Archive - May 2014 - Story

Update: JPM just jumped on the bandwagon and cut Q1 GDP to -0.8% from -0.4%. Don't worry: it snowed.

The US "recovery" is starting to feel more and more recessionary by the day. As we warned after we reported the trade deficit, it was only a matter of time before the Q1 GDP cuts came. And come they did, first from Barclays, and now from Goldman, which just doubled its GDP forecast loss for the past quarter from -0.3% to -0.6%.

With Syria (and its Al Qaeda-funded "rebels") having taken a back seat in geopolitical developments, some wondered what are all those heavily armed mercenaries doing. The answer emerged moments ago when Saudi Arabia’s Interior Ministry said Tuesday it had thwarted a major plot by a militant group with links to extremist elements in Syria and Yemen, arresting 62 suspected members.

Spanish (and now Italian - for the first time) bond yields are below 3% as Japanese investors pile into any and everything non-Japanese, dragging US Treasury yields lower - and thus US equities lower. JPY strength, however, has dragged USDJPY down towards 101.50 which means US equity futures have lost all of yesterday's gains. Of course, this weakness is merely proming the pump for another run at 102, igniting momentum for moar all-time-high dip buying and an 8th green Tuesday close in a row... (or not this time?) Gold is flat but silver and oil are moving higher.

Despite being told for weeks that the always efficient US equity market had "priced in" the end of Twitter's lock-up period, it seems (surprise) that it hadn't. Yesterday, some Twitter insiders were promising they would hang on to their stock now that the selling lock up has been lifted. Judging by today's price action, where TWTR is down another 7%, and is down over 50% from its all time high hit in late December, they lied.

A month ago, it was alleged, that Ukraine - under cover of night - loaded its gold reserves onto a plane and shipped them off (for safekeeping) in the US, as the potential price of 'liberation'. So how ironic that, given the massive gas debts that Ukraine owes to Russia (and prepayments pending), and sizable bond maturities pending, the first thing that Ukraine's National Bank governor will be buying with his freshly minted loan from the IMF is... buy a billion dollars of gold.

And just like that Q1 GDP may have turned even more negative, after the March trade deficit ended up being worse than the $40.0 billion expected, printing at $40.4 billion. However, the one offset may be that the February deficit was revised from $42.3 billion to $41.9 billion, in effect being a wash to the Q1 GDP number, which as most already know, is set to be -0.4% at the first revision. Among the reasons for the (smaller than expected) decline in the deficit was a "decrease in imports of services mainly accounted for by a decrease in royalties and license fees, which in February included payments for the rights to broadcast the 2014 Winter Olympic Games." For once (not so) harsh weather (in USSR 2.0) was a boost to the economy.

The "middle class" has atrophied into the 10% of households just below the top 10%. The truth is painfully obvious: a middle class lifestyle is unaffordable to all but the top 20%. This reality is destabilizing to the current arrangement, i.e. debt-based consumerism a.k.a. neofeudal state-cartel capitalism, so it is actively suppressed by the officially sanctioned narrative: that middle class status is attainable by almost every household with two earners (a mere $50,000 annual household income makes one middle class) and middle class wealth is increasing.

So much for the Lehman effect: five years after Barclays acquired Lehman's only valuable asset - its North American brokerage personnel - in a liquidation firesale, the benefits have all but disappeared (confirmed further by the most recent departure of such prominent ex-Lehmanites as Paul Parker, Larry Wiesenck and of course, Skip McGee). Case in point: today's announced earnings, in which we found that Lehman's pre-tax profits slid 5% to £1.69 billion. However, looking at the bottom line, which reflected benefits from cost cuts and loan loss reserve releases, not to mention an "accounting gain on Barclays debt" would surely miss the big picture, which was that the bank's Investment Banking revenue was down 28% £2.49 billion. However the punchline was that core driver of New Normal bank revenues: FICC, which was slaughtered by an unprecedented 41% to to £1.23 billion, coming far worse than even the most dire analyst estimates.

• Both sides bury dead as Ukraine slides towards war (Reuters)
• Dollar wilts to 6 1/2-month low; shares drift (Reuters)
• Draghi Grapples With Money Markets Signaling Recovery Too Early (BBG)
• Foreign wristslaps: Credit Suisse Nears Record Tax Plea: Credit Suisse Settlement Expected to Exceed $1 Billion (WSJ)
• OECD joins IMF in cutting global growth forecast, demanding moar QE from ECB  (WSJ)
• Three Bankers Bolster Blankfein as Goldman Trading Sinks (BBG)
• Strong performance from eurozone services sector (FT)
• OECD Cuts Forecast for 2014 Global Growth; Urges ECB Action (WSJ)
• Elite Colleges Don't Buy Happiness for Graduates (WSJ)
• How Russia Inc. Moves Billions Offshore -- and a Handful of Tax Havens May Hold Key to Sanctions (BBG)

In this brave New Normal world, a Chinese contraction is somehow expected to be offset by a rebound in Europe's worst economies, because following China's latest PMI miss, overnight we were told of beats in the Service PMI in Spain (56.5, vs Exp. 54.0, a 7 year high sending the Spanish 10 Year to fresh sub 3% lows), Italy at 51.1, vs Exp. 50.5, also pushing Italian yields to record lows, and France 50.4 (Exp. 50.3). We would speculate that macro events such as these, as fabricated as they may be, are relevant or even market-moving, but they aren't - all that matters is what the JPY and VIX traders at the NY Fed do in a low volume tape, usually in the last 30 minutes of the trading day. And since the trading day today happens to be a Tuesday, and nothing ever goes down on a Tuesday, the outcome is pretty much clear, and not even the absolutely abysmal Barclays earnings report has any chance of denting the latest rigged and manufactured low-volume levitation.

At this point it is clear that Malaysian Airlines flight MH 370 which has been missing for two months will almost certainly never be found: whether due to the nature of the disappearance, or because it is a cover up stretching all the way to the very top (recall that it was disclosed by none other than NBC that the released air traffic control recording with the plane was edited, suggesting that the government itself is complicit in whatever happened), the plane will forever be entombed in the annals of history, alongside CNN's Nielsen ratings, and its final resting place will remain a mystery. However, over the past 24 hours, another mystery surrounding the final voyage of flight MH-370 has emerged,  one which this time involves the plane's cargo.

State media reports indicate that a foreign agent recruited Chinese netizens to provide information on military tech. According to the reports, a foreign intelligence agent using the alias “Feige” (“Flying Brother” in Chinese) recruited 40 people from 20 different provinces to gather information on China’s military development. None of the reports hinted at Feige’s nationality, or which country was behind the espionage.

The activity across the entire Eastern European region is starting to rattle the nerves of more than just the well-meaning sanctionsers in Washington. Today saw Moldova:

*MOLDOVA PUTS ITS BORDERS ON ALERT CITING UKRAINE UNREST

And Latvia:

"The society has fear... We know what it means to be under Russia."

Both nations are also extremely divided along ethnic Russian lines and leadership is gravely concerned that any further gains by a pro-Russian force in Ukraine will either a) spill over physically into their nations; and/or b) instill confidence in the deeply divided nations' Russian-speakers.

The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents”, as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.The chief villain in this article will be no stranger to readers of this site. It is Blackstone...

Despite the promise of 6-7% GDP growth forever - fake invoices, intangible accounting, and contracting PMIs aside - based on the Hang Seng China Enterprise Index, revenues for Chinese firms dropped over 7% in Q1 compared to the same period in 2013. This is the largest year-over-year drop since Q1 2009. As China Daily reports, earnings growth remains positive but is at the slowest since Q3 2012... So if "sales" are down 7%, how is GDP growing 7%? What's Chinese for non-GAAP GDP?