Average US gas prices are over 13% higher since late December 2011, back at June 2011 levels, and do not look set to drop any time soon. The anecdotal impact of this rise in a significant segment of the real US consumer's spending habits is unmistakable, as we discussed earlier, but it is more important to note where we have come from when considering the macro impact. Q4 macro data was 'juiced' by the significant drop in the price of energy as the 4-5pt drop in Energy-and-Utilities spend enabled 'visible' consumption to rise during that time (obviously helped by government handouts also). Just as occurred in the latter part of 2008, as the consumer was forced to spend more on Energy, so the visible consumption dropped notably and given the significance of the current data 'drop' in energy spending, when the current gas prices filter into this data, we would expect, as Credit Suisse points out, consumption on more discretionary spending will drop significantly, especially with the gridlock in Washington. Perhaps this is just the 'crash' that Bernanke needs to run-the-presses again as conditionality will increasingly force investors to reject the buy-and-keep-buying trend as they recognize that QE3 can't start until things get worse, and buying in anticipation of QE3 means it will never happen?
Just a headline from AP for now:
- Sen. McCain calls for US to lead 'international effort' to begin air strikes on Syria.
Looks like operation "Enduring Brent Crude Freedom" is about to commence.
Dallas Fed's Fisher "Perplexed" By Wall Street "Fetish" With QE3 And Disgusted With The Addiction To "Monetary Morphine...Submitted by Tyler Durden on 03/05/2012 - 14:36
And now for some pure irony, we have a member of the Fed, granted a gold bug, but a Fed member nonetheless, one of the same people who not only enacted ZIRP, but encourage easy money every time there is a downtick in the market, complaining about, get this, Wall Street's "continued preoccupation, bordering upon fetish" with QE3. The irony continues: "Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery....I believe adding to the accommodative doses we have applied rather than beginning to wean the patient might be the equivalent of medical malpractice." So let's get this straight: these academic titans, who for one reason or another, are given free rein to determine the fate of the once free world with their secret decisions every two or three months, are completely unaware of classical conditioning, discovered by Pavlov nearly 90 years ago, also known as a salivation response. The same Fed is shocked, shocked, that every time the market dips, the red light goes off, and the "balls to the wall" crowd scream for more, more, more free money. Really Fisher? Really? Oh, and let us guess what happens the next time the S&P slides into the tripple digits: will the Fed a) do nothing, thereby letting the market slide to its fair value in the 400 point range, or b) print. Our money, in the form of hard yellow metal, is on the latter, just like we predicted, correctly, back in March 2009 in " Bailoutspotting (Or The Search For The Great Financial Methadone Clinic" that nothing will ever change vis-a-vis the great market junkie until it all comes crashing down.
While phrases like 'eat the rich' or 'fatter-cats' might come to mind, the rise in discretionary spending on dining-out, that has surged post 2009 crisis lows, has now regained levels not seen since 2007. The percentage of discretionary income spent on dining-out may conjure images of filet mignon and Margaux, but it is critical to understand that the sub-index contains all restaurant-eating including Denny's, McDonalds, and the other QSRs; and in the current weakening income environment, it is a safe-bet that much of this spend is not headed to Delmonico's. With food stamps at record highs, real disposable personal income growth stagnant, and real consumer spending decelerating rapidly the difference between consumer sentiment and real consumer actions seems to highlight the hope-filled 'bubble' we find ourselves in as the first quarter is off to a very weak start for spending trends. As Bloomberg notes, a perfect example of weak concrete data, but optimistic sentiment.
For those who are in a hurry today, the bottom line is that Japan is in serious trouble right now and is a top candidate to be the next black swan. Here are the elements of difficulty that concern me the most, each one serving to reduce Japan's economic and financial stability:
- The total shutdown of all 54 nuclear plants, leading to an energy insufficiency
- Japan's trade deficit in negative territory for the first time in decades, driven largely by energy imports
- A budget deficit that is now 56% larger than revenues (!!)
- Total debt standing at a whopping 235% of GDP
- A recession shrinking Japan's economy at an annual rate of 2.3%
- Renewed efforts underway to debase the yen
As I wrote a shortly after the earthquake in March 2011, Japan is facing an economic meltdown. If it is not careful, it may well face a currency meltdown, too. These things take time to play out, but now almost exactly a year after the devastating earthquake of 2011, the difficulties for Japan are mounting -- as expected.
The overnight news that China's economic growth forecast was cut is notable in that it brings to mind the complexities (and realities) of the shift from an investment-led economy to consumption-led sustainability. As Bloomberg BRIEF's Economics note pointed out this morning, China is ranked fourth highest out of 170 countries for its reliance on investment (investment-to-GDP of 49%). The fix requires increasing incomes, internationalization of the yuan, and liberalization of interest rates. The latter is perhaps most troublesome (though all are hard to centrally plan together) as the mis-allocation of capital to large cash-rich SOEs relative to the broader (and potentially more growth-tastic) individual borrower or SME leaves what George Magnus of UBS calls a 'sequencing' problem for the powers that be. His concern is that China gets the downside risks of an investment decline before the upside potential from restructuring the economy towards household spending occurs. Critically, the investment-centric economy is not one of industrial capex or export-oriented expansion but inward-facing construction and infrastructure meaning a slowing of investment-led strength is implicitly ending the property boom. In China it’s very simple: you want to keep both eyes on the state of property markets.
Central banks are printing money all over the world. New names have been given to what is really an age old phenomenon. Desperate governments have traditionally debased their currencies when they have no other way of financing their deficits. So far the world’s central banks have been “lucky”. Thanks to the prior global bubble ending in 2008 and the realization that the so-called advanced countries are reaching the end of their borrowing capacity, the world is in a massive deleveraging mode which tends to be deflationary. For the moment the central banks can get away with printing all the money they want without massive increases in consumer price indexes. The public doesn’t connect increases in prices of commodities like gold or oil with the current bout of money printing. But if history is any guide, this money printing will matter and the age of deflation and deleveraging will be followed by an age of inflation.The coming battles over solving the problems of the bankrupt American government will not be pretty. It will be a bit more difficult for an American president to preach patriotism to the affluent in these circumstances. Although, if there is a war with Iran, he might try.
In what was likely the most ominous news from last week (and a near certain top for the stock) we reported that now none other than the Israel Central Bank was going long shares of AAPL. While the implications for stocks in general are extensive and were previously discussed, it is worth noting that the Israel Monetary Authority now has a big MTM loss on its Apple investment (although as Greece and the ECB have taught us, a central bank can book a "profit" even when a given security is trading at an all time low, and completely irrelevant of what one's cost basis is). And where Israel is, it is quite certain that other central banks have boldly ventured as well. So how long until the Fed has to open an FX swap line with Tel Aviv to bailout Stanley Fischer in this latest of hare brained schemes to keep the Ponzi system going? And how long until it has to be extended to the nearly 250 hedge funds who are now also long the stock, with the universe of incremental buyers disappearing by the day? What is most stunning is that Apple dipped a modest 3% intraday... Which just happened to be the biggest decline since November 2010.
Blinded by the light of the European equity market, one could be forgiven for thinking that LTRO 2 has indeed had some stabilizing impact on the European (and even the world) economy market. However, just as we have been aggressively pointing out, this is not the case (or at least not a sustainable case) as we see the 'LTRO-stigma' rising - now 10-15bps wide of its post-LTRO best levels - as LTRO-behooven banks trade notably wider (worse) than non-LTRO-subservient banks. What is very clear is that European credit markets, which are now trading at their worst levels post LTRO are much more concerned at the unintended consequences of the massive subordination and dependency than the equity market appears to be. Senior financial credit spreads are underperforming as they re-price for the broad subordination that has occurred but investment grade and high-yield credit in Europe is dramatically wider today even as stocks levitate. With ECB deposits breaking records and bank funding costs rising (as opposed to the hoped for drop), it seems unlikely that all this freshly minted collateralized cash will find its way out to the real economy and do anything but further zombify European banks and implicitly drag economic growth down (as credit markets appear to be better at discounting once again). As Europe closes, credit is pushing even lower to its worst in over a week.
"Emotions exceeding known parameters cause extreme events, such as stock market booms and busts. They are self-reinforcing spirals upward and especially downward that, once established, keep diverging from equilibrium until the driving forces fade or stronger counter forces reverse them. Ever-increasing desires for accumulating ever greater wealth faster and faster ignited a credit bubble that spiralled upwards until it burst in 2007 from a lack of new borrowers. The multi decade credit bubble and its bursting were extreme events. No model recognized the credit bubble or its collapse and no model is giving any indication of the plethora of problems now brewing in Europe."
Is Apple going to $1,000 per share and dragging the market higher with it? Sometimes one chart tells us more than a thicket of charts. Every analyst and punter seeks an "edge" by plotting and comparing innumerable indicators, ratios, correlations and data points. Sometimes all this complexity pays dividends, but if it did so consistently then 90% of hedge funds and mutual funds wouldn't be underperforming index funds. Sometimes a single chart says it all.
Last Thursday, following the second in one day GDP forecast tweak lower by Goldman on disappointing Consumer and ISM data, we said "And this, ladies and gents, is ultra high frequency economics, where HFT machines push the market up and down without reason, and where this has an immediate impact on economic indicators, all changed around in real time." Sure enough, today, following the better than expected Services ISM print, Goldman has now revised its GDP tracking number, this time higher, from 1.9% to 2.0%! At this rate GDP will soon become a coincident indicator of nothing more than consumer confidence that record high gas prices are a bullish indicator for consumption. That it is already a coincident indicator to real-time economic data, and merely shows the prevalent confusion within the strategist community, is a given.
While headlines may evoke underlying strength (despite a slowing China, underlying employment indices lagging, and rising-price concerns growing) the expectations of our elite economists has once again extrapolated, Birinyi-style, a self-sustaining recovery to infinity and beyond. Unfortunately, economic data is disappointing in the last few weeks relative to expectations as the Citi Economic Surprise Indicator drops to three-month lows. It appears to us that the economic data in the US, driven up in the (cyclical) short-term by tax cuts, fuel cost drops, and very recently the warm weather according to Morgan Stanley, is set to repeat the 2008 pattern as ECRI data did not confirm the improvement. The mean-reversion in the Citi ECO index suggests at best a significant slowing in equity performance but more likely a negative return in the three-months ahead. It would appear that our hopium-filled expectations have once again become unsustainable.
Okay, we don’t know if that is a good translation of Dead Bank Walking into Portuguese, but we didn’t think zombie banks was sufficient. As Portugal's sovereign spreads have risen by 200bps in the last 3 weeks and now trade at a wholly unsustainable 1200bps over Bunds, we thought it worth looking at how large (and under-capitalized) the Portuguese banking system was. Perhaps more critically just how zombified they were with regards to their Central Bank liquidity needs - the picture is not encouraging. As tensions continue to mount internally, it seems the LTRO's lull should be used to wipe out the weak banks or recap the less-than-dismal banks as that is the only real firewall. With the Greek PSI/restructuring dangling in the dust, it seems increasingly likely (as the IIF just noted) that Portugal is next and imminent given market pricing, despite the 'uniqueness' of their Hellenic neighbors.