"The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long... And so these companies put together optimistic financial statements that have the benefit of these extremely low interest rates. They keep adding debt onto debt onto debt. How long can they continue to get more debt to finance this whole operation? It's not a model that anybody who is very sensible would follow."
"Just be long. Pretty much anything. So here’s how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won’t). Hey this is easy… And then it crashed"
- Hugh Hendry
Futures Pushed Higher On Weaker Yen, But All Could Change With Today's "Most Important Ever" Jobs NumberSubmitted by Tyler Durden on 12/06/2013 06:58 -0500
The latest "most important payrolls day of all time" day is finally upon us. Of course, this is a ridiculous statement: considering that the average December seasonal adjustment to the actual, unadjusted number is 824K jobs, it will once again be up to the BLS' Arima X 13 goal-seeking, seasonal adjusting software to determine whether the momentum ignition algos send stocks soaring or plunging, especially since the difference between up and down could be as small as 30K jobs. As Deutsche Bank explains: " today's number is probably one where anything above +200k (net of revisions) will lead to a further dip in risk as taper fears intensify and anything less than say +170k will probably see a decent relief rally after a tricky week for markets. Indeed yesterday saw the S&P500 (-0.43%) down for a fifth day - extending a sequence last seen in September." And then consider that nearly 30 times that difference comes from seasonal adjustments and it becomes clear why "farcial" is a far better definition of labor Friday.
China's GDP is about to undergo the same magic that US GDP received earlier in the year. The "Chinese system of National Accounts" will see five significant adjustments that are expected to (surprise) boost the size of the nation's estimate of its GDP. The National Bureau of Statistics is considering making the changes to reflect the latest economic and social developments and implement the reform guidelines unveiled at the 3rd Plenum recently. From the addition of research and development - intellectual properrty - (just as the US did) to including mark-to-market changes (read rises) in employee stock options and real estate in consumption data, the Chinese appear dead set on making a once-unbelievably goal-seeked number into an entirely fantastical representation of reality (which of course enables moar higher manipulation as to avoid any debt-to-gdp hurdles that the real world might see as a concern).
The Fed will have to increase QE (not taper it) because systemic debt is compounding faster than production and interest rates are already zero-bound. Lee Quaintance noted many years ago that the Fed was holding a burning match. This remains true today (only it is a bomb with a short fuse). Thirteen years after the over-levered US equity market collapsed, eleven years following Bernanke’s speech, five years after the over-levered housing bubble burst, and four years into the necessary onset of global Zero Interest Rate Policies and Long-Term Refinancing Operations, global monetary authorities seem to have run out of new outlets for credit. In real economic terms, central bank policies have become ineffective. In other words, the US is now producing as much new debt as goods and services.
"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro...
The sad, stark fact is that oil is now too expensive to permit further expansion of economies and populations. Expensive oil upsets the cost structure of virtually every system we need to run modern life: transportation, commerce, food production, governance, to name a few. In particular expensive oil destroys the cost structures of banking and finance because not enough new wealth can be generated to repay previously accumulated debt, and new credit cannot be extended without a reasonable expectation that more new wealth will be generated to repay it. Through the industrial age, our money has become an increasingly abstract and complex product of debt creation. In short, a society with deeply impaired capital formation has turned to crime, corruption, fakery, and subterfuge in order to pretend that “growth” — i.e. expansion of capital — is still happening.
"One day this whole credit bubble will be deflated very badly - you are going to experience a complete implosion of all asset prices and the credit system..."
Risk assets are not quite (yet) back to the ‘melt-up' of May but equity markets are trading in a confident mood after Bernanke caused sentiment to flip from glass ‘half empty' to ‘half full'. China Q2 GDP data did not derail price action as equity futures anticipate a positive start of the week. The semi-annual testimony of the Fed Chairman is typically a seminal event on the market calendar but do we dare say that the one coming up this week is a non-event following last week's message on policy accommodation? The VIX index dropped 7 points over the last three weeks of which 2 points alone came last Thursday and Friday as stocks roared to new highs and shrugged off the candid observation on the Chinese economy by finance minister Lou Jiwei. If a 6.5% growth rate is tolerable in the future, there is little doubt that commodities and the AUD have further to fall. Chinese GDP slowed from 7.7% to 7.5% according to data released overnight and prospects for the second half don't look much brighter after evidence of slowing credit growth. Data on Friday showed declines of narrow money from 11.3% yoy to 9.1% in May, with broad money growth slowing to 14% yoy. Non-bank credit and new foreign currency bank lending also weakened.
Barry Ritholtz is convinced that once the current short-term bounce is over with, the recent cyclical bear market in gold will resume. The reality is of course that neither Mr. Ritholtz, nor anyone else actually knows the future. Therefore, he cannot know whether the bear market is or isn't over. However, judging from the remainder of his post, he actually seems to think that the secular bull market in gold is over. In our opinion there is no evidence for that, and we will explain below why we think that he and others in the long term bear camp are wrong. Further below is the evidence marshaled by Mr. Ritholtz (actually, apart from the technical analysis he provides, it isn't really evidence at all – it reads like an unsupported opinion). Sure enough, gold has no yield, no conference calls, and no income statements (paraphrasing Jim Grant). That is actually the beauty of it. But that does not mean it 'has no fundamentals', nor does it means that it 'cannot be an investment'. We comment on his article (and its errors) further below.
In UBS' view, 1994 is critical for guiding investing today. The key point about 1994 was not that US bond yields rose during a global recovery. But that the leverage and positioning built up in previous years, on the assumption that yields would remain low, then got stressed. The central issue, they note, is that a long period of lacklustre growth, low rates and easy money induces individual investors, funds, non-financial corporates and banks to reach for yield. In many cases, they gear up to do it. And as Hyman Minsky warned; in this way, stability breeds leverage, and leverage breeds instability. It is much less likely that we see the US enter a ‘high plateau’ of growth as we saw from 1995-98, where the US saw a powerful productivity & credit fuelled boom while the emerging markets deflated. And it makes it more likely that the US stays on a lower trajectory, interspersed with periodic recessionary slowdowns in the years ahead. The point at which the market realises this would likely herald a significant risk-off event.
In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.
At the moment, it seems like the US is that naïve kid sitting in front of the Chinese magician watching China pull economic growth out from behind their ears and rabbits to chase after (that disappear down holes usually). But while their attention is focused on the Chinese magician, they are missing the assistant! She’s doing far more than they could ever imagine. And, nobody is taking the blindest bit of notice. The Philippines! You’d better watch out! She’s behind you!
Despite the aura of control, Fed officials (and casual observers) may sense things spinning out of control. Of course, hyper-fragility is exactly the effect that all the Fed’s own actions would predictably lead to. When you divorce truth from reality, strange things are bound to happen. There is one thing that we know for sure in this strange period when bankers have tried to manage reality in the absence of truth: that advanced industrial-technological economies designed to run on $20-a-barrel oil can’t run on $100-a-barrel oil, and that is why the US economy was subject to financialization in the first place - to offset declining productive activity by an attempt to get something for nothing. The world is about to find out that you really can’t get something for nothing. It will be a harsh lesson.