The debt limit was formally reached last week, and we expect the Treasury's ability to borrow to be exhausted by around March 1 (if not before) and while CDS are not flashing red, USA is at near 3-month wides. Like the previous debt limit debate in the summer of 2011, the debate seems likely to be messy, with resolution right around the deadline. That said, like the last debate we would expect the Treasury to prioritize payments if necessary, and Goldman does not believe holders of Treasury securities are at risk of missing interest or principal payments. The debt limit is only one of three upcoming fiscal issues, albeit the most important one. Congress also must address the spending cuts under sequestration, scheduled to take place March 1, and the expiration of temporary spending authority on March 27. While these are technically separate issues, it seems likely that they will be combined, perhaps into one package. This remains a 'very' recurring issue, given our government's spending habits and insistence on its solvency, as we laid out almost two years ago in great detail.
Perhaps it is time for the punditry and the chatterbox media to start considering what happens not when the much anticipated rotation out of bonds and into stocks, which has not happened for 4 years now, and won't, at least not until the government bond bubble finally pops which will only happen when the central banks finally lose control, but what happens if even a tiny amount of the global pension capital allocated to bonds and/or equities, is rotated into gold.
“Pension money invested in bullion is ‘peanuts’ at the moment,” Toshima said. “If 1 percent of their total assets shift to the metal, the gold market would explode.”
Could not have said it better ourselves.
The groupthink in the world of finance is some of the worst on the planet. It’s incredible how such an educated, experienced group can willfully ignore reality, stick their heads in the sand, and repeat the same mantras over and over again until they become axiomatic. The desire to be accepted by one’s peers is part of human nature. And when it’s one’s peers who are rigging the financial system, the pressure to adopt industrial groupthink is enormous. The dawning of a new year is invariably a time for forecasts. But we have some reservations about the seemingly ubiquitous binary decision to ditch bonds and put the proceeds into the stock market. To put it more plainly, ditching bonds to buy stocks may be jumping from the frying pan into another frying pan. To put it more plainly still, stock markets are only cheap by reference to grotesquely expensive government bonds, and the risk of significant price falls is ever present, especially at what is likely the tail-end of a multi-decade expansion in credit. A falling tide might sink more than one type of boat.
It is one thing for Pineapple republics like Greece (because only the US has full faith and credit in the "Banana" adjective) to have their former Prime Minister's mom be uncovered with $700 millions in Swiss accounts, or its former finance minister get caught literally whiting out his relatives (and perhaps himself?) from a list exposing tax evaders and offshore bank holders, but when the rulers of that bastion of neo-socialism, where everyone is equal, are shown as having done the same, and ostensibly "laundering tax fraud" and hiding unpaid taxes in some bank vault deep under the Swiss alps, implicitly having been part of that group of much hated "rich people" that the same regime is doing all it can to expel to progressive places such as Russia and Belgium, one can't help but wonder, are some more equal than others?
If corporate earnings have topped out, what will push the stock market higher? The usual answer is "central bank intervention," but history suggests that in the long run, the market eventually correlates to corporate earnings. Earnings up, market up; earnings down, market down.
As if Yum Brands were not suffering enough this morning - as they forecast China comp sales to drop 6% (more than the forecast 4% decline), it seems the UK has their next PR disaster waiting to happen, courtesy of their KFC brand. After a 19-year-old Brit found a "horrible wrinkled foreign body" in his fried chicken meal, KFC has apologized (rather magnanimously) saying "while there was no health risk, we agree it was unsightly." Judge for yourself just how puke-worthy and generally emotionally scarred you would have been after biting into this 'brain-looking' image. KFC clarifies: "Although we haven't received the product, it appears from a photograph that unfortunately on this occasion a kidney, and not a brain as claimed, was not removed in the preparation process." Oh, just a kidney? Pass the salt then.
Today's Sesame Street market moment is brought to you by the word "hope" and by the number '-0.025%'. For the last five months, Goldman notes that the US equity markets have rerated their economic growth view as hope remains for a future full of unicorns and faerie-fart-powered autos. However, the reality is that, as Goldman's macro-economic Swirlogram shows, that the data is no longer indicating expansion and in fact in December shifted into a 'slowdown' mode. Once again we are left, as we head into earnings season where headline numbers have been slashed to make the bar low for beats (but stocks have not re-rated yet), with a divergence between macro (and micro) reality and the nominal equity index implied reality that so many managers hope is true.
We were wondering how long until the latest lunatic idea out of the "serious economist" mainstream would get the proper comedic treatment it so rightfully deserves. That time finally came last night when Stephen Colbert gave it the 3 minutes of attention it almost deserves. Oh well, now that it has made the comic circuit it is time to officially forget about this idiotic idea... At least until the next debt ceiling crisis in a year or so when like a bad sequel to Weekend at Bennie's Bernie's, it is resurrected once more.
Sometimes you just have to laugh - or you will cry. In what could well have been Tuesday Humor if it wasn't so real, the AIG board (fulfilling its shareholder fiduciary duty) is considering joining Hank Greenberg's suit against the government over the cruel-and-unusual bailout that saved the company. The $25bn lawsuit, as NY Times reports, based not on the basis that help was needed but that the onerous nature "taking what became a 92% stake in the company with high interest rates and funneling billions to the insurer's Wall Street clients" deprived shareholders of tens of billions of dollars and violated the Fifth Amendment (prohibiting the taking of private property for "public use, without just compensation"). The 'audacious display of ingratitude' comes weeks after the firm has repaid the $182 billion bailout funneled to it and its clients by an overly generous Treasury. The firm has asked for 16 million pages of government documentation, this "slap in the face of the government" portends a question of whether the government will sue The Fed for enabling the recovery that strengthened Greenberg's case that the bailout was so harsh. Happy retirement Tim Geithner.
Reuters report that Asia's physical market has picked up so far this year, with buyers tempted by last week's big drop in prices -- when prices retreated to as low as 1,626 per ounce -- and on demand ahead of the Lunar New Year, traders said. The trading volume on the Shanghai Gold Exchange's 99.99 gold physical contract shot through the roof on Monday, hitting a record of 19,504.8 kilograms, after double-counting transactions in both directions. "Physical demand is very strong," said a Beijing-based trader. "It's a combination of the attraction of lower prices as well as pre-holiday demand." But such appetite could waver if prices recover towards $1,700, he added.
Equity markets recovered from a lower open following press reports overnight by eKathimerini that the country’s main banks are considering requesting additional funds for their recapitalization and edged higher throughout the session after sources at Hellenic Financial Stability Fund said that there no indications that Greek banks need more recap funds. In addition to that, Xinhua reported that chance of China RRR cut is increasing for January, citing industry insiders for RRR cut forecast. This follows on from the reports in ChinaDaily last week, which suggested that a small interest rate cut at the right time could substantially decrease financing costs and improve expectations for profitability, citing researchers from the China Development Bank, the State Information Center and the Shanghai Securities News who have worked together to forecast key economic indicators and policies in 2013. The risk sentiment was also supported by well subscribed debt auctions from the Netherlands, Austria, Greece and Belgium. As a result, peripheral bond yield spreads are tighter by around 5bps in 10s. Going forward, market participants will get to digest the latest NFIB, IBD/TIPP and Consumer Credit reports. The Fed is due to conduct Treasury op targeting Oct'18-Dec'19 (USD 3.00-3.75bln) and the US Treasury is also set to auction USD 32bln in 3y notes.
You read that right: SocGen, the second largest French bank, not only has labor unions, but they have just announced a one-day national strike to protect their jobs. Which is odd, because it was our impression that in socialist France nobody is allowed to lose their job ever again. Perhaps that excludes bankers: the confusion surrounding the Fairness Doctrine, which may or may not tax millionaires at a 75% tax rate continues to grow.
- London Quantitative Hedge Funds Report Second Year of Losses (BBG)
- Berlusconi Forms Alliance in Comeback Bid (WSJ)
- Japan to Buy ESM Bonds Using FX Reserves to Help Weaken Yen (BBG)
- Japan Mulling BOJ Accord Linked to Employment, Mainichi Says (BBG)
- Samsung Expects Record Operating Profit (WSJ)
- Boeing 787 Dreamliner Fire Probed, Blaze Adds to Setbacks (BBG)
- BOJ's Shirai: Open to Firmer Inflation Target (WSJ)
- HSBC N.J. Client Admits Conspiracy in Offshore Tax Case (BBG)
- Lampert to Assume CEO Role at Sears (WSJ)
- Abe prepares fresh stimulus measures (FT)
- U.S. Set for Biggest State-Local Jobs Boost Since 2007 (BBG)
- Pakistan Seen Needing IMF Bailout as Rupee Drops Before Vote (BBG)
Earlier today, Bill Frezza of the Competitive Enterprise Institute and CNBC's Steve Liesman got into a heated exchange over a recent Frezza article, based on some of the key points we made in a prior post "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed" in which, as the title implies, we showed how it was that the Fed was indirectly intervening in the stock market by way of banks using excess deposits to chase risky returns and generally push the market higher. We urge readers to spend the few minutes of this clip to familiarize themselves with Frezza's point which is essentially what Zero Hedge suggested, and Liesman's objection that "this is something the banks don't do and can't do." Liesman's naive view, as is to be expected for anyone who does not understand money creation under a fractional reserve system, was simple: the Fed does not create reserves to boost bank profits, and thus shareholder returns, and certainly is not using the fungible cash, which at the end of the day is what reserves amount to once dispersed among the US banks, to gun risk assets higher.
Alas, Steve is very much wrong.