New Normal

When is marginable collateral not marginable collateral? When it is an ETN, or Exchange Trade Note: the cousin of the Exchange Traded Fund (ETF). The very mutated, and unabashedly evil cousin of the ETF that is. At least such is the view of US brokerage Interactive Brokers " Pursuant to a recent decision by FINRA whereby Exchange Traded Notes (ETNs) will no longer be eligible for Portfolio Margining, these securities, including options having an ETN as an underlying, will be phased out of the program by OCC during the week of May 19, 2014."

According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone..."if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans..." What a surprise – a government guarantee. The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook. In other words, the government is panicking. But it’s not working... so much excess inventory has built up, a major slowdown was inevitable. And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.

The blue line is conventional, single-family housing starts and/or permits.

The red line is "New Normal", "Blackstone is America's landlord" multi-family (i.e. rental) housing starts and/or permits.

Go.

When it comes to the topic of the marginal utility of debt, or how much GDP does a dollar of debt buy (an example of which can be seen here), most people are aware that the developed world is facing ruin: with debt across the west already at record, nosebleed levels, and with GDP growth slowing down (due to capital misallocation, thank you Fed, demographic and productivity reasons), it is only a matter of time before it doesn't matter how many trillions in debt a given treasury will issue (and a given central bank will monetize) - the credit impulse will simply not translate into incremental economic growth. But did those same people also know that Asia is almost as bad if not worse as the west when it comes to the marginal utility of debt?

Dwindling resources produce the least admirable human behaviors, something science has tested and understands quite well. Ukraine is a bellwether; we will see other conflicts like it elsewhere in the world, and likely, in time, within our own nation. Which is why understanding the nature of social unrest is so important, particularly to those considering relocation (within or outside of their home country). You certainly don't want to leap from the frying pan into the fire as resource scarcity and conflicts are now part of the global equation.

With stocks at record highs and priced for some nirvanic perfection of future growth reaching escape velocity at some point soon, the question of why bonds keep rallying is vexing to the status quo minders who just can't fathom it. However, as Bloomberg notes, the world’s most actively traded short-term interest-rate futures are signaling the path higher for the Federal Reserve’s benchmark rate won’t be that high. "The market now sees diminished macroeconomic expectations and expects the Fed to ending the upcoming tightening cycle at around 3 percent." In other words, the bond market believes in the Japanization of America and another lost decade as the new normal low/no growth world slugs along with no escape velocity dreams anytime soon.

"by July we expect the US economy to be in full recovery from the weather- and inventory-induced slowdown in Q1, and this should push US rates higher and boost the Dollar, including against the Yen." - Goldman Sachs

While Asia in general may be slowing now that China's epic debt creation machine is starting to break down, when it comes to trends within Asia not everyone is equal. And nowhere is this more visible than when comparing Japan, that dynamo of Asia in the 1980s and 1990s, and China, that other "New Normal" dynamo which carried the world across the Great Depression chasm. For the best representation of Japan's epic fall from economic relevance and, inversely, China's superpower ascendancy, here is one chart showing how vastly more relevant to Asia China now is compared to Japan just under 20 years ago.

If, in the New Normal, newsflow and facts mattered, facts such as the German Zew Investor Expectations index crashing from 43.2 to 33.1, smashing expectations of a 40.0 print to the downside and down to the lowest since January 2013 nearly half the 7 year half reported as recently as December confirming Germany can no longer be Europe's growth dynamo courtesy of a still nosebleed high EURUSD, or facts such as overnight Chinese data missed in every category with industrial output up 8.7% y/y in April vs an estimated 8.9%, retail sales up 11.9% below the estimated 12.2% rise and ; Jan.-April fixed-asset investment growing 17.3% vs est. 17.7%, then futures may just posted a downtick. However, since it is a Tuesday, with a ~$1 billion POMO, one can ignore the fundamentals and proceed straight to buying anything and everything with indiscriminate abandon. The only question is whether the NY Fed orders Citadel to slam the VIX under 11 to start off the morning S&P rampage which should push the broad market index above Goldman's 1900 price target for the end of the 2014.

Cruising through earnings, it is now time to revisit certain indicators that speak to the underlying health of the economy and that of the US equity and Treasury bond market.

"If everyone in society is trying to get into the financing business, we may have entered a phase where a fever has started to affect our ability to think," warns one analyst of the bubble-fervor in China... but President Xi Jinping dashed the hopes of stimulus-hunters everywhere (once again) last night amid a slowdown that analysts forecast will lead to the weakest expansion since 1990. As Bloomberg reports, Xi said there will be no major stimulus and commented that "[Chinese] must boost [their] confidence, adapt to the new normal condition based on the characteristics of China’s economic growth in the current phase and stay cool-minded." In other words, keep calm and carry on (oh and don't lever any more carry trades please!).

It is only one word, but it has been repeated so many times by FOMC members in the past year or so it has taken on the imprimatur of officialdom vernacular. Whenever speaking of bubbles, these policymakers inevitably include the word, “obvious.” Long is the list of internal literature that purports to place bubbles in the same category with the Supreme Court’s definition of pornography – we know it only when we see it. In that respect, “obvious” is the perfect qualifier that situates even the brightest of the PhD’s in the same herd as the little guy investor. It would be hard to blame them in disaster if that were actually the case since “everyone” else missed it too. The “good” news is that we will know for sure, including Yellen and her FOMC conspirators, at some point once it all becomes perfectly clear in hindsight. What a way to craft scarily intrusive policy!

Our condolences to students in Arizona, who have seen a near doubling of their college tuition in just 5 short years. In fact our condolences to students in the six states where tuition have risen by more than 60%, in the ten states where it has increased by more than 40%, and in the 29, or more than half of all states, where college tuitions have risen by more than 10 times the Fed's inflation target of 2% per year.

Another month, another confirmation that when it comes to the US consumer, it is all about student debt (and to a lesser extent, car loans). Moments ago the Fed reported that consumer credit number for March: at $17.5 billion, it not only blew out the expectation of a $15.5 billion increase (although when one adds last month's $3.5 billion downward revision to $13.0 billion the two month total actually missed), but was the highest monthly increase since February 2013. That's the good news. The bad news was once again in the composition: of this $17.5 billion $16.4 billion was non-revolving debt, or about 94% of total. The "good", or revolving, credit card debt? Only $1.1 billion.