Super Bowl Sunday…
“Most nations have things in their past which they wish to forget… But to forget them is to invite their return, in words that are echoes of the past, and the objectification of ‘the other’ as they choose to define them. Like financial frauds, the sins of the past keep coming back with new names, but the same old words and false propositions.” –Jesse’s Cafe Americain
Stories from the financial crisis: The folly of prevailing models or how to lose $3mm in 1 second | Scientific American Blog Network
Trader recounts Lehman bankruptcy (2008):
He was caught short Brazilian interest rate swaps, which gapped up upon the market open; he couldn’t cover position with $3mm paper losses, so he sold related/liquid assets (e.g. Argentinian bonds), hence correlations rose.
“Markets are not supposed to do this… Almost all of modern finance, all of trading of assets, is predicated on continuity, on transactions able to be made at every price along a path.” New quantitative “jump models” have arisen to account for outlier events like illiquidity/gaps, and they value assets with a higher liquidity premium. The Street shuns such [accurate] models because they’re too conservative and the incentive structure is too short term.
Rail traffic weekly: Growth decelerates, commodity groups remain bifurcated | Association of American Railroads (AAR)
Carloads -7% and Intermodal +4.7 (cumulative ytd volume y/y); -6.3% and +1.6 respectively (vs. this week last year).
10 of 20 carload groups posted gains: Petroleum products +56%, farm products +16.9 & forestry +12%; metallic ores -20.4%, iron/steel scrap -16.8 & coal -14.6.
[Growth decelerating as choppy start to 2013 continues. 2012’s themes continue in bifurcated commodity groups.]
Global Purchasing Managers Index (January 2013): 10 month highs | Business Insider
Global PMI continued its rise to 51.5, the highest reading since April 2012 (>50 indicates growth):
Japan up to 47.7, trying to recover from the lower depths of contraction.
Asian & Chinese expansion continues, but Australia crashes down to 40.2.
Europe still contracting (47.9), but continues improvement since Summer 2012.
US surge to 55.8 beat expectations with inventories making the biggest leap.
4q12 US GDP -0.1% vs. +1.0% expected | Calculated Risk
Consumption (PCE) growth accelerated to +2.2% & investment rebounded to +12.4%, but inventories -1.27pp, government spending (esp. defense) -1.25pp & trade deficit -0.25pp were the drag.
Fed economists finally recognize risks of bond losses | Jon Hilsenrath (The Wall Street Journal)
Fed ran stress test of its balance sheet & earnings, found substantial duration risk from QEs: if Fed Funds Rate rises to 3.8% by YE14, the Fed would lose $40B (4.8%= -$125B), which it would have to book as a deferred asset and print currency to avoid remitting losses to the Treasury. That’s never happened before in history.
[Fed transferred $89B in profits to the Treasury in 2012.]
Solar energy gamechangers: It’s about to be a whole new world | Noahpinion
Breakthrough solar technologies will help installation volumes & pricing parity sooner than expected (~2020):
1. Nano-templated molecules- convert & store excess energy indefinitely
2. Printed solar cells- flexible & durable
3. Solar thermal panels- 8x more efficient than today’s best panel; convert heat from ambient light (even on overcast days)
4. M13 virus- spaces out cells’ nanotubes to maximize efficiency
5. Transparent cells- thin film for application anywhere (e.g. windows)
6. Spin Cells- cone-shaped cells that are always exposed to sun & self-cool
Chinese corporate credit: Tripling in debt drags on economy | Bloomberg
Since 2007, corporate non-financial borrowing has risen from $604B to $1.7T, with 10y interest rates at 13 month highs (5.27%) and Total Debt/GDP up from 124% in 2008 to 190% by YE12.
Credit has faced decreasing marginal returns, with only 29% contributing to growth as interest expenses (14.3% debt service/GDP) drag on investment.
Gold & Silver lease rates plunge into the red | Kitco
Silver lease rates turned negative in 11/2012 (short term rates were deepest into red), but Gold just turned negative across the curve.
White paper: Regionalization vs. Globalization (1960-2010) | International Monetary Fund (IMF)
Finds that despite globalization, regional business cycles reemerged after 1980, deemphasizing individual countries’ correlation to global growth and dispelling the myth of global synchronization.
Attributes this to intra-regional trade/currency pacts & financial flows, which are pronounced in North America, Europe, Asia & Latin America.
Unlike output (GDP) & fixed investment, consumption trends are more idiosyncratic–hardly explained by global & regional factors–suggesting there’s a significant global growth opportunity there.