Surplus capital used to be the understood as the primary challenge, but this fell out of favor. This essay seeks to return it to the center of the narrative.
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- Second (and Third) liens are back, and so is 2005: As Banks Retreat, Hedge Funds Smell Profit (WSJ)
- Singapore funds benefit from Asian wealth (FT)
- 2 years later the lies haven't changed one bit - Tepco hit over slow admission of radioactive leak (FT)
- How big tech stays offline on tax (Reuters)
- Hilton Leads Rush to Africa in Fastest Boom (BBG)
- U.S. and UK fine high-speed trader for manipulation (Reuters)
- Key witness takes stand in SEC case against Goldman's Tourre (Reuters)
- Boomer Sex With Dementia Foreshadowed in Nursing Home (BBG)
- Bentley SUV gives £800m boost to UK car industry (FT)
In a day in which there was and will be virtually no A-list macro data (later we get the FHFA and Richmond Fed B-listers), the inevitable low volume centrally-planned levitation was attributed to news out of China, namely that Likonomics has set a hard (landing) floor of 7% for the GDP, and that just like other flourishing economies (Spain, Italy, California) China would invest in "monorails" to get rid of excess capacity, as well as a smattering of European M&A activity involving Telefonica Deutscheland and KPN. In Japan, the government upgraded its economic view for the 3rd straight month and also raised its view on capex for the 1st time in 4 months: who says the (negative Sharpe ratio) PenNikkeistock market is not the economy? All this led to a 2% rise in the Shanghai Composite - the most in 2 weeks - and the risk on sentiment also resulted into tighter credit spreads in Europe, with the iTraxx Crossover index falling 4bps and sr. financial also declining by around 4bps, with 5y CDS rates on Spanish lenders down by over 10bps. Naturally, US futures wouldn't be left far behind and took today's first major revenue miss of the day, that of DuPont, which beat EPS and naturally missed revenue estimates, as bullish and a signal to BTFATH (all time high). On the earnings side, in addition to Apple, other notable companies reporting include Lockheed Martin, Altria, AT&T and UPS.
Trends in motion tend to stay in motion. Monetary collapse is a near certainty, but here's one way to profit from crypto-currencies.
As we warned here most recently, the shadow-banking system remains the most crisis-catalyzing part of the markets currently as collateral shortages (and capital inadequacy) continue to grow as concerns. In recent weeks, between The Fed, Basel III, and the FDIC, regulators have signalled the possible intent to change risk, netting, and capital rules that could have dramatic implications on the repo markets and now, it seems, the SEC has begun to recognize just how big a concern that could be. As Reuters reports, the SEC urged funds and advisers last week to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance. A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities and the impact on the derivative portfolios should not be underestimated.
Financial asset investors may continue to benefit in the short term while stocks and bonds remain well bid, but production and labor in over-levered economies should continue to wither. When we take it to its logical conclusion, central banks cannot withdraw debt support (on a net basis) and so our baseless currencies seem highly likely to fail to provide sustainable purchasing power. (This happens as producers demand more currency units for their labor and resources, not when consumers drive prices higher by competing with each other for finite supplies of labor and resources.) Continued inflation of all global currency stocks is likely. This implies to us that fundamental expectations of the inevitability of price inflation across borders and in all currencies must change, from unlikely to highly likely. Since very few investors expect rising inflation anytime soon, the return skew is overwhelmingly positive in its favor.
With earnings season in full swing as some 20% of the S&P is expected to report, the quieter macro picture moves to the backburner especially with the Fed now silent for a long time. Looking at key central banks events, at the Turkey central bank meeting this week, Goldman expects that the bank is more likely to deliver a moderately hawkish “surprise” and hike the lending rate by 100bp to 7.5% (7.0% for primary dealers), and leave the key policy (1-week repo) and the borrowing rates unchanged at 4.5% and 3.5%, respectively. Among the other central bank meetings this week, benchmark rates are expected to remain unchanged in New Zealand, Philippines and Colombia, in line with consensus, while a 25bp cut is expected to be announced at the Hungary MPC meeting.
Don't look now but futures are up as usual, driven higher by both good and bad news. The biggest event of the weekend, if largely priced in, was the victory by Abe's coalition in the upper-house leading to the following seat breakdown. Of course, judging by the Yen and market reaction, which barely managed to eek out a gain: its first in four trading days, the event was largely of the "sell the news" type despite such bold proclamations: "Abe’s victory in the upper house is bullish for Japanese equities and the Japanese economy as a whole, as the removal of political headwinds bolsters the government’s ability to press forward with all ‘three arrows’ of its growth strategy," John Vail, Tokyo-based chief global strategist at Nikko Asset Management Co., which manages $162 billion, wrote in an e-mail. Elsewhere in Europe, Portugal bond yields have plunged by roughly 60 bps on news that the Portuguese President Silva has backed the centre-right coalition government, consequently ruling out snap polls. Well, what else is he going to do? This also comes on the heels of a Goldman report that said a second bailout for the country will be necessary and will likely be discussed in the fall. That too is bullish. What also was bullish in Europe apparently is that government debt hit a new record high of 92.2% of GDP. Remember: debt is wealth so just buy more futures. Looking forward to the US, the market will focus on the latest existing home sales data, the Chicago Fed activity index, as well as earnings report releases from McDonalds, Texas Instruments and Halliburton and a bunch of other companies that will beat EPS and miss revenues.
UPDATE: At least 22 killed, 300 injured in the Chabu quake; Nikkei 225 -400 from intraday highs.
It seems Asia-Pac is a hot-bed of activity this evening as both markets and mainland are being buffeted. Despite the 'positive' news of Abe's victory, JPY is strengthening (back below 100) and the Nikkei has given up all its post-Japan-close gains from Friday (down 340 from the US-day-session-close). But more importantly, New Zealand (Wellington) and China (Chabu) have suffered significant earthquakes this evening. There are reports of some damage to buildings and infrastructure in New Zealand after the 6.5 quake (and >4.5 aftershocks). Local news in China claims that a village has been leveled by a strong, shallow 6.6 quake but China Daily notes details remain unclear. We worry that just as in late 2010 (culminating in Japan in March 2011), the tectonic plate movement in Asia-Pac is starting to pick up.
China is similar to Japan in the 1980s in terms of financial imbalances and challenges for the real economy, but, as JPMorgan notes, China differs in terms of its stage of economic development. Turning possibility into reality is not an easy task, especially as China’s structural slowdown is accompanied by mounting financial imbalances. In the near term, overcapacity and decline in the rate of return on investment are the major challenges to be addressed by policymakers, and rising debt in the corporate sector and local governments needs to be contained and gradually reduced. In our view, this would require reform not only on the economic front (e.g., fiscal reform, land reform, financial reform, and SOE reform), but also social reform (e.g., hukou reform) and governmental reform (e.g., changing the role of the government and de-monopolizing). The list of tasks is daunting, but policy inaction could be even more dangerous - a delay in economic restructuring in China could lead to a repeat of Japan’s experience.
Overview of the investment climate.
As expected, Prime Minister Shinzo Abe's ruling bloc won a decisive victory in an upper house election on Sunday, setting the stage for Japan's first stable government since Koizumi left office in 2006. The Japanese people voted for moar of the same irresponsible monetary policy and this provides a three-year window without a national election and strengthens PM Abe’s hand to supposedly deliver on the promised reforms. As Reuters reports, "people wanted politics that can make decisions", and, "'Abenomics' is proceeding smoothly and people want us to ensure the benefits reach them too." So moar trickle-down wealth-creation for the Japanese, moar surging energy prices, moar currency wars, and moar leverage. There will now be a significant tradeoff among his 'three-arrows' strategy - between monetary and fiscal/reform policy - as the reform agenda may actually enable less monetary policy, increasing the chances of higher inflation in Japan without additional monetary stimulus. This may be just what Kuroda needs to save the JGB market from failure (at least in terms of jawboning if not actuality).
A month ago we showed the chart that we suspect scared Bernanke straight and required his verbal intervention to de-froth the US Treasury market. The huge surge in 'fails-to-deliver' in the US Treasury market meant something was very wrong as this critical indicator of both collateral shortages and technical carry trade unwinds was flashing a very angry red (and as Barclays notes "was ready to feed upon itself"). Bernanke's jawboning provided just the right amount of concern at the Taper that the market began to clear a little and 'fails' have been reduced (though we note are rising once again as un-Taper exuberance returns). The problem is - exactly the same critical dilemma is now hitting the JGB market and as JPMorgan warns, the sharp rise in fails in June suggests that there is perhaps more stress in the JGB market than that conveyed by the recent stability of JGB yields.
“Who Could Trust Such A Company?” – The Big Fat Lies About Radiation Exposure Of Workers At FukushimaSubmitted by testosteronepit on 07/20/2013 16:03 -0400
They still obfuscate and minimize the consequences of the triple melt-down at Fukushima Daiichi.
The secret is the world is more indebted now than it was at the height of the financial bubble in 2007. And big changes are needed to avoid further trouble.