As earnings season is upon us, we will no doubt hear that expectations are so low that the market has it all priced in and upside is the only way to go (apart from the fact that Q4 expectations remain in the land of faeries and unicorns). Of course Q4's hockey-stick is critically going to depend on the fiscal-cliff - post-election. As we noted here, there are few positive outcomes from the fiscal cliff 'negotiations' with even a best-case 'possibility' of a 0.9% fiscal drag in the first half of 2013. Using trend growth of 3%, and Goldman's estimate of around a 4% drag (lower than the 6-plus% drag the CBO estimates), we can work back from the consensus 2.05% GDP growth for 2013 to figure what the market's priced in probability of a fiscal-cliff resolution is. It would seem the market is more than happy to almost entirely dismiss the fiscal cliff. Back of the envelope math implies only a 1.5% probability of the full fiscal cliff impact and therefore any expectation of an equity market rally on hopes of a compromise seem far-fetched with well over 95% priced in currently.
Friday's ramp-fest in European stocks - which did not appear to be correspondingly followed by European sovereign debt - was largely retraced today. Extended by the bullish bias from the US NFP data (and closed before the US data BLShit sunk in), it seems that not just the catch down drove stocks in Europe (and Europe's VIX) but anxiety ahead of the expected wall of noise from European leaders ahead of their meetings (which we have already suffered today). European government bonds leaked lower (yields/spreads higher) and Swiss 2Y rates dropped to their lowest in a month (though still well above the mid-crisis safety panic levels of a few months ago). European credit also slid - tending to follow equities this time.
Given the Fed's ZIRP impact on expected returns, PIMCO notes that those approaching retirement have three choices: a) save more, b) work longer, or c) tighten their belts in retirement. If everyone saves more, we consume less, and therefore GDP growth slows down. Anemic growth leads to a Fed on hold for a prolonged period - and even further lowered return expectations in an ugly paradox-of-thrift-like feedback loop. PIMCO has found a concerning empirical link between lower rates and longer periods in the workforce as a higher fraction of older Americans remain employed. This has the structurally dismal impact of reducing (implicitly) the level of 'prime working age' employment and has 'convexity' - in other words, the lower rates go, the greater the inertia of the elderly to stay in the workforce. Intuitively, low rates leading to longer work lives just makes sense – especially in an era where fewer retirees will draw defined benefit pensions. This is why some of us are wondering if the Fed is spinning its wheels by sticking to the old model of trying to stimulate growth. So expect lower-rates and longer working years or go all-in on HY CCC debt with 20% of your savings.
The majority of Americans seem OK with just waddling through life, accepting the lies and misinformation blasted from the boob tube and their various iGadgets by their owners, gorging themselves to death on Twinkies and Cheetos, paying 15% interest on their $10,000 rolling credit card balance, and growing ever more dependent on the welfare/warfare state to provide and protect them from accepting personal responsibility for their lives. A minority of critical thinking people have chosen to question everything they see and hear being spewed at us by the propagandist mainstream media. What do 'we, the people' want? As it seems the entitlement “free shit” mentality permeates our culture. The question is whether we will stand idly by, fiddling with our gadgets, tweeting about Honey Boo Boo, or will we regain our sense of duty to the future generations of this country.
This particular news from Goldman and the SEC needs absolutely no introduction, explanation, or conclusion. It is, as Homer J. Simpson would say, "a tidy little package."
- GOLDMAN HIRES EX-SEC INVESTMENT MGMT CHIEF BUDDY DONOHUE: MEMO
- GOLDMAN NAMES DONOHUE GENERAL COUNSEL OF GSAM INVESTMENT COS
Shocking. Absolutely shocking. Elsewhere, completely unfounded rumors that various DOJ staffers are planning to join assorted Mexican drug cartels shortly.
As we have been saying for over a year now, there are two key issues (one of which follows logically from the other) that central bankers are banging their heads against: the increasing scarcity of money good-assets, i.e., credible collateral, that can be pledged in exchange for debt at both the private and public level, and the collapsing cash flows at the corporate and household level (both incidentally direct artifacts of ubiquitous central planning and central banker intervention). This, among various other reasons chief among which is the parallel collapse in CapEx and R&D spending at the corporate level, is the main reason for the now secular decline in corporate revenues, which in turn will impact corporate profitability for years to come (now that the easy cost cuts have been made and firms have no choice but to cut into the muscle), and why any expectations that currency dilution will transform into higher profits in a time when input costs rise far more aggressively than revenues, are merely pipe dreams, as is the market's obsession with expanding PE multiples. Perhaps the best confirmation that the much needed cash flows continue to not materialize, is the news that first Amazon, and now Google, are slowly migrating to a model of vendor financing, whereby they provide credit to their product and service vendors to stimulate top line growth. And while this may boost AMZN and GOOG stock price briefly, all it indicates is what we have all know for a long time: the US consumer is once again tapped out, and is unwilling and/or unable to spend money at the rate needed to justify either the forecast S&P earnings or the applied multiple, confirming fundamentals are even more disjointed from market surreality than previously expected.
When fringe-blogs highlight the reality of the US banking system and its financial engineering as nothing but overly complex three-card-Monte, it can be shrugged off; but when the head of China's sovereign wealth fund (yes the same one that will bail the world out) notes that the JPMorgan loss highlights a system that has become too complex, perhaps some should listen. As Bloomberg BusinessWeek reports, Gao Xiqing of CIC stated that "I think we do need to slow down a little bit instead of rushing up to all these fancy derivatives." The fact that the 'whale' loss was not a rogue trader but a systemic decision gone wrong on weak risk management of an overly-complex position was "the single most revealing thing" to Gao as he expressed concern about a society in which "all the best engineers are engineering financial products." Summing up the entire ethos of US financial innovation he concluded: "You have all the smartest kids to design these products, the only purpose of which is to get money out of other people’s pockets, that is not very good."
The biggest headlines (and refutations) have been saved for the struggling nations of Europe's periphery. Top-down, this makes sense as PPP-weighted PMIs show Europe notably decoupling (badly) from the rest of the world - with periphery and eurozone-ex-periphery having resynced at these lower levels. This convergence (down) of the core with the periphery is not good news but what is more concerning is that while many investors have assumed the 'pricing' of risk assets in the periphery relative to the core is due mostly to 'contagion', there is in fact a massive fundamental divide between the core and periphery's corporate debt credit quality. With ECB's OMT apparently removing much of the systemic risk premium (though we are clear on our views of this short-term LTRO-esque reaction), the idiosyncratic risk differential between Core and Periphery credit quality is large and getting larger. It seems the need for simultaneous private and public deleveraging in the periphery - especially in Spain - is as critical as ever.
The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and "retired" to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens. Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims. The rule of law is dead in the U.S. It "cost too much" to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.
Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!
Gas stations across California - from San Diego to San Francisco - are seeing increasing price-sensitivity by drivers with lines at the 'cheapest' and empty lots at the priciest. It seems yet another weekend of hyperinflating gas prices has pushed the until-now seemingly uncaring-at-the-margin gasoline-'user' to seek out rationally lowest prices. Credit card caps at pumps are also causing problems as the typical SUV-driving soccer-mom needs multiple lines to fill up the family people-mover. Gas prices rose 5c on average over the weekend alone to an all-time record high price of $4.668 (for Regular) - up 86c (or 22%) in a year and 12% in a week.
As we all await the next, next, next meeting of the European Finance Ministers and our eyes are turned to Spain and what machinations are going to be brought to our attention, we wonder if actual decisions are going to actually be forthcoming. These people “applaud and hail and congratulate” each other on various non-accomplishments and they tap dance on the world’s stage as if each and every problem is not only solved but light years behind them while there are giant dificulties to their forefront that are largely ignored in the continuing attempt to obscure everyone’s field of vision. We remain skeptical however; we can see just fine thank you and it is not the poppy fields of Oz at which we stare.
In the last few weeks much has been said about how the US economy, after nearly collapsing in the Lehman aftermath has staged a gradual, if painful and very slow improvement in the last 3 years. Sure enough, After jobs peaked at an all time high of 138 million in January 2008, they then tumbled to a depression low of 129.2 million in February 2010 and beginning in September 2010 have posted 24 consecutive months of growth, rising to 133.5 million last month: a 4.25 million trough to, so far peak. Not bad. What, however, has received little discussion by either presidential candidate, primarily because it is largely a byproduct of both Republican and Democratic action, is what can be seen on the chart below courtesy of Diapason Securities, namely the New Normal angle of debt increase, which from merely steep, has mutated into beyond acute. What one can see is that the public cost of "normalization", aka the Trade Off of the new normal is an additional $4.25 trilion in debt over and above where the previous historic trendline would put total US debt, just under $12 trillion. Instead total debt is now $16.2 trillion. Oddly enough, this translates to precisely $1,000,000 per job gained or saved from the first (and certainly not last) post-crisis trough: yet another fact that will not be mentioned in either the mainstream press or any presidential debate, as sadly trading off record amounts of public debt for new jobs is the only game left in town for either party.
Risk averse sentiment dominate the session, as market participants looked forward to the latest European finance ministers meeting who are due to discuss Spain’s finances, as well as Greece, which is yet to formalise spending cuts in order to receive the next aid tranche. Reports that China's economic growth is expected to have slowed to 7.5% in Q3 from 7.6% in Q2 weighed on basic materials and industrials stocks. The World Bank cut its 2012 GDP forecast for China to 7.7% from 8.2%; 2013 to 8.1% from 8.6%. Uncertainty surrounding the never-ending sovereign debt crisis in Europe weighed on financials, and in turn translated into lower 3m EURUSD cross currency basis. Peripheral bond yields rose, with Italy underperforming, ahead of the supply later on in the week. Going forward, given the Columbus Day holiday across the pond, trade volumes are expected to be below the average.
- Italy rejects need for EU control (FT)
- ‘Worst US quarterly earnings since 2009’ (FT)
- Chinese firm helps Iran spy on citizens (Reuters)
- World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
- Foxconn factory rolls on in spite of strike (China Daily)
- Economic recovery ‘on the ropes’ (FT)
- Japan Tries Cars That Make the Mini Look Maxi (Businessweek)
- Euro Finance Chiefs to Give Positive Greece Statement, Rehn Says (Bloomberg)
- Romney attacks drones policy (FT)
- Euro zone mulls 20 billion euro separate budget (Reuters)
- Hong Kong’s Leung Seeks Turnaround With Economy Focus (Bloomberg)
- RBA Keeps Some Documents Private in Securency Bribe Probe (Bloomberg)
- India Inflation to Remain at 7.5%-8% Till Early 2013 (WSJ)