You don't need a degree in macro economics to understand an economy. Just because an economy is complex, the analysis need not be. I've been studying the change in GDP from Q4 2010 to Q1 2011 to get a sense of where the economy is regarding contraction or expansion. I have a sense the economy stands today where it stood in December 2007 the very month the great recession began. I've shared various technical charts showing striking similarities with the 10 year treasury market and equity markets comparing the price action between May 2011 to present and October 2007 through December. The big component though was the macro picture. You could easily argue it is far closer to recession now than it was in 2007 when Q4 07 GDP was 2.9% only to print (.72)% the very next quarter. With Q1 2011 GDP at 1.9% the margin for error is far less than in 07. But that is not enough to base an investment decision upon.
For those who think the News Corp. fallout is anywhere near close to ending, we have one word: Nope. The chart below from BusinessWeek is the best visual representation of what started as a simple voicemail tapping scandal and is set to not only topple a media empire, but to revolutionize the tabloid industry (for once into something better we hope), in the process maybe even returning a few IQ points to the average "developed nation" citizen.
One of the "positive" side-effects of the Treasury's plundering of retirement accounts is that total US debt in June actually declined for the first time since January 2010, dropping by $1.6 billion from the May 31 closing print of $14.344 trillion. No doubt this was predicated by the US Treasury officially breaching the debt ceiling on May 16. Yet due to this, or for some other reason (and it is not a surge in net income tax receipts as these appear to have reached an inflection point earlier in the year and are now trendlining lower on a Y/Y basis), something else happened: the slope on the cumulative deficit line since the start of the depression in December 2007 (see below), is now the shallowest it has ever been. In other words, the US over the past few months, faced with the threat and now reality of a debt ceiling breach was actively cutting spending, while benefitting from a transitory spike in income tax revenues, although unfortunately now that the unemployment rate is back on the trendline to double digits, this will be the only true transitory thing about the US economy. Whether this actual, factual fiscal prudence was conscious is unclear, however the result is clear: faced with the threat of being unable to finance every single dollar in perpetuity, the US government's involuntary self-imposed austerity actually... Worked! And yes, the direct side effect is that Q2 GDP is now likely to come at 1.6%: the worst quarterly increase since... Q2 of 2010 (recall that 2010 Q2 GDP was revised from 2.4% to 1.6$ on August 27 last year... hours before Bernanke announced QE2 ). And there once again is the glaring correlation between the slowing of the economy and the decline in debt issuance, and the actual deficit "improvement." Now take this slower deficit growth, and assume it actually is reversed, i.e., America has a budget surplus. While great for the country in the Long-Run, it would mean that GDP, which is now purely reliant on how much debt Geithner can issue, it would mean a collapse in the GDP, in the S&P, and in Wall Street executives' bank accounts. At least in the absence of QE3, 4 and so forth...
After working hard to compile a list of Obama's rather questionable record of fiscal promises and actual executions, the gist of which is represented best by the violent clash between myth and realty in Christina Romer's "The Job Impact of the American Recovery and Reinvestment Plan" whose epic failure is defined by one simple chart, we were disappointed to learn that Paul Ryan had already done this. And leaving Paul Ryan's politics aside, the facts do speak themselves. They speak even louder when one considers the din raised by the same president who back in 2006 said: "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better." Indeed they do president Obama. Indeed they do. So without further ado...
It may be time to rebrand Congress as the new CTU, although when it comes to who in D.C. should play agent Jack Bauer we are still unsure. The reason is that this morning we get two diametrically opposing fictions about the latest reality on the debt ceiling. On the one hand we read in the LA Times that, "Republican leaders in the House have begun to prepare their troops for politically painful votes to raise the nation's debt limit, offering warnings and concessions to move the hard-line majority toward a compromise that would avert a federal default. For weeks, GOP conservatives, particularly in the House, have issued demands about what they would require in exchange for their votes to increase the debt limit... Unwilling to risk the economic and political consequences of a federal default, which could come as early as Aug. 2, they have started the difficult process of standing down." That, however is not what The Hill heard: "House Republican leaders have missed a 36-hour deadline President Obama set during a Thursday meeting for lawmakers to give him a plan to avert a national default. The deadline came and went Saturday morning without a response from House Speaker John Boehner (R-Ohio). Instead, Boehner and House Majority Leader Eric Cantor (R-Va.) plan to move the Cut, Cap and Balance Act on the floor next week, which would require passage of a balanced budget amendment to the Constitution before the debt limit is raised. A House GOP leadership aide said at noontime Saturday that Boehner and Cantor did not send Obama a revised proposal to raise the debt-limit, as the president requested." So which is it? And has M. Night Shyamalan been retained to write the surprise twist ending to this nail-biter? We doubt it. Unfortunately, we are still convinced the republicans, under the "wise" defection of Mitch McConnell will fold, Obama will get what he wants, and the republican tough stance will go up in a puff of smoke leading to an even great loss of credibility for the GOP. There is less than 168 hours in which we can be proven wrong. We hope we are, but we doubt it.
After clearly demonstrating that last year's flash crash was essentially a byproduct of massive quote stuffing-induced churn surge, which cascaded into a full blown liquidity collapse, coupled with the bulk of HFT "liquidity" providers simply turning their machines off and subsequently reverberating by ETF "amplifiers" to the nth degree, last week Nanex released what is probably one of the most critical white papers on why in its pursuit of ever higher speed (or, at least speed that is physically capped by the theory of relativity at 300,000km/sec) to gain a frontrunning advantage over everyone else, courtesy of a massively two tiered market in which there is the collocated Ph.D. braintrust focused on millisecond trading (day trading is so 20th century), and then everyone else, the core premise of the "fair and efficient market" - the National Best Bid Or Offer, which is at the heart of Regulation NMS which in turn sets forth the guiding principles behind modern "capital markets" is now an anachronism and is being overrun on a daily basis as the fastest to the market gets to set just what their own NBBO is, in the process literally destroying the premise of market fairness and efficiency, as those who have the newest and shiniest toys are guaranteed to win, while everyone else fights for a fraction of the scraps. Said otherwise, steroids are forbidden in sports but when it comes to capital markets, they are very much accepted.
Never before has the job of Goldman's equity markets strategist been so difficult: on one hand he has to deal with an economy that is openly imploding after a readjustment of Q2 GDP to below subspeed, a drop in Q3 growth from his economic team as of last night to 2.5%, and a growth hockeystick that nobody (except for Joe LaVorgna of course) believes in any more. On the other he has to get paid for spreading propaganda to the firm's whale accounts even as GS is openly selling into any risk rally (Abacus deja vu). And while the latest weekly chartology from David Kostin is already very much outdated, after Jan Hatzius was forced to admit in his latest Friday night bomb installment that our view on the economy (i.e., absent stimulus = game over) is correct, he does make pretty charts. So ignore all the forecasts as they are 100% wrong as usual and focus on the pretty breakdowns of what has already happened. If nothing else, Goldman proves that billions in taxpayer bailout funds and secret Short Term OMO access can sure buy a damn good WP/Graphics department.
This discussion of "tradition" in the context of "value" is the central problem of our financial age. The question of faith in valuations is at the very heart of the ongoing crisis, infecting all facets of finance and economics. Almost three years after a major banking panic, we are still wrestling with the idea of valuations, and more innately, value itself. Economic and financial unease and uncertainty trace their roots to the shaky valuations that have been provided or interjected into every marketplace, keeping up with the grand tradition of fiat currencies and centralized policy. For example, U.S. treasuries are supposed to be, pardon the pun, the gold standard of riskless assets. Yet they are increasingly questioned (ask Bill Gross and China). The value of the paper is a derivative function of the ability to tax, as in full faith and credit of the United States. But the same is also true of Greek paper, as sovereign Greek debt derives its value from the Greek government's ability to tax. Yet U.S. debt is more "valuable", in money terms, than Greek debt solely because the Greeks have a "tradition" of default while the U.S. does not. Tradition matters.
Nobody could have foreseen this now typical Friday night bomb from the 200 West macroeconomic wrecking crew. Nobody. Well... "Here is the first official Q3 GDP downgrade, courtesy of JPM's Michael
Feroli. We fully expect every other clueless Wall Street lemming to
follow suit in minutes." But as long as the lemmings all move in a herd over the cliff, they will still somehow all get paid the same $5 million (of which 25% is cash and the rest is indentured cliff-vesting equity servitude) at the end of the year. Either way, can we all now agree that Goldman did indeed jump the shark in December, especially now that it sees Q1 GDP at below stall speed in real terms. So here it is: "Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012." Here is why Hatzius gets paid the big Bernankebux: "The “bugbear” is that we are still unsure about the precise reasons
for the slowdown in 2011 to date, which is sharply at odds with our
expectation at the end of last year that growth would accelerate in
2011." And the punchline: "Our forecast remains no fresh monetary easing from the Federal Reserve, but the probability has risen. In particular, Fed officials would undoubtedly ease if the economy returned to recession—not our forecast, but clearly a possibility given the recent numbers." Our prediction is that when Bill Dudley's 2011 calendar is released in December, his first meeting with Jan Hatzius at the Pound and Pence will have taken place right.... about.... now.
Following A Plethora Of Technical Breakdowns (And Outs), Here Are The Charts That Matter Next Week With PodcastSubmitted by Tyler Durden on 07/15/2011 - 17:49
As usual, attached is the complete set of "charts that matter" next week from Goldman's John Noyce, which will hopefully be a useful source of technical clues for anyone trading the all too critical EURUSD which has become the defacto driver of global risk courtesy of 100% correlated ES algos. Being the primary variable doesn't make it any easier to predict: as Noyce observes, "EURUSD trades to new lows then squeezes back into the range - as ever this leaves quite a confused ST picture which makes it difficult to make a strong daily chart based call. The daily chart setup has again become confused at best, but the underlying structure still looks heavy and as such a sell on rallies bias still seems the one to stick with." While in the past we have agreed with Noyce outright (we is by far the best technician at Goldman) this time we are concerned that the EUR is the only one looking at big weakness. The reason why a straddle may be the best trade ahead of next week is that by next Friday many question marks should disappear: on July 21 the Euro parliament will convene for an emergency meeting at which some speculate Greece's fate may be decided, leading to a "soft" or "transitory" default which will send the EUR plunging at least briefly. On the other side of the Atlantic, we have Congress which is supposed to reach a decision (or not) by Friday the 22nd in order to meet the August 2 deadline. If no solution is reached in the next week, it will be the dollar's turn to plunge. So yes, next week will be critical. In addition to the above, Noyce touches on the technical breakout patterns in the BTP and the SPG chart, associated euro FX correlations, and the recent breakdown in JPY. Probably the biggest question is whether the right shoulder of the S&P H&S formation means a major drop back to the 1,260 level is imminent.
While we may not make that much stuff in America any more, we can say that the nation's gigantic wealth inequality is totally Made in the U.S.A. Before we examine the data in some charts, I want to stipulate that great wealth in and of itself does not make a person an "enemy of the people" or threat to democracy. I confess to having generally lumped the top 1% of wealth holders into one category, something I have decided to stop doing, as this misses two critically important distinctions: 1. Not all wealth is created equally; 2. Wealth destroys democracy and free markets when it buys the machinery of governance. Much of the debate about wealth inequality focuses on whether the super-wealthy are "paying their fair share" of the nation's taxes. If we refer to point 2 above, we see that if the super-wealthy are allowed to buy the machinery of governance, then they will never allow themselves to be taxed like regular tax donkeys. In that sense, the debate over tax rates is pointless, because as long as the super-wealthy own the levers of Federal governance and regulation, then they will buy exclusions, loopholes, rebates, subsidies etc. which relieve them of whatever official tax rates have been passed for public consumption/propaganda purposes.
Epic Market Closing Ramp Materializes Out Of Nowhere On No Volume, Provides Great RISK-ES Reentry PointSubmitted by Tyler Durden on 07/15/2011 - 15:09
The Treasury may be ceasing the incremental funding for its market manipulative efforts.... but not quite yet. Presenting the E-mini surge on absolutely no volume. According to Chicago floor traders, at least one bank bought 150 S&P contracts at very the close with one obvious purpose: ramp the stock market into the weekend. Luckily, for the observant ones this is merely another free money opportunity: the ES-RISK spread just soared and presents the latest compression opportunity.
After pillaging the G Fund and Civil Service Retirement and Disability Fund (CSRDF), aka the Government retirement funds, Tim Geithner was just forced to resort to the final debt ceiling extension measure: suspending reinvestment in the Exchange Stabilization Fund, better known as the mechanism by which the Treasury manipulates the stock, bond and FX markets, often times indirectly (thank you Brian Sack and Citadel fat pipe) and on occasion with CIA assistance. What this means is that FX vol will likely hit unseen levels in the next several weeks as the Treasury's manipulative ways are strongly curtailed.