While we are not sure if this is the biggest weekly outflow from mutual funds (the weeks after the Lehman bankruptcy potentially being larger), we do know that the week ending August 10 saw a near-record amount of redemptions from domestic equity mutual funds, amounting to an unprecedented $23.5 billion. This brings the total for August along to $34 billion: just $13 billion in outflows more and this will be the single biggest outflow month in ICI history. This is obviously a problem because as of the end of June mutual funds once again held a record low just 3.4% in cash. And the outflow was not limited to just US stocks: investors pulled cash from every single asset class for the third week in a row, including foreign stocks, bonds and munis. In fact, in the last three weeks a total of $67 billion has been withdrawan across all asset classes. Going back just to US stocks, this is the 16th consecutive week of outflows since April 2011, amounting to $87 billion in total outflows, and also about $172 billion in domestic equity fund outflows since the beginning of 2010. One thing is certain: there is no way that mutual funds have survived this veritable stock market run unscathed. We expect to find just which funds have blown up as a result in the next few weeks as the news of wholesale terminations can no longer be contained.
S&P Slashes US Growth Forecast, Says Current Crisis Is Worse Than 2008 As US At "Risk Of Default", Ridicules "Transitory"Submitted by Tyler Durden on 08/17/2011 - 12:37
First they cut the rating of the US, then the went and downgraded Google, now S&P is going for the "treason trifecta" by just releasing a report which literally takes the US to the toolshed. Among many other things, the rating agency just cut US growth for the next 3 years. To wit: "While July data finally showed a slight improvement in the U.S. economy, it's not enough to support expectations that the second half of the year will see a bounce in growth. We now expect to see an even slower recovery than the half-speed we earlier expected. We now expect just 1.9% growth in the third quarter and 1.8% in the fourth, to bring 2011 calendar year growth closer to 1.7% instead of 2.4% we earlier expected. We also downwardly revised growth expectations for 2012 and 2013, as a more drawn-out recovery is factored into our forecast." We wonder how soon before the realization that the US is in fact contracting will force S&P to downgrade America even further, a move which will force Moodys and Fitch to come up with a AAAA rating for the US in order to keep the weighted average rating at current levels. It gets even worse though as S&P now openly brings the 2008 analogy: "The markets' violent swings in early August resurrected fears of the market meltdown, such as the one in 2008 when Lehman Brothers went under and Reserve Fund broke the buck. Currently, the crisis is considered to be much more severe, with U.S. sovereign debt at risk of default. The low Treasury yields indicated that markets were expecting Congress to come to its senses and reach a deal. However, the wait and the last-minute deal, which left a lot to be desired, only increased worries that the government will do more harm than good. Confidence in the recovery and in U.S. policymaking has hit new lows. After U.S. sovereign debt lost its triple-A status and financial markets unwound, consumer confidence hit a 31-year low and manufacturing sentiment readings contracted." And the kicker: S&P, yes S&P, makes fun of the Fed, and specifically the "transitory" nature of the economic collapse: "Continued weak growth after sharply downward GDP revisions has made the "temporary argument" a less plausible explanation for the slew of bad news for the first half of the year. At least the GDP revisions make the persistently high unemployment rate make more sense. But the revised data also indicate a much weaker outlook than we previously expected. As the boosts from rebuilding inventories and fiscal stimulus unwound, consumer spending and housing couldn't cover the hole, because the former is still working off excess debts and the latter excess supply. The recovery comprised a first-half average growth of just 0.8%." And that is how you respond to endless scapegoating that now blames the S&P for the collapse. Look for S&P to make the FBI's most wanted list very shortly.
A growing number of individuals believe our economic and societal status quo is defined by unsustainable addiction to cheap oil and ever increasing debt. With that viewpoint, it's hard not to see a hard takedown of our national standard of living in the future. Even harder to answer is: what do you do about it? Charles Hugh Smith, proprietor of the esteemed weblog OfTwoMinds.com, sees the path to future prosperity in removing capital from the Wall Street machine and investing it into local enterprise within the community in which you live. "Enterprise is completely possible in an era of declining resource consumption. In other words, just because we have to use less, doesn’t mean that there is no opportunity for investing in enterprise. I think enterprise and investing in fact, are the solution. And if we withdraw our money from Wall Street and put it to use in our own communities, to the benefit of our own income streams, then I think that things happen."... "Being dependent on corporate America and a job a hundred miles away - that’s a really fragile, vulnerable lifestyle. So if you can relocalize your income streams and your enterprises and live close to work and school, you’re already tremendously more resilient and have a much more sustainable household regardless of what happens."
As we predicted earlier, following the disappointing announcement out of the SNB overnight, now it is the Swiss government's turn to make it clear that nothing good will happen for USDCHF and EUCHF longs following a 9 sigma move higher in the past week. As a result, the EURCHF promptly took out another 200 pips in the past hour and tumbled as soon as Switzerland's Widmer-Schlumpf said that the Franc is a matter for the SNB, not a matter for politicians, and that it is up to the SNB to decide on the CHF target, throwing the ball of responsibility back in Philipp's court, and making sure that all the CHF pairs retest all time lows in the very near future. Because, just as eurobonds are the last ditch option for the eurozone, so a CHF peg is the last option for the SNB before ongoing pressures in the eurozone push the CHF to parity with the EUR, in the process bankrupting the CHF, and destroying the country's export sector.
A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.
Courtesy of The Chart Store, here is more evidence that the Fed just pushed the day of reckoning forward a few months: the first charts the current NASDAQ market plotted over the Great Depression Dow, and the second plots the current NASDAQ over the post-1989 Nikkei market. The similarity of the two Bear market progressions is uncanny. As Ron Greiss of the Chart Store notes on the chart, "Did QE2 prevent nature from pursuing its intended course?" Judging by the recent "unexpected" cascade in stock valuations, it seems the Fed has yet to learn that you can't fool Mother Nature for very long:
Due to tangential questions arising out of a parallel twitter-based conversation, we have been swamped with requests to demonstrate the performance of gold versus US Treasurys since the "great moderation" or the period of time benefiting the most from both the end of the Bretton-Woods system, or infinite fiat dilution, and the Volcker counter-inflationary protocols (infinite printing ot Treasury puts among others) which has led many to fallaciously believe the thought experiment (hopefully just that) that an infinity in outstanding US debt would mean zero in prevailing US interest rate. Anyway, here is the result.
Yesterday we had some choice words indicating why fiscal stimulus in a period of unprecedented monetary intervention (such as now) is about the worst thing that can happen to America, when not even 8 months ago Goldman based its completely wrong and now discredited call that the $100 billion payroll tax "stimulus" would lead to 4.5% 2011 GDP (since retracted). Today, we provide some additional information on just how Obama plans to further stimulate the economy by sacrificing the middle class at the alter of the "this time it's different" gods. From Bloomberg: "President Barack Obama plans to ask Congress for billions of dollars in fresh spending to boost the economy and reduce unemployment, with a new focus on helping the long-term unemployed, an administration official said." But as pointed out the humor is in the post script: "The president also will call for long-term cuts beyond the $1.5 trillion that Congress has charged a 12-member bipartisan “super-committee” of lawmakers to trim by late November, the official said." Preferably cuts that actually affect the US after 2016 when Obama's second term expires. Or even 2013, because according to the mainstream media Perry is now gaining, and who is that Ron Paul fellow?
So the conventional herd wisdom is that following last week's near implosion, Europe is now suddenly supposed to be fixed? Perhaps. Perhaps not. According to the just released results of the ECB's tender operation for emergency 7 day liquidity, arguably the closest the ECB has to a dollar denominated discount window (and the associated stigmata upon borrowing), just one bank borrowed $500 million in a 7 day liquidity providing operation at a 1.1% rate. Why is this notable? Because as the chart below indicates, there had been no borrowing under this facility since March 2011, and the last time there was a sizable borrowing under the 7 Day OT was back in May 2010, when Europe was blowing up for the first time and the ECB was scrambling like a headless chicken to contain the contagion fires. So the question now is which (French? Italian?) bank is still caught with its pants down and is crawling to the ECB for what is a quite sizable $-based capital injection (this same bank is certainly using the ECB's various other liquidity providing lines of credit).
Response To The "No Eurobond" Announcement - "The Theme Of The Market Being "Broken" Continues To Play Out"Submitted by Tyler Durden on 08/17/2011 - 08:59
Europe is shaking off yesterday's seemingly disappointing Merkel/Sarkozy press conference. I can't find anyone who is particularly bullish about it, but the moves in the hedge products have to be respected. XOVER is 26 tighter, back to 584. Main is 7 tighter at 139, and even SOVX is 5 tighter with Spain and Italy leading the charge. That is in spite of relatively neutral moves in the bond markets. It seems like Europe must have had bigger and larger hedges than I realized. The pain in trading books there is palpable today. Bonds are getting marked marginally tighter, index shorts are getting marked a LOT tighter. Investors are scrambling to get on side, and are using to the move in indices as an excuse to shift to "risk on" mode. The theme of the market being "broken" continues to play out. This time market is gapping tighter on what if anything, seemed like a disappointing announcement - No Eurobond, No new increase in EFSF, and Yes a new tax. BAC CDS is already at least 20 bps tighter this morning. Anothing shining example of a crowded (and possibly longer term correct) trade getting squeezed.
Following A One Month Break, PPI Resumes Climb, Rises 0.2% From -0.4% Previously, Biggest One Month Surge Since January; Core Rises 0.4%,Submitted by Tyler Durden on 08/17/2011 - 08:41
Following a big drop in June energy prices, which pushed the broader PPI to a one year low sequential change of -0.4%, the PPI is once again in an uptrend, rising by 0.2% in July, higher than consensus of 0.1%. Core PPI was higher by 0.4%, following the 0.3% increase in June, and double consensus of 0.2%. Energy did drop modestly in July by 0.6%, but far less than the June 2.8% drop, and was more than offset by the rise in food Producer Prices of 0.6%. In terms of various stages of production, finished core goods rose due to a 2.8% hike in tobacco products, with light motor trucks and pharmaceutical preparations also contributed significantly to the rise in the finished core index; finished foods rose primarily due to a 2.7% rise in veal prices, while energy prices dropped due a 2.8% decline in gasoline. In intermediate goods, core was led by higher prices for plastic resins and materials, which rose 2.1 percent, energy was led by liquefied petroleum gas led this advance, increasing 2.5 percent, and foods saw a 6.3% increase in natural, processed, and imitation cheese. Crude energy benefited from a 5.2% decline in crude petroleum, crude foodstuffs actually dropped 0.8% in July, led by a 9.7% decline in prices for slaughter poultry led the monthly decrease in July. Lower prices for fresh and dry vegetables also contributed to the decline in the crude foods index. As for crude core, the biggest upward price mover was a 7.0% increase in prices for copper ores was a major contributor to the monthly increase in July.
Citi On The SNB Non-Intervention: Pegs Can't Fly, And Why FX Spot Market Intervention Is Not A PanaceaSubmitted by Tyler Durden on 08/17/2011 - 08:27
Citi's Steven Englander was proven 100% in his skepticism to the SNB's intervention. Here are his follow up thoughts:
- We think that the SNB is still largely reluctant to intervene on the FX spot market. Investors expecting such measures in the near term could be
disappointed in our view.
- The latest measures imply that the SNB will have to increase the size of its balance sheet by at least about CHF 40bn or 8% of the Swiss GDP
- FX spot market intervention is not a panacea and that the best that the SNB could hope for would be to prevent further CHF appreciation.
- While we could have seen the lows in EURCHF and USDCHF for now, we doubt that an uptrend in the crosses could be sustained.
The meeting between German chancellor Merkel and French president Sarkozy yesterday yielded neither an approval for Eurobonds issuance, nor any immediate extension to the EFSF; instead the two leaders did say that a financial transaction tax will be proposed in September. The news promoted risk-aversion during the European session and weighed on equities, with particular underperformance seen in financials, whereas Bunds received support and marginal widening was observed in the Eurozone 10-year government bond yield spreads across the board. Elsewhere, weakness in the USD-Index supported EUR/USD, GBP/USD and commodity-linked currencies. However, GBP came under pressure following the release of BoE’s minutes, which showed that the MPC members voted 9-0 for no interest-rate hike, together with worse than expected jobs data from the UK. In other forex news, CHF received a boost across the board after the SNB didn’t mention EUR/CHF peg in its latest communiqué. Moving into the North American open, the economic calendar remains thin, however markets look ahead to the PPI and DOE inventories reports from the US later.
The Merkel Sarkozy plans to centralize financial and economic governance in the EU has failed to calm markets and there is further weakness in stock markets today. A key aim of the meeting was to restore confidence in the euro. In the short term this has not been achieved and it is highly unlikely that it will be achieved in the long term. Centralised financial and economic governance will not be a panacea to the current debt crisis. It does nothing to address the root cause of the problem which is massive indebtedness and the saddling of taxpayers with massive liabilities incurred by banks. Concerns about currencies and currency debasement is leading to continued safe haven demand for gold.