We addressed the systemic ills of U.S. healthcare, a.k.a. sickcare most recently here. Nobody likes any of the practical solutions because everyone wants unlimited care and unlimited choice. Expectations in a system where the government can just borrow another $1+ trillion to pay the bills are high, and the feedback from reality, i.e. price, has been eliminated in the cartel/fiefdom system that is sickcare. Everyone talks about "reform," but real reform is impossible in a bought-and-paid-for "democracy" like ours. There is no one solution to something as complex and costly as healthcare; the solution is to let 100 solutions blossom and compete openly for citizens' money and trust.
In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good; that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence.
However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. Only a solvent central bank can halt hyperinflation. The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation.
Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.
Equities dead-cat-bounced today on minimal upside volume (and low average trade size) to get the S&P back to unchanged for the month. Broadly speaking risk-assets stayed well correlated with stocks though bonds and the USD looked somewhat dead trading in a very small range given recent shenanigans. Gold and Silver had their best day of the year so far as the former broke back over $1600 (and has now seen the best 4-day jump in 6 months). It seems Bernanke's relative dovishness is losing its equity appeal (as gap prices continue to rise) but precious metals (post China new year) have rediscovered some central bank balance sheet reality. Homebuilders, buoyed by the craziest seasonal adjustments ever to sales, swung from worst-to-first on the week. Equities tracked spot VIX most of the day but even VIX did not fully partake of the exuberance in the last hour or so. AAPL's rumor-driven tom-foolery pushed it handily up to yesterday's closing VWAP +1.4% and supported the broad equity market (just as HD did in the Dow). Despite the best efforts of the media, putting lipstick on this pig day after yesterday is a push in our view.
When the soon to be ex-Pope carts in the U-Haul for the final trip out, in the off chance he decides to raid the Vatican of all Renaissance masterpieces, elsewhere known as IOR collateral, here is one possible New Normal replacement.
Bitcoin represents another way to fight back against the current repressive and immoral monetary system that has a strangle hold on the planet. Ever since WordPress.com (the extremely popular blogging platform and 22nd most popular site on the internet), decided to accept Bitcoin as payment last November the value of Bitcoins versus the U.S. dollar has more than doubled. The esoteric crypto-currency continues to gain popularity and technologies to make it even more user friendly are popping up all over the place. The latest is the Bitcoin ATM, which could be a serious game changer for adoption.
Sorry to steal the jam out of the media pundit's donut but the better-than-average volume that is supposedly representative of something today in fact is solely due to the surge that occurred when we sold off into the European close and when Bernanke was dancing around Senatorial questions about stock market bubbles. It appears once again this afternoon that US equity algos have forgotten that Europe will open once again in 8 hours.
Maker's Mark recent foray into "diluting" reality by keeping prices flat while reducing the alcohol content - a painful reminder that stealth inflation comes in the most unexpected of shapes - came and went, with the outcry limited to a select group of Bourbon lovers. However, when the realization hits that every other alcohol producer may have been engaging in the same less than ethical behavior, including America's precious Budweiser, we expect the response to be faster and furiouser. We also expect the answer to the question of how it is that food inflation is not far greater, will be made even clearer. It will, however, certainly bring new meaning to the phrase the beer glass is half full. Of course, since the lawsuit was filed by two men who "routinely purchased as many as four cases of Bud per month for the past four years" one can see why it may not be taken very seriously.
February has been an odd month for precious metals to say the least. On-again, off-again fears of Bernanke removing the punchbowl (and endless sell-side strategists discussing Great Rotations and the end of the gold cycle) have led to prices for gold and silver sliding notably. However, while all this price deterioration has been going on, demand for physical gold and silver has surged - entirely disconnecting from January's apparent demand-to-price correlation - and Silver set to break all-time record demand highs for a February. We know who was buying in January, as Reuters reports Russia and Turkey were significantly adding to their bullion reserves; and while the divergence between demand and price coincided with Chinese New Year - leaving a large marginal buying nation on the sidelines - we suspect the drop is more to do with hedge fund reflexive selling - now caught offside. It seems at least one smart player was using lower prices to build their stack; manipulation or no manipulation.
There was nothing notable about today's just concluded $35 billion 5 year auction, with the possible exception of the fact that at a high yield of 0.777% (of which just 12.5% was allotted at the high), just inside the When Issued 0.778% at 1 pm, this was the first yield drop in three months, breaking the sequence of rising yields since December 2012 when Bernanke announced his $1 trillion balance sheet expansion program for 2013. Aside from that, the Bid to Cover of 2.85 was just shy of January's 2.88, and on top of the TTM average of 2.86. The Direct takedown was a weakish 14.3%, the lowest since September 2012, Indirects saw a 41.7% allocation, the highest since November, and the remainder was given to the Dealers, who will as usual promptly flip their quota back to the Fed while picking up several point in margin spread at the upcoming POMOs. Overall a snoozer, which however with tomorrow's last auction for this week, will take total record US debt which was $16.61 trillion higher by $53 billion to $16.7 trillion, or a 105% debt/GDP rounded up.
Equity markets relatively collapsed intraday yesterday given the recent lack of volatility with the range around four times larger than the three-month average and volume at its highest in that period. While that is significant of itself, as the S&P broke its uptrend, Nanex has found a much more serious shift in the market structure that occurred yesterday. Soon after the open on the US day session, market-making HFTs surged their quote-stuffing efforts to the highest level in months. Whether this was intended to artificially inflate orders to enable institutional sell-orders to be crossed with falsely hopeful retail orders is unclear but given the order flow and direction of trade, it seems something significant changed yesterday.
What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013? Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.
While all eyes were on Italy today - and we will get to that below - Swiss 2Y rates turned negative once again for the first time in a month; EURUSD relatively flatlined around 1.3050 (250 pips lower than pre-Italy); Europe's VIX exploded to almost 26% (from under 19% yesterday); and 3-month EUR-USD basis swaps plunged to their most liquidity-demanding level since 12/28. Spain and Italy (and Portugal) were the most hurt in bonds today as 2Y Italian spreads broke back above 200bps (surging over 50bps casting doubt on OMT support) and 3Y Spain yields broke above 3% once again. The Italian equity market suffered its equal biggest drop in 6 months falling back to 10 week lows (and down 14% from its end-Jan highs). Italian bond yields (and spreads) smashed higher - the biggest jump in 19 months as BTP futures volume exploded in the last two days. Something dramatic has changed as the fast money is running with bonds and stocks going out at their lows of the day. In CDS-land, Italy is now 'riskier' than Spain for the first time in a year.
At 10 am Eastern the Chairman will go before Senate to deliver his agency's semi-annual Monetary Policy Report to lawmakers. Tomorrow he will do the same before the House. Speaking before the Senate Banking Committee, Bernanke will face questions about the nation's current economic situation. He is also likely to field lawmaker's comments on how the nation's economy will be impacted by sequestration. Perhaps someone will inquire about the Fed's exit plans, but that is unlikely as there are none. Perhaps someone else will inquire what Bernanke's closing print target for the S&P and the EURUSD are. We, and numerous GETCO synthetic momentum algos, are looking forward to both.
It would appear that someone tripped and flipped the algo switch this morning as the ubiquitous morning slamdown has morphed into a take-off. Perhaps it is no coincidence that every Muppet's favorite banker (cough Goldman Sachs cough) opined on Gold's coming weakness yesterday and that hedge funds are the least exposed to the precious metals on record, which as everyone BUT Goldman knows, is the traditional signal that it is a time to buy. Actually we take that back: Goldman certainly knew it, which is why it has been urgently advising its clients to sell... To Goldman.