Archive - Feb 2015 - Story

• if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
• As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
• if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers
• we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation

The fact is, the die is cast. In a couple of weeks, Guitar Center will need to report its Christmas performance to its bondholders. If things do not look good, its bonds will be ripped apart like RadioShack’s. Here’s what this really means: it’s the end of big box retail, an irrational addiction to growth, and the scourge of unregulated structured finance. For a few years, unwise urban planning and unregulated banks created a new bubble in the American suburbs. The objective truth is that the growth of the last decade was financed by banking fraud, and that financial trickery of this sort only fools people in the short-term. Eventually, you must have a product people demand, sold by competent people who care about the business, financed in a way that makes sense.

With hopes that Bridge-gate was drifting into the back of potential voters' minds, New Jersey Governor Chris Christie (and members of his staff) face yet another Federal criminal investigation. Having previously dismissed the accusations as being "conspiratorial nonsense," it appears allegations that the governor and his staff broke the law when they quashed grand jury indictments against Christie supporters, are being taken a little more seriously now.

Deflation remains the enemy thanks to debt, deleveraging, demographics, tech disruption & default risks. US aggregate debt is today a staggering $58.0 trillion (327% of GDP); the number of people unemployed in the European Union is 23.6 million; Greece has spent 90 of the past 192 years in default or debt restructuring. 7 years on from the GFC... The massive policy response continues. Central bank victory means that lower rates, currencies, oil successfully boosts global GDP & PMI’s in Q2/Q3, allowing Fed hikes in Q4. Bond yields would soar in H1 on this outcome. Defeat, no recovery, and currency wars, debt default and deficit financing become macro realities.

In Part 1, we described the world’s economy as one that is based on energy. The design of the system is such that the economy can only grow; shrinkage tends to cause collapse. If this view of the situation is correct, then we need an ever-rising amount of inexpensive energy to keep the system going. We have gone from trying to grow the world economy on oil, to trying to grow the world economy on coal. Both of these approaches have “hit walls”.  Now we have practically nowhere to go.

We can certainly "hope" that the markets will continue to march endlessly higher. However, "hope" has never been an effective portfolio management strategy. Considering that the decline in oil prices is supposed to good for the consumer, even though personal spending declined in the most recently reported period, the decline in dividends will certainly have a negative effect on those depending on those dividends. The current detachment between spending and the stock market will likely be corrected rather harshly at some point.

"Central bank polices have ruptured the proper functioning of capital markets. Some investors myopically believe that 'money printing needs a home' and that it will end up in equities (the asset class with upside). However, such a belief needs to include a deep faith in the central bank’s abilities to navigate a soft landing. History is not on their side. Investors pouring into equities might be playing an epic game of chicken."

As credit markets have been indicating for 15 months, 94-year-old consumer-electronics chain RadioShack has finally pulled the ripcord...

*RADIOSHACK FILES FOR BANKRUPTCY PROTECTION AS LOSSES MOUNT
*RADIOSHACK WILTS UNDER BIG-BOX, ONLINE COMPETITION

RadioShack lists $1.2bn in assets and $1.38bn in debt. Additionally, Bloomberg reports that a post-bankruptcy deal is being worked on with Sprint.

The US chief analyst of Nordea, Johnny Bo Jakobsen, points out a curious statistical finding: in the past decade, consensus forecast over-estimated January reading on 9 out of 10 occasions. As the chart below shows, the average overoptimistic consensus miss for January is just about 50K, with the last time consensus was lower than the final result taking place in 2012, and before that, one has to go all the way back to 2003 for the second payrolls "beat".

In case algos still haven't gotten the message to jump all aboard into the S&P, here comes the CME with a gntle nudge in the form of 90 pages of margin hikes including Brent, RBOB and, just in case there is still anyone who wishes to trade paper precious metals against the BIS, silver. In fact, at first glance it appears the only future  whose margin was not hiked was stocks: apparently stocks are never volatile enough for a margin hike.

The Hong Kong government is so foolish that one official said: "There is a need to stimulate the city’s domestic consumption by introducing measures to leave more cash in the hands of the public." What are you talking about, man? Everyone knows that you stimulate the economy by increasing government spending, not reducing it and just leaving the people to decide what they’re going to spend it on. It’s insane.

On the surface, Twitter's Q4 numbers were good, with the company clocking in $479MM in revenue and $0.12 in EPS on consensus estimates of $454MM and $0.06. Of course, on a GAAP basis things were much uglier, with the company reported a loss per share of $0.20 cents in Q4, and a net loss of $577.8 million for 2014. However, as everyone knows, TWTR's value is not about its numbers, or rather adjusted numbers, but its user growth: after all the company has about a billion monthly active users it needs to catch up in order to compete with Facebook in total user engagement. And it was here that the company stumbled.

When the illusion that the Status Quo can fulfill all its promises to everybody dies, the Status Quo starts the terminal slide to effective collapse.

While today surprised some with its lack of images of Greeks standing in line furiously pulling cash from bank ATMs, as Bloomberg reports, Greeks are anxiously stashing cash in the most unusual places...