Archive - Aug 2014 - Story

With all eyes focused on Ukraine's border with Russia, it is hardly surprising that the 'other' dispute has fallen off the front pages. However, as Stratfor notes, there has been a burst of diplomatic activity in recent months over the territory of Nagorno-Karabakh, which Armenia and Azerbaijan have disputed for decades. Russia, the strongest power in the Caucasus, has become more engaged in the issue as Azerbaijan's leverage in the region grows. Russia's involvement could herald a change in this longstanding conflict.

As Sun Tzu once said (or was it Bud Fox?), "The supreme art of war is to subdue the enemy without fighting," and so it is that we suspect President Xi Jinping's marauding destruction of Zhou Yongkang, among the most powerful and feared officials in China, and his army of corrupt politicians, businessmen, family, and military personnel has won Xi's war before the real fight begins. What fight are we talking about? Why have we been so focused on Zhou and Xi recently? One glance at last night's non-manufacturing PMI for China, or the jobs component of manufacturing PMI, or any of the hard data... in the face of a record-breaking credit impulse (and subsequent hangover) leaves Xi wide open for rebellion and revolt among the ruling powers of China should his non-reform create social unrest. By removing Zhou - the most powerful of contenders - Xi has won without fighting, no matter how hard the economic landing becomes.

Presented with no comment...

Moments ago CNN blasted a headline stating that the US believes there is a new, post-Snowden leaker exposing national security. Why? The reason is the following article that was released a few hours ago by the Intercept, and which is an expose on yet another classified system called Terrorist Identities Datamart Environment (TIDE), in which we read: "The documents, obtained from a source in the intelligence community, also reveal that the Obama Administration has presided over an unprecedented expansion of the terrorist screening system. Since taking office, Obama has boosted the number of people on the no fly list more than ten-fold, to an all-time high of 47,000—surpassing the number of people barred from flying under George W. Bush." And there is Snowden 2.0.

Today, everyone believes that market price levels are largely driven by monetary policy and that we are all being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that market price levels are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.... There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass... It’s the public markets where faith has been lost, and that’s why the Golden Age of the Central Banker poses existential risks for firms and business strategies based on trading activity within those public markets.

Hundreds of troops are being deployed across West Africa in an effort to maintain peace and quarantine. As Liberian health officials warned, "The situation will probably get worse before it gets better." Following Monday's announcement that it will not issue pilgrimage visas to pilgrims from Sierra Leone, Guinea and Liberia due to concerns regarding the spread of the Ebola virus, Saudi Arabian officials have admitted they are testing samples from a man who had returned recently from a business trip to Sierra Leone for suspected Ebola infection. But it gets worse. As The Nigerian Tribune reports, Nigerian officials  has revealed that two people have Ebola-like symptoms after contact with the dead Liberian Ebola victim, Patrick Sawyer. The CDC Director is "deeply concerned" about spread of Ebola in Lagos (4th most populous city in the world).

Fed officials have repeatedly emphasized the importance of financial stability for monetary policy. But, as Goldman Sachs points out, knowing which financial and macroeconomic imbalances to monitor is challenging, not least because of the limited number of past crisis episodes in the US. To help The Fed, Goldman surveys a large economic literature that studies the effectiveness of "Early Warning Systems" (EWS) in detecting banking crises, costly asset price busts, and currency crises across a broad range of countries. While they suggest subtlely that the Fed is clueless with regard what to look for, they note that credit markets and asset-price run-ups (especially when they occur together) provide a statistically clear warning signal... and as we know, both are flashing red currently.

Roughly a month ago, we exposed CYNK Technology Corp. The CYNK bubble was, of course, the result of carefully planned deceit and clever promotion by a handful of people who stood to make a lot of money on the trade. But when you think about it, CYNK’s stock wasn’t really any dumber than owning US Treasuries. In the case of CYNK, it only took about a month for the bubble to inflate and burst. The Treasury bubble, on the other hand, was built on credibility earned over decades; but while previous generations earned the world’s trust, modern day politicians have blown through it. Now all they have left is their snake oil sales pitch. And a mountain of obligations that closed July 2014 at a record high $17.69 trillion.

Having torched Janet Yellen over the weakness of the so-called "living wills" of the Too-Big-To-Fail banks, it appears Elizabeth Warren's tirade struck home. As WSJ reports, in a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation's biggest banks haven't demonstrated they can collapse without causing broad, damaging economic repercussions and ordered them to show "significant" progress by July 2015. Of course, the whole 'living will' concept is a self-referential joke, but we leave it to Thomas Hoenig to sum it up: "the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support." In other words, taxpayers are still on the hook.

Today was the Dow's worst Tuesday in 3 months as yesterday's exuberant gains in stocks evaporated on heavy volume. While Polish officials may have been the catalyst, technical levels and AUDJPY weakness were the essential ingredients for today's equity weakness. It appears the pre-payrolls level was key for stocks. Treasury yields plunged back to unch on the week after the Polish Foreign Minister said the "i" world (invasion). The USD sold off but remains +0.25% on the week as gold and silver popped modestly on the headlines. VIX jumped back over 17 (but closed with a 16 handle). Credit markets leaked wider with equity weakness. So good news (macro) was bad news early and then bad news (geopolitics) was bad news later - Fed needs to print some more world peace. The Dow has not gained anything since Christmas Eve.

Did Rupert Murdoch just save the market from his top-ticking acquisition track record (or sentence it to death):

*21ST CENTURY FOX WITHDRAWS PROPOSAL TO BUY TIME WARNER
*FOXA SEES BUYBACK OF ADDED $6B SHRS COMPLETED IN NEXT 12 MONTHS

Time Warner is down over 13% after-hours.

Here is the bottom line: since Lehman, or starting in 2009, the Birth/Death adjustment alone has added over 3.5 million jobs. Or rather "jobs", because these are not actual jobs - these are BLS estimates for how many jobs newly-formed businesses have created based purely on statistical estimations and hypotheses that the US economy in 2014 is as it was in 1960. Which means that the traditional dynamics used behind the Birth and Death adjustment are now merely Dead, and US employment is overestimated by as much as three and a half million jobs!

We noted last week the coincidental surge in China's currency and stock market (bettering US equities for 2014) after they quietly unveiled QE-lite, but, as Bloomberg reports, Tom DeMark says "selling into strength is now recommended," with losses expected over the next six months. This follows his prediction from June that China's Shanghai Composite was due for a recovery, presaging a 16% rise. With last night's hint of China's credit impulse fading and CNY now recoupled with its fixing, perhaps he is right that the short-term catalysts for gains are exhausted. As DeMark concludes, "the trend is your friend until the trend is about to end."

Paying for unproductive friction with borrowed money has generated the illusion that free to me is actually free - it isn't. We all understand how friction slows our progress: flatten the tires on a bicycle and it becomes much harder to maintain speed. If a brake pad is rubbing against one wheel, it gets even harder. If we pile on additional sources of friction, eventually forward motion stops. In systemic terms, the system freezes up and collapses. We see the same systemic friction in the U.S. economy.