Conventional thinking and reporting has it that Japan is conducting a larger version of the same monetary experiment they’ve been running for about 15 years. The implication here is that we can safely analyze what Japan is up to through the same monetary lens, as always, but with a slightly wider aperture. In truth, what Japan is running is as much a massive social experiment as it is a monetary experiment. It has such enormous implications to everyone, but especially the Japanese people, that we should all be paying very close attention. The early results, with a manic pulse in the Nikkei coincident with arrhythmic gyrations in the Japanese government bond market, suggest that something has been shaken loose in Japan.
Back in late 2010, there was much hope that as a result of the unfolding robosigning "Linda Green" scandal, not only would banks would be forced to fix their ways by incurring crippling civil penalties (because not even the most optimistic hoped any bankers would ever face criminal charges for anything), but that the US housing market may even reprice to a fair price as for a brief moment there nobody had any idea who owned what mortgage. Ironically, what did end up happening was to provide banks with a legal impetus to slow down the foreclosure process to such a crawl that an artificial backlog of millions and millions of houses at the start of the foreclosure process formed, bottlenecking the foreclosure exits even more and in the process providing an artificial, legal subsidy to housing prices manifesting itself best in what is erroneously titled a "housing recovery" for many months now. What this did was to allow banks to aggressively reprice the mortgage-linked "assets" on their balance sheets much higher, and in the process unleash much capital, primarily for bonus and shareholder dividend purposes. Yet this epic self-benefiting act did not come without a cost. Yes, it turns out the banks will have to fork over some out-of-pocket change to put not only the robosigning scandal behind them but the indirect housing subsidy from which they have benefited to the tune of hundreds of billions. That quite literally change, which is what the final cost of the release and bank indemnity amounts to, is roughly $300 for each of the affected borrowers!
Bitcoin has been all the rage lately. The stuff, or lack thereof, runs on peer-to-peer technology, is fully decentralized, has no patents, and is open source. Currently, there are almost 11 million bitcoin units in existence and the maximum amount of bitcoin units that will ever be created by the logic of its design are 21 million. While bitcoins are designed so that they cannot be hyperinflated in name, they certainly can be hyperinflated in substance. There is no doubt that bitcoin is a spontaneous answer to the monetary instability that we see all around us today. On one side of the pond people are worried about the glorified currency peg known as the Euro and on the other about the amount of damage that Bernanke is willing to inflict upon the world’s reserve currency. However, let us not become so enamored of an innovative stateless solution that we forget Austrian economics and hitch libertarianism’s wagon to something heading for a crash.
Here is a short quiz for you. Ready?
- What’s the current situation with Lindsay Lohan’s rehab?
- Who won the latest “Dancing With the Stars”?
- Name five celebrities with “baby bumps.”
- Explain how the Cypriot banking crisis could impact the European economy.
If you answered the first three questions but are clueless on the fourth, you’re in good company. Estimates are that up to half the population in America is ignorant about the situation in Cyprus. Oh sure, they hear snippets on the evening news, but since it’s far away and happening to other people, they don’t worry about it. There are many people who just can’t “see” anything wrong with our country. People continue to cling to the notion that our leaders are working for us, not for themselves. So people sit on their butts watching “American Idol” or reading about celebrity baby bumps. Can the U.S. economy crash? Nah. It can’t happen here.
The 'down-up' streak is over, long live the next streak. Precious metals had a big day with Silver and Gold surging 1-2% (among the biggest moves in 7 months); Treasuries pushed higher in yield from the open but faded rapidly into the close to end unchanged ay 1.75%; Commodities in general were bid on the back (supposedly) of China's lower inflation print; IG credit was bid while HY credit (spreads not the HYG ETF) rolled over into the close. What was most evident was the total and utter failure of the 3:30pm Ramp - it seems our discussion of the farce last night brought a world of front-runners to the game and ruined the Algos day as instead rallying S&P 500 futures dropped 4 points in the last 30 minutes - this is the biggest 3:30-to-4:00 loss in six week (and 3rd biggest of year). The world was celebrating another new all-time high in the Dow and the S&P gave back half its gains to close +4 points; but the Dow Transports closed -0.3%, and the Russell 2000 (for so long Bernanke's policy tool) ended -0.23%.
The KMPG partner at the heart of today's Herbalife/KPMG fiasco was unknown for several hours, until finally his name resurfaced. Per Reuters: "Scott London, a partner at accounting firm KPMG, was the lead auditor for Skechers USA Inc who resigned after allegedly leaking insider information to traders, said Skechers Chief Financial Officer on Tuesday. In an interview, CFO David Weinberg said he was surprised to learn late on Monday from partners at KPMG that London had admitted to the allegations and was leaving the firm."
We have discussed the divergence between US equities and credit markets a number of times in the last few months with the old adage that "credit anticipates, and equity confirms." Well, it appears the high-yield credit investors are 'anticipating' in size. State Street reports that yesterday saw the 2nd biggest withdrawal ever from their $11.6bn JNK ETF. Around $380mm (or over 3%) was redeemed - and we note the price did not exactly reflect that kind of unwind. The more worrying feature is that the last time HY credit investors were this 'sure' was May 2012 and it pre-empted a 9% drop in the S&P 500 and 5% drop in JNK price. The divergence remains extreme.
The boy who cried wolf is now openly screaming "global thermonuclear war." No, really. AFP reports that North Korea said Tuesday the Korean peninsula was headed for "thermo-nuclear" war and advised foreigners to consider leaving South Korea, as the UN chief warned of a potentially "uncontrollable" situation. "Tuesday's advisory -- greeted largely with indifference -- followed a similar one last week to foreign embassies in Pyongyang, to consider evacuating by April 10 on the grounds war may break out. "The situation on the Korean Peninsula is inching close to a thermo-nuclear war," the Asia-Pacific Peace Committee said in a statement carried by the North's official Korean Central News Agency." The result - a big yawn, which sadly for Kim Junior is the worst reaction. After all what is a dictator with an inferiority complex and a laughable military to do to get some respect around here and score some "nuisance value" cash from the superpowers (which has been his entire plan all along).
Curious why the Dow Jones just hit new all time highs? Here's a partial list of recent economic events:
- Markit US PMI Miss
- ISM Manufacturing Miss
- ISM New York Miss
- Vehicle Sales Miss
- ADP Employment Miss
- ISM Services Miss
- Challenger Job Cuts Miss
- Initial Claims Miss
- Trade Balance Beat
- Non-Farm Payrolls Miss
- Hourly Earnings Miss
- NFIB Small Business Miss
- Wholesale Inventories Miss
It's important to draw a line between two very different flavors of banker: "restrained" (Dr. Jekyll) and "unrestrained" (Mr. Hyde). The key feature of a sustainable, non-parasitic banking sector is that banks and bankers have "skin in the game," i.e. they personally suffer losses when their loans and bets go bad. This is the essence of moral hazard: the separation of risk from consequence. Put another way, those who are insulated from risk will have an insatiable appetite for risky bets because any gains will be theirs to keep but any losses will be covered by the central bank or government: this is known as "privatizing profits and socializing losses." The Federal Reserve, the Obama Administration, the housing agencies and the U.S. Treasury are all offering bankers and financiers high-payoff tables that require no skin in the game. No wonder our system is dominated by the unrestrained bankers, sociopathological Mr. Hydes who offer a few coins in compensation for running down the nation.
As SF Fed's John Williams notes (here), cash is king, but the strange thing is that while credit/debit transactions rise exponentially, the cash in circulation is also rising at a rapid pace. So where does all the cash go? The short answer is into large-denomination bills and out of the country by his findings. While low denomination bills suffer (as we discussed here) it is worth asking who is 'hoarding' the $100 bills? This is the question that BofAML asks in Europe as the huge EUR500 Bill (the developed world's highest value note in circulation) remains in great demand (apparanelty by shady offshore types). This is not good news for the central banks of the world as they run dry of monetary policy tools to drive velocity in money (or spending). BofAML's proposal: Ban the EUR500 Bill; force those shady people who 'stack' these high denomination bills to spend that money into circulation. This would appear to be the latest 'capital control' strawman, 'floated' to eliminate the people's right to keep cash segregated from a banking system and out of broad electronic circulation. So in both the US and Europe, high denomination bills are being hoarded (or exported to 'safe' havens) as Williams notes, "around the world, during periods of political unrest or war, cash - especially the currency of a stable country... - is seen as a safe asset that can be spirited out of harm’s way with relative ease." This, of course, is not what the elites want - and we suspect a "ban the EUR500 Bill" legislation will be coming soon to the EU Commission.
Following yesterday's note on the near-record level of shorts in Silver futures, it is perhaps just a coincindence that spot silver prices are surging today - their biggest jump in seven months. Gold is also having one of its best 3-day runs in the last nine months, yet both moves are peanuts compared to what is going on in the "electronic" asset arena, namely the policy vehicle formerly known as "stocks" and BitCoin, both of which are racing for the title of most insane parabolic bubble ever.
France is engulfed by a political, economic and moral paralysis. The president has record low popularity, unemployment is making new highs and the tax czar of a supposedly left wing government just quit after repeatedly lying about a pile of cash he had stashed in a Swiss bank account. From such a sorry state of affairs, you might think that things could only get only get better. Unfortunately, economic cycles do not work this way and it is my contention that France is about to enter what was known during the gold standard era as a “secondary depression.” The rigid design of the euro system means the whole eurozone is prone to the kind of brutal cyclical adjustments seen in that hard money era of the 19th and early 20th centuries. But having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors. Until quite recently, our working assumption was that a full-blown French debt crisis would occur between 2014 and 2017. In light of the extraordinary malfeasance of the current government we have changed our mind and believe that France is now extremely near to that abyss. Fasten your seat belt in Europe - the world’s last truly Communist country is about to implode.
A few days ago, Bloomberg released an article in which it described the lamentations emanating from the Primary Dealers whose role in bond purchases is being increasingly undercut by Direct bidders who get to buy US paper directly from the Treasury and without Dealer intermediation. Well, no such worries in today's just concluded $32 billion auction of 3 Year paper, which closed moments ago at a high yield of 0.342%, the lowest "high yield" in 2013 and a Bid To Cover of 3.238, the lowest since September 2011. But what was most notable is that the combined take down of Directs and Indirects was a tiny 35.1%: the lowest non Dealer interest since January 2009. Naturally, the Dealer take down was the inverse or 64.9%, which also was the largest since January 2009. Obviously all this paper will be promptly sold back to the Fed, but any artificial (and inaccurate) concerns that Dealers are not getting their due allocation of paper can now be put to rest.
While the 2012 Deja-Vu chart analog continues to play out in far too similarly scary manner than many had believed possible, a glance at the catalysts over the two months that form the 'tops' should also send a shiver down the spine of the momentum believers. In 2012, the first dip was the Greek default and restructuring (a Europe-based crisis risk flare); that dip was bought (of course) as "the worst is behind us," only to see a miss in US non-farm payrolls confirm the "it's different this time," hopers were wrong once again. In 2013, the Italian election created a Europe crisis risk-flare, which was bought (of course) as "the ECB has our back", and then a month later, the non-farm payroll prints at a dismal level. For now, we remain hopefully bid on a sea of central bank liquidity (just as we were in 2012 thanks to ECB's LTROs) but what happens when 'markets' realize the hole is bigger than the central banks can fill?