Archive - May 2014 - Story

While The White House's Jay Carney issued his "sell" recommendation week ago now, it appears Citi's FX techicals group have decided to do the unpatriotic thing and look for a positive "rusk"-on environment as Russia's MICEX stock market index begins to test pivotal resistance...

"I am owed 28,296 Bitcoins. I do not accept United States dollars, as it is the preferred currency of criminal organizations such as the FBI, DOJ, ATF, and Federal Reserve and I do not assist criminal racketeering enterprises."

Both sides have run their nuclear drills (US here and Russia here) and it had all gone eerily quiet in the detente between the West and Russia...until now:

RUSSIA TEST FIRES INTERCONTINENTAL BALLISTIC MISSILE: INTERFAX
INTERFAX CITES RUSSIAN DEFENSE OFFICIAL EGOROV ON MISSILE TEST

That should wake things up for the 2nd time in two months. Time to BTFWWIII.

Ben Bernanke told those that could afford to hear that rates would not "normalize" in his lifetime and just last week we noted the market's shifting attitude towards what a post-rate-hike 'rate normalization cycle' might look like. As longer-term bond yields tumble, the Fed's Bill Dudley just confirmed the lower post-rate-hike "terminal rate" meme:

DUDLEY: LONG-TERM RATES LIKELY TO BE LOWER THAN HISTORIC NORM, SAYS EQUILIBRIUM REAL RATE MAY BE LOWER THAN NORMAL

 In other words, if and when the Fed starts raising rates, the highest rate to which it will raise rates in the next cycle is now expected to be notably below previous historical 'norms'. And stocks didn't like it and long-term bond yields tumbled...

Last week, for the first time ever, in "From Rothschild To Koch Industries: Meet The People Who "Fix" The Price Of Gold" Zero Hedge shone a spotlight on the mysterious, and "without any permanent employees" company known as The London Gold Market Fixing Limited which for 117 years has served as the corporate face of the London bankers who "fix" the price of gold twice daily. Since then, more than one of the LinkedIn pages we profiled of the bankers among the 5 gold fixing banks has quietly been taken down. However, the biggest surprise took place moments ago when none other than the head of spot gold trading at Barclays, Marc Booker, did what so many heads of spot FX trading in the past few months have done over fears of being caught in the ongoing manipulation probe: he exited stage left from Barclays HQ at One Chruchill Place.

Equity markets are not happy about the Fed's Charles Plosser's economic exuberance ("3% growth no matter the weather" which is 20% above consensus of 2.5%) and his 'good-news-bad-news' monetary policy hawkishness ("may need to raise rates sooner rather than later"). But perhaps the most crucial part of his speech this morning was what the headlines notably left out. Plosser admonished his global central bank brethren: "if central banks do not limit their interventionist strategies and focus on returning to more normal policymaking aimed at promoting price stability and long-term growth, then they will simply encourage the financial markets to ignore fundamentals and to focus instead on the next actions of the central bank." Simply put, he warned, "central bankers have become too sensitive and desirous of managing prices in the financial world.."

The relationship between high-yield credit spreads (the 'cost' of protecting the most equity-like of the credit-risky bond spectrum) and VIX (the 'cost' of protecting equities) tend to have a very stable and consistently correlated relationship driven by clear arbitrages between the two asset classes and corporate finance causation. Last July, VIX futures plunged while credit spreads remained less impressed... that ended badly for the penny-in-front-of-the-steamroller crowd who saw VIX spike back to credit's reality. May 2014 - as the chart below shows - is exhibiting the same kind of disconnect and VIX traders and credit market participants are concerned.

USDJPY has broken below its 200-day moving-average at 101.25 and is trading back to almost 6-month lows this morning ahead of this evening's BoJ meeting (which is largely expected now not to provide the additional QQE that everyone hoped for earlier in the exuberant year). The Nikkei is tumbling right along side it... as are US equities... and US Treasury bond yields...

Over the weekend we titled our summary of GM's unprecedented avalanche of recalls so far in 2014 - the year in which the company's criminal practice of covering up its faulty products became a congressional scandal -  as follows: "GM Set To Surpass Total Recall Record This Year." Three days later we are happy to report that while Detroit, we not only have a big recall problem, we also have a new record, after moments ago GM just announced another 4 recalls affecting 2.4 million cars. This brings the total number of vehicle investigations since the start of the year to 35, and with today's four latest fiascos, has initiated a whopping 29 recalls. More importantly, this also means that the number of domestic recalls rises to 13.6 million, smashing the previous record of 11.8 million recalls in 2004, and brings the number of global recalls to 15.2 million: or a stunning 56% greater than the 9.7 million cars GM sold in all of 2013!

For those curious how much further into banana status the "developed" world may further drop, look no further than Turkey which is rapidly becoming the case study of banana governance par excellence.

Having pricked the Biotech bubble with the simple questioning of the ballooning prices of drugs, it appears Congress may be well on its way to bursting the M&A Mania as Senator Carl Levin pushes his anti-inversion legislation by increasing, once again, the complexity of the tax code:

• *SEN. LEVIN SAYS U.S. FACING 'FLOOD OF TAX AVOIDANCE'
• *LEVIN BILL INCLUDES TWO YEAR MORATORIUM TO ALLOW FOR TAX REVAMP
• *LEVIN BILL RAISES THRESHOLD FOR INVERSIONS TO 50 PERCENT

“This is about leveling the playing field and rooting out flagrant tax abuse in our system...The fact that companies can change their tax liability to low-tax jurisdictions on paper while maintaining operations and ownership in the U.S. is unacceptable" We're glad they know what's best for all of us. Ironically, while the US makes the tax code so complex everyone wants to get out of the country, in italy the PM wants to simply it so much people can file by text message.

The last few days have been the worst for peripheral European bonds in well over a year. Spain, Italy, Greece, and Portugal have all seen yields jump and credit spreads soar in the last week as 'faith' in Draghi appears to be faltering. The reason this is concerning is, as we explained here, in the new normal, negative feedback loops have gone and instead we have hyperbolic loops which, when broken, end much more badly than a self-correcting un-rigged market would.

An economy where most people work for the state or a global corporation is an economy that has lost its knowledge of the key entrepreneurial building blocks.

The drubbing in sales across all other markets excluding the US continued, with sales in Asia/Pacific, EAME and Latin America all dropping by more than 20% compared to last year. End blended result: global retail sales have now declined Y/Y for 17 consecutive months, which incidentally is just shy of the longest stretch of declining retail sales on record. Worse: the -13% drop in world retail sales matched the biggest annual drop since February of 2010.