Free Money

We recently detailed the critical charts on the progression of 'Abenomics' but perhaps more important than the total lack of positive economic 'change'  - due, we are sure, to not-enough-time or not-enough-money - is the drastic change in investor positioning in Japanese equities.

Much has been said about "the Cyprus Template" (the so-called bail-in, where deposits are expropriated to recapitalize the insolvent banks), but virtually nothing has been written about the Real Cyprus Template. It appears the key preliminary step of the Real Cyprus Template is that money-center banks in Germany and other "core" Eurozone nations pull their money out of the soon-to-implode "periphery" nation's banks before the banking crisis is announced, "...this explains a lot about something that has always puzzled us: why the delay in resolving Cyprus after the Greek haircut?" We can now see there are two Cyprus Templates: 1. The public-relations/propaganda model; 2. The real one, that enables "core" eurozone banks to pull their deposits out of periphery banks before the deposit expropriation and capital controls kick in. Why are we not surprised the entire charade and expropriation is rigged to benefit the core banks?

The enduring myth of the post-2008 era is that central-planning money printing and deficit spending would soon spark a self-sustaining recovery. Once consumers and businesses stepped up their own borrowing and spending, the central bank and state would then pare back money printing and deficit spending, as the increase in private-sector spending would fuel further borrowing and spending, i.e. become self-sustaining. The reality is the mythical self-sustaining recovery is the carrot dangled in front of a credulous public: though we're constantly reassured "we're almost there" (the promised land of self-sustaining recovery), the mythical recovery remains out of reach, no matter how much money is printed or borrowed and blown in fiscal stimulus. There are several key reasons for this.

For credit to be productive, there must first be productive uses for the capital. In an economy with over-capacity in virtually every sector, a massive surplus of labor, a predatory financial sector and a grossly inefficient government in thrall to crony-capitalist cartels, truly productive investments are few and far between. Instead we borrow trillions of dollars to squander on wasteful consumption and claim it's an "investment." Consumption is not investment, but this simple truth is taboo in our financialized, centrally planned Empire of Mis-Allocated Capital.

There is no hope whatsoever of so-called U.S. "energy indepedence" unless three things happen. First, environmental rules have to be wound back to 1970 standards -- in other words, disband the EPA and make civil plaintiffs show actual harm, not just hypothetical harm because someone goofed on a sheaf of mandated paperwork. Second, stop wasting taxpayer money on nonsense like $25 per gallon biofuel. Third and most urgently, stop subsidizing Wall Street. Let the market decide what interest rates make sense, rewarding companies who can find and produce oil, instead of gorging themselves sick on artificially cheap junk bonds that money-losing shale swindlers will never pay off.

The insecurity of self-employment can generate a far more resilient life and mindset. In a sense being self-employed simply means stripping away the artifice that somebody else is going to take care of you or give you "free money." Once we understand the promised security is bogus, self-employment doesn't feel so risky--it feels like embracing the risk that is hidden behind the flimsy facade of team-building, "guaranteed" pensions and all the rest of the unpayable promises.

It is clear now that we must have been wrong about the economy. No more proof is needed than the fact the Dow has gone up 1,500 points. Everyone knows the stock market reflects the true health of the nation – multi-millionaire Jim Cramer and his millionaire CNBC talking head cohorts tell us so. Ignore the fact that the bottom 80% only own 5% of the financial assets in this country and are not benefitted by the stock market in any way. It is time to open your eyes and arise from your stupor. Observe what is happening around you. Look closely. Does the storyline match what you see in your ever day reality? It is them versus us. Whether you call them the invisible government, ruling class, financial overlords, oligarchs, the powers that be, ruling elite, or owners; there are powerful wealthy men who call the shots in this global criminal enterprise. No amount of propaganda can cover up the physical, economic, social, and psychological descent afflicting our world. There’s a bad moon rising and trouble is on the way.

If you don’t collapse the system, the system will collapse you.

Reuters headlines crossing the closing tape, supposedly out of a (very credible) Greek source, according to whom the Eurogroup will give Cyprus more flexibility on bank levy, and that Cyprus should safeguard depositors under €100,000, even as the full €5.8 billion deposit goal must still be hit. Well, at least they were not kidding with the whole plan. This was not unexpected - there are two key questions which remain woefully unanswered: i) how will Europe restore the confidence it has lost by even contemplating insured deposit impairments, and ii) a deposit haircut is still a deposit haircut, and as noted earlier, the majority of Cypriot parties have announced they would vote against any bank levy, not just that which is determined to be "fair" by 10 European bureaucrats, and supposedly only hurts those evil, evil Russian billionaires. In other words, the final word still remains with the Cypriot parties. Let the horse trading begin.

Finally, the Russian response to the discovery that haircuts on big deposits just rose from 9.9% to over 15.6% will hardly be warm and cuddly. Now may be a good time to ban gun (and plutonium) sales to angry Russian billionaire oligarchs.

The European Union had painted itself in the corner: not wanting to deal with Cyprus immediately has proven costly. The EU had hoped for a pro-euro, pro-austerity government in Italy, but the plan backfired. The idea was that by postponing the bailout it would help in the elections. It was impossible to wait until the German elections, as Cyprus has a bond maturity in June that it would have been unable to pay. As the maturity date was so close, there was no time to take the bond owners to court (the bonds were issued under English law, so a simple haircut was not possible). The only way to fund the bailout was either a gift from the EU or deposit confiscation. They did both. There are two ways of seeing this: #1 Europe just became even more dysfunctional and fragmented, or #2 it has become more unified in doing whatever it takes to protect investors’ interests. The commentary is already utterly negative, but it might take some time for the markets to realize that the upside in crisis country bonds is minimal and there are no restrictions stopping the bank jogs.

Prior to yesterday, if you were trying to handicap how the unelected leaders of the Eurozone were going to react to a tough situation, you only had to refer to the quote "When it becomes serious, you have to lie" from Mr. Junker to understand their mindset. But so long as someone at the ECB was willing to flood the world with free EURs (with significant backup provided the US Federal Reserve) the market closed its eyes, held its breath and took the leap of faith that all was well. However, post the Cyprus decision, the curtain has been pulled back and wizard revealed with all his faults and warts. It would be hard to over-emphasize how significant the Cyprus situation is. The damage done here is not related to the size of the haircut - currently discussed between 3 and 13% - but rather that the legal language which each and every investor on the planet must rely on in order to maintain confidence in the system has been subordinated to the needs of the powerful elite.

As Marc Faber noted, we hardly expect China to report GDP growth rates that do not perfectly fit the goal-seeked solution for utopian society, but under the covers, there appears to be some considerably more ugly real data. One of the hardest to manipulate, manage, or mitigate for a centrally planned economy is Electricity production. The year-over-year drop in China's electricity production is the largest since the slump in Q1 2009; and the seasonal drop (associated with the New Year) is the largest on record at 25.3%! So on one hand China is discussing tightening monetary policy amid inflation anxiety and a potential real estate bubble - thanks to the rest of the world pumping free money - and on the other hand Chinese officials are faced with the reality of a drastically slowing 'real' economy. At the same time, we note that it appears China's export-import data appears overstated. Rock meet hard place.

Yesterday we noted the fact that China's Shanghai Composite was now red for 2013 as inflationary fears once again raise the odd specter of a central bank suggesting less than orgasmic expansion of its free money. While the 'Pisani's of the world see the relative outperformance as some 'rotation' in the smart money, we humbly suggest he take a trip down memory lane and note how rapidly the so-called 'smart money' reverted to China's lead in the last few years as the lack of an inflation shock absorber led the PBoC to pull back and implicitly drag on the world's equity market-based linearly-extrapolated economic growth hopes. As a reminder, it's never different this time.

Our last discussion of the miracle of earnings expectations focused on the bottom-up hockey-stick that it seems the consensus believes is ahead (always out there in the future). Today's 'factual' and 'empirical' whiteboard lecture on the 'miracle' comes courtesy of CNBC's Rick Santelli, who appears as frustrated at his co-correspondents permabullishness (see Liesman's flip-flopping views on retail sales today) as the implicit disconnect between the market and fundamentals. To wit, the fact that expectations for GDP growth and earnings are so divergent. With earnings growth expected to be +14.7% this year and nominal GDP around +3-4%, Santelli asks his guest where nominal GDP 'normally' is for such strong earnings expectations - the answer 7.6% nominal GDP growth... reality discussion ensues...

The American spirit is rooted in the belief of a better tomorrow. Its success has been due to generations of men and women who toiled, through both hardship and boom times, to make that dream a reality. But at some point over the past several decades, that hope for a better tomorrow became an expectation. Or perhaps a perceived entitlement is more accurate. It became assumed that the future would be more prosperous than today, irrespective of the actual steps being taken in the here and now. And for a prolonged time – characterized by plentiful and cheap energy, accelerating globalization, technical innovation, and the financialization of the economy – it seemed like this assumption was a certain bet. But these wonderful tailwinds that America has been enjoying for so many decades are sputtering out. The forces of resource scarcity, debt saturation, price inflation, and physical limits will impact our way of life dramatically more going forward than living generations have experienced to date. And Americans, who had the luxury of abandoning savings and sacrifice for consumerism and credit financing, are on a collision course with that reality.