Americans consume 20 million barrels of oil per day and FutureMoneyTrends asks what will happen when the price of gas reaches $4, $5, or $6 per gallon. Between exponentially rising fuel prices and stagnant wage growth for those employed, American consumers were broken in the lead up to the start of the depression recession in 2008. The situation is massively worse now than at the bottom in March 2009 (from $2.00/gallon to $3.92 currently) and that is where they take up the narrative of where we go next as the cost to drive has more than doubled in the space of three years and is on an unsustainable path; either as a nation of consumers facing de minimus wage growth, or the lack of firms' ability to pass this cost on to consumers leading to more unemployment. As the unreality of the S&P 500 passing back above 1400, a reflection back on the real economy is sobering to say the least.
The balance sheet recession diagnosis of many of the world's developed nations remains among the clearest explanation linking the failure of textbook monetary policy to the dismal multipliers, transmission mechanism breakages, and sad reality of a recovery-less recovery. Whether you agree with Richard Koo's traditional but massive Keynesian fiscal stimulus medicinal choice is a different matter but the Nomura economist delineates the three problems (two macroeconomic and one capital flow) exacerbating the eurozone crisis and notes that "bulls have gotten ahead of themselves". Noting that the central bank supply of funds may help address financial crises but cannot resolve problems at borrowers, and that authorities have never admitted they were wrong, Koo stresses the three key reasons that bullish speculation on eurozone is premature - monetary accommodation's ineffectiveness when the private sector is deleveraging, active fiscal retrenchment by the core when fiscal stimulus is the only plus for aggregate demand, and Japanese and US lagged-examples of that dash any short-term hope that structural reforms will lead to growth. Even his solution to the European debacle - one of financial repression limiting the sale of government bonds to each nation's own citizens - while retroactively limiting a nation's largesse seems to only lead to the inevitable Japanification we have discussed at length. In the meantime, Koo appears far less sanguine than the markets about the prospects for anything but further demise in Europe (and the US).
It is three and a half years since the Great Recession hit in 2008 with the collapse of our financial system caused by the Wall Street banks and their captured politician cronies in Washington D.C. Their mouthpieces in the mainstream media have been telling the American sheeple that we have been out of recession and in recovery since the 4th quarter of 2009. It truly has been a recovery for the Wall Street bankers and the mega-corporations that have laid off millions and opened new factories in the Far East while generating record profits and rewarding their executives with millions in bonuses. The stock market has doubled from its 2009 lows. All is well on Wall Street – not so much on Main Street. The compliant non-questioning MSM reported that GDP in the 1st quarter rose 2.2%, less than expected. This pitiful government manipulated result confirms that we are back in recession. The first quarter had the huge benefit of fantastic weather, an extra day, and a supposed surge in jobs. And this is all we got? Take a good long hard look at this chart.
Whatever one thinks of the practical implications of the Kalecki equation (and as we pointed out a month ago, GMO's James Montier sure doesn't think much particularly when one accounts for the ever critical issue of asset depreciation), it intuitively has one important implication: every incremental dollar of debt created at the public level during a time of stagnant growth (such as Q1 2012 as already shown earlier) should offset one dollar of deleveraging in the private sector. In turn, this should facilitate the growth of private America so it can eventually take back the reins of debt creation back from the public sector (and ostensibly help it delever, although that would mean running a surplus - something America has done only once in the post-war period). This growth would manifest itself directly by the hiring of Americans by US corporations, small, medium and large, who in turn, courtesy of their newly found job safety, would proceed to spend, and slowly but surely restart the frozen velocity of money which would then spur inflation, growth, public sector deleveraging, and all those other things we learn about in Econ 101. All of the above works... in theory. In practice, not so much. Because as the WSJ demonstrates, in the period 2009-2011, America's largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers. Those among us cynically inclined could say, correctly, that the US is incurring record levels of leverage to fund foreign leverage, foreign employment, and, most importantly, foreign leverage.
For the third week in a row, European equity and credit markets have remained range-bound. Equities broadly ended the week in the green with the BE500 (Bloomberg's broad S&P 500-equivalent for Europe) ending near the top of the recent range - around the pre-NFP levels from 4/5. Spain and Italy have seen improvements this week in their equity indices but they remain down notably on the month and perhaps surprisingly only the UK's FTSE 100 is in the green for the month. Credit is considerably more dispersed but also green close-to-close on the week after a strong finish today (as the dismal data started rumors of more ECB easing and QE3 lifts). Stocks and high-beta crossover credit outperformed in the liquidity rush but subordinated financials lagged on the week. Critically though, while anchoring bias might make us all feel joyous in the last few days of recovery, we remain significantly red on the month across all risk asset classes in Europe. Sovereigns followed the same path as equities and credit - with another range-bound rotation up better on bill auction success and worse on bond auction failure but as with equities/credit today's exuberance lifted them to the middle of the recent range - well off the best levels of the last few weeks. Most notably, Spanish and Italian 10Y bond spreads are over 60bps wider in April and continue to trade in a two-steps-wider-one-step-tighter rotation intra-week. Portugal is the big winner on the week (and month) when it comes to bond spreads - which are now back to mid-September levels. However - as we have tried to explain before - the massive cheapness of Portuguese bonds relative to CDS (the so-called basis) has just been too tempting and grabbing this 'risk-free' carry has provided some bid to a notably illiquid Portuguese bond market and crushed the differential between bonds and CDS. The point being - be careful in reading too much into Portuguese bond improvements as it is much more a technical arbitrage move than real money flowing into this restructuring prone nation.
Guest Post: The New Drug of Choice In The White House, Federal Reserve and Treasury: Delusionol (tm)Submitted by Tyler Durden on 04/27/2012 - 10:45
Inside sources are reporting that there's a new drug of choice circulating in the hallways of power--the White House, Federal Reserve and the Treasury Department--and it's a perfectly legal prescription psychotropic: Delusionol (tm). Delusionol works by activating the parts of the brain that replace cognition and reasoning with positive fantasies. For example, a driver on Delusionol might run over a person in a wheelchair, bounce off a fire hydrant and send a baby carriage hurtling into a brick wall, and they would be happily convinced that they were an excellent driver. Now you understand why Delusionol is being gulped in vast quantities in the halls of power: the guys (and yes, it's mostly guys) really want to believe the "economic recovery" they've been hyping, and since it's rationally preposterous, they need a drug to suppress recognition that their policies have only made the financial disease worse and stimulate a delusional belief in the fantasy of "recovery."
There have been many grand experiments in social engineering during the past several centuries. We have witnessed the American Revolution, the French Revolution, the American Civil War, Communism and finally 1999 and the founding of the European Union. It is an interesting exercise to consider the long view as I have wondered what the world looked like in 1789 which was thirteen years after the commencement of the American experiment. It seems then historically that thirteen years after America began we were in a process of formation and working towards national goals as a coalition of individual States while we find the European Union, thirteen years after its inception, following quite a different route. May 6 may mark the date when the sleeper finally awakens as Greece and France may both vote in such a manner as to significantly change the political landscape on the Continent. We submit that we are quickly coming to a major reversal in both equities and in credit/risk assets and that instead of being aggravated that it took so long that you should be thankful that you had the luxury of time to prepare for it.
... but not from us: after all we are known for being biased, which in the mainstream media parlance means calling it like it is. No - instead we leave it to none other than Bloomberg's Jonathan Weil who does as good a job of being "biased" as we ever could: "Egan-Jones, which has been in business since 1992, could have continued operating as an independent publisher of ratings and analysis, not subject to government oversight or control. Instead it chose to play within the Big Three’s system, exposing itself to regulation and the whims of the SEC in exchange for the government’s imprimatur. Now it’s paying the price." And not only that: as the most recent example of Spain just shows, where Egan Jones downgraded Spain 9 days ago and was ignored, but well ahead of everyone else, only to be piggybacked by S&P, and the whole world flipping out, it has become clear: calling out reality, and the fools that populate it, is becoming not only a dangerous game, but increasingly more illegal. Then again - this is not the first time we have seen just this happen in broad daylight, with nobody daring to say anything about it. In fact, this phenomenon tends to be a rather traditional side-effect of every declining superpower. Such as the case is right now...
Relative to their positively exuberant +2.7% GDP growth expectation, Goldman opines on the below consensus print for today's Real GDP growth. The composition of growth was seen as weak, with a larger add from inventories and less momentum in domestic final sales than they had expected. There is a silver-lining though as they suggest the weakness in national defense spending that explained part of the miss will possibly reverse next quarter (or not we hesitate to add). BofA adds that the strength in consumer spending and contribution from motor vehicle output look unlikely to repeat in future quarters. Auto production added more than a percentage point to growth. At least half of that is due to the recovery from Japan supply chains and is not sustainable. Outside of autos, GDP growth would have been just 1.1% - thank goodness for all that channel-stuffing.
The other Chairman (of the fermentation committee) provides his unique color on the market's ability to shrug off the terrible news of the last few days thanks to the lesser-Chairman (of the Fed's) commitment to 'catch us if we fall' which has extended this rally for its fourth day-in-a-row so far. Critically UBS' Art Cashin opines on the tension between an entirely independent Fed and the pending election and the somewhat shocking statements from European Parliamentary President Schulz on the possible collapse of the European Union.
The University of Michigan Consumer Confidence headline data beat expectations and rose to its highest level since February 2011. However, the somewhat surprising drop in 1-year inflation expectations (to four-month-lows) and drop in Current Economic Conditions index to four-month-lows that underlies less exuberance. Perhaps it is the fact that this current economic conditions index dropped by its largest amount in eight months that is fading equities.
Between credible and non-credible political and fiscal policies and a reflationary or deflationary monetary policy aimed at the financial system, Morgan Stanley provides a quick-and-dirty 'map' of where Europe finds itself and the four different scenarios that await this troubled region. The 'Quantum Leap' of credible fiscal integration with term liquidity support and even easier monetary policy is where everyone hoped we would be by now (especially post the October 26th Grand Plan decisions). However, the sad truth in reality is the drop in credibility of political will (or direct nationalism emerging) combined with some concerns over inflation and the dramatic fading of the liquidity impact of the ECB's latest actions means we are drifting rapidly towards 'Debt Crisis Derailment' as the elite continue to confuse insolvency and illiquidity and stick their heads in the sand with regard the reality they face under the restrictions of Maastricht. With implicit monetary conditions dramatically easy and peripheral banks over-stuffed with sovereign debt, there is little room for anything but more encumbrance or ECB-Treaty-busting direct printing (which is the rumor floating all boats this morning).
Presented without much commentary, because little is necessary: the only ratio that matters for the US economy, the change in US public debt ($359.1 billion) and US GDP ($142.4) in the first quarter, hit 2.52x and rising.
It takes $2.52 in new debt to "buy" $1 of economic "growth"
So much for the +3.0% GDP whisper number. Instead of printing at the expected number of +2.5%, the first preliminary GDP data point (two more revisions pending) came out at 2.2%, a big disappointment for a quarter which had a substantial boost from the weather. And while of the 2.2%, Personal Consumption came in strong - as expected, as it was precisely the factor most impacted by pulling in demand forward courtesy of "April in February", 0.59% of the 2.2% was an increase in inventories, something which was not supposed to happen as it means that the quality of the economic growth in Q1 was far worse than expected. Cementing the ugly composition of Q1 GDP was fixed investment which added just a paltry 0.18% - this is the number which is critical for ongoing cashflow generation and unfortunately, the very low print means that growth outlook for Q2 is now even worse than before and we expect economists will promptly trim their already bearish predictions for Q2 GDP. Finally, government "consumption" subtracted just 0.6% from the total number, a decrease from the 0.84% in Q4, which means that once again the government is starting to become less of a detractor to growth - a dagger in the heart to anyone who claims there is "quality" in GDP growth. And the number you have all been waiting for: At March 31, US Debt/GDP was 100.8%
In 45 minutes we will get the first unrevised big picture look of how the US economy did in the record hot weather-boosted first quarter of 2012. Consensus is looking for a +2.5% print, although according to some preliminary analysis, the weather, which simply pulled "demand" forward, may have resulted in an up to 30-40% increase in the baseline print. Whether or not that is the case depends on the flow through Q2 data, which so far has been quite horrible as we showed yesterday, but far more importantly, on how much debt the Treasury issues, as when one cuts out the noise, the only thing that does matter for "growth" is what the net re-leveraging in the system is. Everything else is mostly weekly BLS BS that only serves to increase the general level of Schrodingerian confusion. Anyway, for those who enjoy observing the trees and ignoring the forest, here is a preview of what to expect today, first from Bloomberg and then from Goldman.