To answer the question, do high energy prices cause recessions, I would say with full respect to uncertainty and causality, yes. Eventually, however, the energy transition away from fossil fuels will gather enough momentum that we will interpret high energy prices differently: we will say they forced (helpfully) a necessary transition. But as we are so early in any global transition to alternatives, it would be better for economists, policy makers, and business to consider the Douglas Adams quote that’s in the header of this essay. Trying to prove that black is white may be a noble effort -- in the fullness of epistemology and causality -- but in the short term it could get you run over in a crosswalk. We face a more immediate question: is the global economy headed back into recession in 2012? Almost certainly, I think.
While not quite a "jarring" as the Saxo Bank "outrageous predictions", Bank of America has also put together yet another list of "other" risks for 2012, which as BofA's Martin Mauro says, "have persisted or become worse over the course of the year, but have escaped market attention due to the spotlight on Europe." The risks are as follows: i) Hard landing in China; ii) Currency wars (competitive currency devaluation); iii) Middle East oil supply shock and iv) Municipal default fears. The only thing we would add is that these are not really risks, as the are all developing processes in some stage of deterioration. And, as usually happens, they will likely all strike at the same time, just when the world is most vulnerable, likely minutes after Greece announces it has left the Eurozone, and the Euro is in legal and structural limbo. But luckily we have at least a few weeks to months before that happens. So here is Bank of America's predictive prowess in all its rhetorical glory.
Three years ago, Congress balked at the mere thought of giving Hank Paulson's (so lovingly portrayed in Andrew Ross Sorkin's straight to HBO Too Big To Fail) proposed TARP, which came in an "exhaustive" 3 page term sheet with limited bailout powers however with virtually unlimited waivers and supervision, and voted it down leading to one of the biggest market collapses in history. Curiously, a more careful look through Europe's €500 billion (oddly enough almost the same size as America's $700 billion TARP) European Stability Mechanism or ESM, reveals that in preparing the terms and conditions of the ESM, Europe may have laid precisely the same Easter Egg that Paulson did with TARP, but failed. Because at its core, the ESM is like a TARP... on steroids. It is a potentially unlimited liquidity conduit (only contingent on how much cash Germany wants to allocate to it - which in turn means how much cash Germany is willing to let the ECB print), with no supervisory checks and balances embedded, and even worse with no explicit or implicit liability clauses - in essence it is a carte blanche for its owners to do as they see fit without any form of regulation. As the following brief but must watch video explains, the ESM "is an organization that can sue us, but is immune from any forms of prosecution and whose managers enjoy the same immunity; there are no independent reviewers and no existing laws apply; governments can not take action against it? Europe's national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU? A Europe devoid of sovereign democracies?" Ironically even America's feeble and corrupt Congress stopped a version of TARP that demanded far less from the taxpaying citizens. Yet somehow, Europe has completely let this one slip by. Is it simply to continue the illusion of the insolvent Walfare State for a continent habituated by zombifying socialism, or is Europe by now just too afraid and too tired to say anything against its eurocrat class? One thing is certain: when the people voluntarily give up on democracy, out of sheer laziness or any other reason, the historical outcomes are always all too tragic.
It’s clear that the BRICS cannot be the engine room of global economic growth. Meanwhile, Europe is a complete basket case, and the euro is looking increasingly as though it will be consigned to the dustbin of history. Across the pond, the US is trying to put a brave face on its jobless recovery whilst kicking a $15 trillion debt bomb down the road. Anyone who steps back and looks at the big picture has -got- to recognize the absurdity of this situation. Now… here’s the good news: you and I have a huge advantage. Citi, Deutsche Bank, Unicredit, etc. are sitting on incalculable losses, unrealistic obligations, and worthless paper that will destroy their organizations. They’ve been accumulating these for years and have no way of avoiding the endgame. We do. We, on the other hand, are little guys. If you and I want to cut our exposure to these silly pieces of paper that governments pass off as currency, we can do that easily. We can easily do that by buying gold or productive land overseas. Bank of America, on the other hand, has to hold Tim Geithner’s dirty laundry.
Gallup, which unlike the BLS, does not fudge, Birth/Die, or seasonally adjust its data, has just released its most recent (un)employment data. And it's not pretty: for all those hoping that the Labor Participation Rate fudge that managed to stun the world a few weeks ago with a major drop in the November jobless rate, don't hold your breath. Gallup which constantly pools 30,000 people on a weekly basis, has found that for the past 4 weeks, both underemployment and unemployment have risen for 4 weeks in a row. And while the number of US workers "working part time and wanting full-time work" one of the traditional short cuts to boosting US jobs has risen to almost a 2 year high, it is the Job Creation Index in December which plunged in the last week, confirming that the Initial Claims data out of the BLS has been spurious and is likely to revert back over 400k on short notice. In summary, here is how Gallup debunks the BLS' propganda: "The sharp drop in the government-reported unemployment rate for November and the sharp drop in jobless claims during the most recent reporting week have combined to create the perception that the job market may be improving. Economists are wondering whether this means the economy is stronger than previously estimated. Political observers are wondering how fast and how far the unemployment rate needs to fall to significantly improve the president's re-election prospects. In contrast, Gallup's data suggest little improvement in the jobs situation. December unemployment is up slightly on an unadjusted basis. In fact, the government is likely to report essentially no change in the unemployment rate when it issues its report on December unemployment in the first week of 2012. Of course, this assumes that the labor force doesn't continue to shrink at so rapid a pace that it drives down the unemployment rate, as it did last month. Gallup's most recent weekly job creation numbers also suggest little improvement in the jobs situation. As a result, it may be wise to exercise caution in interpreting the drop in the government's most recent jobless claims numbers." Or, less diplomatically, the BLS is lying like a drunken sailor just as the economy is about to turn. And if BAC continues languishing under $5, it will turn very hard.
As definitive evidence just how fucked up this entire market is, here is what happens to the ES the second the infinite BAC Bid at $5.00 finally gets taken out. This is the ESH2. That's right - the entire market moved tens billions in market cap because the Plunge Protection Team just failed at protecting the "precious" $5.00 level.
Europe Is Now Officially Bazooko's Circus - Italy To Provide €23.5 Billion In IMF Cash To Bailout ItalySubmitted by Tyler Durden on 12/19/2011 - 16:04
The EU was already embarrassed into releasing a press release that it could procure €150 billion in Eurozone contributions to the IMF rescue, now that the UK is out of the picture and the December 9 Eurosummit agreed upon total of €200 billion including non-Eurozone contributors (mostly the UK with €30.9 billion) has been "adjusted." Now we find that the rabbit hole goes even deeper into Bazooko's Circus because according to a just released update, of the remaining meager €150 billion in funding, Germany will be responsible for €41.5 bn, France at €31.4 billion, and Italy will need to provide €23.5 billion. To, you know, bailout Italy. #Ref!
Forget the Santa rally, and pack up on parachutes. That is the advice of Bank of America's chief technician Mary Ann Bartels who in a note today writes: "Test of the October lows is underway – Santa is not coming - Last week the S&P 500 fell below its 50-day moving average which is the new level to watch – 1228. A failure to move above and hold the 50-day moving average confirms to us that we have already begun to enter the phase of testing the October lows near 1100-1074. This pattern is becoming eerily similar to 2008 into 2009. A base building process has been underway since August but we have maintained the belief that the lows still need to be tested and undercuts to 985- 935 are possible (50% probability) as part of this process. We expect a new cyclical bull market to emerge near 2Q12. Time and patience are needed." Which is to be expected: after all Bank of America, which is about to have a $4 handle once the Maginot Fortress of a near infinite number of bids at $5.00 is soaked up, will be the first to go the way of the dodo unless the market cracks and the Fed has political cover for QE3. Which is precisely what we have been saying for a year - namely that the market has to stop discounting (events such as QE3, 4 and so on) and allow itself to plunge in order to unleash all these favorable outcomes. And yet it refuses to as someone always start lifting the offer on every big dip in following with the now suicidal (for many banks) practices of BTFD. Oh well, when you have 24 year olds like this kid, who somehow made top billing in Forbes 30 under 30, defining market structure, we are long past overdue for the mother of all market crashes.
Following last week's stellar auctions, this week's issuance trio has started off with a whimper. While Tim Geithner managed to sell $35 billion in 2 year notes today at a near record low rate of 0.24%, the details were very unimpressive. Because not only did the Bid To Cover decline from last month's record 4.07 to a modest 3.45, in line with the last 12 auction average, it was the precipitous drop in Indirect Bidding, aka foreign interest, that was most notable: at just 21.65% this was the lowest Indirect Take Down since February of 2008. Which means Dealers had to take on a majority of the auction. Which they did at 63.66% of the total. Naturally, this will not be a surprise to many: after all according to the latest TIC data, Chinese bond holdings tumbled in October to the lowest in a year, Russian holdings collapsed, and courtesy of the Fed's weekly custodial account updates, we know that foreigners have been selling tens of billions in US paper in the past several weeks. Slowly, the US is becoming the same ponzi scheme that it accuses Europe of being whereby Dealers buy up paper, and immediately repo it back to the Fed and other conduits. In other words, once the European repo market freeze crosses the Atlantic, then it will get very interesting very fast.
Scouring through the news screens, we nearly fell of the proverbial chair after reading the following Bloomberg headline paraphrasing a Nikkei report: "Japan May Buy Chinese Govt Bonds, Nikkei Says....Japan is seeking to diversify forex funds and strengthen economic cooperation with China by helping make yuan more international. Japan may purchase a total of $10b worth in stages." Naturally, there are two interpretations: the ugly one is that Japan, the 3rd largest holder of US debt after the Fed and China, is considering gradually abandoning the dollar or, as the term is better known in polite circles "diversifying." The second one, and the far more amusing one, is that Japan will somehow bail out China by providing the much needed credit money that will translate into GDP (at a sub 100% ratio of course, because as is well known by now the world has reached the stage where one unit of debt generates less than one unit of incremental growth). The reason why this is amusing is because as the chart below shows, Japan's debt is now a hair's width below ¥ 1.... quadrillion. And yes, ignore the fact that the demographic squeeze in Japan is already forcing households to proceeds to monetize the largely domestically held debt. So, we wonder, where will the JGB debt curve go next in the deflationary basketcase that is Japan? As for where it has been, see below.
Following the sudden and surprising death of North Korea's "Dear Leader", many are wondering what this means for risk, especially in the Pacific rim. In other words, was last night's selloff warranted? For what it's worth, here is Goldman's Goohoon Kwon with a take of how the institutional audience is trying to comfort itself that all shall be well, and that power vacuums are all inherently rational and perfectly predictable. Just ask Egypt. And Robespierre.
Paul Mylchreest, author of the Thunder Road, releases his much anticipated latest report, and it's a doozy: "2012: Dear Portfolio Manager, you are leaving the capitalist sector and heading into a full-spectrum crisis." He continues: "You were to hear a report on the world crisis. That is what you are going to hear. For twelve years you have been asking: Who is John Galt? This is John Galt speaking….Now it’s getting serious. 2012 will be a year to remember as the globalist agenda comes into focus amidst economic and geo-political crises: The titles of the last two Thunder Road Reports were prefaced with “Helter Skelter” - “The Illusion of Market Stability” followed by “Gentlemen Start Your Engines”. Sadly, the Helter Skelter I was writing about – the second part of the Great Financial Crisis is in progress and I’m expecting it to come to a head next year (2013 if we’re very lucky). The only question is WHAT brings it to a head? We’re not short of possible causes – a bank failure, sovereign default, Eurozone tipping into recession or the Middle East. Despite all the evidence to the contrary, like overwhelming debt levels and insolvent banks/sovereigns, the consensus seems convinced that we can “muddle through”. Dow Theory veteran, Richard Russell, explained it best: “In the coming two or three years we will be going through unprecedented situations beyond the understanding of most analysts.”"