Surprise, surprise

Courtesy of Zerohedge and Bloomberg. A summary on Syria

U.S. ACTIONS:

• Obama Begins Selling Action Ahead of Decision on Force
• U.S. and Allies Move Closer to Brink of Syria Military Action
• U.S. to Release Syria Gas Attack Proof
• Tomahawk Missile Launches Likely in U.S.-Led Attack on Syria
• U.S. Said to Weigh Legal Justification for Attack on Syria

SYRIAN ACTIONS:

• UN Syria Envoy Says Strikes Can’t Precede Council Decision
• Rebels Used Chemical Weapons: AFP Cites Syrian Ambassador to UN
• Syria Evacuates Troops From Damascus Military Base: Arabiya
• Syria Foreign Minister Denies Chemical Attack to BBC
• Assad Not in Iran, Mehr Says, Citing Iranian Foreign Ministry

INTERNATIONAL ACTIONS:

• U.K. Drafts UNSC Resolution to Protect Syrian Civilians
• Cyprus Says Hasn’t Heard From U.K. on Use of Bases for Strike
• Iran’s Khamenei Says Syria Attack Would Be ‘Disaster’
• Ban Ki-Moon Says Syria Now in Most Serious Moment of Conflict
• Italy waiting on UN
• Russia FM Says Rejects U.S. Assessment of Chemical Attack
• Germany May Participate in Syria Action: Rheinische Post
• German CDU Party Lawmaker Calls for “Surgical Strike”
• Hollande to Meet Head of Opposition Syrian National Coalition
• Recalls French Parliament to Discuss Syria, Spokeswoman Says
• Israel Warns Iran, Syria Against Reprisal for U.S. Strike
• Strike Would Lead to Retaliation on Israel, Iran Warns, According to NYT

MARKET REACTION:

• WTI Crude Rises to Two-Year High
• Oil Diverges From U.S. Stocks Most Since 2011 on Syria
• Brent Crude May Spike to $150 on Syria Spillover: SocGen
• Libya Compounds Syria Tension in Oil Market
• Bond Markets Price in Syria Strike, Not Wider Clash
• European Stocks fall to 6-Week Low

US, Britain and Israel have used chemical weapons within the last 10 years... Kind of..

• Article

  
  

  http://www.filmsforaction.org/news/the_us_britain_and_israel_have_used_chemical_weapons_within_the_last_10_years/

  
  

  A debate on the above:

  
  

  ABC I don't want to get too semantic, but neither depleted uranium nor white phosphorus are chemical weapons? I agree that both have horrible effects if used in the wrong circumstances, but there's an important line between these and chemical weapons per se.
  
  For example, depleted uranium's primary effect is that it's an extremely dense material which punches through fortifications. The problem with DU is that it has toxic and radioactive properties which, in cases like Fallujah in '04, where extreme quantities built up in a place which was still inhabited by significant numbers of civilians, could have caused horrors like birth defects. While dreadful and regrettable, and I don't mean this to somehow atone, these effects are extrinsic to the intent of the attacker. The shells aren't fired with the intention of causing birth defects.
  
  The primary effect of nerve agents (i.e. proper chemical weapons, which incidentally are only confirmed to be stockpiled by four countries in the world), however, is to attack the central nervous system, with the typical result of constraining people's muscles so they lose control of their bodily functions, suffocate and die. Historically, they have typically been used en masse to injure and kill with the full intention of these horrible effects.
  
  All forms of death are as grim as each other, but I think it's important to keep a view on intent. I don't think the claims of hypocrisy are justified.

  
  
•   XYZ Deploying DU and white phosphorus with the knowledge of those effects is tantamount to deploying them with those intentions...

  
  
•   ABC I disagree, though to get into my reasons would involve some pretty dry and abstract ethical reasoning. I agree that to  deploy DU  and white phosphorus with knowledge of the effects is morally bad. (Though I'd leave out white phosphorus and  just stick with DU;  it's really quite a different case and is nowhere near the same league as chemical weapons.) I just think there's  qualitative difference  between the use of the them versus 'conventional' weapons which needs to be maintained else we end up    in unhelpful reductionism.

  ABC i.e. Bullets are pretty nasty, too! Where do we stop?
• ABC Furthermore on DU, the US military at least doesn't believe there's even a negative effect on the health of its own troops. One could question the honesty of that assertion, but assuming it's sincere then I don't think we can attribute to them true knowledge of the effects which we believe ourselves.
• XYZ i understand your point, i just dont agree that we only hold states responsible for the 'purported' intentional effects of their weapons, if theyre fully cognisant of toxic and radioactive qualities of these weapons then it seems to me that they are deploying toxic and radioactive arms
• ABC Oh of course I agree; effects are what matter. I'd just maintain a hierarchies of evil, so to speak. One of the cleanest deaths in war is a bullet through the head. One of the ugliest is lingering death in a trench from nerve gas. We're still working out how bad DU is along that scale, with both primary and secondary effects included (in time I imagine countries will ban its use in civilian areas and perhaps stop using it altogether), but I don't believe it shares its character with nerve gas either in the typical intent causing its use or in its sum effects.
• ABC In a sentence, we're shits, but they're worse shits.

Desperate times, desperate measures. Saudis offer Russia secret oil deal if it drops Syria. Insane.

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10266957/Saudis-offer-Russia-secret-oil-deal-if-it-drops-Syria.html

'Syrian rebels used Sarin nerve gas not Assad's regime' - Washington Times Article from May

http://www.washingtontimes.com/news/2013/may/6/syrian-rebels-used-sarin-nerve-gas-not-assads-regi/

Sorry, I've been taking a break from blogging. Back now.

Breaking news: Mubarak to be released

http://www.aljazeera.com/news/middleeast/2013/08/201382151326789174.html

POMO site down, for now :)

End of Tapering Panic

The Risk-off trade that occurred after the wake of the Fed panic is getting unwound:

-Bonds rated CCC lower lost 2.4% since May 22 and June 19 (Bernanke's comments) since then debt has rebounded nicely by 3.5%

-Most risk assets “have probably retraced a good 75 percent on average of the widening that occurred in the late May and June period,”

However risk trades getting unwound is a worry, here's why:

The end of QE signaled a shift in how the Fed wanted to communicate about risk. As QE was meant to push down risk premiums, the end of QE is likely to push up risk premiums:

-Dont expect the Fed to push yields down anymore, they wont be pushing you to take risk

-For stocks they will rise if the economy lifts off - however dont expect P/Es to go up - the Fed will not push the P anymore, rather the E component will lower the ratio

2 trades to look at:
-DBV Carry trade (e ETF that is short three currencies and long three currencies at all times) DBV tanked since May 22 and it has struggled with a key technical resistance level. Does this look like that risk is getting bought again?
-However, The EMB/HYG (emerging markets to high yield bonds etf) ratio fell through a key relative support level and has had trouble regaining relative strength. So risk on may not be coming back globally, market hasn't totally "healed"

Interesting article - 'Don't believe the economic hype, this is a bubble not a boom'

http://www.neweconomics.org/blog/entry/dont-believe-the-economic-hype-this-is-a-bubble-not-a-boom

Check your stats - UK unemployment

While the government points to the fall in unemployment by 4,000 to 2.51 million between April and June (Office for National Statistics) as evidence for the successes of austerity, this view is barely skin deep.

- The unemployment rate holds fast at 7.8% -- essentially more people in work is just a symptom of a growing population. In reality, the jobs market is stationary: just about keeping up with new entrants. (ONS)

- All else being equal, the people that need most help getting a job are young people and those in long term unemployment. Yet unemployment actually rose in both groups by 10,000 and 15,000 respectively. Yet another indication that the gap between the 'haves' and the 'have nots' is widening. (ONS)

- Even for those that have work, real wages are still declining: average wages (including bonuses) averaged a 2.1% increase between April and June, while CPI for June shows that the cost of living increased by 2.9%. (ONS)

Corporate Issuance Back after 2 month lull

-After selloff during May and June, investors are coming back to tap high grade and alternative markets (PIK toggle)
-Institutional clients continue to hunt for yield after Taper Tantrum
-The average extra yield investors demand to hold investment-grade corporate bonds rather than similar-maturity Treasuries tightened 0.5 basis point to 128.5 basis points
-Push into higher yields as investors see QE positives

New issues:
-Viacom sold $3bn with $500mn 2.5%, $1.25bn 10yr of 4.25% at 178bps and $1.25bn of 5.85% 30yr
-Kodiak Oil&Gas, below investment grade sold $400mn up from a planned 300 at 5.5%, same it paid for $350mn offering mid-Jan. Priced lower than 6% as oversubscribed ($1.6bn)

What the FRAC?!

Event Risk in the coming month (and a bit)

21/08/13 - Release of minutes from 30-31/07 FOMC meeting

05/09/13 - 1) Japan announces its 2014 money supply target, 2) ECB Interest Rate decision

09/09/13 - Congress returns to session

18/09/13 - FOMC decision and press conference

22/09/13 - German federal elections

30/09/13 - Deadline for Congress to prevent government shutdown

How many 0s in a quadrillion? This many:

IPod. IMac. IPad. ICahn?

Europe?

Stronger macro data suggests that the worst of the Eurozone crisis may be behind us. Last week, Eurozone consumer confidence strengthened for the eight consecutive month, which could bode well for consumer spending in coming months.

New orders placed with German manufacturers jumped a seasonally adjusted 3.8% monthly, more than reversing May's revised 0.5% decrease. Italy's longest recession in the post- World War II era eased in the second quarter of 2013 with the gross domestic product declining 0.2% on the quarter — the slowest pace in nearly two years. Britain's industrial production was up 1.1% on the month following three consecutive months of zero growth. The 1.1% increase was the fastest since July 2012, when it grew 3.1%.

^^

This is the consensus it seems. I'm skeptical. Countries are broke, burgeoned with debt. No-one really knows whats going on. But, for sure, those who have been thick skinned in the last year have reaped the rewards. Look towards equity markets, peripheral debt. Is it too late to get in? Maybe. But this may give you some food for thought:

European equities are trading on P/B of 1.8x and 12 month forward P/E of 12.5x, 15% and 6% below 25 year averages. But maybe these averages were inflated to begin with?

Understanding new GDP calculations for the US

Intellectual property product investment (IPP) has been added to the National Income & Product Accounts (NIPA) – as party of July’s benchmark GDP revisions (hence inflating GDP to 1.7% - although this far beat expectations of 1.1% regardless). The new category introduces spending on entertainment, artistic and literary originals (EALO) (basically goods that the rich can afford), software and R&D. Software, however, has already been around in the GDP measurements but has been reassigned from one way or another – something about ‘legacy equipment investment’ category. Adding R&D and EALO has lead to an increase in real GDP growth by 0.07% (approx..) since 1947 with large contributions during the .com boom in the 90s.

Japanese debt: A perspective for beginners (i.e. myself!)

2012 – Japan’s central govt was 997trn in debt, that’s 200% of GDP, and more than $80,000 (USD) per capita.

To understand any debt workflow:

The government collects taxes from households and corporations.
The government spends.
If wants to spend more than revenues, issues bonds.
When outstanding debts get too large, central bank lowers the interest rates or buys bonds.
For the government to spend more, it issues debt again.
Investors buy (and receive interest).
Investors worry when debts get too large.
Then Central Bank lowers interest rates.
Investors’ worries are intermittently allayed, and they continue investing.
Eventually it leads to an inescapable trap.
Each year the government has to pay interest, and fund other expenditures.
Investors sell.
Government cannot spend what it does not borrow.
Printing press can’t help now.
Inflation been going on as well.
Investors sell bonds to account for inflation.
Debt costs are higher than tax revenues.

To put this in perspective for Japan, let’s take figures from the end of 2012 fiscal year – Japan’s debt was 23x revenues. 1% increase in average debt cost increases overall interest expense by 23% of tax revenues. By this calculation, the govt needs to keep debt costs lower than 4%. Can they do this? Yields are only 0.8% at the moment. But what about in the future? Let’s look at investor rationale.

Japanese investors – JGB bond prices are very high, and a lot has been invested in JGBs by locals. But savings are declining with an ageing population, so can they keep the demand for the debt so high?

Foreign investors see only 0.8% yield?! OK inflation in real terms is low, so the yield is now that bad. Last year yields were around -1% with inflation of -1%, that’s a real return of 2%, right?! But now, inflation has been increasing, (0.2% June YoY, -0.2% if you discount food and energy prices) and will continue to increase because of the 3 arrow approach taken by Abe and Kuroda. They are targeting 2% inflation, so to keep real returns constant the average debt cost may rise to 4% and this is the critical point.

The Kyle Bass view (Hayman Capital) is essentially that there will be a collapse in Japanese bond yields because its expansion ultimately engenders this Weimar style of hyperinflation. – and you can watch some of his talks online for example here.

What this does not take into account however is that, whilst it well know that in a recovery, bond yields go up, the extreme scenario is unconvincing. This is because it doesn’t account for the increase in tax revenue that will follow from increase in GDP – the Japanese tax structure is very pro-cyclical (although less so now than in the 1990s due to the introduction of consumption tax). The origin of fiscal stresses isn’t really fiscal spending but instead is tax revenue based – tax revenue today is only 60% of the level of 1990. Personal tax revenues have gone down compared to GDP, and consumption tax hasn’t done much to replace loss of tax revenue. However if Japan truly does grow, the increased strength in fiscal position could be enough to offset interest payment increases.