You know the drill: please point out on this chart, which shows the yearly change in average hourly earnings for all US private workers, just where is this so-called "recovery", which an additional $6 trillion in public debt, and 5 quantitative easing episodes, have allegedly created out of thin air. For those confused, like us, we bring attention to the fact that in the past two months we have seen the smallest Y/Y increase in avg hourly earnings. Ever.
- Hilsenrath Humor du jour: Bernanke Advocates Stronger Currencies (WSJ)
- Auditors want two more years for Greece on deficit (Spiegel)
- More bluster: Schaeuble Rules Out Greek Default as Samaras, Troika Bargain (Bloomberg)
- And even more bluster: De Jager Says Greece Needs to Make Fiscal Reforms Immediately (Bloomberg)
- Global Economy Distress 3.0 Looms as Emerging Markets Falter (Bloomberg)
- Central bank governor stresses inflation control (China Daily)
- Greek Yields Reach Post Debt-Swap Low as Bunds Slip on Schaeuble (Bloomberg)
- Roth and Shapely win Nobel prize for economics (Reuters)
- Fed chief rounds on stimulus critics (FT)
- IMF Board Sees Biggest Power Shift Reshuffle in Two Decades (Bloomberg)
- EU Girds for Summit as Nobel’s Glow Fades on Crisis Response (Bloomberg)
- Japan security environment tougher than ever (Reuters)
After starting the overnight trading at its lows, the EURUSD has once again seen the now traditional overnight levitation, this time with absolutely no economic news, in the process raising equity futures across the Atlantic, even as unfounded Chinese optimism for more liquidity has waned leading to the SHCOMP closing down 0.3%. Perhaps the most notable event in the quiet trading session so far has been the surge in 10 year Greek debt whose yield has tumbled to post-restructuring lows, driven by more and more hedge funds piling in to piggyback on Dan Loeb's recent public GGB purchase announcement (strength into which he has long since sold), and hopes that Greece will somehow see an Official Sector Initiative (OSI) to make recovery prospects for Private Investors more attractive: a capital impairment the ECB has said would happen only over its dead body. But in the new normal, facts and rules are for chumps, and only exist to be broken. More on this amusing stupidity here. Amusingly, this comes just as Greece’s Staikouras says the economy’s downward spiral is not over yet. But, again, who cares about fundamentals.
A new week begins. Here are the major global market-moving events to look forward to for both the next week, and for the remainder of October and November.
It feels different this time. It also 'looks' different this time in that our 'recovery' just is not bouncing back from its Friedman-ite 'plucked' level to rise phoenix-like back to Potential GDP - as it is 'supposed' to. In an excellent two-part animated series, Stanford's John 'Rule' Taylor and Russ Roberts discuss this recovery's differences along many variables including GDP trend reversion, percent of the population that is working and, economic growth overall. They then go on to discuss potential reasons for this sluggish recovery; the ongoing slump in construction employment, the effect of housing prices on saving and spending decisions by households, and this recovery's having been preceded by a financial crisis. Taylor rejects these arguments, arguing instead that the sluggish recovery can be explained by poor economic policy decisions made by the Bush and the Obama administrations. Simple, clear, 20 minutes of Sunday evening preparation for the week.
A few weeks ago we noted Bundesbank president and ECB governing council member Jens Weidmann's analogy between the Faustian bargain offered by a money-printing Mephistopheles in Goethe's classic prose and today's ubiquitous oh-so-tempting short-term solution to everyone's pain. His full speech (below), while a little dramatic, should indeed strike fear into many with its clarity. The financial power of a central bank is unlimited in principle; it does not have to acquire beforehand the money it lends or uses for payments. Many believe Goethe was portraying the modern economy with its creation of paper money as a continuation of alchemy by other means. While traditional alchemists attempted to turn lead into gold, in the modern economy, paper was made into money. Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish. Of course, Weidmann concludes, it is important that central bankers, who are in charge of a public good – in this case, stable money – bolster public confidence by explaining their policies. The best protection against temptation in monetary policy is an enlightened and stability-oriented society. [and Gold!]
"Liquidity trap" was a term coined by John Maynard Keynes in the aftermath of the Great Depression. He argued that when yields are low enough, expanding money supply won't stimulate growth because bonds and cash are already near-equivalents when bonds pay (almost) no interest. Some, like Citi's credit strategy team, would say that it is a pretty apt description of the state of play these days. To their minds (and ours), there is very little doubt that central banks have played an absolutely crucial role in propping up asset prices in recent years, Why have markets responded so resolutely when growth hasn't? The answer, we think, is that in their attempts to free markets from the liquidity trap, central banks are ensnaring markets in what we'll call a "liquidity lure". That lure is three pronged... but tail risks are bound to re-appear and from this position, there is no painless escape.
EURUSD meandered for the first few hours this afternoon but as Asia opens EUR (and AUD) weakness, USD strength and risk-off has come to pass. While not earth-shatteringly devastating, S&P 500 futures are trading down 5 points (8 points from opening high this evening) - their lowest in a month - and testing critical support from the Draghi 'believe' speech spike. AUD weakness is especially notable after opening rather strong (swing from a 0.3% gain to a 0.3% loss now against the USD). Treasuries are still waking up (down 1bps).
We know its 'early' and we should not be judging yet another QE-book by its front-running cover; but the following four charts might give all those hopeful that this time its different some pause for thought on the Fed's actions being anything other than by the banks, for the banks, and of the banks. With refi activity's burst fading, retail mortgage rates having not budged, residential delinquencies rising once again, and average 'approved mortgage loan' FICO score at 750, it would seem the Fed could throw another cajillion dollars at the banks and reserves would just inflate further (along with everything we eat, use, and need), leaving the economy muddling through at best.
The percentage of Americans who reside in the lowest income quintile and move up either to the middle quintile or higher has been in decline over the past three decades. This statistic should be alarming as it is indicative of stagnation within an economy that supposedly fosters the entrepreneurial spirit. In a world of scarcity, opportunity for a better life is an ever-present reality. In the marketplace, success is achieved by making others better off. Achievement for the state means trampling on the rights of others. One embodies the elements of peace and cooperation which give way to fostering incalculable opportunities to thrive. The other results in a perpetual state of conflict between those who “pay the taxes” and “those who are the recipients of their proceeds.” The state creates opportunity for latter and decimates it for the former. The only way to set free the innovative minds who build wealth and opportunity is to scale back this exploitive state of affairs.
The fact that the major credit indices have had to resort to 'imaginary credit' in order to generate an actionable market is perhaps the final nail in the coffin of the single-name CDS market in this cycle. An artificially low spread environment, forced their by massive technical flows thanks to central-bankers' financial repression has removed a natural buyer- and seller- from the market - reducing liquidity; and combined with Dodd-Frank and more regulation (higher capital reqs), dealers are also forced to delever risk books (reducing liquidity). But, there is one glaring reason why the single-name CDS market is dying; extremely high correlation. As Barclays notes, in a market where investors’ ears are, more than ever, finely tuned to the statements of politicians and central banks and the tail outcomes for the market, it makes sense for correlation to be high – at this stage, there should be little distinction between individual names – trading the level of systemic risk premia is the focus. And sure enough, index (systemic) volumes is rising as single-name (idiosyncratic risk) trading volumes and exposures are fading fast. So what brings it back?
On a regular basis we are placated by commercials to satisfy our craving to know which bathroom tissue is the most absorbent; debates 'infomercials' assuaging our fears over which vice-presidential candidate has the best dentist; and reality-shows that comfort our 'at least I am not as bad as...' need; there is an inescapable reality occurring right under our propagandized nose (as we noted here). Economic Reason has gathered together the Top 15 'reality' economic documentaries - so turn-on, tune-in, and drop-out of the mainstream for a few hours...
The truth of the matter is that there is no such thing as a free lunch. The phony prosperity of monetary inflation is entirely illusory. You cannot get something for nothing. "So, whenever you see a criticism of austerity as fostering recession, you are reading a Keynesian. He may not call himself a Keynesian, but in this case, he is delusional. Only Keynesianism teaches that reduced national government spending (“austerity”) in a nation whose national government spends 40% of its GDP (Greece) will produce a recession." Keynesian economic pundits advance many fallacious arguments about government spending. Chief among them is the egregious notion that mortgaging your posterity with debt and deficits is somehow “virtuous.”
Abe Gulkowitz, publisher of the periodic chart masterpiece The Punch Line, has released his latest macro economic update full of 17 pages of charts and news blurbs indicating the true state of the economy in an easily digestible format. While it will hardly come as a surprise to most, the prevalent chart direction is one from the top left to the bottom right in practically every macro vertical, despite the now endless monetary intervention attempts by all central developed world central banks.