New Normal

With Tim Cook being fried on Capitol Hill, it is perhaps ironic that the issue of taxes is front-and-center in the European parliament today. However, as usual, the always-willing-to-tell-the-truth Nigel Farage points out the gross hypocrisy of a political elite calling for higher taxes (on the wealthy and more broadly in peripheral nations) when the reality is that the higher-ups in the European parliament have their marginal tax rates capped at 12%. Of course, none of that matters because stocks are rising and interest rates are falling; but perhaps the 60% of Greek youth or 57% of Spanish youth, as we discussed here, might be intrigued at the new normal idea of 'fair share' in Europe.

Concentrated power and wealth are intrinsically sociopathological by their very nature. We have long spoken of the dangers inherent to centralization of power and the extreme concentrations of wealth centralization inevitably creates. There is another danger of centralization: sociopaths/psychopaths excel in organizations that centralize power, and their ability to flatter, browbeat and manipulate others greases their climb to the top. In effect, centralization is tailor-made for sociopaths gaining power. Nothing infuriates a sociopath or a sociopathological organization more than the exposure of their sociopathology, and so those in power will stop at nothing to silence, discredit, criminalize or eliminate the heroic whistleblower.

We are now used to the daily dispensation of deep twitsight by Pimco's head. Today's installment does not disappoint: in under 140 characters, the bond kind breaks down the now thoroughly dis-proven Efficient Market Hypothesis for the "new normal" in which both alpha and beta are purely functions of virtual central bank printers. However, his view on what happens when said virtual ink runs out (or rather if) is well-known by all at this point. The only question is when.

Gross:Alpha is gr8ly a function of beta &the levered structurs that domin8 credit mkts. No beta? Skinnier alpha ahed 4 unsuspecting investrs

— PIMCO (@PIMCO) May 21, 2013

Reuters reports that following news that the South African gold mining union demands a wage hike up to 60%, "ten striking South African miners were taken to hospital on Tuesday after being hit by rubber bullets, police said, as labor strife swells in mines and factories ahead of mid-year pay negotiations."

"Earnings are the mother's milk of the stock market," is the oft-repeated anthem of a million marching lemmings; parroting the same phrase come hell or high-water in the dismal hope that they can gather moar assets-under-management, garner moar fees, and make moar TV appearances. However, as the chart below shows, we suspect perhaps given the reality of earnings expectations that the new normal mantra for stocks-for-the-long-term should be - "Central Bank liquidity is the PCP of the stock market."

In August of 2011, Argentina’s government slowly began to implement a series of actions destined to curtail the right of citizens to access US dollars (foreign exchange in general). The goal was and is to force savings into pesos, as pesos are after the taxable asset in a country that cannot access capital markets and fully monetizes its deficits. From that moment onward  physical US dollars started to trade at a premium. First-hand experience on the ground in Patagonia confirm the irreversible damage caused by interventionist policies: Widespread poverty, abandoned infrastructure, scarcity of consumer goods, unseen unemployment and criminality, and the madness of hedging against inflation with the purchase of new cars. The streets of any forgotten small town in Patagonia are filled with brand new 4×4 vehicles that would be the envy of many in North America. We can now see that the sustainability of the manipulation in a segmented/broken foreign exchange market causes a negative carry, which would create a quasi-fiscal deficit in Argentina (i.e. the deficit of the Banco Central), fully opening the gates to hyperinflation.

In case the complete disconnect of paper selling from physical hand-over-fist buying (see this chart to explain all the gold activity in Q1 which can be summarized in two words: paper liquidation) were not enough to send the price of precious metals to zero, then news that quite soon gold mining companies in one of the world's largest producers of gold may be going out of business, leading to a collapse in physical product, should be sufficient to really send precious metals well into negative territory. The only question will be if the GDX gets there first. Reuters reports that South Africa's National Union of Mineworkers said it would seek pay rises of up to 60 percent from gold and coal producers, raising the prospect of fresh strikes as firms battle higher costs and falling prices in an already heated labor climate.

Is a $400,000 house with NINJA loan normal? How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing? Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down. Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%. Of course, all of the above is actually referring to the same house. So what is normal? At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2012. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies?

Those who were closely following the S&P cash in the last seconds before the close, and who were eagerly looking forward to a satanic close of 1,666, were likely disappointed when in the last 5 minutes of trading the cash index ramped from 1,665 and easily crossed in and out of 1,666, with the final print pointing to a mid-1,667 close. And then something happened: instead of a closing print of 1,667.50, over one point of the cash S&P suddenly was wiped out for no reason, in turn leading to the satisfactory 1,666 closing print or exactly 1,000 points higher than the "generational" lows of 2009. Yet, refreshing the settlement of the S&P500 an hour later, showed that the final closing price was, indeed, 1667.47.

So what happened?

We didn't really need a confirmation that the economy was deteriorating and completely disconnected from the "market", but we got it nonetheless. First, Initial Claims coming at 360K, on expectations of 330K, the worst print and worst miss in six weeks, confirming that weekly data is largely noise and that there is no sustainable downward trend. The May 11 weekly print adjusted and unadjusted were 360K and 318K respectively, virtually unchanged from a year ago at 373K and 325K, showing that in one year there has been essentially no progress, and that weekly initial claims of 350K is the new normal. Of course, the last week's print was also revised higher from 323K to 328K, while initial claims also missed expectations of a round 3MM print, instead printing at 3009K.

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.

As reported earlier, at least one prominent hedge fund manager, Dan Loeb, is very bullish on Sony (or at least has played his cards well enough to buy the stock 50% lower and is using today's ramp to offload to unwitting momentum chasers as he did with Herbalife). Whether he is merely using the opportunity to earn some activism brownie points on the background of the overall levitation of the Japanese stock market, or is genuinely convinced there is upside for Sony remains to be seen. However, anyone who thinks that Japanese corporates have no place to go but up, is kindly urged to take a look at one-time Japanese electronics titan Sharp, which posted a whopping loss of $5.36 billion, the biggest loss in the company's 100 year history.

There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy. 

We, and the TBAC, previously made clear there is a massive shortage of high-quality collateral - the stuff that forms the backbone of modern monetary practice- some $11 trillion to be exact , as the insolvent world encumbers every possible asset that is not nailed down with more and more and more debt. However, we didn't realize that the asset shortage has also spread to food. As it turns out, Malthus may have been right after all. But fear not: the UN has a modest proposal how to resolve this particular asset shortage: Eat Moar Insects, at least according to the FAO's latest report: "Edible insects Future prospects for food and feed security."

While high-yield bond yields are at record lows, the spread (or compensation for risk) remains above all-time record lows leaving some to suggest there is room for more compression and for the circus to continue. The credit market's disconnect from anything macro-, micro-, or cashflow-related (with CCCs now trading sub-7%) is purely a function of flow and yield-grabbing with WACC curves back at 2006 levels suggesting little pain for firms willing to relever to recap their shareholders. In late 2006, the high yield credit market surged ahead of stocks in an exuberant fanfare (heralded by many as the new normal then); it retraced quickly, only to re-accelerate (driven by the vinegar strokes of a CDO rampage) until April 2007 when it once again roared tighter (way ahead of stocks) in a final capitulative fervor. Fast forward 6 years and in September last year (QE3) HY raced ahead of stocks (only to retrace) and in the last few weeks credit has massively outperformed stocks in what feels very capitulative once again. Is this melt-up the message most ignored in 2007?