QE3 ON: Goldman Lowers Global Government Bond Forecasts Following 2012 US GDP Cut To 2.1%, Repeats "QE3 Is Part Of Baseline Estimates"Submitted by Tyler Durden on 08/16/2011 - 10:34
For those wondering why gold just surged by about $20 dollars, and why Gartman's cab driver once again proves to be far more astute than his passenger, we bring to your attention a report just released by Goldman's Francesco Garzarelli which is appropriately titled "The Price of Slower Growth" - appropriately, because in it Goldman slashes the firm's outlook on global policy rates across the board, slashes to cut its 10 Year bond yield outlook from 3.75% to 2.75% in 2011 and from 4.25% to 3.50%, slashes 2012 US GDP from 3.0% to 2.10%, and once again makes it all too clear that QE3 is coming, and not only coming but is already priced in (to the tune of about $300-400 billion): "In previous work, we have estimated that every US$1trn in purchases, if maintained, decreases 10-yr Treasury yields by 25bp-50bp. If our subjective assessment that market participants now assign a greater-than-even chance of ‘QE3’ is correct, and considering that the expected ‘unsterilized’ size of these purchases is in the region of US$600-800bn, this would equate to as much as 20bp being already ‘in the price’. Clearly, these magnitudes are unobservable, and thus subject to great uncertainty. Nevertheless, our calculations would suggest that the bond market is already discounting a mild recession and the chance of a Fed reaction to it." Translation (and this is nothing new to ZH readers): Bill Dudley has his marching orders from Jan Hatzius: GS now sees deflation as the broader risk, and anything and everything must be done to make sure Wall Street has another record bonus season round, pardon, deflation must be halted.
Over the weekend, we presented the suddenly very pessimistic outlook by Morgan Stanley's equity strategist team which stated in no uncertain terms that it "assigns a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic" adding that it "continues to assign a higher probability to the bear case than the bull case, and believe the recent price action increases the probability of the bear case." Yesterday, the firm's Credit Strategy team joined the call for a bearish outcome, when in a conference call it stated its case for why its "bearish strategic view is based on long-term structural and valuation issues." Two key metrics watched by MS: i) The unsustainable DM credit super-cycle may be approaching a difficult dénouement, and ii) based on long-term P/E valuation measures, US and UK equities are still expensive. MS warns that "a larger correction in risk assets is likely if a recession occurs, more so for equities" a topic discussed by the equity strategy team over the weekend which believes that the probability of a recession has surged (and continues to be confirmed by leading indicators such as yesterday's Empire State Fed survey). Morgan Stanley's concluding advice to clients: "look to reduce risk in Developed Markets in Counter-Trend rallies." Luckily, any time volume trickles to a halt, the counter-trend rally should present itself providing ample opportunities for selling into it.
A French-owned rating agency (the same country that currently has a short-selling ban) just did all it can not to tip the boat. What can one say but "truly a gutsy call." Unlike S&P which looks at such obsolete things as fundamentals and realistic projections, Fitch instead relies on something far more intangible: "its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base." In other words, it's rated AAA... because it is rated AAA. Somehow we doubt Fitch will take the initiative to be the first to downgrade France... That said even Fitch had some pseudo-harsh words: "Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA')." So, record debt for a AAA-rated country, check, but... AAA-rated. So all is good.
July industrial production came in slightly better than consensus expectatins of 0.5%, printing at 0.9% for the biggest rise of 2011 to date. This followed an upward revised June of 0.4%, up from 0.2%. Manufacturing output rose 0.6 percent in July, as the index for motor vehicles and parts jumped 5.2 percent, the biggest driver for the spike, and production elsewhere moved up 0.3 percent. Some other details from the report: "The output of mines advanced 1.1 percent, and the output of utilities increased 2.8 percent, as the extreme heat during the month boosted air conditioning usage. At 94.2 percent of its 2007 average, total industrial production for July was 3.7 percentage points above its year-earlier level." As for capacity utilization, the total industry rate climbed to 77.5 percent, a rate 2.2 percentage points above the rate from a year earlier but 2.9 percentage points below its long-run (1972--2010) average."
Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday. It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative.
US Resumes Importing Inflation, Exporting Deflation, As Annual Import Prices Increase Highest Since August 2008Submitted by Tyler Durden on 08/16/2011 - 08:45
So much for the end of inflation importing. After dropping by the most in 2011, or 0.6% in June, import prices once again increased firmly, rising by 0.3% in July, on expectations of a -0.1% decline. So much for that commodity drop "cooling" with fuel imports increasing 0.4%, and non-fuel imports up 0.2%. The take home: "Import prices rose 14.0 percent for the year ended in July, the largest 12-month advance since the index increased 18.1 percent for the year ended in August 2008." The picture is far uglier on the export side, where prices posted the first drop since July 2010. "The downturn was led by a decline in the price index for agricultural commodities, which was partially offset by an advance in nonagricultural prices. Export prices rose 9.8 percent over the past 12 months, down from the 10.1 percent change for the year ended in June, which was the largest year-over-year increase in export prices since a 10.2 percent advance between July 2007 and July 2008." In other words: the US is now importing inflation and exporting deflation. What does that mean if you are a chairman of the Fed reserve? Why, that you want to return the favor of course, and as soon as possible at that, as this implies ongoing GDP contraction due to terms of trade.
Today's Economic Data Docket - Industrial Production And Housing Starts; 12:30pm MerkOzy Press Conference Will Be Market MovingSubmitted by Tyler Durden on 08/16/2011 - 08:21
Housing starts, industrial production and import prices. The only real market driving event is the massively overhyped 12:30pm MerkOzy press conference.
We are not sure just how many times the same piece of news can be recycled and spun off as new, but here goes. After we reported back in July that "Merkel faces a German revolt over the Greek bailout", a sentiment broadly indicative of what will happen today should the 12:30 pm EDT MerkOzy summit actually not disappoint markets (and it well), here is Ambrose Evans-Pritchard with the latest speculation on the mutiny that awaits Frau Merkel should she proceed with putting doomed common currency over the interests of her people. From the Telegraph: "The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP). Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future." And to think a few short days ago we were ridiculing Die Welt's media propaganda approach to make it seem that the Eurobonds were a done deal...
Well, that short-selling ban sure worked for 48 hours.
- EURO Bnks: +doub digits on avg across the board
As for Sovereigns, + means bad:
- LIMONCELLO: +2
- GALICIAN: +10
- MOSCATEL: +14
- OUZO: +1
- DUBBEL: +1
- GREY GOOSE: -1
- ZIPFER: +1
- NEWCASTLE: -1.5
- GUINNESS: +20
- KOLSCH: +1
- High pressure on Sarkozy-Merkel talks (Reuters)
- Noda to "watch" "one-sided moves" in the USDJPY to parity soon enough - Yen to Reach Record Amid ‘Downfall’ of West, Sakakibara Says (Bloomberg)
- Eurobond Debate Rises in Germany, France (WSJ)
- China official paper calls for widening of yuan trading band (Reuters)
- China Economy Slowing ‘Significantly,’ Conference Board Says (Bloomberg)
- BOE's Miles: No Need for More QE (WSJ)
- Christine Lagarde: Don’t let fiscal brakes stall global recovery (FT)
- Zoellick: Governments should deal with global debt woes (Reuters)
- On Midwest Bus Tour, Obama Jabs at GOP (WSJ)
- U.S. debt still safest place for China reserves: top banker (Reuters)
Economic growth is faltering in all major economies with data this morning showing Eurozone and German GDP growth slowing. Eurozone GDP rose 0.2% from the first quarter, when it increased 0.8% while German GDP growth fell by more than expected in the second quarter, dropping to a derisory 0.1%. Double dip recessions involving inflation and therefore stagflation seem increasingly likely.The conditions today are far more bullish than in the 1970’s as in the 1970’s the U.S. was the largest creditor nation in the world whereas today the U.S. is the largest debtor nation the world has ever seen. Gold went parabolic in the 1970’s after a period of stagflation. Today, we appear to be on the verge of a period of stagflation. The 1970’s saw significant geopolitical risk with oil crisis, the overthrow of the Shah of Iran and the Russians invading Afghanistan. Today there is significant geopolitical risk in the world, arguably more, and there remains the real risk of a conflagration in the Middle East between Israel and its allies and Iran and its allies. Today we have a global debt crisis, massive systemic risk in the financial system threatening the solvency of many banks and sovereign governments. This was not the case in the 1970’s. This makes a parabolic move in gold very likely in the coming days, weeks and months. Increasingly, the question is not if we go parabolic rather it is when do we go parabolic – in the weeks and months or in the coming years.
Just when Europe managed to get away from the headline rotation for one whole day, it is back with a thud, reminding everyone that at the heart of it all is not a liquidity crisis but a solvency one, after both German and EU GDP surprisingly missed consensus. And what a surprise it was: while everyone was talking about stagflation in the US, the UK, even China, few if anyone dared to mention that word in the same sentence with Germany. That may change after Q2 GDP expanded by just 0.1% in Q2, on expectations of 0.5% growth and down from a downward revised 1.3% (from 1.5%) previously, (2.8% growth Y/Y vs exp of 3.2%). According to the stats office the weak result was primarily due to weaker net trade and consumption. Well if export-focused and mostly wealthy Germany can't generate enough growth through these two core sources of economic output, then nobody can. The immediate result of this datapoint was Commerzbank, and soon other, analysts lowering their GDP forecasts for 2011 to 3% from 3.4%. Germany is still expected to grow faster than the rest of the Eurozone but not by much any longer as this latest decoupling thesis starts to implode. And speaking of Eurozone GDP, it too surprised to the downside, printing at 0.2% on expectations of 0.3$ Q/Q, down from 0.8% previously (or up 1.7% Y/Y on expectations of 1/8%). The accelerating contraction of the European (and German) economy proves that just like in 2008, the ECB's series of rate hikes was the most misguided decision possible by the world's most clueless central bank, and anyone hoping for more rate hikes can kiss such dreams and aspirations goodbye.The net result: yesterday's entire no volume stock market levitation is about to be undone. Too bad the ECB can't buy some extra GDP for its insolvent (and solvent... for now) member countries.
A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
In A CNN Interview, Ron Paul Discusses The Media's Blackout Of His Presidential Candidacy, And Many Other ThingsSubmitted by Tyler Durden on 08/15/2011 - 23:53
Yesterday ago presented the mass media' self disclosure that it was ignoring Ron Paul for this reason or that. Today, Paul, whose support base has suddenly become the target of some aggressive lateral grab tactics by fellow GOP presidential candidates, was interviewed by CNN's Piers Morgan, in an Q&A seeking, among others, to find why it is that Paul, who to everyone's great dismay (not ours) may actually be the GOP's top candidate for the presidential position, is being slighted in his own view. Paul's take: "they're afraid of me, they don't want my views out there, they're too dangerous, we want freedom and we're challenging the status quo, we want to end the war, we want a gold standard, and their view is that people just can't handle all this freedom, they want dependency, they want socialism and welfarism, so I think they don't like to hear our views, but I think we'll make the best of it and we'll do very well." Paul proceeds to cover his relationship with Bachmann (disagrees with her views, as she is "not as far from the status quo as he would like her to be"), why Paul's anti-war program is a challenge not just to GOPers but to Obama as well, with his numerous war fronts, how Paul at 75 is finally resonating with the majority of the US population, but most important is Piers Morgan's question on how Paul plans on becoming one of the fold and "making himself more electable", confirming precisely the bias that the idiot media holds against what can easily be the most honorable candidate in not just the GOP's but all party ranks. Paul's response: "why should someone soften their viewpoint on defending the rule of law and defending the constitution: that would be foolish. Extremists have been in charge for the last 4 years since they've been allowed to print money at will, so that's why we have overextended ouselves overseas, that's why we have inflation, depressions, inflations."...etc. When the mainstream media, and when Rick Perry, understands what Paul is talking about, that i when America will be worthy of a good president. Until then, it will have to make do with whoever win the popularity context in any given day, regardless of the amount of lies uttered in process. After all, as Morgan makes it all too clear, it is all just about "being electable" ... the same reason America is currently on the verge of the end.