The paradox of an advanced post-industrial economy is that the number of jobs needed declines even as the cost of living rises. The fundamental dynamic of America's job market is simple: we need relatively few workers to provide the absolute essentials of life even as the cost-basis of the economy inexorably rises. In other words, there are fewer jobs even as the costs of maintaining a "middle class" life rise. The solution to the post-industrial decline of labor is not unproductive "make-work" jobs and borrowing trillions of dollars until the system implodes, it's lowering the cost basis of the entire economy and culture, which means eliminating all the systemic sources of unproductive friction.
With Gold, Silver, and Oil down quite considerably since the second LTRO from the ECB ended the immediate elevations in global central bank stocks and flows and now all marginally positive/negative year-todate, the question of the day is whether this is a dip to be bought or a liquidation to be sold into. Sean Corrigan, of Diapason Commodities, provides some guidance.
Just a month ago we warned that all was not well in the political elites of China. Critically, expectations of some coordinated and massive stimulus to save the world were far overblown since "the last thing Hu & Co. would want in their final months in office would be to unleash another oligarch-enriching orgy of speculation". Sure enough, as Reuters just reported, 'China's ruling Communist Party is seriously considering a delay in its upcoming five-yearly congress by a few months amid internal debate over the size and makeup of its top decision-making body as the party struggles to finalize a once-in-a-decade leadership change.' The delay will likely further unnerve global financial markets whose perception of Chinese politics as a well-oiled machine has already been shaken this year by the extraordinary downfall of an ambitious senior leader, Bo Xilai, in a murder scandal.
While not exactly surprising, today's Senate failure to extend a bill extending the currently low interest on student loans, after a blocking vote by the GOP may bring even more attention to what Zero Hedge has dubbed one of the biggest bubbles of 2012... That there will be politics involved in this touchy subject is not a secret. What, however, will hit the American (young) consumer class (and recidivist iGadget buyer) like a wall of bricks is if on July 1 there is still no deal, and the student protests seen in the recent past in London and Montreal spread to US campuses, where students demand the dignity to file for bankruptcy in peace... and full debt discharge. The counter of course will be whether anyone had put a gun to their head when they were taking out a loan. The counter to that counter will be that no students expected there would be zero jobs available upon graduation. And so on, in a tit for tat repeat of the housing bubble and the massive unexpected consequences as yet another $1 trillion bubble pops, which just like last time, will result in yet another broad taxpayer funded bailout, in which the all end up paying for the the few.
So we know that the pro-bailout parties in Greece have failed to form a coalition, and that this will either mean an anti-bailout anti-austerity government, or new elections, and that this will probably mean that the Greek default is about to become extremely messy (because let’s face it the chances of the Greek people electing a pro-austerity, pro-bailout government is about as likely as Hillary Clinton quitting her job at the State Department and seeking a job shaking her booty at Spearmint Rhino). It was said that the E.U.’s existence was justified in the name of preventing the return of nationalism and fascism to European politics. Well, as a result of the austerity terms imposed upon Greece by their European cousins in Brussels and Frankfurt, Greeks just put a fully-blown fascist party into Parliament.
Last week, looking at Third Point's best performing positions we noticed something odd: a big win in Portuguese sovereign bonds in the month of April. We further suggested: "We suspect the plan went something like this: Loeb had one of his hedge-fund-huddles; the cartel all bought into Portuguese bonds (or more likely the basis trade - lower risk, higher leverage if a 'guaranteed winner'); bonds soared and the basis was crushed; now that same cartel - facing pressure on its AAPL position (noted as one of Loeb's largest positions at the end of April) - has to liquidate (reduce leverage thanks to AAPL's collateral-value dropping) and is forced to unwind the Portuguese positions. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?" Since the end of April, both AAPL and Portuguese bonds have tumbled, and Portugal CDS is +45 bps today alone, proving that circumstantially we have been quite correct. Today, we have the full Long Portugal thesis as explained by Loeb (it was a simple Portuguese bond long, which explains the odd rip-fest seen in the cash product in April). There is nothing too surprising in the thesis, with the pros and cons of the trade neatly laid out, however the core premise is that the Troika will simply not allow Portugal to fail, and that downside on the bonds is limited... A thesis we have heard repeatedly before, most recently last week by Greylock and various other hedge funds, which said a long-Greek bond was the "trade of the year", and a "no brainer." Sure, that works, until it doesn't: such as after this past weekend, in which Greece left the world stunned with the aftermath of what happens when the people's voice is for once heard over that of the kleptocrats, and the entire house of cards is poised to collapse.
Just as we warned last night, the lack of an active European credit market to look over the shoulders of their more exuberant equity colleagues quickly came to bear today as London traders turned up for work in no mood for bullish hope. Investment grade credit spreads in Europe jumped their most in a month and pushed close to four-month wides as the entire credit complex sold off aggressively. It seemed Main (the European IG credit index) was instrument of choice for hedgers (cheaper and more liquid with a smattering of financials) as opposed to XOVER (the European HY credit index) but we suspect the latter will rapidly catch up. Stocks fell further with Greece hitting multi-decade lows but Italy and France underperforming (as reality bit following yesterday's pump). Euro Stoxx 50 was down around 2% (now -3.5% YTD) but Spain remains the YTD biggest loser -18.2% (as opposed to Germany's DAX +9.25%). Sovereign credit was also not happy (just like yesterday) but as US opened, Italy and Spain saw notable derisking pushing their 5Y spreads +7bps and +15bps respectively on the week now. Portugal is +24bps on the week so far as the basis trade unwind begins. Europe's VIX surged above 31% for the first time since the beginning of the year and while Treasuries were bid (with 30Y touching 3%), 10Y Bunds outperformed on the safety rotation now 28.5bps inside of the 10Y TSY. EURUSD slid back under 1.30 shortly after the US opened but some miraculous gappiness (and comments from Greece) dragged its lumbering body back over the 1.30 Maginot line for now.
"Sometime the math just doesn't add up" is how CNBC's Rick Santelli begins what should become must-watch viewing for the youth of America as he tries to "Wake Up Young People" to the incredible realities of the level of debt encumbrance they are being born with. The lessons we are learning from our European brothers is that no-one is going to volunteer for austerity and fundamentally, to Rick, austerity is about 'past due bills'. From birth (where the average soon-to-be-taxpayer is already encumbered by $138k) to the future (looking for growth through capital attainment and job creation), Santelli starkly looks into camera, addressing the under-27-year-old demographic and tells them straight "you are paying for a meal that previous generations have eaten". The worrying point is that in order for the youth not to revolt against this 'unfairness' they need optimism and what appears to be occurring now is a fading of that generational optimism (except for CEOs whose last name begin with Z) as joblessness, and the costs of college and healthcare anchor our traditionally upwardly mobile bias. So how do 'we' hook the younger generations in? Student loan forgiveness? But where's that money going to come from? ...and so the ponzi feeds on itself once again.
As we warned, the EURUSD would surge on any headlines that a coalition pro-bailout government would be formed (the chances of which died yesterday when Samaras handed back the government formation mandate to the president). However the following...
- GREEK CONSERVATIVE LEADER SAMARAS SAYS IS READY TO TOLERATE MINORITY GOVERNMENT - BBG
- SAMARAS SAYS SYRIZA STATEMENTS DON'T SECURE PLACE IN EUROPE - BBG
- GREECE'S SAMARAS SAYS DON'T WANT COUNTRY TO GO TO NEW ELECTIONS - BBG
- GREEK CONSERVATIVE LEADER SAMARAS SAYS I WILL NOT PUT SIGNATURE TO THE DESTRUCTION OF GREECE - BBG
... is NOT the good news for a pro-bailout Greek government, that the algos were looking for, as it means that the Euro-friendly forces do not have the needed majority, which is to be expected in a government in which anti-bailout parties have nearly 60% of the vote: sorry, but the math just doesn't work. Of course, the algos have not been programmed to read into nuances, and the initial EURUSD spike is 40 pips higher. We can patiently wait until their 19 year old math Ph.D. programmers of algo signals understand what this headline actually means.
We skipped the first part of today's hearing by the Ron Paul-chaired Domestic Monetary Policy and Technology Subcommittee titled “Improving the Federal Reserve System: Examining Legislation to Reform the Fed and Other Alternatives” as one of the two panelists was Barney Frank, which immediately meant it would be a complete and utter waste of time, and everyone would walk away far dumber from it, with god likely not having mercy on anyone's soul. The second part however promises to be far more interesting featuring such names as John Taylor (not the FX Concepts Taylor or the musician), Peter Klein, James Galbraith and Alice Rivlin. While everyone knows wha has to be done about the Fed, the likelihood that this will happen before the Big Reset is zero, but at least people can talk, dream and speculate. Watch the live webcast for more of the latter.
Given both the ECB (we must give LTRO time to work) and the Fed (it would be reckless to risk inflation for a few jobs) appear to be disappointing the addicts in the equity markets, perhaps it is time to reflect on what the relative size of the Fed and ECB balance sheets say about the new normal fair-value for EURUSD. Given the current levels, it appears 1.20 is not such a leap of faith here. Or alternatively, assuming all else equal, the market is obviously still pricing $700 billion in more QE by the Fed.
After an extended and detailed rant against the BLS and their ineptitude, which is worth watching in its own right, Charles Biderman (CEO of TrimTabs) sums up Europe's troubles and hopes in 30 seconds. Towards the end of the clip, Biderman notes that Monsier Hollande is saying that governments should borrow more money so they can give more money to more people and THAT will create economic growth. Instead, Charles sees Europe sliding down a slippery slope faster and faster with no end in sight.
The only relevant section from a just released note by Jan Hatzius titled "Still Dreary" (guess what he is referring to), is the following: "we have stuck with our forecast of some additional monetary easing at the June 19-20 FOMC meeting for now, despite the less-than-encouraging noises from Fed officials in recent weeks. However, it is a close call, and we worry about a re-run of the 2010 and 2011 experience—the last two times Fed officials decided to let a purchase program lapse without having put a successor program in place. In both cases, the economy slowed and financial conditions tightened to a degree that pulled them back into the market before long. It is easy to see how this could happen again, given the renewed turmoil in Europe and the possibility that US markets will ratchet up their concerns about the impending fiscal cliff in the run up to the election. In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policymakers." Replace "US monetary policymakers" with "banker bonuses" and you get the picture. And here is our free tip to Goldman: the Fed has finally understood that in order to surprise the market with more easing it has to, gasp, surprise the market with more easing (and banks obviously have to play along and all act like they don't expect more easing, wink wink). Don't worry Jan - Bernanke knows the game plan and will not leave you hanging. However, as has been constantly repeated, there first has to be a deflationary scare before any announcement: such as oil crumbling, gold plunging, and stocks tumbling. Kinda like today. Who whouda think that Greece would serve the role of Lehman... over and over and over. In the meantime keep an eye on Bill Gross holdings of MBS securities when the April update is announced shortly- we fully expect a new all time record high, not to mention an imminent Hilsenrath Op-Ed suddenly hinting that, forget Twist, the Fed is now outright contemplating full blown MBS and UST LSAPs all over again. Because this time it will be different.
Gold just lost the $1600 handle for the first time since January 5th and is suffering its biggest one-day loss in over two months as Europe's meltdown is driving broad liquidations. Are hungry Chinese central bankers more than happy to soak up the precious metal at a discount from levered longs liquidating into the European fiasco?
"Uncivilized" China Quietly Building Gold Reserves As Gold Imports From HK Soar By 587% In First QuarterSubmitted by Tyler Durden on 05/08/2012 - 09:00
A month ago we ended up with the hilarious situation where the US was actively considering releasing petroleum from the Strategic Petroleum Reserve even as China was demonstratively and concurrently adding to its strategic inventory. Now, as the developed world is seeing day after day of gold hammering on amusing flights of fancy that central banks won't be forced to engage in more and ever bigger rounds of monetary dilution, and where the seller apparently has no regard for getting a "good" price, but merely seeks to crash the bid stack slams various PM prices, we see the same inversion with gold. Because as Bloomberg reports, "Mainland China's gold imports from Hong Kong surged more than sixfold in the first quarter, to 156 metric tons, adding to signs that the country may displace India as the world's largest consumer of the precious metal on an annual basis." And the punchline: "The purchases through Hong Kong may signal that the mainland is accumulating reserves, London-based brokerage Sharps Pixley Ltd. said in February. The nation last made its reserves known more than two years ago, stating them at 1,054 tons." Yep ladies and gents: the PBOC is very grateful that it can add hundreds of tons of gold to its reserve holdings in a stealthy operation which it will announce only after its conclusion, at which point, like true 13F chasing lemmings, retail will send gold soaring. But in the meantime, dear hedge funds worried about your margin calls and 1 month performance reports, please proceed calmly along with the lemming herd, and keep pushing gold lower and cheaper for our new Chinese overlords, and for everyone else who, without P&L timing constraints, takes delight in such brief arbitrage opportunities.