Europe has now officially become the Schrodinger continent, demanding both sides of the economic coin so to speak, and is stuck between the proverbial rock and hard place (or "a cake and eating it"). On one hand it wants to telegraph its financial system is getting stronger, and doesn't need trillions in implicit and explicit ECB backstops, on the other it needs a liquidity buffer against an economy that, especially in the periphary, is rapidly deteriorating (Spanish bad debt just hit a new all time high while Italian bad loans rose by 16.7% in one year as more and more assets become impaired). On one hand it wants a strong currency to avoid any doubt that there is redenomination risk, on the other it desperately needs a weak currency to spur exports out of the Eurozone (as Spain showed when the EUR plunged in 2012, however that weak currency is now a distant memory and it is now seriously weighing on exports). On the one hand Europe wants to show its banks have solidarity with one another and will support each other, on the other those banks that are in a stronger position can't wait to shed the stigma of being associated with the weak banks (in this case by accepting LTRO bailouts).
Ours is a dysfunctional debt-based Empire that buys the complicity of its debt-serfs with entitlement bread and circuses. The road to debt-serfdom is paved by the banks and enforced by the Central State. If there is any point that is lost on ideologues, Progressive and Conservative alike, it is this: the first-order servitude and second-order tyranny of debt-serfdom can only occur if the banks' power is extended and protected by an expansive Central State.
- Fed Pushes Into ‘Uncharted Territory’ With Record Assets (BBG)
- Next up in the currency wars: Korea - Samsung Drops on $2.8 Billion Won Profit-Cut Prediction (BBG)
- China Warns ‘Hot Money’ Inflows Possible on Easing From Abroad (Bloomberg)
- BOJ Shirakawa affirms easy policy pledge but warns of costs (Reuters)
- Merkel Takes a Swipe at Japan Over Yen (WSJ)
- Wages in way of Abe’s war on deflation (FT)
- Italian PM under fire over bank crisis (FT)
- Senior officials urge calm over islands dispute (China Daily)
- Spain tries to peel back business rules (FT)
- Rifts Over Cyprus Bailout Feed Broader Fears (WSJ)
- Soros Says the Euro Is Here to Stay as Currency War Looms (BBG)
“Those are my principles,” Marx said. “And if you don't like them... well, I have others.”
Just when the Super Goldman Mario Bros (Monti and Draghi) told us everything is fine in Europe, and it is not only safe but encouraged to get back in the pool, the first canary of 2013 just died.
While the main topic of conversation overnight was the Apple implosion after earnings (which was mercifully spared inbound calls from repo desk margin clerks who had all gone home by the time the stock hit $460), there was some macro data to muddle up the picture, which, like everything else in this baffle with BS new normal came in "good/bad cop" pairs. In early trading, all eyes were focused on Japan, whose trade and especially exports imploded when the country posted a record trade gap of 6.93 trillion yen ($78.27 billion) in 2012 and the seventh consecutive monthly drop in exports which showed that improved sentiment has yet to translate into hard economic data. Finance ministry data on Thursday showed that exports fell 5.8 percent in the year to December, more than economists' consensus forecast of a 4.2 percent drop. Trade with China was hit particularly hard following the ongoing island fiasco, which means that all the ongoing Yen destruction has largely been for nothing as organic growth markets simply shut off Japan. This ugly news was marginally offset by a tiny beat in the HSBC China manufacturing PMI which came slighly above consensus at 51.9 vs exp. 51.7, the highest print in 24 months, but as with everything else coming out of China one really shouldn't believe this or any other number in a country that will not allow even one corporate default to prevent the credit-driven illusion from popping.
"Return = Cash + Beta + Alpha": An Inside Look At The World's Biggest And Most Successful "Beta" Hedge FundSubmitted by Tyler Durden on 01/23/2013 22:31 -0400
Some time ago when we looked at the the performance of the world's largest and best returning hedge fund, Ray Dalio's Bridgewater, it had some $138 billion in assets. This number subsequently rose by $4 billion to $142 billion a week ago, however one thing remained the same: on a dollar for dollar basis, it is still the best performing and largest hedge fund of the past 20 years, and one which also has a remarkably low standard deviation of returns to boast. This is known to most people. What is less known, however, is that the two funds that comprise the entity known as "Bridgewater" serve two distinct purposes: while the Pure Alpha fund is, as its name implies, a chaser of alpha, or the 'tactical', active return component of an investment, the All Weather fund has a simple "beta isolate and capture" premise, and seeks to generate a modestly better return than the market using a mixture of equity and bonds investments and leverage. Ironically, as we foretold back in 2009, in the age of ZIRP, virtually every "actively managed" hedge fund would soon become not more than a massively levered beta chaser however charging an "alpha" fund's 2 and 20 fee structure. At least Ray Dalio is honest about where the return comes from without hiding behind meaningless concepts and lugubrious econospeak drollery. Courtesy of "The All Weather Story: How Bridgewater created the All Weather investment strategy, the foundation of the "risk parity" movement" everyone else can learn that answer too.
From a valuation perspective, Chinese equities do not, at first glance, look to be a likely candidate for trouble. The PE ratios are either 12 or 15 times on MSCI China, depending on whether you include financials or not, and do not scream 'bubble'. And yet, China has been a source of worry for GMO over the past three years and continues to be one. China scares them because it looks like a bubble economy. Understanding these kinds of bubbles is important because they represent a situation in which standard valuation methodologies may fail. Just as financial stocks gave a false signal of cheapness before the GFC because the credit bubble pushed their earnings well above sustainable levels and masked the risks they were taking, so some valuation models may fail in the face of the credit, real estate, and general fixed asset investment boom in China, since it has gone on long enough to warp the models' estimation of what "normal" is. Of course, every credit bubble involves a widening divergence between perception and reality. China's case is not fundamentally different. In GMO's extensive discussion below, they have documented rapid credit growth against the background of a nationwide property bubble, the worst of Asian crony lending practices, and the appearance of a voracious and unstable shadow banking system. "Bad" credit booms generally end in banking crises and are followed by periods of lackluster economic growth. China appears to be heading in this direction.
Why do commercial investment advisers always tell you that gold (& silver) and PM assets are all massively risky? Here's the one chart that explains everything.
"America has carried on not simply because of the skill or vision of those in high office, but because we, the people, have remained faithful to the ideals of our forebears and true to our founding documents.... The question we ask today is not whether our government is too big or too small, but whether it works -- whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified. Where the answer is yes, we intend to move forward. Where the answer is no, programs will end. And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government."
While it is somewhat broadly understood that the 'market' is disconnected from 'fundamentals' currently - apparently on the basis of forward hope and central bank liquidity - we thought the following charts would be worthwhile paying attention to in an effort to shake off the anchoring biases that so strongly hold us as our nominally-priced markets break to new highs. Again and again over the past six years we have seen stocks ignore (just a blip) significant trend changes in macro data, only to revert aggressively back to reality soon after. Whether compared with pure 'macro' data or the liquidity-fueled fed balance-sheet driver, reversions come - especially when the market least expects them (and is most aggressively positioned). Presented with little comment...
Over the past few months, the perception has been that the risk of a meltdown in Europe (characterized by the loss of market access for Spain and Italy) has grown increasingly remote. The relative calm comes courtesy of the ECB which conventional wisdom has it, began acting "like a real central bank" in September when it announced it was willing to throw eurozone taxpayers' wallets behind theoretically unlimited purchases of Spanish and/or Italian bonds. This promise of course, was meant to discourage so-called "bond vigilantes" (otherwise known as investors who know a bad deal when they see it) from "speculating" on rising periphery bond yields. As it turns out, the effect of the as yet untested Draghi put has been dramatic. Spanish and Italian 10s have tightened by a ridiculous 240 basis points since late July.
The groupthink for investors today is predicting three major outcomes for 2013. Unfortunately, they will likely all prove to be popular delusions.
With Spanish and Italian sovereign bond spreads back at 19-month lows (admittedly driven by OMT 'promises' and self-referential buying from any and every domestic fund possible), many are arguing that all is well, crisis averted and the world can go on its merry way to Dow 30,000. However, the reality is extremely different in the real economy - and the optics of the spread compression have done nothing but armor the politicians to stall any needed reforms for now. The ultimate cognitive dissonance is highlighted nowhere better than in Italian GDP (whose 2013 forecast was just slashed further to -1% - and remember in Jan 2012, the 2012 GDP forecast was -0.4% and it is currently running at a 6x miss around -2.4%); and Spanish bad loans, which are now running at ever-new record highs of 11.6% and accelerating year-over-year. The chasm between the facts on the ground (reality) and the market's optics have never been wider as data point after data point indicates stagnation at best (core and periphery) and depression at worst.
US politicians have opted to begin mimicking their EU counterparts when it comes to dealing with our debt issues. What could go wrong?