Archive - Jun 2014 - Story

Jeff Deist, of The Mises View, explains how the Fed has created a perilous landscape in which there is no 'honest' pricing left - everything has been distorted. As David Stockman exclaimed, "The system we have now is one in which the Fed decides, through a Politburo of planners sitting in Washington, how much liquidity is necessary, what the interest rates should be, what the unemployment rate should be, and what economic growth should be."

Despite exuberant Services and Manufacturing PMIs, Bloomberg's index of CEO sentiment remains stagnant near 2014 lows as April's hope for Q2 has faded into 'more of the same' by June. As Bloomberg's Rich Yamarone points out, in reality (in spite of all the hope), the second quarter is drawing to a close and it was a rough one for corporate America, with CEOs citing "slower growth in household income overall", "the recovery remains fragile, especially for customers on a budget", and perhaps most concerning, "whether or not this softness in store traffic is representative of a permanent sea change in customer behavior or a temporary phenomenon is hard to tell at this stage."

Paul Warburg - the oft-cited 'father of the Federal Reserve' - pushes back on those who see him as favoring the issue of 'fiat money'... No one, he writes, "has given more time and energy to "the fight for sound money," adding a warning that "all direct connection between the government and the banking business is undesirable." We suspect Warburg would be turning in his grave at the oligarchy he unleashed...

This week's "Things To Ponder" is focused on things that, in my opinion, far too many individuals are ignoring. Bob Farrell once wrote that "when all experts and forecasts agree; something else is bound to happen." Today, that is the case as much as it ever was. Despite rising geopolitical risks, weak economic data, deteriorating fundamentals and softer internals - the overwhelming belief is "equities are the only game in town." Of course, we have seen this mentality many times in past history whether it was 1929, 1987, 2000 or 2007. While every market peak was different, there were all the same.

Before 330ET, the Nasdaq was the lone survivor in the green this week despite every effort to spark short squeezes and ramps day after day - but that all changed as the ubiquitous late-Friday buying panic occurred of course - lifting stock green for the day (and desperately searching for green on the week). There was a sudden heavy volume dump at 1315ET with no news catalyst amking many wonder if a dark pool puked its orders? A glance at the week's market moves would suggest 'volatility' is anything but low - yet we always manage to close day-to-day calmly. Wondering what provides the ammo for Nasdaq's rise? "Most shorted" stocks are up for the 7th week in a row. Despite all that idiocy, bond yields tumbled the most in 6 weeks and USDJPY fell the most in 14 weeks. Oil slipped on the week but copper, gold, and silver all gained. With the Rusell rebalance, volume was extreme today (but only at the close and that 1315ET dump).

Noting that it has had thousands of years to develop a more agreeable option, humankind expressed bewilderment this week that it has yet to devise a better alternative to governing itself than always letting power-hungry assholes run everything, sources worldwide reported.

The news that hundreds of thousands of people will lose water supplies is not a stunning headline anymore - poor old Ukraine... or Iraq. However, this time, the 'it couldn't happen here' crowd might be stunned to hear that The Motor City is playing serious hardball with residents who have fallen behind on paying their water bills. Detroit’s Water and Sewerage Department has begun turning off the taps of 150,000 residents who are at least two months behind on payments. As one advocate notes, "sick people have been left without running water and working toilets. People recovering from surgery cannot wash and change bandages. Children cannot bathe, and parents cannot cook." Of course, given that these are generally voting members of the US public, we would be stunned if the Federal government did not create a new fund to 'help' them out of this 'unfairness'.

With USDJPY near 4-week lows and, as BofAML's Macneil Curry warns "is setting up for a breakdown", we thought a look back at the total and utter chaos that last week's FOMC statement (and press conference) unleashed in futures markets. JPY futures were the only market in the world that was halted as the statement was revealed as Nanex shows below it seemed 'someone' decided that 'carry traders' needed to show the world just how positive what Janet said was... then within 24 hours, chaos was unleashed as the real world algos tried to come to terms with just what the Fed had done. With every asset class in the world predicated on JPY weakness, this market behavior shows just how illiquid and thin the world's risk really is.

With Petroshenko agreeing to extend today's cease-fire deadline for 3 days, the Russians, unfortunately, are not optimistic after the 'expert-level' talks in Europe. Given this, it appears Russia is preparing its retaliation for possible further sanctions that are being waved by Europe and the US. As AP reports, Russia's state-controlled gas company, Gazprom, says it could limit supplies to European customers that intend to re-sell the natural gas on to Ukraine. Whil enot naming specific countries, the Gazprom CEO explained he needed to clamp down on the so-called reverse-flow supplies the the cut-off Ukraine as they were "half-fraudulent schemes."

As Barclays Joe Abate warns, delivery fails in the Treasury market have surged recently. Whil enot at the scale of the 2008 crisis, we suspect the spike is what is paniccing the Fed to say "the market is wrong", talk up short-end rates, and implore the public to sell-sell-sell their bonds. The Fed's market domination has meant massive collateral shortages (as we have detailed previously) and now more even that during last year's taper-tantrum, the repo market is trouble. But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds). Q.E.D.

With Iraq closing a last minute deal with Russia to reinforce its depleted airforce by purchasing second-hand Su fighter jets, suddenly the US found itself scrambling: the last thing it wants is to hand over control of Iraq's skies to foreign-made warplanes. Which is perhaps why as CBS just reported, a Pentagon official has officially confirmed that the US is now flying armed drones over Baghdad. "The flights, which are not round the clock, are for the protection of the embassy and are not the precursor to air strikes" according to the same source.

It was a week ago when we learned that in yet another diplomatic masterstroke, Russia's Vladimir Putin took advantage of the vacuum in relations between the US (which now wants its heretofore puppet prime minister in Iraq removed) and the Iraqi PM (who has been increasingly vocal against US allies in the region, namely Saudi Arabia, and US demands for a coalition government) and offered his "complete support" to the Iraqi leader. Today, the Iraqi leader has decided to  take Putin up on his offer and has announced he has bought used Russian jets which he will use instead of US fighter planes in his war against ISIS. "I'll be frank and say that we were deluded when we signed the contract [with the US]," Maliki said. "We should have sought to buy other jet fighters like British, French and Russian to secure the air cover for our forces; if we had air cover we would have averted what had happened," he went on.

While Poroshenko extends today's ceasefire (under threat of military action if nothing is solved by then); the phrase "hearts and minds" comes to mind as Russia unleashes its latest softly-softly headline in providing 'humanitarian aid' to the eastern regions of Ukraine. While 'asking' Ukraine to help determine the route for the aid, the press release explains this is 'aid' for the eastern regions of Donetsk and Luhansk following "numerous appeals" by the people. It appears that the "aid" does not include US-Iraq-style "special advisers."

The domestic energy boom is behind the expansion of Industrial Production. The remarkable untold story: Ex mining and oil and gas extraction, US Industrial Production has been in contraction for most of the period since Peak Oil in 2005-08.

The economy must be doing great, right? The market's at all-time highs... We suspect President Obama will 'brush off' the Q1 GDP collapse and focus his 'remarks on the US economy' on how well America is doing; how exceptional it's growth is'; and how any minute now it's going to the moon alice (and not just the Fed balance sheet). And just a reminder, the last time Obama spoke aggressively on 'fixing' inequality, stocks were not happy. Remember, the greatest irony of it all...