The one thing that all of us know, surely all of us must know at least this, is that markets do not go forever in one direction. I am not speaking here of the pecularities of a day or of trying to eke out some trade but of shifts in circumstances and sentiments that sets the direction upon a new course. We live in a world recently comprised of three basic tenets; postpone, make up facts to suit the goals of some nation or nations and throw money at anything that moves. This is an inherently unstable construct and yet that is what our brilliant leaders have embraced. I will tell you this; when chicanery is trotted out as truth, when liabilities are not counted, when losses are termed investments, when the only answer to anything is the printing of more small pieces of green and blue paper then trouble is approaching with a capital “T” and the future is a bleak cloud of foreboding.
A quick ranking of the world's most "miserable" countries, based on the conventional measure of the Misery Index which is simply the Unemployment Rate plus Inflation, shows just why most people in Spain are, well, less than happy (and Spain is damn lucky there is no subset of the Misery index for just those aged 25 and under as we would certainly need a bigger chart). As the chart below shows, the Spanish "misery" is now the greatest in the world, at some 30%, and is worse than South Africa, Greece, Venezuela, Argentina and Egypt.
Yesterday $42 billion tech behemoth VMWare stunned its investors when not only did it cut guidance, announcing that global demand is sliding, scaling back products but also disclosing a 7% workforce cut: hardly the stuff that global recoveries are made of. Sure enough, the stock is getting clobbered -17% lower this morning with the weakness likely to spread to the rest of the tech space. But just in case there was any confusion who was making money into last night's epic collapse, and was selling the stock to muppets who were told it was not only a Buy, but a "Conviction Buy", and to buy with both hands no questions asked, look no further than the usual suspect.
- U.S. Wants Criminal Charges for RBS (WSJ)
- Bernanke Seen Buying $1.14 Trillion in Assets in 2014 (BBG)
- Irish banks at mercy of international paymasters (Reuters)
- Do badly, and we will let you do even worse: Rehn Signals EU May Ease Spain Budget Goal in Austerity Retreat (BBG)
- Too Soon to Celebrate for Europe's Banks (WSJ)
- Army says political strife taking Egypt to brink (Reuters)
- Media Firms Probed on Data Release (WSJ) - No Criminal Charges Seen
- Japan’s Government Proposes First Spending Cut in 7 Years (BBG)
- Nazi Goebbels’ Step-Grandchildren Are Hidden Billionaires (BBG)
- Goldman seeks to reduce China exposure (FT)
- More than 70% of Chinese airports generate losses (People's Daily)
Following yet another quiet overnight session, futures have surprised many walking into work today as the traditional overnight levitation is strangely missing. The reason for that may be the lack of the traditional for 2013 lift in various funding currency pairs, with both the USDJPY and the EURUSD lower. While there was no major macro news, the former may have been dragged lower by various comments from the German BDI industry federation chief who said he is worried about the devaluation race stemming from Japan's central bank policy echoing Merkel's comparable sentiment and revealing that the EURUSD may have topped out, while the latter was pushed lower following today's 7 day ECB MRO, which saw some €124.1 billion allotted at a 0.75% yield. This was largely in line with expectations, with Barclays seeing some €135.4 billion maturing, while BNP had expected modestly more, or some €150 billion. The MRO is the first such operation, with tomorrow's 3 month refinancing operation likely to give a better glimpse of the bank's post-LTRO repayment funding needs. Whether it is this, or the market finally demanding some action out of central banks which, except for the Fed, have been in constant promise mode, or just a random walk, is unknown, but for now the carry funded nominal devaluation of risk may have topped out.
Things in France must not be very serious, because the French labor minister accidentally let the truth come out a little earlier today. As the Telegraph reports, France's labour minister sent the country into a state of shock on Monday after he described the nation as “totally bankrupt."
The hypocrisy of the government knows no bounds. The writing on the wall couldn’t be clearer.
"Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies. Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm. On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price. Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit. His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm."
Beginning with the "Yes or No" questions only, everyone's favorite talk-show host takes on The Bernank in this earth-shattering interview. While Lance Armstrong managed to keep the dream alive for over a decade as all around him showed point-blank-proof of artificial stimulation, it took Oprah to get the truth from his lips (oh and a USADA threat). It seems The Federal Reserve has been forced to 'fess up in this entertaining interview as Bernanke sits sobbing across from Ms. Winfrey - and comes clean to years of monetary policy artificial stimulation and performance-enhancing economic-doping. Just like Armstrong, Bernanke admits that it is widespread and that this generation of central bankers "all do it" as he notes that "some retard from the FT or NYT will write excruciatingly thoughtful op-eds about how this is actually a good thing." From the raging parties at Club-Fed to "good f##king times" with Alan Greenspan to "telling people to chillax and enjoy the good times" as the housing bubble popped, Bernanke leaves us with these chilling words: "Buy food, guns, and gold, this $hit is about to get real!" Print-strong.
Things don’t look so good for China.
Prior to the crisis, the 29 largest global banks benefitted from just over one notch of uplift from the ratings agencies due to expectations of state support. Today, those same global leviathans benefit from around three notches of implied support. Expectations of state support have risen threefold since the crisis began. This translates into a large implicit subsidy to the world’s biggest banks in the form of lower funding costs and higher profits. Prior to the crisis, this amounted to tens of billions of dollars each year. Today, it is hundreds of billions. Too-big-to-fail is far from gone.
Given our recent discussion (here and here) of the rising importance of Africa in the world's power and money echelons, it is not entirely surprising that the NY Times reports that US military command in Africa is actively preparing to establish a drone base in northwest Africa to increase "unarmed surveillance missions on the local affiliate of Al Qaeda and other Islamist extremist groups" that American and other Western officials say pose a growing menace to the region. It would appear Niger will be the most likely place for the base - from which officials envision flying only unarmed surveillance drones though, of course, they have not ruled out conducting missile strikes at some point if the threat worsens. “This is directly related to the Mali mission, but it could also give Africom a more enduring presence for I.S.R.,” one American military official said Sunday, referring to intelligence, surveillance and reconnaissance. Perhaps, actually scratch the "perhaps", what is really happening is the US now has a drone base with which to supervise Chinese expansion in Northweast Africa, anda drone fleet to use defensively and offensively as it sees fit.
Amid all of this messy thinking we miss the simple truth behind our material wealth: It has been achieved through the accumulation, by us and inherited from our forefathers, of a stock of highly configured and embedded tools that make human effort more effective and things possible that never were before. And we turn our backs on this truth when we turn more and more of these tools over to government bureaucrats. Profits are but an intermediate end of capital investment. Its ultimate end, in fact, is the material progression of our civilization. How easily we lose sight of this, at our and our progeny's peril. We all want more economic growth, but we ignore the means to get there: the onerous choices and commitments made along the round-about path to those ends. We even confuse the means with the ends.
Back in July 2008, just before all hell broke loose and the S&P was trading in the upper 1,200s, everyone's favorite permabull, JPM strategist famously reiterated his S&P 500 price target for the end of 2008: 1450. Two months later Lehman filed for bankruptcy, and 4 months later the S&P closed 2008 some 40% lower than said price target. Another two months later and anyone who had listened to Tom Lee lost 50% of their investment. Today, as the Fed's balance sheet crosses $3 trillion, and the global central banks have pumped a total of some $15 trillion into the markets, Tom Lee ws back on CNBC with what is his most permabullish prediction ever: he now expects the S&P to generate some 150 in earnings to which he applies a 17x multiple. His conclusion "If you put a 17 multiple on $150, the S&P really sort of peaks around 2,400 or 2,500." In Dow terms, this means a Dow Jones Industrial Average of, drumroll, 20000. He does, caveat it, however: "that's obviously 4 years away." And if Tom Lee was off by 40% in 4 months, we can't help but wonder what the hit rate on his 4 year prediction will be, and if, by using the same ruler extrapolation mechanism he applies to corporate earnings nand multiples one extrapolates the Fed's balance sheet at some $7 trillion in 4 years, what a loaf of bread will cost just as the DJIA crosses 20,000. For future humor purposes, it may be useful to bookmark this post.