"The crisis isn't over yet," warns Carmen Reinhart, "not in the US and not in Europe." Known for her deep understanding that 'it's never different this time', the Harvard economist drops the truth grenade a number of times in this excellent Der Spiegel interview. Sweeping away the sound and fury of a self-serving Federal Reserve or BoJ, she chides, "no central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits," and guess what, "this is nothing new in history." After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds; but, nowadays, she explains, "monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments." Nations "seldom just grow themselves out of debt," as so many believe is possible, "you need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation," with the consequence that people are going to lose their savings. Reinhart succinctly summarizes, "no doubt, our pensions are screwed."
It's been a long night for the Japanese markets. As Abe and Kuroda awoke stunned that JPY had not broken above 100, things went from bad to worse as USDJPY slid 60 pips from the last US day-session. The Japanese equity market is following the FX pair in its hyper-correlated way as TOPIX is struggling with its first loss in eight days. The Japanese bond market is not doing well either, despite the BoJ's JPY2.5 trillion monetization today. 7-year to 30-year JGBs are 5-7bps higher in yield (3-4 times the average move) and JGB Futures are suffering significantly with the 10Y down over almost a point - within a tick of triggering the TSE's circuit-breaker for the 5th time in 6 days. While everything points to a 'disorderly' market (especially in bonds), we can rest assured they are on it:
- *KURODA CONFIDENT BOJ CAN BUY BONDS AS PLEDGED
Add to that the fact that JGB implied vols just hit a 10-year high and it seems all is well in the land of the setting sun once again.
Many have argued that sovereign CDS markets 'caused' the problems in Europe - as opposed to simply 'signaled' what was in fact being hidden by cash market manipulation. But as the IMF notes in a recent paper, there are times when the CDS market leads the cash bond market and other times when it lags. But as far as looking at risk in Europe and the US, based on a wonderful model that uses Markov-switching to predict what the probability of the world being in a low-risk or high-risk state, we are as 'low risk' as we have been since the crisis began. Each time that level of complacency was reached before, equity markets have rapidly sold off. What is perhaps most notable is the systemic compression of every risk indicator, first VIX (Kevin Henry and the fungible excess reserves of every prime dealer whale), then the liquid SovX index (via Greece CDS auction uncertainty and 'naked' short bans), then the Euro TED Spread (via LTRO), then individual Sovereign CDS (via Draghi's 'promise'). The result, the 'free-market' signal of risk is non-existent.
Mankind has faced a bewildering multitude of self-made catastrophes and self-made terrors over the past few millennium, most of which stem from a single solitary conflict between two opposing social qualities: individualism vs. collectivism. These two forces of organizational mechanics have gone through evolution after evolution over the years, and we believe the long battle is nearing an apex moment; a moment in which one ideology or the other will become dominant around the world for well beyond the foreseeable future. Collectivism as a philosophy is a perfect tool for oligarchy. The men who dominate such systems rarely if ever actually believe in the tenets they espouse. They sell the idea of single-minded society as a nurturing light that will create group supremacy, prosperity, and perfect safety. But the truth is, they couldn’t care less about accomplishing any of these things for the masses. The most vital aspect of the collectivist process is convincing the public that the individual citizen is not sovereign, but is actually the property of the group.
Think the 75% plunge in BitCoin values in two days has crushed all former supporters of the virtual currency (which truth be told is only back to levels from a month ago)? Wrong. As the NYT reports, a very unexpected supporting genepool (split into two identical halves) has emerged in the shape of two names previously linked to yet another pre-bubble frenzy name, FaceBook: Cameron and Tyler Winklevoss (collectively, the "Winklevii"). Following stints as Olympic rowers, Simpsons characters, and antagonistic Facebook litigants, the two 31 year-old identical twins are now indirect investors in the latest "currency" craze, whose heyday may well have come and gone, courtesy of owning a whopping 1% stake in all of the entire outstanding supply of BitCoin which at last count was worth $1.3 billion (if maybe a little less now).
It should come as no surprise that struggling retailer JCPenney, which has been burning cash at an unprecedented rate, and which just wasted two years of turnaround time following the sacking of its now former CEO Ron Johnson only to return to the same strategy that Bill Ackman blasted as recently as 2012, has been in dire cash straits. However, while everyone expected the company to announce that it would satisfy its immediate cash needs by drawing down in part or in whole on its recently amended and restated, and currently undrawn, $1,850 billion revolver with JPM as administrative agent (as every other company does when it needs a brief liquidity burst), nobody expected that JCP, whose stock yesterday hit a 12 year low, would be forced to hire Blackstone to advise in on raising cash. Which according to the WSJ it just did.
As of later this month, we’ll receive the final picture on China’s U.S. bond sales over late 2011 and early 2012, and the reaction isn’t likely to be much different than it was last year. But, we argue that there’s actually quite a lot to see. Namely, there’s a brand new reason to be concerned about America’s access to foreign capital. In a nutshell, America needs foreigners to be both willing and able to buy its bonds. China is able but much less willing than it used to be. (Treasury data that isn’t shown here suggests its interest in U.S. securities recovered somewhat in late 2012, but remains far short of the levels of two years ago.) Other countries are willing but not nearly as able as China, notwithstanding the sharp increase in purchases in the recent period. And overall, the message in the preliminary TIC data is more worrisome than it may appear on the surface. Should the final report on April 30th confirm the message, consider it a warning of a potentially disastrous future decline in foreign purchases of U.S. debt.
Just because Goldman's track record at predicting the near-future is so fantastic (Abby Joseph Cohen "forecasting" in March 2008 the S&P would close the year at 1500, or about 40% off), the firm that spawned a thousand central bankers and ambassadors, has decided to try its hand at really long-term stock predictions. As in "three years over the horizon" long. And, of course, it's only uphill from here. To wit: "We develop a new framework for forecasting equity returns over the medium term using a consistent approach globally. We extend our forecast horizon to the end of 2015."And the punchline: "With a 2015 horizon all regions look attractive on an absolute basis"
While hope springs eternal that the US housing sector 'record-inventory-compression and foreclosure-stuffed' 'recovery' will become self-sustaining, there are two rather disappointing 'facts' to ruin the 'fiction' that all is well. As Gluskin Sheff's David Rosenberg notes, not only are mortgage applications for new purchases stalling rather notably from a 'red-hot' +16% YoY in January to a mere +3% in the last week; but an even more critical indicator of housing's health just turned negative after providing hope for the last 14 months. The year-over-year growth in bank-wide real estate credit has turned down again - after first turning positive in February of 2012. So the first (and second) derivative of real-estate credit is now on the down-swing - not the stuff of sustainable housing recoveries.
For the second day in a row, VIX has gone nowhere as stocks pushed on to new highs. PC-related names were hammered on the dismal shipments data and Transports also suffered once again. The S&P made new all-time highs but with the JPY unable to break 100 (yet), ES lost its partner-in-crime and faded back to VWAP into the close. While the major indices closed green (once again) and in spite of less demand than expected at the 30Y auction today, Treasuries were absolutely not being rotated away from. 10Y was -1bps at around 1.79%. Stocks topped out at the European close (POMO end) which also coincided with the low of the day in the USD. Commodities mirrored the USD today with gold, silver, and copper all rolling back towards unch on the day as EUR and JPY weakened. WTI was the worst performer -1.25% testing down to $93 intraday. Bitcoin was falling early before MtGox decided a 12-hour halt was necessary - we only hope this 'temporary' halt is not as temporary as Cyprus capital controls.
The money printing of the Federal Reserve with no anchor to gold has allowed the welfare state to grow to immense proportions. It has allowed politicians to buy votes by spending taxpayer dollars on multi-million dollar Keynesian zero return albatrosses. It has allowed politicians to enslave black people on a welfare plantation of entitlements. Bernanke and his cronies reward mal-investment through their policies. They reward bad behavior (borrowing & spending), while punishing good behavior (saving and investing). West Philly is a testament to failed economic policies, government waste, lack of personal responsibility, corrupt politicians, excessive union costs, and the delusional belief that government can create economic growth. The 30 Blocks of Squalor is descending further into squalor and it will accelerate as Bernanke’s policies further destroy what remains of capitalism in this country.
Several months ago we pointed out something not fully grasped by the broader public: the Chinese corporate debt bubble is the largest of any developed and developing country, and at 151% of GDP (and rising rapidly) is the biggest in the world. What is better known is that corporate debt is just one part of the total debt picture, which also includes consumer loans, government debt and other "shadow debt" credit in the case of China. So how does China's true debt picture as a percentage of debt look? As the chart below from Goldman shows, in 2013 the total credit outstanding in China is expected to rise to a whopping 240% of GDP, and continue rising from there at an ever faster pace.
These are certainly days of miracle and wonder. Well, of absurd and extraordinary financial experimentation, at any rate. Last week, for example, saw the Bank of Japan abandon any last pretense of restraint and topple headfirst into a gigantic pile of monetary cocaine. It would be difficult to overstate the drama of this monetary stimulus (although we favour the word debauchery). Yet as the Japanese monetary authorities declare a holy war against deflation, it would only be fair to draw attention to the colossal opportunity being presented as the antidote to monetary intemperance, namely gold and gold miners. There is a clear mismatch between the prices of gold and silver mining shares and spot prices of gold and silver. But as to why the miners are trading so poorly relative to the physical is unclear to us.
The rattling of sabres grows louder as missile launchers are turned to the sky and launch-pads moved across North and South Korea. It appears the previous missile test-launch did not go so well...
A new twist in the neverending battle between Icahn and Ackman over the true value of Herbalife emerged moments ago when while reading from the criminal complaint filed against the charged former KPMG auditor Scott London, CNBC's Jane Wells cited an email from London to his "client" that "Herbalife was going to go private." Supposedly this means that Icahn is not just sitting there and twiddling his thumbs waiting for Ackman to be crushed under the weight of JCPenney, but that he, or someone else, is preparing an imminent LBO, if at least the data KPMG had until its resignation as HLF's auditor is credible. Why, however, an auditor would know what an equity investor's plans for the company are, remains unclear.