Every nation-state has a body of laws woven into the fabric of society. As Peruvian economist Hernando de Soto has commented on extensively, the stronger the rule of law, the stronger the economy. And by "stronger" laws, I mean laws that are impervious to tampering for personal or political gains. The connection between a sound judiciary and economic health is readily comprehensible, except maybe to a politician... businesses and individuals are far more likely to invest capital in a country with understandable laws that are impartially and universally enforced than if the opposite condition exists. That's because the lack of a consistent body of law breeds uncertainty and adds a huge element of risk for entrepreneurs. Which brings us back to the matter at hand – American justice on a slippery slope.
The release of the National Federation Of Independent Business (NFIB) Small Business Survey for December was much like the report we discussed in November. In short - there were very few positives to be found. The current survey was completed prior to the last minute "fiscal cliff" deal that raised taxes on small business owners and employers. It is unlikely that higher tax rates will spur businesses to expand employment, make capital expenditures or increase production. Furthermore, with the resolution to the upcoming debt ceiling likely resulting in few, if any, real spending cuts the worries about future economic strength will likely persist.
In light of this evening's entertainment from Paul Krugman, we thought QBAMCO's Paul Brodsky's view of the present debt-ceiling policy-through-the-looking-glass extremely apropos. Speaking of monetary abstractionism, there has been recent talk of a fiscal gimmick called “The Trillion Dollar Coin,” in which a platinum coin valued at $1 trillion would be created by the U.S. Mint for the Treasury Department. Treasury would then rid itself of its pesky fiscal deficit in one fell swoop by simply keeping the coin on deposit at the Fed. The TDC idea is a marvel of political imagination and public ignorance. Obviously, the TDC idea is a political ploy with a targeted mission: to rid the US Treasury of its debt ceiling, which is an increasingly frequent and embarrassing public reminder of government ineptitude. Everyone knows government-led de-levering is not a serious threat. However, the irony of the scheme and its MMT (Modern Money Theory, is espoused by imaginative economists technically proficient in double-entry bookkeeping and deficient in confidence that free marketplaces can provide accurate valuations) / liberal Keynesian promoters could not be more delicious. The scheme exposes the forty year-old charade, otherwise known as the global monetary system, better than any mind-exercise we have been able to come up with.
It will not come as a surprise to too many Zero Hedge readers but we feel a big told-you-so dance coming on again. Via BATS:
- *BATS SAYS 'SYSTEM ISSUE' CAUSED PRICING PROBLEMS OVER 4 YRS:WSJ
- BZX Exchange (10/24/08 - 01/04/13) Average Daily Incidents: 410.1 Total Incidents: 433,039
In simple terms BATS admits that the Reg NMS trading principle of NBBO (National Best Bid or Offer) has failed; meaning the core premise of market structure since 2005 has been massively abused by at least one and likely all exchanges. The bottom-line is that the primary and really only safeguard in the market when HFT was unleashed was never operational and the SEC has had i) no actual supervision over who or what was abusing the NBBO and ii) no way of keeping track of what really happens in the market.
The world has done everything humanly possible to put off any tough financial decisions and that is especially true in Europe and in America. The leaders on both Continents just cannot take the heat and so everything possible has been pushed forward in the hopes that economies will improve and that growth will cure the ills brought on by the lack of any real leadership. The centerpiece of the success of lower yields in all of the countries in Europe rests squarely upon Draghi’s “Save the World” plan where the ECB will backstop everything. A careful examination of the numbers and the possibilities limit what can be done in 2013 and the countries in question are Greece, Portugal, Cyprus, Spain and Italy. The other side of the coin here is social unrest that I believe will surface in the spring so that the present general belief that things have improved in Europe is nothing more than a hope which is fashioned by political design. The debt to GDP ratios for each nation in Europe are nothing more than gimmickry. The central banks, phony accounting and a promise by the ECB may well have saved 2012 from an implosion but 2013 brings a new set of circumstances that are far less appealing than last year. Stay safe!
The economic implosion of Europe is accelerating. Even while the mainstream media continues to proclaim that the financial crisis in Europe has been “averted”, the economic statistics that are coming out of Europe just continue to get worse. Meanwhile, those of us living in the United States smugly look down our noses at Europe because we are still living in a false bubble of debt-fueled prosperity. But eventually we will feel the sting of austerity as well. The recent fiscal cliff deal was an indication of that. Taxes are going up and government spending is at least going to slow down. It won’t be too long before the effects of that are felt in the economy. And of course the reality of the situation is that the U.S. economy really did not perform very well at all during 2012 when you take a look at the numbers. The cold, hard truth is that the U.S. economy has been declining for a very long time, and there are a whole bunch of reasons to expect that our decline will accelerate even further in 2013. So if you are an American, don’t laugh at what is happening over in Europe at the moment. We are headed down the exact same path that they have gone, and we are going to experience the same kind of suffering that they are going through right now. Use these last few “bubble months” to prepare for what is ahead.
The saga of an American family centered around Kunta Kinte's roller-coaster life through freedom and slavery made Santiago Capital's Brent Johnson reflect on just how critical 'roots' are in many aspects of our lives. From anthropology and linguistics to the root of law in the US Constitution and Bill of Rights, Johnson extends the analogy to precious metal derivatives exchanges rooted in trust and explains that money is not the root of all evil. While his political taunts and Keynesian antagonism is well worth the price of admission, it is the discussion of the 'manipulation and debasement of money' as the root of all evil that is key as the manager explains gold's centuries long avoidance of this Lenin- or Keynes-inspired comprehension of how governments can "confiscate wealth" and by a "process of inflation... can overturn the existing basis of society." Gold provides the roots or solid base on which economies have grown (or individuals stored value) for all of recorded history. His conclusion is key - a tree (currency) with no roots simply cannot stand for long and the market will eventually come to the same conclusion it has for the last 5000 years as the OTC derivative bubble implodes.
On the day that California's Governor Jerry Brown asks federal judges to lift an order to release prisoners to reduce overcrowding, this brief clip seemed extremely appropriate when considering just why it is that the US prison population is so high (as we noted most recently here). Professor Daniel D'Amico provides some insightful color, noting that fully 24 percent of inmates in U.S. prisons are non-violent drug offenders. The drug war has been adding to a growing U.S. prison population for the past 40 years. Today, the United States holds more human beings in prisons than any other country, both as a percentage of the population and in counting total numbers. The war on drugs has led to significant increases in the U.S. prison population and he argues that perhaps this is an ineffective way to address drug use in America. An interesting dilemma on the day when another 'freedom', that of gun ownership, is up for potential prohibition.
This past weekend, as part of a system update to the CalWIN software of California's Social Services department, HP accidentally cancelled EBT cards for some 37,000 Californians. We can only imagine the resulting panic and the scramble by all these Californians who suddenly could not live within their means to print trillion, and other denomination, coins, in the shining example of their government. The OC Register reports that eighteen counties were affected in the CalFresh chaos (the 'friendly' name given to California's food stamp program - also formerly known as the Supplemental Nutrition Assistance Program or SNAP). While we worry for the strippers and liquor stores, CalWIN and Xerox (the state's primary contractor for administering CalFresh) developed a process to reactivate the cards by Tuesday morning. While this must have been a tough day or two for many, we wonder if Geithner's 'extraordinary' efforts to extend the debt ceiling deadline have perhaps gone a little too far? Finally, instead of minting coins, perhaps Hewlett Packard can remotely update its software in the Fed printers, which can then proceed to print a few cool extra trillion unsupervised, and voila: all of America's problems are gone.
Update: those (few) worried if America's overactive Attorney General, best known for soon to be confiscating guns and perhaps shipping them off to Mexico, and doing nothing else in the past 4 years, will stick around for Obama's second term.
And no, before the questions pile in, she was not fired, as poetic as that would be (nor was she replaced by a 65 year old, part-time worker as is the case with the vast majority of the US labor force). She quit, saying "decided to begin a new future, and return to the people and places I love" and that as the product of "a large Mexican-American family I never imagined that I would...serve in a president’s Cabinet." From WaPo: "Labor Secretary Hilda Solis said in a letter to colleagues Wednesday she was stepping down from her post." Of course, using the BLS' own policies and "logic", this means the unemployment rate just ticked even lower. We look forward to Hilda's book due out in 6-12 months bashing, who else, Tim Geithner.
VIX rose majestically (by a mere 0.25 vols and still below 14%) for the first time in seven days (but the term structure steepened a little more) and while stocks did not like that, they still managed to pull off the lows, close green, and remain in a 1% range for the last week. Treasury yields continue to slide lower (even with a weak auction today) as it would appear the end of the bond bull market was called a little premature (and as we noted, merely reflected short-term rate-locks for corporate issuance). While HLF grabbed headlines, it is AAPL that seems to be swept under the rug as it ends the day crashtastically at its lows (where its margins will be after the iPoor is released). The USD leaked ever so gently higher on the day - ending practically unchanged on the week (with JPY 0.5% stronger on the week). Commodities chopped around non-directionally (though Silver is the week's winner so far). Financials, and Energy had a tough day (and homebuilders were sold hard after Europe's close). HYG seemed today's lever of rampaciousness and remains rich to intrinsics (as cash HY bonds just can't catch a bid at record-high prices). Once again the S&P reversed its (up)trend at around the European close but late-day VWAP reversion held us bid on the day.
Well they aren’t really your “new” slumlord in the sense you have been debt slaves to the financials system for decades. What I really mean is that it is now becoming overt and literal. Literal because financiers are now the main players in the real estate market and are buying all the homes ordinary citizens were kicked out of over the past few years. Yep, we bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.
While Ackman and Loeb battle it out over HLF, the other potentially firework-prone battle has died an ignominious death. The WSJ reports that AIG has generously decided not to bit the Treasury hand that fed it just a few short years ago:
- *AIG WON'T JOIN GREENBERG SUIT CHALLENGING U.S. BAILOUT :AIG US
- *AIG WON'T PURSUE CLAIMS ITSELF :AIG US
- *AIG SEES FILING FORMAL STATEMENT WITH COURTS IN COMING WEEKS
- *BENMOSCHE SAYS HE PERSONALLY TOLD GREENBERG ABOUT AIG VOTE
It seems that common-sense prevailed for once - or did Benmosche and team get a friendly tap on the shoulder from outgoing Treasury head Geithner that stirring up a few million pages of Treasury documentation would not be good for anyone?
Update: this is just getting better and better: flashing headlines that the SEC has opened an inquiry into Herbalife. Dow Jones adds that inquiry may not result in action. Stock slides on the news, however following speculation that the SEC may (or rather should) be investigating the various massive puts in HLF stock before the Ackman presentation in mid-December, it bounces. Total chaos, and all very exciting.
One guy (whose positive P&L in 2012 was primarily thanks to the gap lower in HLF in the last two weeks of 2012, since filled entirely and then some), says $0. Another guy, whose nearly $10 billion hedge fund was up 30% in 2012, says over $60. Whom do you trust? As far as we are concerned, the second Tilson goes long, we dump everything.
On January 8, 2013 there were two separate events where an exchange stopped disseminating quotes, which caused the last quote sent from that exchange to lock (bid price equals ask price) or cross (bid price is greater than ask price) the NBBO (National Best Bid/Offer) when market prices moved higher or lower on other exchanges. Crossed quotes cause many problems for wholesalers (who internally match orders), order-routers, traders, financial web-sites, business news channels, and any of the 2.5 million subscribers that use the consolidated quote to analyze stock prices. From IWM to HLF, the crosses (and thus integrity of the consolidated feed) were everywhere.