Yesterday's high volume dumpfest in stocks - its biggest drop in 5 months - is followed by a considerably smaller volume pumpfest that elevates the S&P by its 2nd most of the year (2nd only to the opening day of the year). The 'excessive' grab for protection yesterday that took VIX above 17% was smashed into the open and provided the ammo to leak stocks higher all day (VIX fell 3.3vols back under 14% - the biggest VIX drop of the year). The critical level for the bounce appeared to be the pre-Boston drop and every major index managed to regain it - with the Trannies leading the way. S&P futures regained 60% of the Friday-to-Monday slump, gold regained around 25% of its drop, and 10Y yields rose on the day, unwinding around 35% of the rally in Treasuries. EUR strength (and broad-based USD weakness) provided some impetus for algos to lift stocks. All-in-all, today's lower volume, lower average trade size move is not surprising and the coincident close of the S&P at around yesterday's VWAP (and lesser follow-through on other risk-assets) suggest this is more a bounce than a renewed uptrend for now.
That the IMF is the most unwavering optimist despite fundamentals, facts and reality has been well-documented over the years. For those who still haven't seen the agency's perpetual upward bias in forecasting world growth, a quick scan of the charts below will cement the understanding that all the Washington-based serial bail-outer of insolvent countries is, is a dispenser of optimism and whose agenda is simply to preserve confidence that all is still well. The charts show how just over the past year's six outlook revisions, the IMF has been forced to downgrade, with quarterly precision, its overly optimistic forecast for virtually every part of the world, from the US, to the Euroarea, to China, and of course, the entire world: the black line is the most recent revision set - it also happens to be the lowest one. However, one chart which deserves particular attention not because it is accurate, but because the rate of deterioration is truly troublesome, is the IMF's view on global trade volume of goods and services. It is here that one can clearly see the disastrous impact of global central bank micro-mismanagement, capital misallocation and central planning. In short: global trade is collapsing - even from the point of view of one of the staunchest macro optimists - at a rate unseen since the Great Financial Crisis, and the Great Depression before it.
In 1996 it was Alan Greenspan with his "irrational exuberance" call, is Janet Yellen sending the same message, as she warns...
- *YELLEN SEES SIGNS `SOME PARTIES ARE REACHING FOR YIELD'
- *YELLEN SAYS LOW INTEREST RATES MAY PROMPT `TOO MUCH LEVERAGE'
Did the Fed's most dovish member, and likely next chairperson just suggest that, while 'lower for longer' rates will continue, that stocks and high-yield credit look a little more than frothy.
The most recent gold bear raid has vastly enriched the bullion bankers, once again, at the expense of everyone trying to protect their wealth from global central bank money printing. The central plank of Bernanke's magic recovery plan has been to get everybody back borrowing, spending, and "investing" in stocks, bonds, and other financial assets. But not equally so - he has been instrumental in distorting the landscape towards risk assets and away from safe harbors. That's why a 2- year loan to the US government will only net you 0.22%, a rate that is far below even the official rate of inflation. After the two years is up, you are up $44k (interest) but out $260k (inflation) for net loss of $216,000. That wealth, or purchasing power, did not just vanish: it was taken by the process of inflation and transferred to someone else. This explains, almost completely, why the gap between the rich and everyone else is widening so rapidly, and why financiers now populate the top of every Forbes 400 list. There is no mystery, just a process of wealth transfer of magnificent and historic proportions; one that has been repeated dozens of times throughout history.
The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone. The "gold bugs" are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth. Unfortunately, both arguments, while great for headlines, are wrong. The real concern for investors should not be the fall of gold - but the overall stock market. With investors fully allocated to the markets - the lurking correction therein is potentially far more dangerous to portfolios than the current fall in gold simply due to weighting differences. Even with earnings hurdles moved substantially lower in recent weeks it may not be enough to offset the softening global economy. Perhaps, just perhaps, this is what gold, commodities and interest rates are really telling us.
"In this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin
In most cases, Mr. Franklin's statement would be correct. However, as you will see below, there are some countries in the world where you can be certain you won't pay taxes. With the year 2013 marking the 100th anniversary of the income tax and the Federal Reserve in the US (two of the most powerful tools the government uses to extract wealth), we thought it would be useful to look at when Tax Freedom Day occurs across the world to gain some perspective. Tax Freedom Day (TFD) is the day of the year that the average person has in theory earned enough money to pay his or her annual tax bill.
Well-known permabull financial analyst Dick Bove lost his job in November 2012. Not due to his ineptness, but due to his Rochdale Securities colleague David Miller who today plead guilty to wire fraud and conspiracy over an epic Apple trade gone wrong. As Reuters reports, Miller faces a maximum 25 years (though is expected to suffer less) after falsely telling his bosses that he executed a 1,625 share trade for a client, when in fact he bought 1,623,375 shares of the 'never-gonna-fall' stock on the day of its earnings release (October 25th 2012). When the bet backfired, Rochdale was on the hook for the losses which led the firm to cease operations and to provide the market with a brief respite from Bove's 'loan-loss-provision'-ignoring, 'we're-going-to-the-moon-Alice' investment advice on US banks. What a difference a decimal place makes...
VIX, the market's measure of forward-looking expectations of equity volatility has been hovering at decade lows (and even after yesterday's spike has plunged back once again today). MOVE, the bond market's measure of forward-looking uncertainty is at all-time record lows. As one infamous rates trader said recently, maybe it's early Alzheimers, but we are fairly certain that that last time Implied Volatility was scraping the lows, we did not experience:
- Gold moving almost $250 or over 15% in less than 48 hours;
- A G-3 currency moving over 25% in less than six months;
- A G-3 bond yield moving by 35% in two months;
- The Dow leaping by almost 20% in five months;
- A joint monetary policy as impactful as Volker or the Paris accords.
We can't help but agree.
Did anyone seriously believe the global economy was expanding so robustly that corporate profits would loft ever higher? Based on what data? Laughably bogus data from China, where warehouses are bulging with stockpiles of aluminum and copper, and a diminishing-return housing/credit bubble is the only "engine of growth"? Or was it the equally bogus unemployment rate in the U.S. that inspired such confidence? Did money managers really not notice that most of those new jobs are part-time, and that the rate is only low because millions of people have statistically been disappeared from the workforce by central planners? Wages, private-sector employment and labor's share of the economy have all declined: no wonder the risk-on recovery is rolling over.
Time after time, it appears, in Europe 'beggars can be choosers'. That is, it seems, until Cyprus, when the Merkel hammer was brought down and a new 'template' to avoid German taxpayers implictly taking on the burden of southern European largesse. The initial pro-Euro indifference to the bailouts has turned increasingly to resentment in Germany - and, as we noted here, the rise of anti-Euro parties in the very heart of the political project. The following Bloomberg Briefs chart explains the tension and why the German 'five-wise-men' are pushing for a broad-based 'wealth tax' across Europe's periphery. Simply put, the Germans bearing the burden are 'poorer' than the peripheral nations as the chart of median wealth so clearly indicates. Combine this with the fact that Germany has the lowest rate of home ownership in Europe and it is little wonder that 'Alternative-for-Germany' party is already at a 3% polling? However, as discussed below, this is misleading since wealth is very unequally distributed in Germany, creating a perception among less wealthy Germans that these transfers are unfair.
While a week ago, when gold was $1600/ounce the self-funded component (read gold sale) of the Cypriot bailout amounted to just over 10 tons of gold, as of today's price and EURUSD rate, Cyprus would now have to sell 12 tons of gold to cover the gap, if it were to hit the sell button today (assuming a price of $1385/ounce and a 1.315 EURUSD exchange rate). As far as we know, Cyprus hasn't sold one ounce yet. But what if gold keeps tumbling as it has in the past three days? Well, the problem as most know, is that as of March based on IMF data, Cyprus only has 13.9 metric tons of "excess" (as the EC defined it) gold. This means one can extrapolate below what price Cyrpus is out of luck and the proposed European Commission bailout fails as one of the key self-funded elements simply will not have enough cash to fill the €400 MM hold. That price for gold, once again assuming a 1.315 EURUSD, is roughly $1175/ounce. So if the coordinated selling (straight to Goldman's traders) were to continue, and gold did plunge to the threshold price, or even drop into triple digit territory, and Cyprus simply did not have enough gold to sell, what then?
As gold recovered overnight and JPY weakness sparked hope for risk-assets once again, European stocks opened down and rallied for much of the European day. However, just as with yesterday, once the US opened, European stocks decided enough was enough and rolled over quite significantly (led by the banks). Safety was well bid in general in Europe with 2Y Swiss rates dropping further to 3-month lows at -10bps at their lowest! It appears the appeal of European sovereign debt has worn off for a moment among the BoJ as Spanish and Italian bond spreads leaked back wider on the day. EUR strength (and JPY weakness) provided the impetus for US equities to levitate but it appears more like EUR repatriation given Europe's risk-aversion today.
The President is due to address the nation at 1130ET - the big question is, will it be Boston (given the events of this morning already) or will it be the Budget... or is it Immigration?
UPDATE: In an unrelated event, Laguardia Airport has been evacated due to a suspicious package
And so the flashbacks to the aftermath of 9/11 begin, as apparently the only catalyst necessary to have a plane grounded and returned to the gate is to speak Arabic. So in hopes of diffusing what is already a very tense, if ridiculous situation, here is how in a world where Murphy's Law dominates and all it takes to be judged a potential terrorist is to have a deep tan and speak a language the average American is not familiar with (i.e., most of them), airplane seating truly works.