Claiming he wasn't afraid to let everyone in attendance know about "the real mess we're in," Federal Reserve chairman Ben Bernanke reportedly got drunk Tuesday and told everyone at Elwood's Corner Tavern about how absolutely fucked the U.S. economy actually is.
Italy and Spain, and now France, CDS hitting all time highs? Been a few hours since Unicredit was last halted? Europe looking like it is about to implode all over again (and nobody even remembers Greece any more)? Have no fear. President (he was elected?) Barroso is here, telling us all the imploding sovereign bond markets of Italy and Spain are "unwarranted." All this and many more jokes in the full just released statement which confirms that Europe is starting to freak out all over again.
For more than 3 years - since gold rose above its nominal high of $850/oz in February 2008 - there has been much talk about gold being a bubble. Nouriel Roubini, professor of economics at New York University's Stern School of Business, is one of the more prominent financial and economic experts who said gold was a bubble and many other experts internationally echoed his sentiments. On December 10th, 2009, with gold at $1,100 per ounce, Roubini, said, "all the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense". Roubini went on to say ,"I don't believe in gold." Gold has now risen 50% since then and Roubini has been silent on the gold price. We believe that he was wrong regarding gold as he, like many in the western world, is simply not aware of the facts and the fundamentals driving the gold market. He also is not aware of gold’s diversification benefits. The fundamental drivers of the gold market are not appreciated by most and rapidly get forgotten by many due to the daily barrage of noise and fear emanating from the markets. The facts and charts below strongly suggest gold is not a bubble. However, even if it were a bubble, those calling gold a bubble should acknowledge the diversification benefits of owning gold and urge diversification rather than vainly trying to predict the future and the future movement of asset prices.
"A host of countries are struggling with appreciating currencies. We don’t have to be too concerned about that here in the United States, unfortunately as our purchasing power is declining on a global basis in dollars. However, the upshot, as we see with Switzerland with a rate cut to weaken its franc this morning (down only 1.20% as of this writing reversing earlier weakness), is that other regimes are struggling to adjust with global inflows. In Brazil, for instance, taxes and other currency control type maneuvers are increasingly being imposed to deter global safe haven monies from being to HOT for their own respective economies. This also has an auxiliary affect on U.S. bond market as Swissy, JAPAN, Brazil, others etc. increasingly prospectively have dollars purchased vs. their currencies TO INVEST, finding its way to our rate structure. Further, we get the sense that increasingly TARRIFFS and other nationalistic schemes could ensue in the spirit of countries protecting their domestic production/consumption/isolationism/nationalistic tendencies, which also comes at the expense of global economic activity, another benefit for bonds."
For the 3 or so people and vacuum tubes who actually care about the ADP employment report, whose NFP predictive fault rate is about 100%, the July number was a wash, printing at 114K or above expectations of 100K, while the June number was revised from 157K to 145K, or in other words a complete wash relative to expectations. On the other hand, the NFP will do whatever the BLS decides it wants it to do, just like the BEA will make the GDP number indicate whatever the US Department of Truth wants it to indicate. From the report: "Employment in the service-providing sector rose by 121,000 in July, marking 19 consecutive months of employment gains. Employment in the goods-producing sector fell by 7,000 in July, the second decline in three months. Manufacturing employment decreased 1,000 in July, which has seen growth in seven of the past nine months. Employment in the service-providing sector rose by 121,000 in July, marking 19 consecutive months of employment gains. Employment in the goods-producing sector fell by 7,000 in July, the second decline in three months. Manufacturing employment decreased 1,000 in July, which has seen growth in seven of the past nine months." As for the two critical occupations of construction and financials: there was nothing good there: "Employment in the construction industry declined 11,000 in July, the third consecutive monthly decline, bringing the total decrease in construction employment since its peak in January 2007 to 2,135,000. Employment in the financial services sector decreased 1,000 in July, bringing the total employment decrease for that same period to 687,000."
China Joins Russia in Blasting U.S. Borrowing After Debt Ceiling Agreement (Bloomberg)
Eurozone Moves to Prop Up Rescue Fund (FT)
SNB Cuts Rate to Zero to Counter Franc Strength (WSJ)
US Retreats from Brink of Debt Default (FT)
Strains Ease on Short-Term Credit Markets (Hilsenrath)
China’s Non-Manufacturing Industries Expanded in July, PMI Surveys Show (Bloomberg)
Moody's, Fitch Maintain U.S. Triple-A Rating (Reuters)
Britain’s ‘Weak’ Economy May Need Tax Cuts to Boost Demand, Institute Says (Bloomberg)
Japan Keeps Up Warnings on Yen After U.S. Debt Deal (Reuters)
No Double-Dip Seen in GDP (Shanghai Daily)
Today we get the completely irrelevant and "nothing but noise" ADP and the somewhat more relevant non-manufacturing ISM. Speaking of ADP, we wonder how many of the private layoffs this month will originate at ADP following years after years of wrong, wrong and more wrong data.
I will continue to watch European credit closely. It seems like the politicians are starting to talk up the last bailout plan and how they could increase it. This is about par for the course, since 2 weeks after the latest deal was announced, most of the market gains, and almost all of the good feelings inspired by it, have been given back. It would take a material change in Europe for me to switch out of my negative bias. We are probably due for some positive surprises from the data, and although I don't think the weakness is fully reflected in the market, we could bounce a little more. If either Europe or the data really disappoint, I will rush to reload my shorts, otherwise I will likely gradually reset shorts into any rally. I am shifting my focus to short more HY than stocks.
Those looking for an optimistic early look of this Friday's NFP (nobody cares about the ADP any longer) should probably avoid the Challenger lay off data just released. As Bloomberg summarizes, U.S. planned firings up 59% Y/y in July to 66,414, led by pharma, retail; largest number in 16 months. The number includes Merck’s plan to cut ~13k jobs. This 3rd consecutive increase; “seems to provide additional evidence” recovery has stalled, according to CEO John A. Challenger. New Jersey (where MRK is based) led states, with 13,330 cuts, followed by Michigan. Employers also announced plans to hire 10,706 after prior month’s 15,498: this is just barely better than the lowest number this year printed in May when just 10,248 businesses announced intention to hire, and well off the 72,581 highs in February. Bottom line: subzero NFP print coming?
As had been rumored over the past few weeks, the WSJ reports that Bank of America is actively pursuing a deal in which it would get "broad release" from legal claims against the lender (which if provisioned properly and in their full amount will destroy the bank) in exchange for cutting the amounts owed by borrowers. The bank is "discussing the proposal with state and federal officials who are prodding the country's biggest banks toward a multibillion-dollar deal to atone for foreclosure errors…As the discussions dragged on past the mid-June target set by U.S. officials, Bank of America began pressing officials for a speedy resolution, and it put forward its principal reduction proposal in one-on-one talks with state and federal officials. Meanwhile, negotiations continue with the banks as a group…Bank of America has told officials it wants protection against future litigation relating to mortgage servicing, said people familiar with the situation. In exchange it is willing to agree to a program in which troubled borrowers would have to prove financial distress to qualify for a writedown of the principal owed on their mortgage…The principal amount would have to be $1 million or less in certain geographic areas, one of these people said, and a reduction would apply to the bank's own mortgages and those its services for private investors…The more modifications the bank agrees to, the less it will pay in cash as part of an eventual settlement, one of these people said." So in summary, in order to protect itself from being destroyed in the courts, Bank of America is happy to spread the Bernanke Put love on all of its deadbeat clients, in the process further exacerbating the class warfare that is emerging to be the most successful legacy of the Obama administration.
The European Commission will issue a statement on the “situation in the financial markets” later today, spokeswoman Karolina Kottova told reporters in Brussels. We, for one, can't wait to hear how the bureaucrats will convince the bond vigilantes that all is well. We really can't.
Two words: default risk. And one more word: record. Below is the equivalent of another 1000 words.
There is that famous line from the movie Die Hard: "You ask me for miracles, I give you the FBI." Well, to all the gold bulls out there, "I give you the SNB." The Swiss central bank "unexpectedly" intervened to curb the record appreciation of the Swiss Franc which is having Swiss exporters seeing black and blue, by saying it would cut rates and by increasing the supply of francs to money markets. Specifically it lowered its target 3 month Libor to "as close to zero as possible" from 0.25%. The central bank also expanded banks' sight deposits to 80 billion Swiss Francs from 30 billion and said it will repurchase outstanding SNB bills. So while it did not directly go ahead and buy dollars it made it all too clear the SNB's appreciation days are over. Which leaves those seeing a non-fiat based refuge from all the insanity in Europe (which is currently raging at unseen before levels, and as a result the EU announced it would issue a statement on the situation in the markets this afternoon - expect nothing but more lies and BS) and the rest of the world, with just one option. Gold.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.