As we approached the debt-ceiling debacle last year, there was much wailing and gnashing of teeth among talking heads and portfolio managers and indeed the latter actually started to put their money where there mouth was - i.e. they sold/reduced exposure to US equities. A year or so later and the fiscal cliff and debt-ceiling SNAFU is once again upon us but this time, while sentiment is just as negative, real speculative positioning is at multi-year record high longs. It would seem to us that all those holding out for a hero in Congress and some compromise to provide a liftathon in stocks are already all-in (as the two charts below indicate oh so clearly). One can only hope they are not disappointed as the 'money on the sidelines' appears to be more exposed than ever and unlike last year's massive net short positioning, there is no more squeeze ammunition left for the next leg.
If the US Dollar was not the world’s reserve currency and US Treasury IOUs were not the world’s preferred holding of reserves behind their own currencies and financial systems, the Treasury’s debt limit would have been done away with a long time ago. But the US Dollar IS the world’s reserve currency so the debt of the US government IS the underpinnings of the global financial system. That being the case, the system stands or falls on the continuing perception that Treasury debt paper is a viable form of “reserve” and that the debt of the US government will NEVER become “unsustainable”. An announcement by the US government that it was getting rid of any “limits” to its debt-generating capacity would put that perception at risk - quite possibly at grave risk. That is the reason why the debt limit remains - even though it has not been an impediment to ever increasing Treasury indebtedness for well over half a century. It is easy to laugh at the seeming absurdity of a Treasury “debt limit” and many people do. Take it away, however, and the fiction that sovereign debt is “sustainable” - let alone any “confidence” in its eventual repayment - would be MUCH harder to maintain. Absurdities abound in history, and the more abject the absurdity, the more tenacious it tends to be. Today, a US Treasury debt “limit” is a very necessary absurdity.
In “The Biggest Myth About the Fed,” David Beckworth, an assistant professor of economics at Western Kentucky University, suggests that the pessimists are wrong to be concerned about what Mr. Bernanke and Co. are up to. The notion that current benign market conditions are a reason for optimism sums up just how out of touch with reality most academic economists (and other alleged experts, including journalists-cum-forecasters who parrot this nonsense) are.
By this sort of logic:
- Mid-2005 was the right time to be optimistic on housing
- January-2007 was the right time to be optimistic on the banking sector
- The spring of 2007 was the right time to be optimistic on credit markets
- The fall of 2007 was the right time to be optimistic on global equity markets
- Mid-2008 was the right time to be optimistic on commodities
- This past September was the right time to be optimistic on technology stocks
Of course, we know how those all worked out (hint: not well).
Catalonia's exit polls confirm over two-thirds of votes will go to pro-independence parties that will likely push for a referendum to break away from Spain, which the central government will challenge as unconstitutional. The more-populous-than-Denmark region is home to car factories and banks that generate one-fifth of Spain's economic wealth (larger than Portugal's). The incumbent, Artur Mas, has converted to a more radical separatist bias since huge street demonstrations in September showed the will of the people. As Reuters notes, growing Catalan separatism is a huge challenge for Prime Minister Mariano Rajoy, who is trying to bring down painfully high borrowing costs by persuading investors of Spain's fiscal and political stability. Critically, the exit polls suggest the dominance of separatist parties will mean a referendum for secession within two years - leaving us asking the simple question: who will buy any Spanish debt, even fully backstopped by the ECB, if there is a real risk that in under two years, 20% of Spanish GDP will simply pick up and leave.
Egyptian stocks cliff-dived by their most since the Arab Spring in January 2011 as Morsi's reach-for-omnipotence sends concerned ripples through the nation that they have replaced 'military fascism' with so-called 'islamofascism'. Tensions are rising once again in Tahrir Square, but as Russia Today notes in this clip, the new regime is somewhat more heavy-handed than the previous one in its control of protesters. Critically, the Musilm Brotherhood's opposition forces, who have been quite divided recently, are joining to fight the common enemy as clashes between pro-Morsi and anti-Morsi forces are erupting. Perhaps just as worrisome as the social unrest is the fact that Egypt's Stock Exchange Director Said Hisham Tawfiq fears "Egypt announces bankruptcy within 3 months in the case of the continuation of the current situation," though we note Egypt CDS are near 16-month lows.
Two Fridays ago, just as AAPL was in danger of plunging below the absolute last support level of $500 after which freefall for it and the entire market begins, a truly unexpected deus ex machina appeared for those still clinging to long stock positions: politicians, in this case John Boehner and Nancy Pelosi, who held a press conference in which they defined the recently launched "Fiscal Cliff" talks as "constructive." In reality, this appearance was nothing but a photo opportunity for talking heads (as explained in "Risk Ramp on Boehner Banality"), and one which as Nancy Pelosi herself admitted later, served simply to halt what then looked like an assured free fall in the markets. Since then the ongoing rally in stocks and the EURUSD has been predicated on the "constructiveness" of the talks actually being real. Judging by the latest update from Reuters, Goldman will likely be right, if only in the short term. As Reuters admits, " U.S. lawmakers have made little progress in the last 10 days toward a compromise to avoid the harsh tax increases and government spending cuts scheduled for Jan. 1, a senior Democratic senator said on Sunday." That this update comes after the "big" market swoon into the recent lows from November 16, is certainly cause for alarm, because it means that at least one more violent market whipsaw to the downside will have to take place before there is any cliff progress to report.
With all bad news on the tape now having a suitable "explanation", be it a prior president, a tropical storm, the weather being too hot, the weather being too cold, the weather being just right, but never, ever someone actually taking blame for the fact that life is what happens when corporate CEOs (and sovereign presidents) are busy making "priced to perfection" plans. So it is with what is now a confirmed flop of a Black Friday, which according to ShopperTrak saw sales drop by nearly 2% to $11.2 from 2011, which in turn was a 6.6% gain over 2010 (and would be revised to far lower once all the refunds and exchanges to cash took place in the two weeks later). This occurred despite a 3.5% increase in retail foot traffic to 307.7 million store visits. The nominal drop in retail sales also occurred despite a nearly 1% increase in the total US population over last Thanksgiving, and a 2% Y/Y inflation. But fear not: the ad hoc excuse for this "surprising" loss in purchasing power is already handy: it is all Black Thursday's fault, or the latest idiotic attempt by retailers to cannibalize their own future sales by diluting the exclusivity of Black Friday, and which will force all retailers to follow the sovereigns in a race to the bottom, as soon every day will be the equivalent of Black Friday. But at least retailers have another 364 years worth of excuses for the conceivable future to excuse any and all store weakness. Next year: it's all Black Wednesday's fault.
For those still unsure why Spain PM Mariano Rajoy is fighting tooth and nail to avoid requesting an official activation of the ECB's SMP reincarnation: the OMT, which is a conditional bond buying program supposedly pari passu with the private market (but not really) here is an explanation. While Spain already requested, and received, a bailout of its banking system, which according to eronous analyses by firms such as Oliver Wyman will be at most €60 billion, and which according to others (such as us) will eventually end up costing orders of magnitude more once the green light for extortion is open for the New Normal modified vigilantes, said bailout would come with full conditions. Today we learn what a major condition of the first bank bailout tranche disbursement will be. It should come as no surprise to our readers- recall that in May when discussing the absolute lack of any actual austerity implementation we said, that "In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts?" It seems someone at the Troika was paying attention, because as El Pais reported, European condition number 1 will be an epic bloodbath of pink slips come Monday, with Spanish banks expected to fire thousands of bank workers immediately and shut down 1,000 branches.
Jerry O'Neil, six-term GOP state representative in Montana, has asked to receive his salary (which at $10.33 per hour is around $1800 per month) in gold or silver. The long-standing legislator was driven to this decision by his constituents' concerns about the nation's massive debt-load and fears of our country's collapse as "only so many dollars can be printed before they have no value." The long-time Ron Paul supporter, according to Time, cited Article 1, Section 10 of the US Constitution, which says, in part, that "No State shall... make any Thing but gold and silver Coin a Tender in Payment of Debts." State administrators have denied his request and added that "a bill could be introduced to accomplish this result." O'Neil, like many other, believes "The Keynesian era of financing government with debt appears to be close to its demise."
Following this week's 'failed' Eurogroup meeting, leaked details suggest a debt-buyback is becoming the corner-piece of the 'new' Troika deal with Greece. The leaking of details (and anticipation by the market) has driven GGB prices up and reduced much of the benefit of the buyback 'boondoggle' but as Barclays notes, "even if the debt buyback enables the IMF and EU leaders to come to an agreement, leading to a Greek resolution in the near term, in the medium-to-long-term Greek debt is not sustainable on realistic macroeconomic assumptions without notable outright haircuts on official EU loans to Greece. Therefore, a successful debt buyback might resolve the Greek debt sustainability issue on paper in the troika report but it will most likely not resolve it in investors’ minds." While there are 'optical' advantages to the buyback, the four main disadvantages outlined below should be irksome to the Greeks (e.g. creditor benfitting over growth-empowering) - which is critical since, as ekathermini notes, a senior finance minister commented "God forbid we should not be close to an agreement on Monday."
While the general consensus from the media, and the majority of analysts, is that the U.S. economy will avoid a recession - there have been numerous indicators that have continued to point to deterioration in the economic fabric. Most recently industrial production in the U.S. dropped sharply, along with capacity utilization rates, due to the growing recession in Europe, and slowdown in China, which has impacted exports from domestic manufacturers. While it is not popular within the media, or blogosphere, to point out economic concerns but rather why markets are going to engage in a continued bull market - the simple reality is that by the time the NBER announces an official recession it will be far to late for investors to minimize the damage. The leading-to-lagging ratio continues to point to an economy that has very little, if any, actual momentum which leaves it very susceptible to exogenous shocks.
Back in March, we first presented a rather stunning finding: by 2020 75% of Americans will be obese or overweight. This was promptly followed up with a post showing just how it is transpired that America became the fattest nation in the world in less than 20 years. What however may not be known, is that America's fatness epidemic is not localized to the country that gave the world the McDonalds burger (and the McMansion): it really is a fat, fat world, after all.
Ireland is continually held up as the poster-child for austerity-driven 'aid' and how the European Union can successfully manage an economy through a depression with no real pain for bankers. Unfortunately, as we have pointed out previously, judging a nation's progress on the back of its bond yields (when liquidity is negligible and the mighty hand of ECB-collateral-reacharound is upon us) should become anathema from any serious analysis. The sad truth, specific to Ireland in this case, is the relative size and importance of EU subsidies (and the EU budgetary allocation) mean that assumptions of current account surplus going forward (the much-needed elixir to sustain the gross debt load the nation's taxpayers now are buried under thanks to banker-transfers) leave Ireland's debt sustainability greatly in question.
For the entire 8 day duration of Operation Pillar of Defense, there was one major geopolitical player who had been largely quiet and certainly absent from the scene: the same player whose unflinching position over the Syria conflict has so far prevented any intervention in the civil war torn country: Russia. The same Russia which has a military base in the Syrian port city of Tarsus, and thus in its own eyes, a very substantial "national interest" role to play in the middle east, one that is certainly opposing that of the US and the pro-NATO forces, a tension that will surely boil to the surface now that war between Iran and Israel is always at most "hours away" depending on who is asked, and which one day will be more than just a war of words. Today, Russia decided that it had kept quiet for too long over the Gaza conflict, with Voice of Russia reporting, courtesy of Al Arabiya, that Russian warships anchored off the eastern coast of the Mediterranean Sea will be put on military alertness should the conflict in Gaza escalate and brought in proximity, according Russian Navy Command source on Friday.
When it comes to firmly established, currency-for-commodity, self reinforcing systems in the past century of human history, nothing comes close to the petrodollar: it is safe to say that few things have shaped the face of the modern world and defined the reserve currency as much as the $2.3 trillion/year energy exports denominated exclusively in US dollars (although recent confirmations of previously inconceivable exclusions such as Turkey's oil-for-gold trade with Iran are increasingly putting the petrodollar status quo under the microscope). But that is the past, and with rapid changes in modern technology and extraction efficiency, leading to such offshoots are renewable and shale, the days of the petrodollar "as defined" may be over. So what new trade regime may be the dominant one for the next several decades? According to some, for now mostly overheard whispering in the hallways, the primary commodity imbalance that will shape the face of global trade in the coming years is not that of energy, but that of food, driven by constantly rising food prices due to a fragmented supply-side unable to catch up with increasing demand, one in which China will play a dominant role but not due to its commodity extraction and/or processing supremacy, but the contrary: due to its soaring deficit for agricultural products, and in which such legacy trade deficit culprits as the US will suddenly enjoy a huge advantage in both trade and geopolitical terms. Coming soon: the agri-dollar.