Music Director Riccardo Muti and the Chicago Symphony Orchestra 2011 European Tour

Music To Draghi’s Ears

“In the negative-yield vortex that is the European bond market, investors are discovering just what lengths they’re willing to go to generate returns…even the most risk-averse investors are taking chances on assets and regions that few would have considered just months ago.”  Mmm, sweet melody, do continue.  “‘When you are paying some governments to own their bonds, 4 percent actually looks very decent’…European enthusiasm for higher-yielding assets has helped U.S. borrowers sell 3.28 billion euros of junk bonds in 2015, the busiest start to a year since the currency started in 1999.” …this symphony is a little heavy on the brass — “Unlike the Fed’s three waves of quantitative easing, the ECB’s version is coming as European governments are trimming budgets.  That means they issue fewer bonds, and European investors have more reason to look abroad for returns instead of paying dearly for relatively scarce assets at home or having cash in euros that they might need to pay to hold on to.  ‘There are more and more euros being printed, but these are hot-potato euros.’”  Also, “the euro’s turbocharger has been removed”: central banks around the world have slowed their accumulation of dollars and euros and are relaxing their control over their currency (i.e. float the currency).  Meanwhile, “a weak euro and signs of an economic recovery have spurred China to step up its push into Europe.  Analysts at Deloitte say depressed asset prices in the euro zone have created ‘vast opportunities for bargain seekers in China.’”  Well.  


Oil: US Still Gushing Oil

“US crude oil stocks rose 22% y/y to a record 458.5 million barrels during the week of March 13…refineries are working overtime to convert crude oil — which the government bans from exporting — into refined products…over the past 12 months through February, global oil supply is up 2.5% y/y, while demand is up 0.7%…North American frackers have flooded the world market with so much oil that the Saudis are aiming to shut them down with lower prices.  It’s not working so far.  The US and Canada produced 13.2mbd during February, up 4.0mbd since August 2012.  That well exceeds the Saudi’s 9.6mbd.”  Also, oil bears can smell a nuclear deal with Iran which might raise sanctions on another 1.0mbd from Iranian oil fields.  Meanwhile, Oil Rigs Shmoil Rigs (The official title of Goldman’s latest memo on oil rigs, I presume).


USA: Center For Financial Stability Sees Increase In Short-Term Credit

“The CFS defines market finance as the total stock of money-market funds, commercial paper and security repurchase, or repo, contracts held by financial institutions — credit instruments that are generated and traded outside of the regulated banking system.  The figure totaled $4.124 trillion in February, up from $4.111 trillion in January but 46% below its peak seven years ago.”


USA: Economic Surprise Index (Alt)

“The surprise index doesn’t rise or fall with the ebb and flow of the economic cycle…It measures a rolling average of how things turn out relative to forecasts…When the index is deeply negative, as it is today, that is usually a good sign for stocks.  Following the weakest 5% of observations since 2003, the S&P 500 rose by 14.4%, on average, during the following six months.


AAPL: Apple Has Roughly 170 Billion Reasons To Scare Their Future Competitors (Alt)


ICYMI: There’s A Few People Calling The Fed’s Bluff

Meanwhile, “often wrong but seldom boring” guy is done pretending.


What: America’s First Kenyan President Inspires Canadian To Run

Meanwhile, Asset Classes in the Obama Years


US vs Europe allocations Mar 2015

Chasing European Equities Foreign Currency Returns

“The EMU MSCI (in euros) is up 19.0% ytd, well ahead of the 1.5% gain in the US MSCI.  Of course, this divergence has been fueled by the 12.6% ytd plunge in the euro.  The currency is down 24% from last year’s high of $1.39 to $1.06.  In US dollars, the EMU MSCI is up only 4.1% ytd, and is actually down 6.8% y/y.  As a result, there has been a rush to Eurozone ETFs that are hedged to the euro.”  “Bullishness towards European stocks has reached uncharted territory,” says a quant at Merrill Lynch.  “19% of global asset allocators are now underweight U.S. equities — the largest share since January 2008.  Allocations to equities in Japan and particularly the eurozone, by contrast, have risen sharply and many respondents say that this might just be the start of an enduring trend as major central banks around the world continue along sharply different paths.”  Meanwhile, economists at Goldman and Wells are expecting “a cut to the Fed’s growth and inflation forecasts, which could result in the first rate increase coming after the June meeting…[they] still believe a September liftoff in rates is more likely that one in June.”  Meanwhile, Rick Rieder thinks “the application of technology as a deflationary force is nowhere more apparent than in the energy industry…production has continued to grow despite the rig count having peaked more than two years ago…limited incremental investment or working capital is required, but the yield continues to drive forward.  That’s called productive disinflation, and it’s happening in many different sectors of the economy.”


WM: Market Efficiency And The Infinite Regress Of “Dumb”

Meanwhile, S&P 500 funds will be forced to buy American Airlines and sell Allergan on Monday.


WM: Relax, DIY Robo-Tax Preparation Didn’t Kill The Tax Advice Industry Either


Global: “There Are No Shadow Banks, Just A Shadow Banking System”


WM: “Bond-Market Crashes Have Actually Been Relatively Rare And Mild” Says Shiller


What: 27% Of Respondents Think You Can Get Paid To Receive Insurance From Default

Peanut Butter Jelly TimeIt’s Peanut Butter Nervous Time!

Global bond rates dropped to their lowest levels of the year Wednesday, as central bankers signaled their determination to jolt the world’s largest economies out of their malaise…The yield on the 10-year U.S. Treasury dropped to as low as 2.523%, its lowest level in more than six months…In the U.S., despite rock-bottom interest rates, housing activity remains relatively depressed, companies have yet to pick up hiring and inflation has remained worryingly low.”  Bonds have done pretty well so far this year, surprising basically everybody, as investors seek “safe places to put cash as they fret about the flagging U.S. economy.”  That makes this seem even worse: Pimco “recorded net outflows of ($30.0 billion) between January and March 2014.”  Meanwhile, the market has David Tepper shakin’ in his boots (alt): “on Wednesday he struck a cautious note, worried about slow U.S. growth and the risk of a global economy that will worsen unless the European Central Bank takes aggressive action (which actually looks somewhat likely)…’The market is kind of dangerous right now.’…’I think it’s nervous time.’”  Journalists don’t seem to agree with Mr. Tepper: “Oh, sure there’s the selloff in biotech and tech stocks, and there’s the geopolitical threats of an unraveling in Ukraine.  But in general, those things just aren’t getting much of a pulse out of the market…the market is boring.”  Meanwhile, “U.S. homebuilder sentiment slipped unexpectedly in May to its lowest in a year with a darkening view of the current sales environment for single-family homes outweighing a modest pickup in expectations for activity in the next six months…builders have consistently raised concerns about stiff credit conditions for buyers and tight supply of building lots and labor.  In May, they said financial insecurity among potential buyers was a culprit.”  Meanwhile, Trulia takes a closer look at the housing market and finds that among the most expensive cities, “the housing stock is growing slowly, even though these are the places where it would be most profitable to build.  That’s because these cities tend to have geographical constraints that prevent further sprawl, and have adopted zoning codes that make it difficult to add more housing by building density.”  This is pretty much what’s happening in London as well: “tight planning rules and a shortage of land mean that relatively little new housing is being built, even as a booming economy and spectacular population growth create lots of demand for it…As a result, in London, though prices are 25% above the 2008 peak, construction is still about 20% below it…That suggests that unless there is more construction, prices in London and the south east will continue to climb, at least as long as interest rates stay low, the population keeps growing and there isn’t another financial crisis.”  Also, here’s one important difference between the auto and housing markets: “Both of these markets have had some favourable underlying demand-side pressures building in the last few years…Yet access to car loans has been relatively less constrained than access to single-family mortgages.”  Meanwhile, the property bubble in China is really confusing, but here’s what you should know: 1) “Overall credit has grown from about 120 percent to 190 percent of GDP in just the past five years,” 2) “Local incomes can’t support rents or down payments for [sleek inner-city digs].  Instead, wealthy Chinese are buying up multiple properties as investments, while simultaneously investing in the shadow banks that finance this property-building to begin with,” 3) As the property bust starts to settle in, the government is gonna let the system crumble a little, 4) But they won’t let it completely collapse,  5) Even if real estate investment drops significantly in China, global GDP will only take a minor hit (says the IMF),  and 6) But there are two groups that will likely feel a bigger impact: countries exporting raw materials to China, and Europe, where a devalued yuan could lead to deflation (although you could make the same argument for United States I think?).  All of this is especially confusing for Bank of America: “A spokesman for Bank of America said that the don’t-worry view is from the bank’s macroeconomic team while the do-worry view is from the corporate-strategy team.  ‘These two have been known to take different views,’ the spokesman said.  ‘It’s our effort to give a 360- (degree) view.’”

Mario Draghi Better Get His Game Face On

“A crucial new piece of information now makes it virtually certain that the ECB will act in June.  The case for waiting…was that a burgeoning recovery would gradually start to counter disinflationary forces by eroding excess capacity…But today’s report from Eurostat shows that growth in the first quarter of 2014 was sluggish…Output across the 18-country zone rose by only 0.2%, much lower than the 0.4% expected by the markets which was roughly the central projection made by the ECB in its previous forecasts.”  Here’s 5 things you should know about economic growth in the Eurozone: 1) The recovery is fragmented; unequal, 2) Low inflation, even outright deflation, isn’t the end of the world, 3) Growth in the UK and the Eastern fringe (Hungary and Poland) looks pretty good, 4) The ECB basically has no excuse not to pull on its monetary levers, and 5) What levers?  The ECB seems somewhat interested in doing some QE type stuff, but they basically don’t have a market for bonds backed by the credit of a singular Eurozone entity.  This is why most people expect the ECB (alt) to 1) boost lending to small and medium sized businesses (SMEs) in the Eurozone by charging banks to keep money at the ECB, combined with another long-term refinancing operation (LTRO) which would basically be a bunch of cheap money for Eurozone banks to lend out and create SME-loans-backed securities, and 2) purchase these SME-backed securities à la Quantitative Easing.  

Global: BlackRock Signals Bond Trading Shake-Up (Alt)

As the bond market dries up thanks to financial regulation (e.g. higher capital requirements and no proprietary trading), BlackRock is swooping in for the kill:  “The alliance with Tradeweb’s trading network of dealers means that users of BlackRock’s Aladdin risk management system will be able to access a broad number of interest rate markets, including US Treasury bonds, European, Japanese and Australian government bonds, US mortgage and agency debt along with interest rate swaps.”

KutcherJobsHead-Scratching Data Provoke Head-Scratching Reactions

“America’s recent economic data have not exactly been the easiest to interpret.”  Just to refresh your memory (wine tasting this weekend?): 0.1% GDP growth and 288,000 new jobs in the same week.  The Economist doesn’t seem to take the 0.1% number too seriously (weather weather weather), and argues that The Taper is further complicating the issue: “at faster rates of employment growth the Fed begins to worry about inflation pressures (or is perceived to worry about such pressures).  The expected pace of policy tightening and inflation expectations adjust accordingly, and the economy appears to slow back to a ‘safe’ rate of labour-market recovery.”  Furthermore, they argue that wage growth is a more critical indicator than headline unemployment and jobs growth, and “the question then becomes how willing the Fed is to tolerate wage growth that is rising toward ‘normal’ levels (of about 4%, compared with the 2% growth of the past few years).”  Meanwhile, the market reaction to the big jobs report last Friday involved a lot of head scratching: “It seems like the bond market is telling you one thing and the stock market is telling you something else, so which do you believe?”…”It’s almost a schizophrenic reaction from the markets here.”  While the strong economic data did produce some predictable behavior (growth-sensitive stocks rose), bonds and gold also rallied.  Utilities stocks fell ~2%, however, which are sometimes traded as a proxy to bonds.  Merrill Lynch is attributing “some of the muted reaction in rates to a tepid stock market reaction and short positioning in rates.  Other factors such as lower supply dynamics in agencies and the reserve growth in China may be helping longer term yields.  Unfortunately, we have no concrete evidence of the factors driving the bid.”  The tepid stock market reaction seems to suggest that it will take more than good job creation to boost stocks much higher: “It will take some catalyst, a genuine acceleration in economic activity or a sign that corporate America can expand profit margins from already record-high levels.”

World’s Biggest Economy Is A Hoax Work In Progress

“Smaller Chinese banks have ramped up their shadow lending activity (alt), adding to the financial risks that threaten to trip up the world’s second-biggest economy (first-biggest?).”  The Financial Times reports 10 unlisted banks whose “exposure to shadow credit assets soared last year.  For the 10 banks, which operate in large cities from Shijiazhuang in the north to Fuzhou in the south, investments in trust plans and holdings of other non-standard credit products climbed to 23.3 per cent of their total assets last year, up from 14.3 per cent in 2012…For Bank of Zhengzhou, almost two-thirds of its non-standard credit went to local governments, property developers, construction companies and miners — all of which struggle to obtain normal loans because regulators have classified them as risky borrowers.”  Meanwhile, “six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.”  The gradual progress so far has included “simplified business registration,” “removal of distortions in pricing of resources such as gas, and services like rail transport and healthcare,” “special economic zones,” etc.  Further reforms are expected, however, and include “stripping big state firms of an implicit government guarantee,” “reforms to China’s residence registration system and land property rights,” “revamp of how revenues, spending and responsibilities are split between Beijing and local governments,” etc.  Meanwhile, Nomura says that “China’s great real-estate bust has begun” thanks to “a combination of a huge oversupply of housing and a shortage of developer financing…producing a housing market downturn that could drive China’s GDP to less than 6% this year.”  Here’s something to cheer us up: “A narrower gap between China-HK trade balances suggests that the amount of hot money entering the mainland via over-invoicing exports has been efficiently cracked down during the past few months.”  Meanwhile, local governments in the Pearl River Delta (“the manufacturing workshop of the world — in south China”), “are allowing manufacturers to pay lower pension contributions than required (alt) as they worry about companies leaving, particularly as factories face double-digit wage rises each year.”  Here’s the dilemma: “while they want to keep factories, they also want to avoid the kind of strikes that raise concerns in the eyes of potential investors.”  

EU: Deflation Risks In Euro Zone Very Low” Says European Commission

USA: Organic Is Going From Hippie To Mainstream

robot at workTaking Orders From Tradebot: The Pros And Cons

“Eric Schneiderman, New York’s attorney-general, in a speech on Tuesday called for (alt) ‘tougher regulations and market reforms’ of high-frequency trading (HFT) firms.  He highlighted contracts that allow high-frequency trading firms to place computer servers inside trading venues and gain access to extra bandwidth to speed their access to information, such as prices and volume.”  Meanwhile, the CFTC is jumping on (alt) the “Anti-HFT Bandwagon”: “The Commodity Futures Trading Commission is investigating deals between large high-speed firms and the two futures-exchange operators, CME Group and IntercontinentalExchange Group (ICE)…the probe is focused on complicated, often opaque incentive programs that give high-volume trading firms financial benefits such as discounts on fees the exchanges charge to execute trades.”  Perfect quote: “[Tradebot Chairman Dave Cummings] said he sees nothing inappropriate about Tradebot speaking regularly with exchanges and requesting order-type features it believes would be useful.  ‘Tradebot is treated the same as any other customer,’ he said.”  Meanwhile, individual investors should probably leave the technical analysis to Tradebot: “individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, [take more risk etc.]…we estimate that for our data, technical analysis costs investors on average approximately 50 basis points per month in raw returns from poor portfolio selections, and 20 basis points from additional transaction costs.”  All in all, high frequency trading by humans costs them about “8.5 per cent a year for normal traders, and about 20 per cent a year for high rollers.”  Also, consider this: Vanguard has some super convenient research on measuring the true value of wealth-management/financial advisors: they say you’re worth about 3bps to clients as long as you stick to their “Alpha strategy modules.”  So all in all, financial advisors practicing asset allocation, rebalancing and “don’t panic” coaching (i.e. sticking to the plan through the scary times) add over 10% in returns for their clients.  Well done.  Speaking of which, here’s some more evidence that bonds are the best “hedge” you can get with a portfolio weighted towards equities (i.e. asset allocation is a good idea).  Meanwhile, a new study “suggests that people can be prodded into doing something they don’t want to do, by a robot.”  During their experiments, “most apparently believed that the robot was issuing requests autonomously (it wasn’t, a human being was behind a glass wall controlling things) and responded accordingly.  They also found that some of the volunteers even tried bartering, either with themselves or the robot, by requesting another task or by suggesting out loud that perhaps the robot was malfunctioning.”

USA: Janet Yellen’s Moment

“Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets.  Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.”  For some reason, people seem to be teasing the idea that Janet Yellen could introduce some fairly radical new monetary thresholds/forward guidance; especially when it comes to overshooting their original 2% inflation target.  The show starts at 11:30 AM PST.

China: Central Bank Holds Bailout Talks With Property Developer

“China’s central bank and one of its largest state lenders are holding emergency talks over whether to bail out a defaulting real estate developer.”  “Failure of a small property developer is not unusual in China or even in Zhejiang Province, where [Zhejiang Xingrun Real Estate] is based.”  Furthermore, “Xingrun’s problems appear to stem mostly from mismanagement and alleged illegal activity.”  Interestingly enough, the PBOC is denying involvement in bailout talks.  Meanwhile, a survey from the American Chamber of Commerce in China finds that U.S. companies are concerned “over intellectual property, the safety of proprietary data and government-sponsored campaigns against foreign firms operating in [China].”

SEA: Seattle Becomes First City To Cap Uber, Lyft Vehicles

Seattle’s millennials are going all “damn the man!” over this; it seems fairly significant, however, in the context of Seattle’s growing reputation as a major West Coast tech hub á la Silicon Valley.  Meanwhile, Silicon Valley counties Santa Clara, San Mateo and San Francisco top the list of highest wages in America in Q3 2013.  Also, apparently Yolo, CA is a real place (#7 on “Percent increase in average weekly wage”).

YHOO: Is Yahoo’s Business Worth Less Than Nothing?

Here’s an interesting piece on how the market doesn’t seem to have a “correct” grasp on Yahoo!’s market value given its massive stakes in Alibaba and Yahoo Japan: “Alibaba and Yahoo Japan could both be overvalued, thereby understating the true value of Yahoo’s core business…Or it’s possible that Yahoo’s shares are too cheap…Or maybe the markets have it right and Yahoo’s business is hopeless.”

Gross: Morningstar’s Current View On Pimco (alt)

“Given our current view, we have lowered PIMCO’s overall Stewardship Grade to C from B, with an A grade being the highest possible and F the lowest.”

USA: One-Third Of Americans Only Have $1,000 Saved For Retirement

USA: Current-Account Gap Narrows To Level Last Seen In 1999

USA: Politics And The Rise Of “Dark Money”

Chinese Shadow Banking by RegionGetting To The Core Of Japanese Inflation, Nuclear Energy And Tripartite Security

“For months now, you’ve been hearing that Abenomics – or at least the monetary policy of Abenomics – has been a solid success.  Japanese inflation, you’ve heard, is climbing up toward the 2% target… The problem is, the Japanese inflation that people are looking at is the Japanese “core” rate (includes energy), not the “core-core” rate (doesn’t include energy or food)…Take energy and food — which is also probably under upward pressure in part due to yen depreciation — out of CPI and it is only up 0.7% y/y as food prices themselves are up 2.2%.”  Meanwhile, Abe is steering domestic policy in a U-turn over nuclear energy (alt): “the draft of a new Basic Energy Plan, made public on Tuesday, calls nuclear power an ‘important baseload electricity source’ and effectively reverses a decision made by a previous government in 2012 to close all of Japan’s atomic power plants over the next several decades.”  Also, “while India’s relationship with the United States has been faltering of late, following the arrest and mistreatment of an Indian consular official in New York, its ties with Japan are flourishing.”  Furthermore, “with China’s rise having shifted Asia’s balance of power, Indian and Japanese leaders have been seeking new security assurances… Even with a significant deepening of ties, however, bilateral relationships alone will be inadequate to counterbalance China.  Achieving an internal Asian balance of power will require India, Japan and South Korea to build a tripartite security arrangement.”  Meanwhile, “ministers in 12-nation Trans-Pacific trade talks said on Tuesday they had yet to reach agreement on tariffs and other market access issues, with the timing of a completed deal looking increasingly unclear.”

Changing Trade Patterns Could Threaten Euro Zone

“The euro zone’s formation was driven by the belief that trading links between its members would grow ever greater, transforming the currency area into a single, integrated unit that resembled the U.S. rather than a grouping of 11, and now 18, individual national economies.”  But when you have a fragmented recovery, thanks in part to rising exports to countries outside of the Eurozone (“By 2020 Italy and Germany will export more to emerging/developing markets than to euro-area partners, while the contrary will be true for France, Spain, Belgium and the Netherlands”), we may see a shift in the “cost/benefit analysis of membership in the currency area.” (e.g. “increase the likelihood of what are known as ‘heterogenous shocks,’ or setbacks that affect some euro-zone members more severely than others”)  Also, Paul Krugman would like the “Myth of German Austerity” to go away, please.  Finally, here’s something the French can be proud of?: “German workers will die five years earlier than their French neighbors if company pensions forecasts are to be believed.”

EM: Buy Johnson & Johnson, MasterCard For Emerging-Market Exposure

“Roughly one-third of S&P 500 sales are sourced from abroad.  While it would seem logical that globally oriented S&P 500 stocks would behave quite similarly to other global developed market franchises, our work indicates that they are 3X more correlated to emerging market equities.  For this reason, we recommend overweighting U.S. companies with high foreign sales (e.g. Johnson & Johnson, Estee Lauder, MasterCard, Flowserve and Apache).”

Bitcoin: Adieu

“Cyber criminals have infected hundreds of thousands of computers with a virus called ‘Pony’ to steal bitcoins and other digital currencies, in the most ambitious cyber attack on virtual money uncovered so far, according to security firm Trustwave.”  Meanwhile, ”Mt. Gox, once the world’s largest bitcoin exchange, has gone offline, apparently losing hundreds of millions of dollars due to a years-long hacking effort that went unnoticed by the company.”

Buffet: An Excerpt From Buffett’s Upcoming Letter To Shareholders

GS: @GSElevator Tattletale Exposed

UK: My Life In London’s Houseboat Slums

“I’ve often heard people ask how anyone can afford to live in London on low paid, insecure work. The truth is that some don’t really live at all; they merely exist, and their existence is bleak and unforgiving. It is not only the explicit dangers of the boats that cause this but the drudgery of daily life.”

China: A Map Of China’s Shadow Banking Exposure

USA: Labor Department To Cut Export-Price Data Due To Budget Constraints

“The export price data is part of a program that also collects data on import prices.  The department compiles a monthly report on import and export prices using data collected from U.S. companies.”

EU CorruptionEmerging Markets Fall Out: Europe Worse Than United States?

A look at US Exports by Country reveals that the United States could be pretty well insulated from emerging markets; “only a very broad emerging market slowdown — one that included China or Mexico, for example — would have much effect on US exports.”  In fact, the troubles in emerging markets have so far somewhat bolstered the US economy thanks to a falling 10-year yield.  Meanwhile, “European banks have loaned in excess of $3 trillion to emerging markets, more than four times U.S. lenders and putting them at greater risk if financial market turmoil in countries such as Turkey, Brazil, India and South Africa intensifies…European banks’ exposure varies from country to country.  BBVA and UniCredit have big exposure to Turkey, Santander is most exposed to Brazil, while Standard Chartered and HSBC would be hurt by problems in India and Indonesia.  Barclays, meantime, would be most exposed to South African problems.”  Also, the EU commission says “the extent of corruption in Europe is ‘breathtaking’ and it costs the EU economy at least 120bn euros annually,” which is roughly equivalent to the Eurozone’s annual budget.  On average, 74% of respondents in the survey said they believed corruption to be widespread.  “In Croatia, the Czech Republic, Lithuania, Bulgaria, Romania and Greece, between 6% and 29% of respondents said they had been asked for a bribe, or had been expected to pay one, in the past 12 months.”  Meanwhile, Intesa Sanpaolo, Italy’s second biggest bank by market cap, “is working on plans (alt) to become the first Italian lender since the financial crisis to set up an internal “bad bank” by setting aside a chunk of its €55bn of gross non-performing loans ahead of banking stress tests by the European regulator…Analysts have argued that Italy could do with a bad bank worth €9-12bn…Intesa’s new strategy is likely to draw parallels with Royal Bank of Scotland, the state-controlled UK lender that last year established an internal bad bank to house £38bn of its most risky and capital-draining assets.”  Finally, people are asking for Z-scores again (“gauge the probability of a borrower defaulting on its debt) and capital flows are hot, hot, hot!

Shadow Banking systems across countriesIn Defense Of China’s Shadow Banking, Housing Bubble

JPMorgan’s Flows & Liquidity team estimates the “current size of the Chinese shadow banking system to be around RMB46tr or 30% of the assets of traditional banks.  But as Figure 1 shows, even at 30% of bank assets, the Chinese shadow banking system is small compared to those of other countries…In addition the Chinese shadow banking system is simpler and more domestically owned that that of more advanced DM jurisdictions.”  Not only that but shadow banking in China is probably easier to bail out.  Also, here’s 4 reasons why a collapse in China’s home prices won’t spell global disaster: 1) “Chinese households save a greater fraction of their incremental wealth than most other countries,” 2) “the government’s ambitious affordable housing program could cushion the blow to the wider construction industry,” 3) “China’s banks can manage bad home loans,” and 4) “policymakers don’t sit idle.” (read: “they are OK with bailouts”)

Wolves v. Target v. Detroit

Banks and retailers are duking it out under the Federal spotlight to see “which industry bears more responsibility for protecting consumers’ personal information?”  Both sides are blaming the other for poor technology, more or less, with banks pointing to outdated security breach tech and retailers using words like “fraud-prone cards.”  My guess is some tech hero genius from Silicon Valley is just waiting in the wings for his moment to save the Corporate Wall Street Wolves from eating each other (for example).  Also, Detroit’s bankruptcy is pitting Main Street vs Wall Street, and it looks like the wolves may only get $0.10 on the dollar for their “certificates of participation.”  Thanks for participating!

USA: Fed Study Suggests US Labor Market Rosier Than Thought

The New York Fed says that retiring baby boomers are to blame for all this weak labor market nonsense and we should start focusing on the employment-to-population (E/P) ratio, which doesn’t really seem all that different from the participation rate but forget all that and focus on this: the Fed would like us to believe that the labor market is better off than headlines like “74,000 New Jobs in December” would suggest.

USA: U.S. Opens Taps, A Bit, On Oil Exports To Europe

“The Department of Commerce has granted two licenses to export U.S. crude to the UK since last year and another two to Italy…These are the first permits for shipments to the UK since at least 2000 and the first to any European country since 2008.”  Meanwhile, here’s 10 key numbers in the Keystone XL pipeline report.

USA: Going On 30, Living With Mom And Dad

Yeah you’ve heard it all before, but this is a great summary of everything you’ve heard about millennials and their changing attitudes towards family, life’s milestones, jobs, housing etc.

Global: World-Wide Factory Activity, By Country

EU: Smaller Jobless Rise In January Takes Edge Off Spain’s Labor Market Gloom

USA: Ford, GM, Toyota Fall With January Temperatures; Chrysler And Nissan US Sales Up

The naivete of this headline/article kinda sums up my feelings about all the weather blaming going on in the economics/business world.  Also, people seem really desperate  to explain auto sales.

vampire-squid-illustration-se41Chinese Shadow Banking: Less Securitization Means Less Shadows Means Less Risky?

Meet Cinda Asset Management Company, China’s largest “shadow bank.”  The term is used loosely here, however, as Cinda is in reality a distressed asset management company created by the Ministry of Finance (MoF) that basically exists to purchase troubled loans at a discount from other Chinese banks.  But more recently, Cinda has expanded into non-financial enterprises such as receivables (“shadows”).  Not only that, but “the Cinda IPO prospectus states that 60 percent of distressed receivables are attributable to the real estate sector,” combine that with the fact that “roughly 65 percent of China’s household wealth is sitting in real estate” and you got a major house of cards on your hands.  But here’s where it gets real tricky: “Cinda has financed these purchases through a massive borrowing spree at below market rates.”  Furthermore, “the cost of funding issue is important because while Cinda’s distressed asset business is profitable, its profitability is dependent on low borrowing costs.”  So if its borrowing costs go up?  Cinda crashes.  And then all the non-performing loans on (and off) banks’ books everywhere become a big problem.  So that’s bad, but the MoF is highly unlikely to let this happen.  All in all, this structure of shadow banking may be preferable to the American brand : “China’s non-bank lending does not involve genuine securitization. In the U.S., risk got fully dispersed from bank balance sheets and collateral was used multiple times further down the securitization chain for funding. Of course, during the 2008-09 crisis, U.S. banks were forced to take many non-performing assets back on balance sheet. The difference in China is perhaps that banks have no illusions about the ultimate recourse to them. Measured in these terms, China’s systematic risk remains within reasonable limits.”

A Closer Look At World Trade: American Imports, Japanese Exports

Yesterday’s GDP report “reveals an odd feature of this recovery: as the economy has expanded, imports have not grown more rapidly.  That means expansion in the U.S. is providing less benefit to other economies than expected.”  Some reasons for this are probably 1) shale oil and gas revolution has led to a dramatic decrease in imports, 2) manufacturing activity is onshoring, therefore: less materials imports, 3) global trade has slowed.  Meanwhile, Japan’s current economy is experiencing kinda the same thing but opposite: “since Japan’s economy started expanding at the end of 2012, output has rebounded on consumer demand for items such as smartphones and houses.  The volume of exports, however, has not recovered much.”  For example, in December, “on an unadjusted basis, export volumes rose 2.5% on year, compared with a 7.3% rise in production.”  Also, Markit’s Japanese PMI “rose to a seasonally adjusted 56.6 in January from 55.2 in December.”  So Japan is chugging along on domestic demand but the population is shrinking, so they will probably “have to incorporate the growth of emerging countries” to continue.  Finally, the explanation for these “odd features” of the current global economic recovery might be more easily explained by this: “if banks are less willing to finance international trade, less trade will take place.”  But big banks in the United States and Europe are “beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing” so global trade may be heating up again soon.

Haters Gonna Hate: Danes, Libyans and Goldman Sachs

Goldman Sachs would like to invest $1.45bn in Denmark’s Dong Energy, a state-owned utility, in exchange for a seat on the board, veto power over the CEO and no, they’re gonna go ahead and pass on the taxes, thanks.  So the Danish government said, “Ok?” and then it collapsed.  Also, the Libyan Investment Authority is suing GS for helping them lose $1.2bn in stock options in 2008.  Which seems silly and immature, except this is bad: “the complaint is largely the story of how Goldman North Africa salesmen Youssef Kabbaj did his job buttering up Libya” with “small gifts, such as aftershaves and chocolates.”  Also, “both the LIA board of directors and employees did not properly understand whether the Disputed Trades involved direct equity investments, or a species of quasi-share ownership, or constituted an entirely synthetic financial instrument; and/or misunderstood the true position.”  So yeah, people still kinda hate Goldman Sachs (more proof), but GS loves them some Lloyd Blankfein: “Blankfein’s bonus and $2 million salary amount to $3 million more than what JPMorgan paid CEO Jamie Dimon.”

No Oil Is A Problem For Big Oil; Keystone On The Horizon

“In a way, the world’s major oil companies all suffer from some version of the same problem: they’re spending more money to produce less oil.  The world’s cheap, easy-to-find reserves are basically gone; the low-hanging fruit was picked decades ago.  Not only is the new stuff harder to find, but the older stuff is running out faster and faster.”  “But what about the shale oil revolution?” you say.  Listen: “Part of the problem for the biggest oil companies is that they came late to America’s shale revolution…when horizontal drilling methods started bearing fruit, the smaller independents were in shape to snatch up assets on the cheap, all over North America.”  Speaking of which, give it up to NPR for creating the most uncomfortable motion picture portrayal of the oil boom that you’ve ever seen.  Also, rumors are “sweeping Washington” that the State Department might release their review of the Keystone Pipeline project sometime later today, and the environmentalists may not like what they get…

Detroit: New Plan: Divide And Conquer

EM: Australia Looks Like An Emerging Market

USA: Food Stamps Cuts To Hit Wal-Mart’s Profits

Presumably because their customers would have less to spend, not because their cost of labor could increase?

Bernanke: The Financial Media Is Getting All Weird About Bernanke Leaving Them

USA: Labor Costs Rise In Fourth Quarter; Consumer Spending Rises In December, Income Flat; Consumer Sentiment Dips In January

EU: Eurozone Inflation Drop In January Gives ECB Fresh Headache

JPN: Inflation Quickens To Over Five-Year High, Output Rebounds

Facebook Demographics growth 2011 2014Facebook Will Try To Buy Their Cool

When Mark Zuckerberg started Facebook, he decided that in order to eliminate the technical advantages enjoyed by Amazon, Google and Yahoo (what with their proprietary global computing systems), he would need to take an open-source approach to compete.  It seems to have worked, and saved them a lot of money in the process.  But here’s the interesting thing: even though Facebook’s profits are soaring, their demographics are getting older.  Their original freeloading teenage fan base doesn’t think Grandma being on Facebook is very cool.  So now Zuckerberg’s open-source, damn the man, freelove approach is working perfectly for the only growth strategy left: acquisitions.  “Facebook is a partnership company,” because it is no longer a “cool” company.  Then again, there’s not much to dislike about this.

Life After The Taper: Good GDP Is Actually Good, Investors Flee Emerging Market and Dividend-Paying Equities

GDP: “Gross domestic product — the broadest measure of economic activity — grew at a 3.2% annual pace in the fourth quarter…although it’s not indicative of gangbusters growth, the data seems to show the economy is moving forward modestly…Consumer spending picked up at a 3.3% annual pace, and U.S. exports to other countries outpaced imports.”  Furthermore, in a world where the Federal Reserve is tapering away from QE, strong GDP growth is “pretty impressive”: “as the massive fiscal drag diminishes, U.S. economic growth is accelerating.” And?  But?  Nope.  Its just good.

Emerging Markets: “Do not be surprised if the initial, post-FOMC statement slide in emerging-market currencies morphs into another, bigger rout in the days ahead.  Don’t be surprised, either, to see a backlash from governments in these countries, stoking international tensions and making everyone’s jobs at managing the current turmoil all the more difficult.”

Dividend-Paying Stock Funds: “Instead of prizing the funds as a complement to bonds as they did when long-term interest rates were flat lining, they are starting to rotate in other directions, in some instances to alternative funds using hybrid stock and fixed-income investment strategies.”

Chinese Consumption, Corruption and Cute Critters

“Moves to encourage consumer spending are part of a marathon effort by the Communist Party to transform China from a low-wage factory into a high-income creator of technology with self-sustaining economic growth.”  And yet, as President Xi Jinping cracks down on corruption “and perhaps maintain social stability as the [Chinese] wealth gap widens,” retail sales growth slowed from 14.3% to 12.8% in the first half of 2013; GDP growth may even see a 0.1 to 0.2% drop as politicians wean themselves off of lavish funerals and shark fin soup.  Apparently “the campaign could be positive for the economy in the long run” because something about confidence and trust or something.  Meanwhile, “in recent years there’s been a noticeable shift in Chinese attitudes…toward the protection of endangered, or just plain cute, species…aided by China’s transformation from an agrarian culture which views animals in utilitarian terms, to one in which a burgeoning middle class embraces pet ownership.”

The Post Office Kinda Wants To Get Into Shadow Banking

The USPS Inspector General has endorsed turning the post office into a micro-lending hub for the “nearly 68 million Americans — over one-quarter of U.S. households — who have limited or no access to financial services…Post offices could deliver the same services at a 90 percent discount, saving the average underserved household $2,000 a year and still providing the USPS with $8.9 billion in new annual profits.”

People Are Really Excited About Mexico These Days

Mexico boasts free-trade agreements with over 40 countries and a trade-to-GDP ratio — a common measure of economic openness — above 60 percent, surpassing the United States, Brazil, and even China.  And whereas oil once represented over 75 percent of Mexico’s exports, today it is manufactured goods that produce three out of every four export dollars.”  Furthermore, rising wages and energy costs in China are now competing with Mexico’s high productivity and proximity to the United States.  Mexico’s middle class is also growing, and now “comprises anywhere from 40 million to over 60 million [of] a population of 116 million.”

Wall Street’s “Emerging Frontier In Securitization”

“Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world.”  This article, amazingly, is from yesterday; not 2004.

myRA Already Off To A Great Start

In case you missed it, President Obama mentioned something about a new government sponsored “starter” retirement account called myRA in his State of the Union Address.  Turns out there’s also a stock with the ticker symbol MYRA.  It trades over-the-counter for $0.0001.  Someone bought ~1 million shares on January 17th, almost two weeks before the speech.  So.

Windows 8 Is A Flop.  What Is Microsoft’s Next Move?

This article spends a really long time hating on Windows 8, mostly for being a radical strategy “to force touch, force Metro, on every customer in the hope that they would see the benefits, then take to new touch-enabled PCs, and — if Microsoft was lucky — gravitate to its tablets as demand pushed developers into quickly creating a massive app market.”  That strategy has made some techies angry.  Microsoft’s only option at this point may be to abort mission and focus on their next product (Windows 9) which is basically what they did with Vista, but that may be harder to do in a world where Microsoft is competing with Android and iOS.

USA: Jobless Claims Rise More Than Expected

China: PMI Dips To Six-Month Low In January As New Orders Weaken


Tech Employment MinoritiesIncome Inequality And Mobility

An “epic income-mobility study” released last week suggests that “contrary to widespread belief, it’s no harder to climb the economic ladder in the United States today than it was 20 years ago.”  Apparently, when you are three Ivy League professors and a US Treasury Department official, you get access to the IRS’ tax return data, “which of course are not generally available to researchers” and, of course, is terrific irony.  So “the chance in which kids can climb up or down the income ladder has remained pretty stable over the last 20 to 25 years,” which could be good, except for the fact that “economic mobility in the United States remains behind that of other wealthy countries.  An American born at the bottom has about an 8 percent chance of rising to the top…the odds are twice that in Denmark.”  Furthermore, economic mobility in America varies considerably by region: “Rates of advancement in the Seattle, Washington, D.C., and San Francisco metro areas compared favorably with European countries.”  So, a little history lesson: rising income inequality in the United States and China, while different fundamentally, came about more or less at the same time (late 70s early 80s).  Income inequality in the United States is typically attributed to three factors: technological progress (cutting out middle wage jobs), globalization (outsourcing middle wage jobs) and economic policy (lower taxes for capital income).  (Also, rich people like to marry other rich people.  And the tech/information industry appears to be a boon for minorities.)  While we shouldn’t expect much to change in America until new policies (especially tax reform) come along, the pressures of inequality are naturally easing in China as the skill premium declines with a more educated work force.  So while it may not be any harder to climb the economic ladder since Reagan was President, income inequality is still very real; especially at the top: “Much of the increase in inequality has been driven by the extreme upper tail…and there is little or no correlation between mobility and extreme upper tail inequality…Instead, the correlation between inequality and mobility is driven primarily by “middle class” inequality.”  Furthermore, a healthy middle class means consumer confidence and purchasing power.  Finally, some Fortune 500 companies like Lockheed Martin and Deloitte are pledging to “help minimize hiring discrimination against people who have been out of work for many months or longer.”…p.s. State Of The Union is tonight at 6pm PST

China: China’s Rich Know Bailouts Equal Gold No. 1

“One of the nice things for wealthy people in China is that mysterious, unidentified third parties occasionally swoop in at the last minute to bail them out of investments that are about to default.”

USA: Gov’t, Internet Companies Reach Deal On Disclosure

“The Justice Department on Monday reached agreements with Google Inc., Microsoft Corp., Yahoo Inc., Facebook Inc. and LinkedIn Corp. that would allow them to disclose data on national security orders the companies have received under the Foreign Intelligence Surveillance Act.  While the compromise doesn’t allow companies to disclose everything they wished, and allows them to disclose more than the government originally wanted them to, both sides seem relatively satisfied with the agreement.”

USA: The Federal Government’s Backdoor Bailout Of Puerto Rico

“The Obama administration has already provided a multibillion-dollar bailout to Puerto Rico.  Nobody in the major media outlets has noticed because the issue is highly technical.”  Jonathan Weil describes it like this: “The gist is that Puerto Rico enacted an excise tax on U.S. multinationals that is of questionable constitutionality. The companies don’t mind because they get a credit for the tax. And the Treasury Department isn’t intervening. Sullivan concludes: “A lot of powerful interests like the current situation. They include the government and both major political parties in Puerto Rico, the Obama administration, investors in Puerto Rico’s municipal bonds, and U.S. multinationals that can credit the tax. The only ones on the short end of the stick are U.S. taxpayers, who are footing the bill that they would probably be unwilling to pay if they were ever asked.”

USA: Prices On The Rise, Less So For Homes, Durable Goods Orders Drop, Consumer Confidence Rises

“A growing number of U.S. businesses expect to raise prices in the coming months, according to a new survey by the National Association for Business Economics.  About 43% of companies plan to raise prices in the first three months of 2014, far more than the 20% that said they actually did raise prices in last year’s fourth quarter.  Just over half — 56% — expect prices to stay flat and about 2% expect them to fall.”  Meanwhile, “home prices are showing signs of topping out: The S&P/Case-Shiller index posted its first month-over-month decline in 10 months on Tuesday.  The annual measure of home prices still increased 13.7% in November, but that was only narrowly better than the rise posted in October…National prices are still nearly 20% below peak levels reached in mid-2006.”  Here’s a look at Case-Shiller by Metro Area.  Also, “the Commerce Department said on Tuesday durable goods orders dropped 4.3 percent, pulled down by weak demand for transportation equipment, primary metals, computers and electronic products and capital goods.”  Finally, “the Conference Board, an industry group, said its index of consumer attitudes rose to 80.7 from an [sic] downwardly revised 77.5 in December.  Economists polled by Reuters had expected a reading of 78.1.”

UK: Fastest Growth Since 2007

“Gross domestic product expanded by 1.9% in 2013 — compared with 0.3% in 2012 — and there are signs that the recovery is extending beyond consumer spending and the housing market.”

USA: Obama’s Economy In 17 Charts

Global: Asset Class Dashboard