New Normal

From macro to micro; from momentum to valuation; and from money supply to expectations, the 'new normal' in which investors find themselves is one currently dislocated and 'different' from the past. However, as we have seen all too often in the past, these dislocations do not last forever. And with positioning (here, here, and here) as bullish as its ever been, it seems there is little room for error in economic reality catching up to stocks 'hope'-filled expectations.

When only a few dozen claim they understand how an economic system works we have crossed over from examining and describing a complex economic entity and into a religious cult based solely upon faith and belief.

When Europe's politicians boldly said a few weeks ago what they have been repeatedly saying every year for the past three, namely that "Europe is fixed" usually just before it breaks all over again, what they meant was that the various stock markets were up. Because if they were actually referring to the European economies, Europe just broke (no pun intended) once more, with the Greek economy once again back to its "new normal" baseline state: a near complete halt as the cold of winter dissipates, and protests and strikes return. In this case, the biggest losers are the thousands of people living on various Greek islands who have now been cut off from the mainland for the 6th consecutive day. And everyone else, of course, reliant on the Greek economy actually posting an uptick one of these centuries.

As I noted in an article published Thursday morning, the government bought three quarters of a percentage point worth of growth in the third quarter leading several hapless commentators to opine on national television that the U.S. economy was not only on solid footing but was in fact experiencing "above trend" growth. Of course if you're the mainstream financial media what is good for the Q3 goose is not necessarily good for the Q4 gander and so when fourth quarter GDP printed in contraction territory Wednesday, viewers were encouraged (much to the chagrin of a predictably irate Rick Santelli) to discount "volatile" government consumption expenditures and focus only on the components that made a positive contribution.

Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

Over two years ago (and reiterated last year) Zero Hedge first wrote on what was and is an undisputed transition within the US labor force: a shift from full-time to temp, or part-time labor, with virtually no contractual or welfare benefits, and where workers are lucky to get minimum wage. This is because in the "New Normal" where copious amounts of structural slack are pervasive due precisely to the Fed's constant flawed micromanagement of the economy, the US has now become an "employers' market." Furthermore, we were the first to make the critical distinction that it is absolutely not all about the quantity of jobs, but much more importantly, the quality of the new jobs being created. However, just like 99% of the general public, and all of the mainstream media, has an inborn genetic disorder preventing it from grasping the distinction between nominal and real, so these two critical aspects of the US jobs market languished unperturbed. Until now, two years later, when we are happy to see that the mainstream media has finally caught up with what our readers knew in December 2010.

It would appear that the hike in taxes on 77% of Americans that was heralded as a success, has dented confidence just a little. As the efficient stock market moves to all-time nominal highs in many cases, Consumer Confidence just fell off a cliff. The conference board printed at the worst level in 13 months - so all those 2012 gains are gone - and fell month-over-month by the most since the August 2011 fiscal cliff debacle. For every income levels (except those earning under $15k) confidence plunged with the $35k-$50k bracket crashing the most. It would appear that the driver of 70% of the US economy is not buying the new normal being fed to us daily by any and every media outlet possible. No matter how much the market is held up by mysterious runs in FX markets or volatility compression, it would appear that - just as we have been noting - the underlying macro fundamentals will eventually be priced in, as this does not bode well for retail sales.

If there was any confusion where New York's uberwealthy were scrambling to dump their money in December ahead of the now official tax hike on the wealthiest, we now know: some two hours north on the Long Island Expressway, or the Hamptons to be precise. Bloomberg reports: "Home prices in New York’s Hamptons, the resort towns on the Long Island coast, rose to the highest on record as deals at the upper end of the market surged before expected tax increases for sellers. The average price of homes that sold in the fourth quarter jumped 35 percent from a year earlier to $2.13 million, the highest since Miller Samuel Inc. begin tracking Hamptons sales in 1999." Needless to say the when a handful of the 0.001%, and quite close to the New Normal discount window - i.e., the Fed's excess reserves - purchase homes with no price discrimination, it has the same impact as when foreign oligrachs come to the US to launder illgotten cash (with the NAR's blessings), sending prices up some 35% in one year. And since the average price of all houses is dragged higher as a result, TV pundits can spin it as a housing recovery, and get consumers to consume even more by "charging it", making the abovementioned Hamptons' home purchasers even richer: there's your recovery. And it is a recovery, all right, for some: like Lloyd Blankfein who just parked another $32.5 million in prime 8,000 square foot Bridgehampton mansion set on some 7.3 acres.

The market gets smoked for 1/4 Trillion in a single name, and we're trading at the highs. Go figure.

A funny thing happened as US equity indices pushed to new highs - levered this time by Bond and FX markets - and following the new normal US-Open-to-EU-Close pattern. VIX, that much talked-about contemporaneous indicator of concern (or complacency) took a divergent dive. Different this time? Maybe... Or are all those downside call-writers covering their levered losses and forced buy-ins in AAPL? Seems like that initial burst of recovery is fading fast now as AAPL drops back below its VWAP.

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.

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.

In the old days, it was Fed via POMO to stocks; but given the new normal, now we have levered POMO to rescue us via vol compression and yet again - today saw risk-assets sliding all night (though admittedly only around 0.5% off highs) only to be rescued by a vol-compressing equity push that started the moment POMO finished. HY credit was tinkered with in the last hour to keep things afloat and of course AAPL soared into its earnings report. The debt-ceiling vote did little to maintain risk-on as CAD weakness (BoC holding off from rate hikes) pulled the USD higher, and hurt risk-on commodities - as Oil plunged on the day. Treasury yields continued to fall - entirely ignoring stocks once again - even though stocks caught down to risk early and ended at new five-year highs on the Dow (thanks almost entirely to IBM). So low volume in stocks (AAPL decent volume), low average trade size in S&P futures, and a disconnected equity market from bonds and FX once again... eyes down for an Apple full-house...

So much for the latest "recovery." While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

Yesterday Lance Armstrong admitted to the New Normal national confessional and conscience clearinghouse - Oprah - to what everyone had known for a long time, yet what he spent millions over the years suing others for "defaming" him for. Below is the resulting word liecloud of his interview. Spot the words "apologize" and "sorry." In other news, we look forward to Lance's rise to the ranks of primary dealer prop trader. He certainly has all the sociopathological prerequisites.