Archive - May 27, 2014 - Story

With the Fed having tapered its liquidity injections into the stock market from $85 billion to "only" $45 billion per month, retail investors getting burned by the recent high beta and momentum stock flame out and "greatly unrotating" into the renewed safety of bonds, not to mention a churning market that until last week was unchanged for the year, and hedge funds ever shorter into this latest ramp, many are asking themselves: who is buying?

Here is the answer.

We do not need “monetary policy” any more than we need a paintbrush policy, a baseball bat policy, or an automobile policy. We do not need a monopoly institution to create money for us. Money, like any good, is better produced on the market within the nexus of economic calculation. Money creation by government or its privileged central bank yields us business cycles, monetary debasement, and an increase in the power of government. It is desirable from neither an economic nor a libertarian standpoint. If we are going to utter monetary truths, this one is the most central and subversive of all.

As we discussed previously, delinquent loans in China are a problem... and a growing one. It seems that news is finally starting to filter to a mainstream audience as Bloomberg reports that China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.As S&P warns,"overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers... and the disturbing thing is the end is nowhere in sight." CNY has pluned almost 150 pips to new 19-month lows on the news.

"Of course, what that does imply is that when the skies finally do begin to darken, the winds could rapidly wind themselves up into an F5-scale twister. Low and declining volatility, lengthening durations, compressed spreads, high multiples, little FX movement – each feeding on the other – is it too far beyond the bounds of reason to suggest that once that virtuous cycle reaches its culmination, the torsional forces involved in its unwind could be remarkably violent?"

The notion of consumerism as the religion of the United States is nothing new. That said, Warren Pollock did an excellent job explaining just how corrosive this mindset can be to a society. We were particularly taken by the idea that since the vast majority of people define themselves almost entirely by their level of consumption, or by some desired level of future consumption, their consciousness becomes easily controlled and their worldview easily managed and molded. They simply cannot see life in any other context and so they become trapped within a very sick and twisted form of human existence.

The 2 words "collapsing" and "unsustainable" do not conjure images of confidence-inspiring animal spirits or all-time highs in stocks... and yet European earnings expectations have utterly collapsed from their exuberant early year levels and the gap between earnings growth in the US and revenues tumbling is entirely unsustainable. But then - none of this 'fundamental' malarkey matters: we've got the Fed 'put' and the Draghi 'promise'.

Will Israel be the first cashless society on the entire planet?  A committee chaired by Israeli Prime Minister Benjamin Netanyahu’s chief of staff has come up with a three phase plan to “all but do away with cash transactions in Israel”.  Individuals and businesses would still be permitted to conduct cash transactions in small amounts (at least initially), but the eventual goal is to force Israeli citizens to conduct as much business as possible using electronic forms of payment.  In fact, it has been reported that Israeli officials believe that “cash is bad” because it fuels the underground economy and allows people to avoid paying taxes. But is a cashless society actually desirable?  This is a question that people all over the world will have to start asking as governments increasingly restrict the use of cash.

Because it worked so well for housing finance in the last bubble, the US government is poised to ease loan standards on this cycle's biggest bubble - student debt. It appears being punched in the face by over-leveraged, over-debted, over-priced housing finance was not enough and as Bloomberg reports, parents whose financial standing disqualify them from most loans will have an easier time borrowing to pay their children’s college costs under a U.S. government proposal to ease credit standards. Come on in - the debt-serf water is warm. With student loan delinquencies already soaring to record highs, some are actually questioning the government's sanity as consumer advotaes warn "a decent number of people are going to get in trouble."

The only thing more ominous for the world than a Fed raising interest rates is a Bilderberg Group meeting. The concentration of politicians and business leaders has meant the organisation, founded at the Bilderberg Hotel near Arnhem in 1954, has faced accusations of secrecy. Meetings take place behind closed doors, with a ban on journalists. As InfoWars notes, the 2014 Bilderberg meeting in Copenhagen, Denmark is taking place amidst a climate of panic for many of the 120 globalists set to attend the secretive confab, with Russia’s intransigence on the crisis in Ukraine and the anti-EU revolution sweeping Europe posing a serious threat to the unipolar world order Bilderberg spent over 60 years helping to build.

Here is a verbal account of precisely what happens when domestic car-makers overestimate the purchasing power of the US, and clog channels to an epic extent. In this case, we refer to the recently launched GM Cadillac ELR, launched to much aplomb just five months ago as a competitor to the Tesla Model S for a $76,000 price point (above Tesla's $70,000), has been a complete disaster. And how is GM dealing with this latest sales disappointment (which struck even before all the recent recall scandals had hit)? Why by jamming dealers with an unprecedented 725-day supply, or exactly two years worth of cars!

There are over 40.7 million foreign-born residents living in America. Iceland, Bermuda, and Samoa have the lowest level of foreign-born population in the United States but it is Mexico that is head, shoulders, and torso above the rest with 28.2% of the foreign-born population from just aross the border. Russia, interestingly, is 20th (just ahead of Iran in 21st place). We can only hope not all Russian immigrants are currently HFT "traders."

When investors hear "bull markets are bull markets until they aren't," their initial response is "no, duh!." However, if that statement is so obvious, why do we spend so much time in trying to predict the future? It is interesting that we are extremely skeptical of fortune tellers, palm readers and psychics but flock to Wall Street analysts and economists that are nothing more than "fortune tellers" in suits.  The reality is that no one is actually prescient. It is all a "best guess" with nothing assured except what "is." Currently, the bull market cycle that began in 2009 remains intact.  It is, what "is." The hypnotic chant of the "bullish mantra" will lull individuals from a momentary state of consciousness back into the dream world of complacency. It is from that place that investors have typically harbored the worst outcomes.

20% of Detroit homes are in some state of disrepair and as Bloomberg reports, a much-anticipated report from the city’s Blight Removal Task Force says that about half of these should be torn down immediately. Despite Detroit home prices still rising exuberantly in March, over 40,000 structures in the bankrupt city need to be immediately destroyed and a further 44,000 demand attention. The cost of this demolition - about $800 million - which the task force hopes will come from the government. The Keynesian circle is complete - government subsidized mortgages enabled everyone to own a home no matter how unaffordable and now taxpayer funds will subsidize the demolition of that American Dream. Money well spent...

"Unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption ... has eroded social capital. An unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.... Capitalism must reassess bankers' sense of self."

For the 9th Tuesday of the last 11, stocks closed green with the S&P at new record highs. "Most shorted" stocks were under heavy testicular pressure but seemed the only driver supporting stocks as JPY decoupled, bonds decoupled, the USD decoupled, VIX decoupled, and credit spreads decoupled. But hey, it's Tuesday so that doesn't matter. Copper and oil were flat on the day but gold and silver (battered at the open) lost 1.5 to 2% on the day (gold's worst day in 6 months). Treasuries are 1-3bps lower in yield at the long-end with modest flattening. Volume remains abysmal. The last few minutes saw a mad buying panic come over Russell 2000 bulls which had its best day in almost 3 weeks and is up 6 of the last 7 days.