15th March 2012: END THE FED! Introducing “The Austrian Mavericks” As Nassim Taleb Becomes The Latest Ron Paul Conformist

Quote of the Day:

Only one candidate, Ron Paul, seems to have grasped the issues and is offering the right remedies for the central problems we are facing.

Nassim Taleb – 13^th March 2012

Macro Overview

Introducing The Austrian Mavericks

• I don’t know if you’ve noticed, dear reader, but there is a growing number of dissidents in the economic community. Perhaps this is the anti-Keynesian backlash to “big deficit economic policies” and financial repression, or, perhaps it is just another way for uber-bears to express themselves… I don’t know.
• Let me just commit blog-writing suicide by trying to generalize and characterize this diverse group of individuals which I think is emerging. Well, generally they think that The Fed needs to be fundamentally restructured (in some cases abolished!). They tend to be (but not always) of the Austrian School of Economics and they are often (but not always) very critical of “The Feds”, big government and the way congress operated fundamentally. You may be surprised who is finding a sense of belonging in this querky band of economic outcasts, among this group are:

1. Senator Ron Paul … click here: abolish the Fed and the SEC.
2. Bill Gross … click here: “I’m a little Ron Paulish”
3. Jim Rogers … click here: “Abolish The Fed”
4. Stephen Roach … click here: Reform The Fed the Original Sinner
5. Jim Grant … click here: Monetary Policy without the Fed.
6. Marc Faber … click here: What Can the Fed Do To Help The Markets? Collectively Resign.
7. The Daily Reckoning (e.g. Joel Bowman) … click here: Three Words That Could Help Fix The US Monetary System:  END … THE … FED.
8. Peter Schiff … click here: Abolish the Fed, Now What?

Nassim Taleb Joins The Club

• Now I wrote an article not long ago about how Ron Paul could conceivably regarded as a black swan, it’s interesting to see ZeroHedge with a similar headline on this today: Is Ron Paul Taleb’s New Black Swan. In my piece I was listing potential black swans or tail-risks and I said:

Political Surprises. Take your pick: French election unveiling unexpected Euro-skepticism. Putin getting “overthrown” before he’s even re-elected. Ron Paul emerges as a viable front-runner in the Republican Primaries (I will not get drawn into a political argument but suffice it to say, the market is not pricing this probability in with mainstream media dubbing him the unelectable candidate).

• Ron Paul is not going to get elected, and I don’t think is his realistic goal. But if this Austrian Maverick Movement gains more traction and wins some votes, candidates on both sides of the aisle will have to start taking heed of what he is saying.
• I’m not here to endorse Nassim Taleb or Ron Paul or anyone else (nor do I agree with everything they say), but I do find them both entertaining and, indeed, thought provoking. We need more characters like this… they help us attach characters to theories, if nothing at all that is a good thing for our education and/or amusement.
• I’m not going to comment much more on this, this is going to be a very short macro piece. Just look at the video I’ve inserted below and watch good ol’ Nassim try his utmost to control his emotions in this short interview as he declares himself the latest soul on the Ron Paul bandwagon; you’ve gotta love it – were the content not quite so serious!

Market Overview

Toyota Foot Back On The Accelerator

• It seems like a long time ago Toyota had it’s problems with dodgy accelerator pedals. Since November the company seems to have put its problems firmly behind it and the stock has rallied over 50%. In fact as I write this, Toyota is the largest $-mover today. Of course,Toyota is my Chart of the Day.

European Volatility and Credit Not Quite In Lock-step

• Theories have been built on the relationships between credits and volatility of equities. But the European market does not seem to taking too much heed here. I look at the Portuguese CDS spread and it makes me worry, but I look at the V2X Eurozone volatility index and it shows everything will just be A-OKAY… hmmmm… perhaps I’m just being finicky… anyway, (check out Chart of the Day) for those charts too.

Chart of the Day

Toyota (Source: Bloomberg)

Portugal 5yr CDS (Source: Bloomberg)

V2X Eurozone Volatility Index (Source: Bloomberg)

 

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

•  US CPI

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Nothing Significant

Reading, Links:

Nothing Significant

7th March 2012: The LTRO May Be “All You Can Eat” But It’s No Free Lunch

Quote of the Day:

… this kind of giving be but to give with one hand, and take away with the other, which is deluding, not a giving.

John Milton (1608 – 1674)

 

Macro Overview

What The ECB Giveth With One Hand, It Doth Take Away With The Other

• We ought to have a word for John Milton. He might be a poet and he might have died nearly half a millennium ago but the old boy knew what he was talking about. Beware the charitable man bearing gifts with one hand, while the other hand remains tucked behind his back.
• Wall Street should know this. I don’t know how many times I’ve heard a banker or broker say: “there’s not such thing as a free lunch”.
• So when the ECB comes bearing gifts of freshly minted Euros and demands only “trash” in return, the banks ought to be wary of this “cash for trash” scheme – as Bill Gross calls it. All you can eat buffet? Perhaps, but there’s no such thing as an entirely free lunch.

 

Central Banks Oversight Expands In Lockstep With Their Respective Balance Sheets

• I’m drawn to a comment Ben Bernanke made at a dinner in 2008 during the height of the Sub Prime crisis. When asked what he would most like to have knowledge of he basically said that he’d love to know who the hell owned all this crap. It was at a time when banks were keeping their cards very close to their chests on liabilities related to Sub Prime mortgages – nobody wanted to suffer the same fate as Bear Stearns, or later Lehman.
• The Fed found an ingenious way of acquiring such knowledge, killing two birds with one stone, in my opinion. Bernanke was able to draw the most offending banks out of the wood work by allowing them to put trash for collateral in return for cash. This eased up the banking sector while also putting the newly defined banking sector firmly under the regulatory scope.
• The ECB’s LTRO may be performing a similar trick.

ECB Margin Calls Show Increasing Oversight From ECB

• An article in ZeroHedge caught my attention. Let’s start with this table on the official ECB website which summarizes the state of the ECB balance sheet. You see item 2.5 on the liabilities side of the balance sheet – that shows the amount of deposits which effectively represent margin calls by the ECB on the banks. It is at €17.143 billion – which is not very much in the grand scheme of things (remember the size of LTRO is well over 500 billion).
• But to help you put this in context Bloomberg, rather conveniently, have been plotting the size of this margin call allotment over time. It is my Chart of the Day. Looks a little more dramatic doesn’t it?
• We should keep perspective on this of course, having done so much to protect Europe from a financial sector crisis it is unlikely that the ECB will push a major bank over the brink with intense margin squeezes. But generally speaking, it’s a fairly simple concept, dear reader, if you post collateral on a loan it is generally accepted that the collateral will need to be paid good, otherwise it’s fairly typical for the lender to request more collateral or “margin” as reassurance.
• But, if anything these margin calls on the banks go to show that, if they want some nice, freshly minted Euros to boost their capital ratios, they’d better be prepared for much, much more oversight and interference from the central bank and, as a result, the profit margins and indeed share prices of some banks may enter some resistance as a result.
• My mind operates on a simple system, dear reader. I believe for every action there is a reaction and this even includes creative QE monetary policies, like the LTRO – and we have not even touched upon moral hazard or inflationary expectations or the stigmas associated with drawing down on it. The LTRO is no free lunch – what the ECB giveth the banks with one hand, it doth take away with the other.

 

Market Overview

A Blip, A Wobble or A Correction?

• So far it looks like just a blip. The equity markets are recovering well from the little set-back it had this week. In fact the economic data out of the US has been pretty sanguine – indicating an economy on the front-foot not the back-foot.
• ISM data was high (if anything a little too high), jobs numbers and payrolls were pretty good too.  The two main thorns in the side of the market are the Greek workout and Oil prices. But these two issues are at least known-unknowns and in Greece’s case soon to be a known-known.
• Chart of the Day – as mentioned above – Margin Deposits on the ECB Balance Sheet.

 

Chart of the Day

ECB Margin Deposits (Source: Bloomberg)

 

 

Events

Macro Events:

Update:

• Australia GDP +0.4% QoQ a long way below expectations

Alerts:

• Japan GDP

 

Corporate Events:

Results:

• Carrefour [CA FP], Deutsche Post [DPW GR], MTR CorpHong Kong[66 HK]

Dividends:

• FedEx [FDX], Roche [ROG VX], Wal-Mart [WMT],

 

Reading, Links:

Nothing Significant

5th February 2012: Currency Wars and The Yield Curve Lending Trap

Currency Wars: James Rickards

Quote of the Day:

… we need to produce things as opposed to paper…

Bill Gross

Macro Overview

QE’s Yield Curve Lending Trap

• Interesting article by Bill Gross this month where he talks about the limitations (even negative consequences) of QE on the very thing it was designed to nurture: credit extension. Put simply, the zero bound of Fed reserve rates and the twisting of borrowing costs across the entire yield curve may act as a disincentive towards credit extension. The reason being: they (the lenders) have the same downside risk (100%) and yet are simply not going to make as much money (relative to their own risk-free borrowing rates) from a lower-rate loan! Makes sense when you put it like that really, doesn’t it? Here is an excerpt.

But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”

• We have often thought of the limitations of the zero bound in terms of the “Japanese Experience” – see my comment: Turning Japanese and Richard Koo’s Balance Sheet Recession. But Gross’s observations offer a new perspective on what is, effectively, the same problem. In a secular downturn, you cannot force lenders to lend and you cannot force businesses to borrow.
• I look at Keynesian fiscal stimulus a bit like the shock absorbers on a car, when the economy hits a pothole the road the Keynesian suspension kicks in the smooth the ride out a little bit. But in a secular dip, when the road itself is undulating, there is nothing the shock absorbers can do, the car must follow the road upwards as well as downwards.

limitations to Keynesian "shock-absorbers"

Market Overview

Currency Wars

• So the Dow Jones hit a new high… the highest level since pre-Lehman, in fact. It took us a while to get there, but we did it. The S&P still has some way to go but, who knows, we could be there before summer?! Hey, I don’t know anything and I’m not about to make predictions on the S&P.
• What I do know is central banks, globally, are each completely attuned towards the pursuit of highly accommodative policy. That’s right, in the past the ECB and Chinese Central Banks have been seemingly dancing to their own beat; choosing to focus heavily on price stability with much emphasis on asset prices.
• But as the Euro-crisis has unfolded and with a new, seemingly more print-happy President at the helm, the ECB has changed its tune. China, with a property market slowdown and a resolute focus on its own leadership change and 12^th 5-year plan, has also let it be known that there is a stimulus bazooka there to be used.
• So, I think, for the first time in living memory, all major central banks have their arsenal stocked, their bazookas loaded and are taking aim… at the purchasing power of their own currencies! But fiat currency calibration is a relative value game, which of course means they are, in effect, taking aim at each other. Enjoy your election year!
• For the sake of antagonism, Chart of the Day is a long term chart of the Rmb. I’ve also included as usual, for the beginning of the week, the Sovereign Debt Calendars.

Chart of the Day

Renminbi (Source: Bloomberg)

Auctions 5th Feb - Daily (click to enlarge)

Auctions 5th Feb - Weekly (click to enlarge)

 

Events

Macro Events:

Update:

• US ISM Non-Manufacturing was 56.8 – fantastic number if I’m being honest (we’ve only had one ISM number higher than that in the last 5 years).

Alerts:

• Taiwanese CPI

Corporate Events:

Results:

• Japan Tobacco [2914 JT], Loews [L], NTT [9432 JT], Suzuki [7269 JT], Yum! Brands [YUM]

Dividends:

• Nothing Significant

Reading, Links:

Bloomberg Article on James Rickards Book: Currency Wars.

10th January 2012: Fat-Tail Obsession – When Is A Black Swan A White Swan?

Quote of the Day:

‘The only predictable thing about 2012 is its unpredictability.” This insight, which came in a holiday greeting from a professional acquaintance whom I respect highly, is important for any investor looking to generate returns and manage risk over the next 12 months.

Mohammed El Erian – PIMCO

Macro Overview

Thinner Fat Tails?

• I get nervous when people agree with me. It’s hardwired into my brain that real opportunities exist on the themes that few are thinking about. As you know, one of my main themes over the past few months has been the rise of what Nicholas Taleb calls “Black Swans” or what I call “fat-tail risks”. These are the type of events which can wipe out an entire portfolio performance in one fell swoop.
• But I’m a bit nervous about my nervousness (can you tell I’m paranoid, dear reader?). The reason I’m nervous is because everybody else seems to now be agreeing with me. Bill Gross opens his first letter of 2012, Towards the Paranomal, with the following sentence:

The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes.

• This is almost exactly what I’ve been saying about the investment environment – especially with respect to credit risk in Asia and political risk in Europe. For example, remember my piece, Gambling on the Euro Roulette Wheel, quoting Soc Gen’s Kit Kuckes’ bimodal outcome on the Eurocrisis: “the Euro is either Strong or Gone”) and also see my piece Tails of Black Swans and Red Dragons.
• El Erian too, jumped on the band wagon “Investing n a ‘Fat Tail’ World”. Nice to have the World’s biggest fund manager confirm your thoughts a few months after you first made them but I do worry a little. If everybody expects a fat tail it ceases to become fat because, by definition, fat tail events are unexpected. That said I think the main risks to a portfolio will be the multitude of idiosyncratic fat tails (investment minefields – e.g. rising default rates in Asia) as well as potential macro events (political fall out in Europe).
• I also thought I was quite controversial citing Ron Paul as a potential black swan in American political landscape but no sooner had I written this, ZeroHedge published an article saying the exact same thing.
• While attention to risk is welcome, all this hysteria can at times be counterproductive. Hedging against a portfolio against a potential risk which is hard to quantify and will likely never occur can be very costly. Instead, I think the key to managing investment through 2012 will be adequate diversification and maintaining a close scrutiny of macro economic and political developments.

Market Overview

Equity Rally Is Back On Track

• Earnings season will be in full flow by the end of this month so it’ll be interesting to see how the rally holds up through this.
• Still we see the divergence in risk perception between the equity markets and the credit markets. While equities are looking sanguine the credit market treads cautiously. Chart of the Day is the Markit SovX Western Europe Index (showing a compilation of CDS spreads from the 15 Eurozone members plus Denmark, Norway, Sweden and the UK.

Chart of the Day

WE SovX CDS Levels (Source: Bloomberg)

Events

Macro Events:

Update:

• Nothing Significant

Alerts:

• Germany GDP
• Portugal CPI

 

Corporate Events:

Results:

• Nothing Significant

Dividends:

• Yum! Brands [YUM]

Reading, Links:

Nothing Significant

21st December 2011: Pass-the-Trash – Helicopter Draghi’s LTRO = Lying To Restore Order. At Last…We’re All Keynesians Now

ECB Pass-The-Trash Shell Game

Quote of the Day:

What if it’s true that, as Kevin Philips recently stated in an article in Harper’s that:

“Ever since the 1960’s Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.”

Chris Martenson – quoting Kevin Philips

 

But stop and think what it would mean if there were 4% of persistent and undeniable… y’know, you can’t explain away this 4% inflation rate …it would mean that the Fed would clear its throat say, in the marble-mouthed way that it speaks, that… “AHEM! The Party’s Over”.

Jim Grant

Macro Overview

Helicopter Draghi Treads a Fine Line – But Do Not Be Too Quick To Judge

• There are a couple of things that the ECB wants.

1. It wants to preserve its inflation-fighting credibility (its only mandate!) and it wants to be perceived as a bank which keeps inflation firmly under control.
2. Secondly, it wants to help the Eurozone survive. This means it wants to help lower the yields of sovereign debt at the periphery but without the moral hazard of favoritism (i.e. directly purchasing PIIGS paper is a no-go).
• This is the fine line the (Long Term Refinancing Operation) LTRO tries to circumnavigate but it may be achieving the exact opposite. The World’s largest fund manager described it first as a shell game, then later tweeted that it may also mean “Cash for Trash”, “3 card “monti” or all of the above – implying, of course, that it was basically a thinly veiled inflationary monetary response (aka QE – European style).
• What do I think LTRO means? Lying To Restore Order. There is only one thing worse than lying to make things better for everyone… and that is lying to make things worse for everyone! The ECB is truly putting its credibility on the line here, but so far it’s showing signs of actually working… kinda.

• The WSJ featured Tchir of TF Market Adivsors, who thinks that the banks would use the facility to repair holes in their own balance sheets but to purchase new high yield paper in Europe anyway. So it is possible that, rather than preserving the credibility of Europe’s central bank while reducing yields of periphery debt, the LTRO may have the exact opposite effect.
• There is a lot of skepticism in the air on this and, I admit, the ECB is treading a fine line here. But the facility has certainly been well received by the banks and actually the LTRO + Treaty Change combo may be as close to my original multi-layered plan to save the Euro as you are going to get. I still think they are missing the middle piece, which is the collateralization of the EFSF/ESM/whatever-they-think-of-next with real taxpayers’ money from the core, but let’s not beat the Europeans up too much – it does appear for now that they are trying to take decisive and truly penetrative action to stop the contagion of a Eurozone Crisis.
• Never-the-less we should give it some time to see how it sits in the market digestive system. It may be that the German is “able” to pay for the profligacy of peripheral states via an “inflation creep plus a-little-something-extra, perhaps” – as observed in the US shell games and deception.
• The European Central Bank was the last major Western bank to resist cranking the printing press. But it appears that this card may be falling too. Things to watch:
• The German press in response to ECB QE.
• The response/rhetoric from other central banks to ECB’s new stance (including BoE, BoJ, Fed, SNB).
• The commodity markets in response to a global printing frenzy.
• Global Inflation Trends – especially in high inflation-risk economies such as China, Brazil, Arab Spring etc.

Market Overview

Oracle Puts A Spanner In The Works

• Oracle didn’t get the memo – the business cycle is supposed to be turning upward! But the stock went crashing to it’s year lows as it missed earnings. See Chart of the Day.

Commodities Poised For Rally

• Oil was up too today – let’s keep an eye on these commodities now that the ECB has one hand on the printing lever.

Big GDP Numbers Confirmed Tomorrow

• Look out for US and UK GDP numbers out tomorrow to confirm Q3 growth.

Chart of the Day

Oracle Stock (Source: Bloomberg)

Events

Macro Events:

Update:

• Italian GDP negative but in line.

Alerts:

• NetherlandsGDP
• US GDP
• UK GDP

Corporate Events:

Results:

• Nothing Significant

Dividends:

• General Electric [GE]

Reading, Links:

Nothing Significant

30th August 2011, Market Update: Bail-out Ball in Germany’s Court

Economic Promiscuity is not all it's cracked up to be.

Quote of the Day:

Who knows where it goes now, but let’s put it this way – Germany and France are sleeping in a king-size bed while the rest of its EU family are sleeping in separate bedrooms. As a result Euroland faces economic contraction.

- Bill Gross, PIMCO

Macro Overview

• Bill Gross admits making a mistake by selling Treasuries but advises to stay away from Europe and American government bonds as the two economic regions are teetering on the edge of a recession it will have a hard time coming out of. Amusing piece this month (New Fangled Love Songs) from him comparing the various regions around the world to relationships. Certainly there is a lot of chatter in the Blogosphere about these two charts (see chart of the day) and their accuracy in signaling ensuing recession. But this is not yet conclusive – September is a big month – the August data and rhetoric fromBrussels and Washington will determine whether we can circumnavigate this slowdown.
• For an alternative view on the Euro check out fx investment guru, Axel Merk. He still thinks that betting on the Euro (vs the US Dollar) ain’t such a bad idea. Meanwhile the debate in the Bundestag continues, in a crucial vote coming up this week the ruling Christian Democrats (with a total of 330 seats) need 311 votes to pass the bail-out agreement… but dissenters are appearing out of the woodwork… this one will go down to the wire.

Political Slices of the German Pie

Market Overview

• Stocks took off from where they left off with Banks leading the way. TheUKbanks had some catching up to do from the bank holiday yesterday (Lloyds, RBS and Barclays storming ahead) but then things dampened down a little into the morning session.

Chart of the Day

Real GDP historic "stall speed" graphic (Source: Bloomberg)

NFP vs GDP graphic (Source: Bloomberg)

Events

Macro Events:

• Update:
  • European Confidence Numbers were slightly below expectations (Consumer Confidence just above expectations but Economic, Industrial and Services below)
  • Indian GDP came out slightly above expectations but slightly bitter-sweet as there are inflation implications to growth in the BRICs these days. Indian GDP roughly in line (slightly higher than expected)
  • Japanese Jobless Rate roughly in line (slightly higher than expected)
  • South African GDP fell below expectations (1.3% annualized vs 1.6% expected)

• Alerts:
  • Philippines GDP
  • South Korean Industrial Production
  • Japanese Industrial Production
  • Canadian GDP

Corporate Events:

• Results:
  • Carrefour [CA FP], Galaxy Entertainment [27 HK], Hermes [RMS FP], Lukoil [LKOH RM], Samsung Life [032830 KS], Stanley Black & Decker [SWK], Vivendi [VIV FP],

• Dividends:
  • Bank of America [BAC], BlackRock [BLK], Pepsi [PEP], Ping An [2318 HK],

Reading, Links:

• Slowdown in developed countries:
  • Slowdown #1
  • Slowdown #2

• Currency Debate:
  • Euro vs USD

10th August 2011, Market Update: Deflationary Eurogeddon

Cameron brings out the heavy artillery

Quote of the Day:

You don’t need a major in English to know that The Fed came right out and said that the economy is really staring a recession in the face…

David Rosenberg

Macro Overview

• I’m a fan of Rosenberg, if only for his principles of making a call and sticking to it in the face of adversity and humiliation. Rosenberg’s staunch deflationary view has been ridiculed by many over the past couple of years. He don’t look so dumb now, huh? Neither do Gross or El Erian who’ve come in for heavy criticism for implying that we were entering a period of Sovereign risk and lower growth – what they called the “New Normal”.
• BoE Governor, Merv “the Swerve” King came out with his inflationary report today and he hardly calmed the markets down with all his talk of “headwinds” being stronger and “risks to the downside” not to mention the fact that he revised growth projections down – can they get any lower without it being a recession, Merv? I think he also made poignant remarks about the ECB which has been dragged kicking and screaming into the European political fray. He said they’d reached the “outer limit” of what can be expected from a Central Bank – perhaps that is an understatement. His message was quite clear: don’t expect Central Banks to “fix the economy”, there is only so much a Central Bank can do – the rest is up to politicians. El Erian said the same thing today.
• RIM just cannot win. As if capitulating market share is not enough it looks like they are to blame for the viral nature of communication during the UK riots.  What a fall from grace: one minute the ultimate executive accessory, the next a hooligan rally-hooter. Meanwhile Cameron rolls out the heavy artillery to deal with the rioters. What’s alarming is the profile of some of the looters emerging… sure most of them are hoodlums but school assistants, organic chefs, opera-house stewards? I mean these guys have respectable jobs there must be deeper cause than just spill-over gang-based and “hoody” street crime.

Market Overview

• Another strange reversal market. Strong morning in Europe only for the fears over French banks (remember yesterday’s comment about BNP freezing funds). This time it’s Soc Gen – rumour has it they’re insolvent and that Sarkozy was locked in hours of intense meetings today. Of course all rumours were denied by both Sarkozy and Soc Gen. Within minutes Soc Gen was staring at a 20% loss, BNP down just 15% – although they did rally a little into the close.
• This fed into the US markets and they fell heavily in the morning only to rebound after lunch. Rollercoaster!
• Basically this is all about the Financials… Citi, BoA and (I never thought I’d say this) Goldman all getting mullered to the tune of 10% or more! Huge sell off into the close though and everybody is talking about the volume of selling. Market in the US was never in positive territory but this is an ugly close again.
• Apple is now the largest company in the World.
• Fed up with talking about Gold. It almost hit $1800 today. Why don’t you just wake me up when it hits $2000. It’s already up over 550% (not a typo) in the last decade – I don’t know what more there is to say.

Chart of the Day – I can guarantee these resistance levels will hold

Longest losing streak on the German stock exchange (the DAX) since 1978.

This is how it looks. Sad thing is it may not be over.

DAX cracks.

Events

Macro Events:

• Update:
  • German Inflation in line with expectations (no wiggle room for ECB  yet)
  • Japanese Inflation higher than expected … hmmmm – highest level since pre-Lehman (decoupling?)
• Alerts:
  • Japanese Machine Orders

 

Corporate Events:

• Results:

* Anheuser-Busch [ABI BB], Cia De Bebidas [AMBV4 BZ], MTR [66 HK] (AAA-rated – the last of a dying breed!), RWE [RWE GR], Singapore Tel [ST SP], Standard Bank [SB SJ], Swire Pacific [19 HK], Swisscom [SCMN VX], Telstra [TLSN AU], Zurich Financial [ZURN VX]

• Dividends:

* AIA [1299 HK], Dupont [DD], Eli Lilly [LLY],

Reading, Links:

• Bank of England’s Mervin King on growth deterioration:
• Merv The Swerve #1
• Merv the Swerve #2
• Merv the Swerve #3

8th August 2011, Market Update: AAA is the new AA, -5% is the new “Flat”

Dollar Tornado

Quote of the Day:

Jeez, I don’t know what I’m looking for now…

I don’t understand now… what’s going on…th-there’s some kind of… I suspect that we’re now into a high frequency trading, momentum-driven, cascading downturn and I wanna get…I … I…I want to get …I… I… I want to get out of the way of it…

Barton Biggs, the normally sanguine, normally articulate, normally bullish Hedge Fund Manager.

…we decided to deviate from our monetary policy rules…

ECB’s Trichet

Macro Overview

• The European Band-Aid.
• On a day when riots in London remind us of the social consequences of our economic folly it was not Germany’s Merkel but the ECB’s Trichet who blinked first.
• The European Central Bank announced that they would stray beyond their mandate and plunge headlong into the political comedy act that is European politics, announcing finally that they’d buy Italian and Spanish bonds. The market rallied, that was what they’d been looking for. Or was it? Remedies rarely come without side effects and the markets look forward don’t they? As the BBC’s Peston admits:

Because – for the avoidance of any doubt – the ECB is taking a substantial reputational and financial risk in buying the debt of these nations: many will see the ECB as taking a serious credit risk in bailing out two financially over-stretched governments and as behaving contrary to the rules of prudent central banking.

• The Bundesbank was livid at the thought of the ECB stepping into the markets like an drunken porn star in a Shakespearean production. Not only does this impose fiscal union a little too hurriedly for the Germans but it also takes an inflationary stab at the German economy – which does not need inflationary policy at a time when its economy is humming along quite swiftly. Forget the sterilization gimmicks, this is inflationary policy from a Central Bank which has only ONE mandate: to control inflation, at a time when inflation (by its own admission) is already high enough! That’s how bad things have got – they’re throwing the kitchen sink at the problem.
• Granted, the ECB is only doing this until European Bureaucrats get the EFSF in order (at which point the EFSF will take over bond purchases) but the credibility question now hangs over the ECB. Given the fractiousness of EU politics, the ECB is much, much more sensitive to disparate political risk than any other central bank in the World. Embarrassing, given Trichet only days ago said he would not be buying Italian and Spanish debt… hopefully they sneaked that one under the carpet while Mr Market was busy licking his wounds in America – we’ll see. By the close of play the European markets were a blood bath
• S&P on the rampage.
• S&P may have made a $2 Trillion mistake but, when you have future obligations of $60 Trillion who the hell cares? Besides, their reasoning was more to do with the political dysfunction in Washington and the fact that (despite the fact other AAA rated countries, like France and the UK, have bigger deficits) the trajectory of the US public debt was simply out of control. But something tells me that the S&P is lining up the AAA European economies for a downgrade too.
• S&P are not stopping at the US government, they came out and downgraded everything connected to long term US government debt including Fannie Mae and Freddie Mac. Then they came out and downgraded Warren Buffet’s Berkshire Hathaway along with four other AAA peers – citing that any company (like an insurance company) which uses US Treasuries to park vast quantities of cash. These S&P guys are on the rampage… who’s next? Watch this space. Watch Muni’s and Corporates too.
• Bill Gross commended the agency on actually showing some “spine” but Warren Buffet and even Roubini said that this was a harsh action by the rating agency. You decide – I’m not actually sure it’s all that relevant.

Market Overview

• Welcome to the new volatility normal where 5% is the new 0.5% on the S&P. Hey, don’t bother getting out of bed for anything less than that.
• In the middle of the trading day Obama came out and made a speech which went a bit like this:

“Ahhhh… [Yawn]… I’ve just woken up, can someone tell me what’s going on…?” …a lot of words with absolutely no content, what a joke.

• The market was already down 4% at the time but it still found another 2% downward move from there after that brief reminder from the President of just how disconnected politicians are from the realities on both Main Street and Wall Street. Bank of America (being sued by AIG over “massive fraud”) and Citi had lost one third of their value in 3 days at one point. BoA closed down 20% today… that’s a 20% move in ONE DAY for one of America’s biggest banks.
• I’m still trying to look for positives … you’ll be happy to note that the Botswana stock market was up 0.09%. That’s the best I could do.
• Gold reached $1700 today – it was not long ago I was joking about it touching that level soon after we broke through $1600… and here we are.
• This has been a sucker punch, there is something quite scary about the relentlessness of this sell-off. When market traders say things like “it’s actually been quite orderly” then you know this is far worse than it looks. There has been no way any unhedged, “long and wrong” person could have traded their way through this to make back gains. This is real wealth destruction.
• Market message to the Fed: DO SOMETHING!
• I suppose the positive is that things cannot get much worse… the only thing that would make this worse is if we saw this volatility spill into other asset classes such as US or German Bonds or some sort of currency crisis in one of the major currencies (USD or EUR).

• We now are entrenched in a contagion cascade. Markets which are not directly affected by the incompetence of Western politicians are now suddenly on the sell card. Ukrainian, Romanian, Brazilian exchanges all down over 8%.
• Nasdaq closed down a cool 7% (hey it beat Argentina, which was down 10%!) and the S&P closed down just a smidge… -6.7% on the day.
• Good luck Asia!

Chart of the Day – I can guarantee these resistance levels will hold

VIX – highest level since the crisis of 08/09.

Spiky VIX (Source: Bloomberg)

5 year chart of Gold.

Gold just running away from everybody (Source: Bloomberg)

Events

Macro Events:

• Update:
  • Nothing of significance – just watch the news and markets!
• Alerts:
  • Nothing of significance – just watch the news and markets!

 

Corporate Events:

• Results:

* Nothing of significance – just watch the news and markets!

• Dividends:

* Nothing of significance – just watch the news and markets!

Reading, Links:

• ECB must “go nuclear” to save Europe
• Eurozone #1
• Eurozone #2
• Eurozone #3

3rd August 2011, Market Update: Gold Rush!

Macro Overview

Quote of the Day:

“There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.” – Martin Feldstein.

Those of you who don’t know Feldstein, well he’s an economics professor at Harvard. But, more pertinently, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research. Basically he’s one of the few voices that gets to decide whether the US is officially in a recession or not. So, if you think it matters what we call this anemic growth pattern (and, granted, not every body does), it kinda matters what he thinks.

Gold Rush!

Market Overview

• Yesterday the S&P closed on the lows of the day and this was the lowest close of the year officially putting the S&P negative YTD. After the tragic close in the US stock market, futures before the ISM numbers were actually pointing upwards but the market just can’t get out of its bearish funk – it soon turned negative after the open. Then the ISM non-manufacturing numbers came out worse than forecast which meant they offered no offset to the dismal ISM manufacturing numbers earlier in the week. The market is coming to the reality that his is a slowdown – there is no question about that. If we were to close around morning levels it would have been the longest losing streak in US equities since … … … 1978. But the cavalry arrived and a solid afternoon rally helped to alleviate the situation.
• This did not stop Gold from hitting another record high – some of you may have seen my little nostalgic macro piece on Gold and the Debasement of Faith-Based Currencies today in which I referred to Bill Gross’ latest piece, Kings of the Wild Frontier. The vigilantes are getting more vocal.
• Talk of the town was Soc Gen… yep, you guessed it … another investment bank missing earnings by a mile.
• But we should not forget MasterCard – blowing the lid of earnings … it’s not all doom and gloom out there. Large-caps are definitely doing their bit to keep this economy afloat.
• All this political clap-trap in the US has detracted from the real global issues of economic concern back in Europe. Don’t worry – once all this week is over and we’ve digested the economic numbers from the states (note the ISM number out today) focus will return to dismal Europe. And let’s put it this way – the markets will not find any respite there. Take a look at the trend of Italian borrowing costs:

Italian 5 Year CDS - 2 year chart (Source: Bloomberg)

Chart of the Day

Gold 1 Year Chart

Gold - 1 Year Chart (Source: Bloomberg)

Events

Macro Events:

• Update:
  • US ISM Manufacturing came out below expectation at 52.7 (vs 53.5 expected).
• Alerts:
  • US Jobs Data (Initial Jobless Claims) – can we maintain a 3-handle?

Corporate Events:

Results (diverse spread of companies coming out):

*AIG [AIG], Apache [APA], Asahi Glass [5201 JT], Cheung Kong Holdings [1 HK], Edison [ED], CVS [CVS], Direct TV [DTV], General Motors [GM], Hutchison Whampoa [13 HK], Kraft Foods [KFT], Linked-In [LNKD], PriceLine.com [PCLN], PTT (Thailand) [PTT TB], Rio Tinto [RIO AU], Shanxi Xishan Coal [000983 CH]

Dividends:

*Noble Energy [NBL]

Reading, Links:

• PIMCO sticking the knife in:
• PIMCO #1
• PIMCO #2
• PIMCO #3
• New Rome, same old story:
• Italian Debt #1
• Italian Debt #2