Archive - Mar 2014 - Story

While Emerging Market debt has recovered somewhat from the January turmoil, EM FX remains under significant pressure, and as Michael Pettis notes in a recent note, any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.

"If you're sick in Greece, you have an expiration date," is the cheery message from Greece. As WaPo reports, while economists proclaim Europe is turning the corner, a look across the still-bleak landscape, from Greece to Spain, Ireland to Portugal, suggests a painful aftermath, where the plight of millions of Europeans is worsening even as the financial crisis passes with public health being hit in the most troubled corners of the European Union. Greece is the hardest hit and while Greek Health Minister Adonis Georgiadis is attempting to create a fund to help the most acute cases, his concluding remarks are chillingly blunt, "illnesses like cancer are not considered urgent, unless you are in the final stages."

Mainstream media discussion of the macro economic picture goes something like this: “When there is a recession, the Fed should stimulate. We know from history the recovery comes about 12-18 months after stimulus. We stimulated, we printed a lot of money, we waited 18 months. So the economy ipso facto has recovered. Or it’s just about to recover, any time now.” But to quote the comedian Richard Pryor, “Who ya gonna believe? Me or your lying eyes?” However, as Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.

This evening's small rise in HSBC's Services PMI (from 50.7 to 51.0) was not enough to revive the Composite (Services and Manufacturing) PMI into "growth" territory. At 49.65, this is the 2nd lowest print on record (beaten only by July 2013's 49.5 print). HSBC's Services data has consistently been lower than China's "official" data but this print (almost 4 points below that of the government's survey) is the biggest divergence in 14 months.

The last few weeks have been dismally littered with two things. The virtual losses of virtual wealth from virtual currency speculation and the very real losses of very real humans with very real senior financial services positions. Sadly, as NewsWatch reports, tonight sees the two trends converge as the 28-year-old CEO of Singapore-based Bitcoin exchange First Meta has been found dead. The exact reason that may have led to the suicide is not known, and whether the Police have concluded that the cause of death is suicide is also unofficial.

Warren Buffet sees a different America than we do. We would wager he sees a different America than untold millions of people do too. And with due respect to the kind-hearted Mr. Buffet, who is undoubtedly an accomplished and savvy investor, the man has been a major beneficiary of the greatest monetary fraud ever pulled in the history of the world.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

How much farther will the RMB fall? At the outer limit, perhaps as low as 6.24, but probably much less. The reasoning is as follows. Right now the spot market is trading 0.4% weaker than the central parity. So without any further move by PBC to weaken the parity, the limit is 6.18. A move below that would require PBC to adjust the parity further downward. The biggest-ever downward adjustment in the parity was 685 pips, in May 2012. If the PBC matches that move (by adjusting the current parity down another 500 pips), the RMB could fall to 6.24.

Jefferies, Deutsche Bank, and now Citi and JPMorgan are all facing a collapse in trading volumes as Bloomberg reports the two banks brace for a fourth straight drop in first-quarter trading revenues - a period of the year when the largest investment banks typically earn the most from that business. “It sounds like more bloodletting on Wall Street,” warns one analyst, as Citi expects trading revenue to drop by a “high mid-teens” percentage.

Keynesian stimulus always has been presented as a government action that improved general or overall economic conditions, as opposed to being a political wealth-transfer scheme. In reality, the government-based stimulus is based upon bad economics or, to be more specific, one of bad economic logic. To a Keynesian, an economy is a homogeneous mass into which the government stirs new batches of currency. The more currency thrown into the mix, the better the economy operates. Austrian economists, on the other hand, recognize the relationships within the economy, including relationships of factors of production to one another, and how those factors can be directed to their highest-valued uses, according to consumer choices. The U.S. economy remains mired in the mix of low output and high unemployment not because governments are failing to spend enough money but rather because governments are blocking the free flow of both consumers’ and producers’ goods and preventing the real economic relationships to take place and trying to force artificial relationships, instead.

Just six brief days after we discussed the somewhat stunning fact that none other than Fabrice "Fabulous Fab" Tourre was set to each an economics course at the University of Chicago, it appears the prestigious school has had second thoughts. As WSJ reports, a university spokesman explained, "as preparations continue for the Spring Quarter, Fabrice Tourre will no longer be assigned as an instructor for Honors Elements of Economic Analysis," decling to comment on the specifics of the sudden change. We are sure there is an 'ethics' course that needs a TA.

Scrape away the media sensationalism and geopolitical posturing and it boils down to a simple dynamic: follow the energy.

Earlier today we were surprised when none other than uber central-planning skeptic, not to mention bond fund manager, Bill Gross threw in the towel and in his latest letter advocated the purchase of risk assets - and Bill Gross is the last person needing reminding that in a day and age when the 10 Year yields just barely over 2.5%, this means not bonds but stocks. The surprise, however, promptly disappeared when we realized that PIMCO is merely the  latest entrant in the scramble for yield game following, with a substantial delay to all of its other "alternative" asset management peers, right into ground zero: European toxic debt.

With the world distracted by Putin and ICBM launches, The White House, according to the WSJ, is about to extend Obamacare deadlines by another year:

*U.S. MAY GRANT 1-YR EXTENSION ON HEALTH LAW REQUIREMENTS: WSJ
*WSJ CITES INDUSTRY OFFICIAL ON INSURANCE COS., HEALTH CARE LAW

Allowing insurers to keep selling policies that do not meet standards for another year. It seems, if you like your healthcare policy, you can keep it for one more year... (most importantly past the Midterms)

It would appear the BFTATH mentaility has morphed into a BTFICBMD perspective as the "market" shrugs off an 'apparently expected' ICBM launch to soar to new record highs with the best day in stocks for months (if not years). USDJPY was in charge intraday as 102 was flushed through (with JPY's biggest drop in 2 months) and dragged stocks (led by the "most-shorted") non-stop. Equity volumes were 20-30% below yesterday's. The USD was relatively unmoved on the day (modestly higher oddly on a risk-on day). Gold and oil prices slipped (but remain in the green on the week) as Silver slipped into the red. Copper rallied. Treasury yields surged 6-8bps (the biggest jump in 4 months) as 2s10s steepened 6bps. VIX was cracked 2 vols lower to 14%. The S&P closed at 1873, just 27 points shy of Goldman's 2014 year-end target.