Archive - Jun 2014 - Story

Meet RAMPART/BLARNEY/MYSTIC - the NSA's "unconventional special access program" partnering with international agencies to capture - but not collect (though there are exceptions) 'data' directly from the world's fiber-optice cables. The following map shows there is plenty of places to hop on the pipe and suck out as much information as they'd like but it's all good, as NSA notes in the leaked docs - "partnering with Foreign SIGINT partners to enable access to foreign intelligence" as the NSA shows "how to find target communication on a typical fiber optic cable."

Ever since an über-strong U.S. dollar crushed the export sector in the mid-1980s, the U.S. economy hasn’t looked quite the same. This is not a problem of the past however, as export growth already lags behind every one of the past ten expansions, even the 1980s, thanks to a drop in the first quarter. The chart below shows that exports are no longer distinct from other parts of the economy (nearly all of them) that haven’t measured up to a “normal,” credit-infused, post-World War II business cycle. Together with emerging global risks, it begs the question of whether sagging exports can drag the U.S. into recession.

Having been told by she-that-knows that low volatility is not a signal of complacency, it appears Citi's Matt King disagrees. Unlike 2004-2007's "virtuous" cycle of low vol begetting low vol, 2013-2014's lower volatility is leading to a decidedly "vicious" circle that will likely not end well for the Fed and the world's central banks' "financial stability" mandates.

Spend any time watching business media, and you could not help but notice the extreme amount of optimism about the financial markets. Despite weak economic data and geopolitical intrigue, the complacency and "bullishness" are at extreme levels. Considering that the markets have been primarily advancing on the back of continued flows of liquidity from the Federal Reserve combined with artificially suppressed interest rates; what do you think the impact on the financial markets will be? “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” - Andy Grove

It's Friday... which can mean only one thing., The entirely unrigged (but ridiculously ubiquitous) meltdown in VIX starting at 330ET to ensure whatever momentum ignition is left will get flushed higher and ensure higher highs in stocks... These are your "markets"... (just as we predicted this morning)

Fear - or no fear. VIX was monkey-hammered to fresh cycle lows at 10.34 today (still double-digits for now) and OPEX lifted US equity markets (Dow Industrials, Transports, and S&P) to new record highs. Notably European peripheral bond spreads jumped higher (worsened) by their most in 15 months this week. "Most shorted" stocks rose a massive 4.6% this week (surging this afternoon) - the biggest squeeze in 14 months. The USD lost ground (-0.4% on the week) led by EUR strength as JPY closed unch (hardly supportive of the 2% gain in the high-beta honeys this week). Treasuries were nothing like as exuberant as stocks this week (30Y +3bps, 5Y unch) having traded in a 10-11bps range all week. The ubiquitous late-day VIX slam forced stocks to all-time highs. Precious metals had their best week in 4 months closing above $1300 (gold) and $20 (silver) back at 2 and 3 month highs respectively and pushing gold above the S&P year-to-date.

As oil prices have risen on geopolitical concerns (that have been printed away by central banks in stocks), so gas prices at the pump in the US have risen to their highest for this time of year since 2008 (and that did not end well). We are not alone in our concern as Morgan Stanley's (and esx Fed) Vince Reinhart warns that a more extreme jump in oil prices would be enough to stall the recovery (lowering real GDP growth by 1.7 percentage points one year out; and perhaps more worryingly, raise CPI growth by about 3.6pp, lowering real consumer spending growth by a full two percentage points).

Timing matters, as fundamentals have no impact in a euphoric blow-off top or in a panic-driven, bidless crash. It's possible to be right about the fundamentals and lose money trying to trade those fundamentals. It's also possible to be wrong about the fundamentals and make a boatload of money trading Central Planning interventions. Our own advice that we try to live is: "invest in yourself, not Wall Street."

Petro Poroshenko's 14-point peace-plan is not going well (before it's even unleashed). First, Russia blasted back that they were "surprised" by comments on their support and that "this does not represent reality," and is more an ultimatum than a peace-plan:

• *RUSSIA SAYS UKRAINE CEASE-FIRE ISN'T OFFER OF PEACE: IFX
• *RUSSIA SAYS UKRAINE CEASE-FIRE LACKS KEY TALKS OFFER: IFX
• *POROSHENKO GIVING ULTIMATUM TO REBELS TO DISARM: IFX

Then things escalated further as Interfax reports, the 'severe injury' of a Russian border guard and ITAR-TASS reports "Moscow awaits explanations from the authorities in Kiev for the shelling of the Russian territory, which took place on the background of President Petro Proroshenko’s claims about a ceasefire."

On the day after Chairman Yellen’s press conference, investors aggressively bid up inflation trades across numerous asset classes. Gold and silver rallied sharply, TIPS implied inflation breakevens widened (despite a new slug of 30-year supply), Treasury yields rose, and the yield curve steepened. Based on investor positioning and market sentiment (CFTC’s Commitment of Traders data show record net short positions exceeding $1.5 trillion in notional rates exposure among speculators in the eurodollar futures markets), there’s decent potential for additional gains in these inflation expressions in the days and weeks ahead.

With 23 games behind us in the FIFA World Cup in Brazil, we stop to reflect on the success (or failure) of forecasts so far. As we showed here, Brazil began the tournament as more than 3 times more likely winners than any other team, and, according to Goldman's new estimations, remains the strong favorite with a 49.5% chance of raising the Jules Rimet trophy. England's disappointment leaves them a 3% chance of getting to the knockout phase (and USA a 0.7% chance of winning it all). Goldman, however, have severely over-estimated Brazil and Spain's performances (and under-estimated Holland and Spain) as their track-record so far is Stolper-esque at 34% win rate (8 right, 15 wrong).

According to the latest CapGemini wealth report the number of high net worth individuals increased by nearly 1.8 million in the past year, the second biggest surge since 2000, which also happened to be the crazy days of the first tech bubble (not to be confused with the current tech bubble). In other words, the epic, unprecedented stock bubble reflated by the world's coordinated central banks, has succeeded. Succeeded, that is, if its goal was to make the world's richest people wealthy beyond their wildest dreams. As for everyone else, just over 7 billion people, better luck next time.

UPDATE: Not going well... UKRAINE REBELS SAY WON'T DISARM UNTIL KIEV WITHDRAWS TROOPS:AFP

Petro Poroshenko earlier called Russia's Vladmimir Putin to explain his 14-point plan (to be unveiled to the public later today) to curb the pro-Russia insurgency in the east. As AFP reports:

UKRAINE PRESIDENT SAYS UNILATERAL CEASEFIRE TO BEGIN TODAY TO JUNE 27
Ukraine peace plan to call for 10-km buffer zone on Russia border

As Reuters notes, it was not clear if the whole of the proposed demilitarized no-man's land would be on Ukraine's side of the border or part of it on the Russian side. It was also not clear what the status of people living in border areas would be. Putin's initial response is to demand the "immediate end to military operations" against pro-Russian separatists.

While President Obama proclaimed "it is not the place for the United States to choose Iraq’s leaders," it appears that Iraq's current prime minister Maliki's days are numbered. At least three people, who like Mr. Maliki are all members of the Shiite majority, have emerged as possible candidates to take over, but as NY Times makes clear, they face an uphill battle as any prospective successor must convince Iraq’s Sunni Muslims and its ethnic Kurds that he can hold Iraq together, as well as vanquish a Sunni-led insurgency. The Sunnis are adamant that change is needed, "we will not allow a third term for the prime minister; they must change him if they want things to calm down," but it is the statement from the top Shiite cleric that it is time for a new government that likely put the final nail in Maliki's coffin. The only problem... his replacements are far from angelic reformers.

We suspect this is not exactly the great news that GE was expecting... but it looks like a win. French minister Montebourg believes none of the current offers fulfill their demands and will use a decree to block the deal:

• *MONTEBOURG SAYS FRENCH STATE TO TAKE 20% STAKE IN ALSTOM
• *MONTEBOURG SAYS FRANCE WILL BUY ALSTOM STAKE OR BLOCK GE OFFER
• *MONTEBOURG SAYS FRANCE WILL USE DECREE IN ALSTOM CASE
• *MONTEBOURG SAYS FRANCE WILL ENTER IN ALLIANCE WITH GE
• *MONTEBOURG SAYS FRANCE SEEKING ALSTOM STAKE AT MARKET PRICE

So GE forced to partner with French or no deal. Nothing like partnering with the (almost) most socialist government on the planet to make money.