The first estimate of the 2nd Quarter GDP was released at a 1.5% annualized growth rate which was just a smidgen better than the 1.4% general consensus. There has been a rising chorus of calls as of late that the economy is already in a recession. For all intents and purposes that may well be the case but the GDP numbers do not currently reveal that. What we are fairly confident of is that with the weakness that we have seen in the recent swath of economic reports is that the 2nd quarter GDP will likely be weaker than reported in the first estimate. It is this environment, combined with the continued Euro Zone crisis and weaker stock markets, as the recent rumor induced bump fades, that will give the Federal Reserve the latitude to launch a third round of bond buying later this year. While the impact of such a program is likely to be muted - it will likely push off an outright recession into next year.
A lot of desk chatter about this move in risk-assets - and the entire reversion to red on the day in EURUSD - as a WSJ report now circulating suggests that ECB members are not backing reported proposals by President Draghi. Specifically, the statement referenced is the following: "Many ECB Members Surprised By Draghi's Comments Suggesting New Bond Buys, Source Tells WSJ". The bottom line here is that Draghi most likely pulled a Mario Monti (and his hanger on Mariano Rajoy), and spoke up before pre-clearing with Buba's Weidmann. Draghi thinks that, like Monti with Merkel at the June 29 summit, he can bluff the Bundesbank into submission, and Germany will agree to monetization, especially if markets have risen enough where nothing out of the ECB next week leads to a market plunge (as the WSJ explains below). The problem is that as we patiently explained, Monti got absolutely no concessions our of Merkel, as was seen in the bond yields of Spain after the June 29 summit, which hit record wides a few weeks later. Expect the same this time around too: i.e., Germany will hardly cave in to the European beggars.
Update: it just gets stranger and stranger. With a 40 minutes delay, now the WSJ gets in on the action, with their spin: "Many ECB Members Surprised By Draghi's Comments Suggesting New Bond Buys, Source Tells WSJ"
Normal' - USD has now reverted higher, TSY yields back lower, and Gold off but stocks refuse to give up hope
Update: "ECB spokeswoman said in an e-mailed statement that it is usual practice and nothing special that Draghi meets or talks with the members of the Governing Council. She declined to comment on the content of any talks."
And so for the third day in a row, we get Europe continuing to talk itself up ever higher. From Bloomberg, with everything unsourced of course.
- DRAGHI SAID TO SPEAK TO WEIDMANN BEFORE AUG. 2 COUNCIL MEETING
- DRAGHI SAID TO FAVOR GIVING ESM BANKING LICENSE IN LONGER TERM
- DRAGHI'S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO
How much higher, we wonder, can the central planners talk this market up before someone actually demands something be done? And what happens when Merkel comes back from vacation?
Many local governments across the US face steep budget deficits as they struggle to pay off debts accumulated over years. Increasingly, as a last resort, some have filed for bankruptcy. There have been 26 municipal bankruptcy filings since 2010 and the pace is clustering, as Governing.com is keeping track. As Citi's George Friedlander noted (and we discussed here), technicals (net flows) are still dominant and dragging yields lower and spreads tighter; in spite of contagion fears from cities with clear economic problems (specifically those in CA with severe housing price collapses) and also general fund debt that is not secured by a G.O. pledge. However, with the August 'cliff' in redemptions clearly not priced in yet - as fear has driven momentum into bonds recently - we fear more than a few will be wrong-footed when the net flow shifts.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Nice, Mr. Draghi, but at what cost? And who will ultimately bear this cost? It is already far beyond the measure of mere money; democracy, truth and sovereignty have all been destroyed to prop up the central bankers' Status Quo. We can presume Mr. Bernanke and the Federal Reserve are in on the propaganda campaign, and so we need to examine the words and promises of these two central bankers, as well as what they have not said. Is talking about printing money as good as actually printing money? It would seem so. Is promising to "do whatever it takes" as good as actually doing whatever it takes? Once again, it seems so; global markets leaped at the "news" that the financial Status Quo was going to be "saved" yet again.
What if it is beyond saving?
Italian Regulator Extends "One Week Only" Shorting Ban Through September 14 Due To "Persistent Conditions"Submitted by Tyler Durden on 07/27/2012 - 12:07
Europe is so fixed, and so jawboned to death, that the Italian regulator who launched this year's BanWagon episode of financial stock short selling bans with what was supposed to be just a one-week ban of shorting, has just extended the ban for nearly two more months, through September 14. The reason: "persistent conditions" - in other words Europe appears to be only fixed and stuff on a transitory basis. But yes, absolutely nobody could see this coming.
Confirming what we described in detail in March, Bridgewater's Ray Dalio notes in his Daily Observations that "Spanish banks' collateral is running out in a way that could force them into an ELA." The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece - estimates that the Spanish banking system has only a few hundred billion euros left in eligible collateral and that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. Critically, if this occurs, then Spanish banks will need to turn to its own Emergency Liquidity Assistance (ELA) program. An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly. This increasing Balkanization of European central banks and funding capabilities only entrenches the impossible task of fiscal union as 'more' sovereign control transfer will be required in return for any core backstopping. Furthermore, those who are hoping for LTRO3: no collateral, no deal! Which the IMF just confirmed is a flashing red warning:
- IMF: COLLATERAL AT ECB VULNERABLE TO DOWNGRADES, MARGIN CALLS
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.
America's transition into a welfare state continues, as May saw a new all time high number of American households, 22.3 million to be exact, enter technical poverty and collect foodstamps. At the individual level, 46.5 million Americans lived off foodstamps, a 222,157 increase in the month, or nearly three times the number of people who found jobs in June according to the BLS. Next month this too will be a record, as it is currently just 17,367 before the previous all time high set in December of 2011. The good news, and we use the term loosely, is that the average benefit per household rose from all time lows of $275.82 to $276.76. Surely, the bottom is in and just like housing, there is on blue skies ahead.
Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"
Presented with little comment as it appears Gold (and Treasuries) are not as ebuliently following the 'Hilsenrathian' path of most ignorance to NEW QE - as GDP beats, stocks near multi-year highs, and housing recovering on its own just does not seem like the recipe for extreme Bernanke action.
While anticipation of the election cycle's 'can't lose' perspective on markets is widespread, there is a somewhat more concerning cycle that accompanies it that we suspect will be much more critical this election year than in recent times. As Barclays notes, the 'policy uncertainty cycle' into presidential elections is very notable - especially in the 4-5 months immediately prior to the election. The reason this is concerning is simple - in recent years 'policy-uncertainty' has been extremely highly correlated to market-uncertainty (VIX, for example) suggesting that we are due for a rather large risk flare over the next few months. Believing in the omnipotent capabilities of central banks (or governments) to levitate markets in an election year is all well but if the path to that 'outperformance' includes a 20% dip, does anyone stay to benefit? With fiscal drags of $200bn to $650bn based on election-outcomes, it seems the policy-uncertainty cycle is not priced in at all.