The last few years have been dominated by one theme and every trade has been a derivative bet on that theme. The idea that by inflating another asset bubble, a wealth effect will ripple through the market to the real economy, encourage animal spirits and spark a renaissance (in something, we are not sure what). Well, so far no good. The real economy, as discussed at length, is not recovering; but the question of just who is benefiting from the wealth effect is unclear. As the following charts across the 100 largest G4 pension plans show, the asset managers have missed the trickle-down. Despite bad (and worsening) under-funding and a Fed repressing 'safe' assets to the point of ultimate risk, G4 pension funds have refused to partake of any mythical 'great rotation', remain avid bond buyers, are as drastically under-funded as ever, and finally, have maintained the same 'cash on the sidelines' for 14 years now...
While the overnight collapse in precious metals has been notably retraced, the media is unable to take its eyes off the ball that the status quo is shaking focusing on the demise and what that must mean for the future. Well, it seems, the Indian finance minister is very clear. Speaking in New Delhi P. Chidambaram explained his lack of surprise at the increase in gold imports in April (as physical demand exploded amid falling paper prices) adding:
- *CHIDAMBARAM APPEALS TO PEOPLE TO CONTAIN PASSION FOR GOLD, and
- *CHIDAMBARAM: MORE STEPS PLANNED TO CURB GOLD IMPORTS IF NEEDED
So China/Hong Kong is importing near record amounts of the precious metal into reserves and India is not only seeing demand but enough to warrant further government intervention... makes perfect sense that (paper) prices should be falling - or are the planners plans backfiring once again? As we noted here, as long as the price suppression of paper gold prices continues, don't expect any notable changes to these demand trends.
The IRS routinely obtains information about how we earn a living, what investments we make, what we spend on ourselves and our families, and even what charitable and religious organizations we support. Starting next year, the IRS will be collecting personally identifiable health insurance information in order to ensure we are complying with Obamacare’s mandates. The current tax laws even give the IRS power to marginalize any educational, political, or even religious organizations whose goals, beliefs, and values are not favored by the current regime by denying those organizations “tax-free” status. This is the root of the latest scandal involving the IRS.... Considering the type of power the IRS excises over the American people, and the propensity of those who hold power to violate liberty, it is surprising we do not hear about more cases of politically-motivated IRS harassment. As the first US Supreme Court Chief Justice John Marshall said, “The power to tax is the power to destroy” — and who better to destroy than one’s political enemies? The very purpose of the IRS is to transfer wealth from one group to another while violating our liberties in the process, thus the only way Congress can protect our freedoms is to repeal the income tax and shutter the doors of the IRS once and for all.
The collective state of mind in the USA these days may be even more peculiar than what went on in Germany in the early 1930s, when the Nazis were freely elected to lead the country and reconstructed the battered national psyche into a superman cult that soon beat a path to mass death and ruin. America has its own way of going crazy. We don't goose-step to tragedy; we coalesce into an insane clown posse and stumble into it by pratfall -- juggaloes dancing backwards off the cliff edge. A subset of our master wish has been on vivid display in recent months, namely the idea that God has blessed the USA with a limitless supply of new oil that will allow us to keep driving to WalMart forever. Most of the current "endless oil" fantasy revolves around shale oil. Apart from the issue of sheer economic suffering and all the damage that will ensue from the realization of the falsehoods and propaganda, consider that it will be generations before anyone believes the "authorities" again.
While we have wondered on numerous occasions previously if the collapse in lumber prices is the far more accurate indicator of end demand for housing (as confirmed by the recent collapse in multi-family housing starts), perhaps an even better indicator of trends in housing (and by implication the broader economy) is private sector intermediate end demand, such as Caterpillar North America sales, which unlike government data, are far less subject to political intervention, interpolation, guesswork, seasonal adjustments and otherwise, general manipulation. And even though we have previously reported on the woes ailing the world's largest seller of bulldozers, excavators and wheel loaders, such focus was primarily targeted in the offshore markets, and especially China (the abysmal European market needs no mention). So maybe the time has come to shift attention to the US, where as Caterpillar just reported, not only are all foreign markets still trending at several impacted levels, but where US machine retail sales just saw the biggest tumble in three years, falling 18% Y/Y: the most since early 2010. What is more disturbing is that CAT equipment is used in far-broader economic activities than merely housing, and likely is a far more accurate indicator of true industrial end-demand than any other number cherry-picked by the government.
With the bond vigilantes still suppressed by the heavy boot of central bank intervention, the role of 'governor' of monetary (and fiscal implicitly) largesse has been left to the energy markets around the world. As we noted here, the Brent Vigilantes have indeed capped economic gains in the past few years (and perhaps more worryingly for investors, as we detailed here, have capped P/E expansion hopes). Sure enough, with a one-month lead, crude oil prices are leading retail gas prices higher (now near three-month highs) which point to a rally-ending, economy-sapping $3.80 price within the next few weeks (unless oil prices are rapidly suppressed too).
While anecdotally we see again and again that equities rally on bad news (The Fed will save us) and good news (see The Fed saved us), none of that matters until it gets the Goldman Sachs stamp of approval. Sure enough, in a detailed study over the weekend, designed to defend their bullish equity view (specifically financials) and expectations for QE3 to continue to Q3 2014, the bank that does God's work offered up these pearls of statistically sound wisdom: "while equity prices respond more to dovish surprises than hawkish surprises, the results suggest that equity prices typically go up regardless of whether the Fed policy surprise is positive or negative (“good news is good for equities, and bad news is good for equities”). But it is not at all clear why the equity market should systematically buy into this pattern." So rest assured, buying wins; of course, that is, until it doesn't.
While we have become used to the almost daily trading-halts in Japanese government bonds, when the CME reports that Silver trading was halted four times overnight, it is increasingly clear that this market is anything but 'normal':
- *SILVER TRADING WAS HALTED FOUR TIMES OVERNIGHT, CME GROUP SAYS
- *SILVER TRADING WAS STOPPED FOUR TIMES IN 20-SECOND HALTS
- *SILVER TRADING WAS HALTED IN `STOP-LOGIC EVENTS', CME SAYS
Yet somehow, amid all this 'extreme' volatility in 'safe' collateral assets, we still do not hear of funds blowing up (yet). While central bankers would seem to disagree, there really is no stability without volatility and the more that vol is suppressed, the more extreme the inevitable 'event'.
While we are told day after day that not only is Europe 'fixed' but that Cyprus was not a template, it seems the bankers in the peripheral nations are a little less confident (never mind their record amount of reach-around-based domestic bond buying). European "leaders need to moderate their language," warned one bank CEO, and as the FT reports, another feared a "Cyprus virus," adding that "you can't keep playing with fire." The comments come in the wake of the depositor haircuts in Cyprus as a rush of clients wanted to move cash from deposit accounts to vaults: "most clients in Portugal don't trust deposit guarantees... they choose vaults instead." Fixed indeed... and why would these bankers worry about the 'precedent' if it were not a 'template' for future bail-ins?
Do not panic, but it seems the flood of liquidity and central bank largesse can only do so much. The much-discussed issuance of 10 year Rwanda debt at a 7% yield earlier in the month made more than a few of even the most die-hard momo junkies look up from their 'Buy' keyboards for a brief second. In the past few days, something rather disturbing has occurred in this ultimate arbiter of risk-on demand... Rwanda bonds are selling off... now up 15bps in yield since issuance. Have no fear though as we are sure Abe, Bernanke, or Draghi will be along shortly with a plan to help SME lending in Rwanda... or will promise to do 'whatever it takes' to ensure Rwanda yields are not manipulated by speculators...
We commented as it happened that last night's jawbone-inspired flash-smash in USDJPY which triggered what was evidently a major liquidation in gold and silver at the margin was a buying opportunity for the precious metals and sure enough, gold has recovered all of its losses and silver is close.
"Preservation of Capital," has reached epic seriousness in a world with interest rates at unsustainable lows and underlying economic fundamentals that cannot support today's yields. The irrational game goes on based upon one thing and one thing only which is the creation of capital by all of the world's central banks. The money must go somewhere and so it does but the disconnect between the equity markets and bond yields from the real world is frightening. Nowhere on the planet is it scarier than in Europe.
As has been rumored for months, and known for days, the official purchase of Tumblr by Yahoo is now in the books. For $1.1 billion, Yahoo is the proud owner of a whole lot of user-generated porn sites if not that much (read any) revenue. We cant wait to see how it monetizes them. And in a press release, apparently aimed squarely at hipsters, Yahoo promises "not to screw it up." It's cool to be hip and edgy: surely it's worth at least 15% in stock premium. As for profits... ah, it's an Amazon world after all.
In the absence of major data releases, the focal point of the week for markets becomes the release of the minutes of the May FOMC meeting. The most notable change in the statement was the inclusion of the new language: “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” In the May meeting minutes, the market will be looking for any clarification of the motivation behind this change as well as any evidence that the committee members may be becoming less comfortable with the unemployment rate threshold or more specific about tapering timelines and dates.