New Normal

What is more valuable than the life-giving properties of human blood? Why, in the new normal, it's the life-blood of the financial markets - printer ink!!

Just a lucky coincidence?

Every day in the New Normal, it is either a mass shooting or an explosion in some pipeline or crude-carrying train. Moments ago, a pipeline in Texas exploded in a massive fireball and has prompted the evacuation of the nearby town of Milford.

With a shiny red ballon dog selling for $58 million, perhaps it was time to take a little profit in the equity exuberance. S&P futures are down 9 points from last night's close - which in the new normal is considerable (sadly) - with no macro data headlines this morning to spark a move, we will be watching JPY (which for now is rallying awkwardly) for signs of ignition. Meanwhile, as the USD flatlines (despite dispersion in FX), Bitcoin just toppped $400 for the first time ever - doubling in the last two weeks. Precious metals are up modestly; treasury yields are limping lower; and European equities (and sovereign bonds) are having another tough day.

Sadly, only in our new normal world is this funny...

One of the mysteries surrounding the insolvent, and already once bailed out Spanish banking sector, has been the question why reported bad loans - sharply rising as they may be - are still as relatively low as they are currently, considering the nation's near highest in the Eurozone unemployment rate, and in comparison to such even more insolvent European nations as Greece, Cyprus and Slovenia. Courtesy of the just completed bank earnings season, and a WSJ report, we now know why: it turns out that for the past several years, instead of accurately designating non-performing loans, banks would constantly "refinance" bad loans making them appear viable even though banks have known full well there would be zero recoveries on those loans. In fact, as the story below describes, banks would even go so far as making additional loans whose proceeds would be just to pay interest on the existing NPLs - a morbid debt pyramid scheme, which when it collapses, no amount of EFSF, ESM or any other acronym-based bailout, will be able to make the country's irreparably damaged banks appear even remotely viable.

Last week, Citi's Tobias Levkovich raised numerous concerns about the state of exuberance and "disconcerting disconnects" that is our new normal market currently. In the week since, Citi's proprietary Panic/Euphoria model is sending a clear warning of substantial complacency - its most "euphoric" since 2008. This is worrisome, he notes, since there is an 80% probability of a market decline in the next 12 months based on the current reading.

What are the odds that the long-term trend towards lower participation is going to turn around soon? I would say, "Not high".

With what few vacuum tube-based trading algos are left and reacting with rabid kneejerkiness to every flashing red headline, one would get the impression that what matters to the Fed's decision on how to adjust its balance sheet flow depends on the US economy. But if Deutsche Bank is correct, the next source of global economic contraction, which it will be up to the Fed to offset (just like China was the marginal growth dynamo in the months after Lehman filed), and result in an increase in QE nevermind taper, is not in the US at all, but in China where things are about to go bump in the night. Which means that just like that we have moved into the "New Normal paradigm" where the worse the news out of China, the better for stocks.

The following chart, from the Balyasny Asset Management Q3 letter to investors, show just that: the magic of hedge fund leverage in the New Normal.

As we reported previously, for the third quarter in a row, Obama's favorite punching bag bank - JPMorgan - reported a statistically impossible zero trading day losses. Some suggested that since in the New Normal market in which it is virtually impossible to lose money this was to be expected; either that or just because banks work purely to satisfy client flow and have little principal risk, there is little reason for them to actually lose money trading. Both these ideas got blown out earlier today when Goldman reported that in the third quarter, the FDIC-insured hedge fund's trading loss days soared to a total of 15 days: a whopping 23.4% of the total 64 trading days in the quarter.

If ever there was a symptom of the instant gratification meme of the new normal (why wait when you can have it all now?), it is 'vice'. That is why Southbay Research's Vice Index (composed of prices paid, volume, and frequency of sales in liquor sales, gambling, and prostitution) is so worrisome, as WSJ reports, "it's signalling that consumer spending growth is about to drop and stay subdued for a few months." Southbay's Zatlin notes that measuring this kind of discretionary spending provides a window into the true state of the economy - which fits with recent macro data on retail sales (and forecasts for the holiday season as hope of the 'second-half' recovery fade quietly into next year.

Wondering who you will flip your IPO allocation to? Meet 56-year-old admin assistant, Deborah Watkins... "I messed up by not buying any Facebook, so I want to get some Twitter."

3 months later and it appears hope has reverted (once again) to its new normal reality. "Just one more quarter," we are sure, will be the clarion call from all asunder...