The Big Picture

Switzerland – Chapter 2
A Visual Map of the History of Jazz
Succinct Summation of Week’s Events (1/16/15):
Biggest Threat to Human Progress is Relentless Stupidity
There’s Never Been a Better Time to Be Rich . . .
10 Friday AM Reads
New Ford GT

Posted: 17 Jan 2015 02:00 AM PST

Switzerland – Chapter 2
David R. Kotok
January 16, 2015

In the wake of Switzerland's removing the cap on the Swiss franc's value against the euro, debt owed by non-Swiss agents has become an emerging issue. That debt, denominated in either Swiss francs or in euros, is secured by collateral outside of Switzerland. Is this an unfolding foreign-currency-related debt problem? The answer appears to be yes.

Russian businesses secured loans denominated in low-interest foreign currencies, including the Swiss franc. The franc was then pegged to the euro. The collateral for the loans depended on an assumption of $100 oil and a Russian ruble that has since plummeted. It appears that some of these agents now cannot pay.

Real estate speculators in Warsaw pledged their real estate to secure loans in Swiss francs. Why? The interest rate was very low – much lower than if they had borrowed in zlotys. Or they borrowed euros with the assumption that the Swiss peg against the euro would remain in place.

These borrowers around Europe and elsewhere in the world pledged collateral, took on foreign-currency risk, and based the risk-taking on the commitment of the Swiss National Bank (SNB) to maintain its currency peg at 1.2 francs to a euro. Many of these borrowers are now sweating bullets.

Markets around the world are reacting in fear of contagion that could result from these debts. Is the reaction rational? We shall find out in due time.

We do not know how much debt there is, who the borrowers are, or what banks and intermediaries are involved in the loans. We do not know what supervision and regulation have been applied, since this is activity that is mostly outside the US and thus not supervised under the post-Dodd-Frank regulatory regime.

Markets can handle good news, and they can handle bad news. Markets have trouble, however, with uncertainty. The pressure on stock markets and the volatility that has spiked due to the SNB's move are the results of rising uncertainty about the foreign-currency-denominated debt and abrupt changes in central bank policy.

The Swiss have punched new holes in their cheese. They have boiled their chocolate so that it smells bad. They committed to a course, reversed themselves, and have now lost their credibility. This is the second governor of the Swiss central bank who has suffered a loss of credibility. The first one had to resign because a member of his household was allegedly trading a foreign currency position against the euro peg. The second governor has derailed billions in loans and pressured his citizens through his unexpected policy change.

When one central bank loses its credibility, all central banks suffer. The burdens on the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, and others have now intensified.

~~~

David R. Kotok, Chairman and Chief Investment Officer

A Visual Map of the History of Jazz

Posted: 16 Jan 2015 06:00 PM PST

Click for the full map.

Source: Who’s Like Tatum? via Know More

Succinct Summation of Week’s Events (1/16/15):

Posted: 16 Jan 2015 01:15 PM PST

Succinct Summation of Week's Events
Positives:

1) The SNB cries mercy and comes to terms with the fact that it can't win a currency battle with the ECB. The Swiss people have just dramatically improved the purchasing power of their savings. Also, while highly disruptive to economies and markets in the short term, maybe the cult of central banking is seeing its end of days which would ultimately be a huge positive for free markets and price discovery.

2) The UoM consumer confidence index for January jumped to 98.2 from 93.6, well above expectations of 94.1 and the best read since January 2004. Both the current conditions and expectations components were higher m/o/m. One year inflation expectations fell to 2.4% from 2.8%, the lowest since September 2010 and likely driven by lower gas prices.

3) Manufacturing IP rose .3%, one tenth more than expected but was led by mining and an increase in oil and gas extraction which will soon be negatively impacted by a reduction in drilling. A drop in utility output was a drag on the topline and the reduction in capacity utilization to back below 80%.

4) The NY manufacturing index was +10 vs -1.2 in December. That was above the estimate of 5.0 and it gets back to the level of 10.3 seen in November. The 6 month outlook was a bright spot as it rose to 48.4 from 39.3 and that's the best read since January '12.

5) With the big caveat that the MBA data around the holidays is extremely noisy, applications to refinance a mortgage exploded higher by 66.4% and purchases spiked by 23.6%. The average 30 yr mortgage rate fell 12 bps to 3.89%, the lowest since May '13.

6) The level of job openings in November made a new recovery high at 4.97mm, the most since January 2001 and up by 142k m/o/m. The hiring did fall one tenth to 3.4% but the separation rate was down by two tenths. The quit rate was unchanged at 1.9%.

7) The NFIB small business optimism index rose to 100.4 from 98.1 and that is the best since October '06. There was a 4 pt gain in Plans To Hire to the highest level since August '07. Encouragingly too, capital spending plans increased to the best level since December '07. Also, the NFIB said "labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations."

8) Headline CPI fell .4% m/o/m as expected while the core rate was flat vs the estimate of up .1%. The y/o/y gains for both are .8% and 1.6% respectively. The y/o/y core rate is the slowest since February but since August 2012, core CPI has been between 1.6-2%. The drop in energy prices of course drove the headline but food prices were higher and services inflation due to rent remains sticky at 2.4% y/o/y. Let's separate the current commodity deflation from services inflation in the overall discussion over prices.

9) Believing in the virtues of positive real interest rates, the Reserve Bank of India has given itself flexibility to respond to changes in inflation and growth and they lowered interest rates by 25 bps and won't be pushing on a string.

10) Australia, beset by falling oil and iron ore prices, reported a much better than expected job gain in December.

11) China reported a better than expected export figure for December of up 9.7% vs the estimate of 6%. Imports fell less than expected as likely the lower price of oil and iron ore helped.

12) Putting aside my opinion of ECB QE (negative as it's the wrong medicine), as expected, the European Court of Justice's interim ruling (final one doesn't come for another 4-6 months) stayed away from interfering with the ECB's OMT program which directly eases the pressure on the ECB in conducting sovereign bond buying.

13) Industrial production for the EU in November rose .2% m/o/m, two tenths more than expected and the prior month was revised up. It was still down .4% y/o/y.

14) UK CPI in December rose just .5% y/o/y, the lowest since May '00 and below the estimate of up .7%, thus helping REAL wage gains. Core inflation however (also takes out alcohol and tobacco) was steady at 1.3% vs 1.2% last month and in line with the estimate. With respect to asset price inflation in the UK, home prices in November rose 10% y/o/y, still robust but the slowest rate of growth since April. London home prices slowed to a still vibrant 15% increase y/o/y vs 17.2% in the month prior.

Negatives:

1) The SNB created an earthquake for its exporters (contribute about half of GDP) and tourism industry who were planning on a 1.20 peg to the euro and now have to scramble. Over time, they should adjust both from a cost structure perspective and an FX hedging one. Until then, a sharp economic slowdown is likely. Negative bond yields in Switzerland now go out 10 years as the SNB makes it poison (and hugely expensive) to hold Swiss francs. I refer to this now as impounding instead of compounding ones capital.

2) US December retail sales were much weaker than expected across the board. Headline sales fell by .9% vs an expected drop of just .1%. Sales ex volatile autos and gasoline fell by .3% vs the expected gain of .5% and the 'control group' which also takes out building materials saw sales fall by .4%, well below expectations of up .4%. What was saved at the gas station was apparently not spent elsewhere.

3) After a print of 40.2 in November and 24.3 in December, the January Philly manufacturing survey moderated further to 6.3, the lowest since February when it touched -2.0 in the dead of that miserable winter. The six month outlook held steady at 50.9 vs 50.4 but that was the lowest since May.

4) US Initial jobless claims jumped to 316k vs 297k last week and that was 26k more than expected. The w/o/w rise brings the 4 week average to 298k from 291k. After rising by 123k last week, continuing claims fell by 51k. For the first time since oil prices collapsed, Texas showed up as one of the states that saw the largest increase in claims for the week ended December 27th where 5,422 people filed.

5) For purposes of calculating GDP, business inventories rose .2%, one tenth less than expected and the I/S ratio held at the highest level since October '09 as sales fell.

6) Japanese machinery orders in November were up 1.3% m/o/m but that was well below expectations of up 4.4%. The y/o/y drop was 14.6%.

7) Aggregate loan growth in China totaled 1.69T yuan in December, well above expectations of 1.2T and it's the largest monthly gain since March. I put this in the negative camp because credit growth remains excessive and the GDP created per each yuan of debt continues to shrink.

Peter Boockvar
Chief Market Analyst
The Lindsey Group LLC
Main: 703-621-1170
Direct: 973-251-2063
E: peter -at- thelindseygroup.com
www.thelindseygroup.com

Biggest Threat to Human Progress is Relentless Stupidity

Posted: 16 Jan 2015 09:30 AM PST

“Wealth – any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband.”
–H.L. Mencken

On Fridays, I like to wax eloquent and philosophical — about investing, analysis and asset management. Often, there are lessons from other disciplines that are applicable to our own. Sometimes I point out an especially insightful work. But most of the time, I like to highlight misguided, faulty or just plain dumb analysis.

The latter is our subject today: a dishonest and disingenuous argument that is technically correct, but cynical and misleading. It only takes a bit of thinking to realize the absurdity of the claim.

Writing in the Washington Times during last month’s holiday week was this column from Richard Rahn of Cato Institute with the headline, “Common folk live better now than royalty did in earlier times. ”

The entire enterprise is a fatuous and politically inspired attempt to minimize the issue of income inequality, because after all, the poor today live better than kings did centuries ago! There, all problems solved, Here’s Rahn:

"The average low-income American, who makes $25,000 per year, lives in a home that has air conditioning, a color TV and a dishwasher, owns an automobile, and eats more calories than he should from an immense variety of food . . . Louis XIV lived in constant fear of dying from smallpox and many other diseases that are now cured quickly by antibiotics. His palace at Versailles had 700 rooms but no bathrooms (hence he rarely bathed), and no central heating or air conditioning."

Let's set about fisking this intellectual detritus:

Continues here

There’s Never Been a Better Time to Be Rich . . .

Posted: 16 Jan 2015 08:30 AM PST

Source: MoJo

10 Friday AM Reads

Posted: 16 Jan 2015 05:30 AM PST

Good Friday morn. Heckuva week, but its almost over. To tide you til the weekend, here are our morning train reads:

• Behold The Carnage: Hedge Funds Most Short The Swiss Franc Since June 2013 (Zero Hedge) see also Top 10 Hedge Fund Trends for 2015 (All About Alpha)
• 29 Charts Worth Your Time (CFA Institute)
• U.S. companies attracted most venture capital money in 2014 since 2000 (Washington Post) but see Starved of Financing, New Businesses Are in Decline (Gallup)
• The ECB's (Losing) Battle Against Deflation (MoneyBeat)
• Gold Shines as Traders Seek Safety From SNB's Shock Move (WSJ)

Continues here

New Ford GT

Posted: 16 Jan 2015 03:00 AM PST

Source: Road and Track

From Top Gear:

The Ford GT is back. And then some. Taking all the headlines at the Detroit motor show – and confirming some tasty rumours that have been rumbling for a little while now – is the third iteration of Ford’s supercar.

And gone is the supercharged V8 of old, replaced by an Ecoboost engine. Fear not, though, as it still packs a proper amount of cylinders. A twin-turbo 3.5-litre V6 engine drives the rear wheels with 'more than’ 600bhp, and with motorsport development behind it, Ford is claiming great efficiency.

Of course, it’s performance we care about. Nothing’s confirmed in that area just yet, but a 0-60mph time close to 3.0secs and a top speed north of 200mph ought to be very feasible targets.

More photos after the jump

Source: Top Gear

From Road and Track:

Objectivity out the window! Let’s get personal for a moment: I want this. I want this badly. I don’t care that it doesn’t have a manual transmission; I don’t care that it doesn’t have a V-8; I don’t care that it will likely cost far more than my annual salary; I don’t care that we don’t know anything more about it save a few hundred words of press release and some jokes Mark Fields made during scripted stage banter with Bill Ford. It effectively recalls everything good about Ford motorsport and that historic Le Mans win without being stuck in the past. It reminds me of everything good about Detroit and cars and speed. The only missing piece of the puzzle is the Corvette Zora—GM’s upcoming mid-engine C7, about which we know little. But it will likely be available with a manual transmission, and that fact might give me pause.

Everything else, they got right. Oof. What a thing.