Archive - May 2014 - Story

Any day, week, month, quarter, year now... that J-Curve 'recovery' will come bounding over the horizon and save the Japanese economy from its inevitable death spiral... for now, presented with little comment aside for historical confirmation (as even Goldman Sachs has now given up on hope of a bounce), Japan's largest (seasonally-adjusted) Balance of Payment Trade Deficit ever... For FY2013 as a whole, the current account recorded a surplus of +¥789.9bn but was far lower than the +¥4.2tn in FY2012 and the lowest since comparable records became available in FY1985.

...because there's no better time (or fiduciarily dutiful moment) than a Sunday night at 650pm ET after the majority of Eastern Ukraine votes to secede to Russia to sell $231.5 million notional worth of gold futures...

"Mother's milk"

In what is becoming a weekly ritual, the German press continues to demolish the US case of "idealistic humaniatrian" Ukraine intervention. Recall, that it was a week ago that German tabloid Bild am Sonntag, hardly the most reputable source but certainly one which reaches the broadest audience, reported that dozens of CIA and FBI agents were "advising the Ukraine government." This conclusion is hardly a stretch and certainly based on facts considering the recent semi-secret jaunt by CIA head Brennan to Kiev. Fast forward one week when overnight the same Bild reported that about 400 elite mercenary commandos of the private US security firm, Academi, f/k/a Xe Services, f/k/a Blackwater "are involved in a punitive operation mounted by Ukraine's new government" against east Ukraine separatists.

David Cameron has come out and argued that taxes will rise unless he can raid bank accounts in the UK. Cameron argues he will “have to put up taxes” unless tax officials are given draconian powers to raid people’s bank accounts if they think they even owe money. These people are simply beyond control. All they can see is the immediate issue to survive day-by-day. Those at the helm of the world need no elite-conspiracy. They are too stupid to have long-term plans beyond 30 days. This is how Empires Collapse – they are following the precise step-by-step guide for total chaos.

Rebel vote-counter Roman Lyagin tells reporters in #Ukraine's Donetsk that 89.07% voted in favour, 10.19% against - 'final results' he says

— Marc Burleigh (@marcburleigh) May 11, 2014

If the fame and status of a major global metropolis is determined by the number of billionaire inhabitants, then Moscow has officially overtaken New York City, with the Russian capital hosting 48 billionaires compared to NYC's 43. More importantly, the number continues to rise even as economists and other so-called experts debate the reasons for society's record inequality even though the answer stares all of them in the face (at least it would if their face were facing the chart below). But while we are confident Putin will take particular enjoyment in this specific fact (and don't worry about sanctions impacting Russia's billionaires - the banks will always find loopholes to make sure their best clients don't wire their funds elsewhere), the real story is what is going on in London, where as anyone who has tried buying an apartment flat in Mayfair will confirm, the situation is absolutely out of control, and as the Sunday Times reports as part of its annual Rich List, London now has a whopping 72 billionaires, nearly double the number residing in New York!

As with all complex systems, there is no one cause for the structural decline of the middle class - instead there is an interconnected web of reasons. In finding a solution to this decline, we face a double-bind dilemma: we are constantly reassured that technological innovation can provide the solution to all problems - yet the problem here is that technological innovation is destroying the need for costly human labor. Technological innovation alone can't solve the problem because it is a key cause of the problem. As we have noted many times, the solution is not to limit technology - that only leads to impoverishment of the entire economy. The solution is to recognize the critical role of social innovation enabled by networked human and social capital.

With the referendum vote largely concluded in most east Ukraine regions, it was virtually inevitable that the day would end without some provocation. And, as expected, moments ago CBS reported that "Ukrainian national guardsmen opened fire Sunday on a crowd outside a town hall in eastern Ukraine and an official for the region's insurgents said there were fatalities."

"Priced for perfection" would seem an understatement after one glance at the astounding hockey-stick in margin-expansion expectations 'priced-into' the top 1500 US equities. One can't help but wonder, with a stagnating macro-economy and tapering Fed, just how bad the labor force participation rate will become as costs are cut to the bone marrow to enable this margin miracle to come true... and imagine what happens if the summer is hot and winter cold once again?!

The US economy is a house of cards. Every aspect of it is fraudulent, and the illusion of recovery is created with fraudulent statistics. American capitalism itself is an illusion. However, Washington has unique subjects. Americans will take endless abuse and blame some outside government for their predicament – Iraq, Afghanistan, Libya, China, Russia. Such an insouciant and passive people are ideal targets for looting, and their economy, hollowed-out by looting, is a house of cards.

As if the question actually needs to be asked, we thought the following 3 charts would provide at least some defense against the constant barrage of "healthy rotation" bullshit currently being used to maintain assets-under-management as professionals unwind their levered longs into a newly-willing retail public. As Gavekal notes, the following chart show that the median stock is trading at valuation levels only seen at the previous stock market highs of 2007 and 2000.

In this difficult market, and confusing - for traders, and everyone else - environment, what are the three main questions posed by Goldman's clients had? According to David Kostin, "Three questions dominated our investor dialogue this week given the lack of meaningful data releases.

1. Interest rates: The recent decline in ten-year US Treasury yields to 2.6%, the forward path of interest rates, and implications for equity valuation;
2. Capex: the outlook for corporate capital spending in 2014; and
3. Rotation: The potential for the momentum drawdown of the past two months to reverse and vault high expected sales  growth companies back into a market leadership position.

The most significant geopolitical event of the day is the east Ukraine independence referendum taking place in various cities across the region, less than two months after the Crimean case study which saw the region split away from Ukraine and join Russia, despite the fervent warnings by Kiev and the west that the result of the "rigged election" would not be accepted by anyone. As it turned out then, it only needed to be accepted by Russia which promptly took over the Black Sea territory. Today's vote is a carbon copy of what happened in Crimea, with the locals almost certain to vote in Independence from Kiev (even over Putin's "objections" who has managed to distance himself from the vote if quite willingly will accept its outcome), followed by another vote that annexes east Ukraine (and subsequently Transnistria) to Russia, promptly followed by the adoption of the Ruble as the regional currency.

It's been a while since we looked at Japan's debt situation. Here is the dire update.