "has a very different idea of what a society should be like... he has a blind spot - he believes people can be manipulated and cannot resist." That's not the case according to Soros, who exclaims "people do believe in freedom."

With all eyes focused on China (which is quiet for now), Japanese bond futures just collapsed over a point on very heavy volume only to be instantly lifted back to a modest loss in what appears to be a flash-crash - rather than a fat-finger (jamming June JGBs down to 2-month low prices). Gold, meanwhile, is continuing its day-session rally and has topped $1370 - it's highest since September 19th. US equities are holding gains for now as JPY is bid (i.e. JPY crosses are tumbling).

"I don’t think they’ve solved anything. I think they’ve compounded the underlying problems that caused the last crisis, and so now the next crisis will be that much worse because of what the central banks did, in particular the Federal Reserve...The Fed is building an economy that is completely dependent on that cheap money. And so if you take it away, the economy implodes, but if you don’t take it away, then it’s worse." The idea is to preempt capital controls - "get out the window before it slams shut!"

Australia just added the 3rd most full-time jobs ever in a month according to the Aussie Bureau of Statistics. That is 16-times the average monthly gain since 1978. Of course, rather than shrug it off as some idiotic aberration as the nation suffers under the crushing blow of a collapsing commodit market and shrinking China, "traders" bid AUDJPY to the moon (which sparked a mini-rally in US equity futures).

News about Bitcoin suddenly seems to be everywhere. The severe technological and security problems that have led to the outright collapse of Mt. Gox – the largest bitcoin exchange globally - on top of the stunning spike in bitcoin prices by more than five-fold late last year and spectacular collapse (then some rebound!) since, some high-profile arrests in the Bitcoin universe, and a swath of regulators and government officials beginning to weigh in on the subject have pushed Bitcoin and digital currencies into the headlines enough to warrant Goldman Sachs discussing it.

At the onset of the derivatives collapse in 2007/2008 it would have been easy to assume that most of America was receiving a valuable education in normalcy bias. As much as we are for people waking up to the nature of the crisis, there comes a point when those who are going to figure it out will figure it out, and the rest are essentially hopeless. The cultism surrounding the U.S. economy and the U.S. dollar is truly mind boggling, and by “cultism” we mean a blind faith in the fiat currency mechanism that goes beyond all logic, reason and evidence.

Ukraine, we are told, is infamous for its colorful proverbs and as the title suggests Citi's Matt King warns that emerging market (EM) bond investors may yet become familiar with more of them in coming weeks. Unfortunately Ukraine’s importance is greater than its economic or even geopolitical significance would suggest. Risk premia everywhere have been compressed by the prolonged force-feeding of central bank liquidity. EM in particular has benefited from enormous inflows. However, for developed market (DM), King believes even a serious deterioration in Ukraine still feels unlikely to really derail the serene march tighter we see in spreads – but even so, he warns there are some broader implications of the EM woes which investors would do well to be aware of as "drunkards know no danger".