With much fanfare, and as Athens News pointed out, 10 minutes early, the German delegation landed in Athens at 1:20 pm local time, and has brought with it 7,000 part-time Greek police jobs: look for a massive drop in the Greek unemployment rate next month. For the next 6 hours everyone will be praying that the ghost of Gavrilo Princip has not found a new host. In the meantime, the most inexplicable of official visits will take place as Angela Merkel paints the town red (hopefully not literally).
While we have grown 'used' to hearing of protests in several European peripheral nations, South Africa has turned the anti-austerity protest amplifier to 11 in recent days. From the Lonmin massacre and subsequent wage increase to the truck-drivers' strike and Amplats firing of 12,000 workers , Reuters is reporting that South Africa's local government worker's union has now said it will join a nationwide strike amid the labor unrest in the mining sector. Demanding 'market-related salaries' this strike would bring the South African economy to its knees - at a time of rising deficit concerns. Critically, this has dramatic repercussions. Since firing people is no longer an option as "Those who are dismissed will make sure that there will be no operations operating and that will cause a massacre just like at Marikana," some companies will be forced out of business (reducing supply) or suffer significant margin compression on cost increases leaving commodity producers struggling - which will inevitably mean prices for end-users will rise (slowing end-user demand or crushing their margins). It seems the South African labor unions found the M.A.D. card.
While the exquisitely tanned replacement of former IMF head and Sexcapade-extraordinare DSK, Christine Lagarde, who may or may not have nationalized the entire UV-tanning light inventory of CNBC's Fast Money show, is very much aware of what the latest fashion in leather jackets or what the most fashionable plumage of pret-a-porter Hermes sweaters of the Fall season is, she sadly has absolutely no insight into what the actual contents of the IMF's most watched semi-annual report are, as confirmed by the following exchange between her and an Irish Examiner journalist, that has to be seen to be believed. Critically, not only is it clear that Lagarde has not read the WEO report but the section that IE's Ann Cahill asks about brings up a critical systemic problem in the IMF's over-estimation of growth forecasts in a world of increasing fiscal consolidation - an asymmetric fiscal multiplier.
For those who still wonder why China has given up on Europe, and is solely focusing on Africa (where none other than Goldman Sachs is opening more offices than any other bank), the IMF explains why the Berlin Beijing Conference 2.0 is now in its peak, if entirely behind the scenes. And yes, the "developed" world wishes it was one big banana republic. Amazing what not having 100%+ debt/GDP will do for one's economic prospects...
IMF Cuts Global Growth, Warns Central Banks, Whose Capital Is An "Arbitrary Number", Is Only Game In TownSubmitted by Tyler Durden on 10/08/2012 - 17:05
"The recovery continues but it has weakened" is how the IMF sums up their 250-page compendium of rather sullen reading for most hope-and-dreamers. The esteemed establishment led by the tall, dark, and handsome know-nothing Lagarde (as evidenced by her stroppiness after being asked a question she didn't like in the Eurogroup PR) has cut global growth expectations for advanced economics from 2.0% to only 1.5%. Quite sadly, they see two forces pulling growth down in advanced economies: fiscal consolidation and a still-weak financial system; and only one main force pulling growth up is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general. A general feeling of uncertainty weighs on global sentiment. Of note: the IMF finds that "Risks for a Serious Global Slowdown Are Alarmingly High...The probability of global growth falling below 2 percent in 2013––which would be consistent with recession in advanced economies and a serious slowdown in emerging market and developing economies––has risen to about 17 percent, up from about 4 percent in April 2012 and 10 percent (for the one-year-ahead forecast) during the very uncertain setting of the September 2011 WEO. For 2013, the GPM estimates suggest that recession probabilities are about 15 percent in the United States, above 25 percent in Japan, and above 80 percent in the euro area." And yet probably the most defining line of the entire report (that we have found so far) is the following: "Central bank capital is, in many ways, an arbitrary number." And there you have it, straight from the IMF.
On the inaugural day of the much-awaited holy grail of Europe - the ESM - DutchNews.nl reports that Dutch diplomats in Athens have been secretly planning for an eventual Greek exit from the eurozone (along four themes - liquidity, energy, communications, and security). "We have deliberately strictly kept this behind closed doors", a Dutch diplomat told Volkskrant, adding "I do not know who has trumpeted." Among the Dutch companies doing business in Greece are Heineken, Unilever, and Philips as one business owner note that they "send cash back to the Netherlands as soon as possible - holding as little money in Greece as possible." While the foreign affairs ministry would not confirm, the paper cites a diplomat who commented: "we do not want to awaken any sleeping giants." We suspect you just did - sshh!
Europe just can't catch a break these days. While French Fitch naturally came out earlier with a AAA rating and a stable outlook, it is Moody's, which has yet to follow through in S&P's footsteps 14 months later and tell the truth about America's AAA rating, that moments ago spoiled the ESM "inauguration" party by branding it AAA, but with a Negative outlook. So much for the most 'supersecure' CDO on earth: looks like we are not the only ones to assign comical value to the ESM's €80 billion first loss "Paid-in" tranche. Because that 12% in buffered protection can disappear very quick if and when the central planners lose control.
If interest income as a percentage of total personal income had remained at its 2008 level, the total would now be over $1.5 trillion. It is this $550 billion annual delta that the Fed has directly, though its policies, taken away from US consumers in terms of purchasing power. So while the Fed has taken away the bond market as a venue in which to generate current income, it is the structural failures of equities in a post-HFT world (stories of mini, amd maxi, Flash Crashes are now a daily occurrence) that prevent investors from having the same confidence about current income in a market in which terminal and fatal capital loss are all too real fears. And there are those who still wonder why the US consumer is withering away, and absent such crutches as soaring Federal non-revolving debt, used for anything but its designated purposes, would have less purchasing power now than before the crisis as a result of the Fed's failed policies. As George Magnus so peotically summarizes it "What the left hand giveth, the right hand taketh away."
With bond-traders amiss - no doubt all celebrating the indigenous people of our great nation - volumes were dismal and so was any evidence of a BTFD mentality in risk. AAPL, amid the biggest three-day slide in almost six-months, saw pullbacks to VWAP sold immediately (signaling more institutional biased selling) ending very close to a 10% correction from its highs. This weighed on Tech (obviously) which was the worst performing sector and dragged Nasdaq (and the S&P) lower. In general equities stayed in sync with risk-assets on the day (we note that TLT's move implies around a 4-5bps compression in yields at the long-end of the Treasury curve) though the lack of liquidity made the relationships noisy. Low volumes, low range, a premature ramp in the last hour that gathered no momentum left S&P futures having retraced 50% of their low-to-high swing of last week. Gold and Oil decoupled early then recoupled late, ending the day down but outperforming the implied weakness from USD strength (EUR weakness balanced JPY and AUD strength on the day). Copper and Silver ended the day down 1.4%. VIX 'outperformed' equity weakness and pushed a notable 0.8 vols higher back over 15%.
S&P 500 EPS is forecast by consensus to decline 2% both sequentially and YoY in 3Q12 driven by net margin compression. As Morgan Stanley's Adam Parker notes, it appears (for now) that we can have an earnings recession without an economic recession; but the disconnect may be a lag as opposed to a decouple. Roughly 50% of companies are expected to experience YoY contraction in net margins but - and this is the 'funny' segment of this post - consensus expects an 18.2% incremental margin expansion in 2013 (from a 7.2% rise in 2012 which is down from 13.1% rise in 2011); and while 3Q EPS is expected to be negative, the following three quarters EPS growth are expected to rise dramatically (double that of 2012 on average). It seems investors (and analysts) are still willing to believe in miracles.
Since the end of the Second World War, the major powers of the world have lived in relative peace. While there have been wars and conflicts — Vietnam, Afghanistan (twice), Iraq (twice), the Congo, Rwanda, Israel and Palestine, the Iran-Iraq war, the Mexican and Colombian drug wars, the Lebanese civil war — these have been localised and at a much smaller scale than the violence that ripped the world apart during the Second World War. Hopefully, the threat of mutually assured destruction and the promise of commerce will continue to be an effective deterrent, and prevent any kind of global war from breaking out. Nothing would be more wonderful than the continuing spread of peace. Yet we must be guarded against complacency. Sixty years of relative peace is not the end of history.
The president is about to speak in Keene, CA, just off Bakersfield, where he will announce the establishment of the Cesar Chavez national monument. That at least is the official topic. What everyone is curious about is if Obama will bring up the topic that is on every Californian's mind today: gas prices that have never been higher. Find out shortly if the recent gas price breakout is once again the work of evil, evil speculators, some of whom may not even have a printing press, or if the market's discounting of $1 trillion in new Treasury monetizations by the Fed, or roughly half the budget deficit through 2014 has anything to do with it. Also, certainly keep an eye on RBOB and various energy margin hike after the close. After all, Obama is not known as the margin hiker-in-chief for nothing.