UPDATE: BofA already calling the bottom in China's slowdown and CSI drops 0.2%
China's April HSBC Flash PMI came slightly stronger than expected but suggests manufacturing may remain in a contractionary state for the sixth month in a row. The problem for all those stimulus junkies is that while it does suggest contraction, the data rose modestly from last month's final HSBC Manufacturing PMI print. So is this data not cold enough for massive stimulus (which Australia must be craving given tonight's dismal PPI print) and not warm enough for the 'double-rip' camp and the expected hockey-stick in global growth that is to occur any moment now? For now the market seems on the fence.
The last two weeks have seen the market's perception of the risk of Europe's 'firewall' rise at its fastest rate in six months (the peak of the crisis). At 142bps wider than Bunds, EFSF bonds now trade at their widest in three months and look set to break out to peak-crisis levels. We are sure the Japanese will still back-up-the-truck at the next issuance of self-referential ponzi bonds, but not only is the credit risk of this staggering CDO rising fast, as Bloomberg notes, the market's anticipation of the PPCs (Partial Protection Certificates), that - akin to CDS - provide an uncollateralized protection for 'some' of the potential losses investors may face in buying sovereign debt at issuance, is dreary at best and "not something that appears immediately hugely attractive". CDS already trade on these bonds and the only willing players taking advantage of that market in size are the basis traders currently; as real money "will buy peripheral bonds outright, because they’re attractive enough, or they won’t buy them at all, and financial engineering [is not] necessarily going to change that dynamic.” Just as we have again and again pointed out, the reality is that investors have seen through these self-guaranteed and 'irrelevantly convoluted' attempts to kick the can and Draghi's rejection of the IMF-Geithner calls for more crisis-fighting (as noted by Bloomberg this evening) - arguing that they have done enough by cutting rates and issuing bank loans, perhaps reflects a Europe that knows it is on the brink. This was further reinforced by the Bundesbank's Joachim Nagel, who, in a moment of sublime reality-awareness, ruled out any direct EFSF 'help' to the banks "as that would pass on the risk of a bank bailout to all European taxpayers" - but why does Geithner care so much - we thought US banks were 'safe' and unexposed to Europe (eh Jamie?).
For all those starry-eyed readers of Floyd Norris' New York Times real-estate column this morning who have been out viewing new homes this afternoon and already scratching together the down-payment with the family's EBT cards, we have a little contextual reality checking. Norris points to the factual reality that a broad ratio of all financial obligations - both homeowners and renters - relative to disposable income stands at an impressive-sounding lowest level since 1984, and uses this wondrous statistic, in its sublime uniqueness, as an indication to suggest the consumer (and home-buyer we assume) may be coming back as the household debt burden has been so reduced from a record 14% of disposable income to a 'mere' 10.9% now indicating just what good little deleveraging beings we Americans have been. However, as Nomura noted so clearly this week, this statistic is just a small part of everything when we consider the balance sheet (and not just cash-flow) of the household, 'many homeowners are likely to take little comfort from the decline in average debt service costs relative to incomes.' For millions of homeowners whose property is now worth less than the debt used to finance it, mortgage interest costs may be more usefully gauged relative to the equity they retain in their homes. For them, these monthly debt service payments are necessary to retain their claim on an asset whose value has fallen and might not recover, as the $3.7tn negative-equity 'gap' should remind us that the economic crisis of the past decade has taught a new generation a painful lesson about the dangers of excessive debt.
Hayek, while a brilliant mind, was not right on everything. He saw the welfare state is legitimate, a need for regulation into private industries such as education and food, and the necessity of the state in providing for individual and national defense. Yet even he was able to distinguish how political power attracts those who will use in the worst manner. The Secret Service agents who procured prostitutes may be relieved of their duty but it will only serve as a cautionary tale for the rest to keep their off-duty exploits better concealed in the future. The waste and graft will go on despite a pledge from Obama for a “rigorous” probe and his potential successor’s promise to “clean house.” These promises are just political theater used to conceal the playground like mentality which possesses the attitudes of all those who wield the guns of the state.
Two months ago, we warned that while the world had decided to blissfully move on from last year's topic #1, the MENA revolutions, and specifically the massive power vacuum left in their wake, things in the region were far from fixed. Quite the contrary, and as we added back then "it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix". Yet nobody cared as after a year of daily videos showing Molotov Cocktails dropping like flies, people had simply gotten habituated and needed some other source of excitement. Nobody cared also when a week ago Art Cashin warned that the hidden geopolitcal risk is not Spain but Egypt. Today, Egypt just reminded at least one country why perhaps caution about the instability caused by having a military in charge of the most populous Arabic country and the one boasting "the Canal", should have been heeded after Egypt just announced that it is cutting off its natural gas supplies to Israel, which just so happens relies on Egypt for 40% of its energy needs.
8 pm has just passed in France, and all the polls are now closed, which means official preliminary data is now allowed - the first results from IPSOS are in, and are as follows:
- Francois Hollande: 28.4% - with victory virtually assured in the runoff round on May 6, it is now Hollande's election to lose. Could he? Yes - read here how Sarkozy can still catch up per DB.
- Nicholas Sarkozy: 25.5% - make the runoff round
- Marine Le Pen: 20.0% - extreme right: much better than expected as nationalism is back with a bang.
- Jean-Luc Melenchon: 11.7% - extreme left: best communist showing since 1981 yet weaker than expected.
- Francois Bayrou: 8.5%
- Eva Joly: 2.0%
Update: according to Belgian Le Soir, first exit polls show that Hollande is not surprisingly ahead, with 27% of the vote, 25.5% for Sarkozy, 16% for Marine Le Pen, and 13% for Jean-Luc Melenchon. More or less just as expected, and setting the stage for the runoff round which will be Hollande's to lose. French speakers demanding a minute by minute liveblog, can find a great one over at Le Figaro, and an English-one can be found at France24.com
As of 8 am CET, polls are open in the first round of the French presidential elections where voters are expected to trim the playing field of ten to just two candidates, incumbent Nicholas Sarkozy and his socialist challenger Francois Hollande, who will then face off in a May 6 runoff, where as of now Hollande is expected to have a comfortable lead and take over the presidency as the disgruntled French take their revenge for an economy that is contracting, an unemployment rate that keeps rising (see enclosed) despite promises to the contrary, and as their to "express a distaste for a president who has come to be seen as flashy following his highly publicized marriage to supermodel Carla Bruni early in his term, occasional rude outbursts in public and his chumminess with rich executives.....France is struggling with feeble economic growth, a gaping trade deficit, 10 percent unemployment and strained public finances that prompted ratings agency Standard & Poor's to cut the country's triple-A credit rating in January." In a major shift for the country, Hollande would become France's first left-wing president since Francois Mitterand, who beat incumbent Valery Giscard-d'Estaing in 1981. As Reuters reports, "Hollande, 57, promises less drastic spending cuts than Sarkozy and wants higher taxes on the wealthy to fund state-aided job creation, in particular a 75 percent upper tax rate on income above 1 million euros ($1.32 million)." The Buffett Rule may have failed in the US but La Loi de Buffett is alive and well in soon to be uber-socialist France. Yet it is not so much Hollande's domestic policies, as his international ones, especially vis-a-vis the European Fiscal Treaty, Germany, and most importantly the ECB, that roiled markets last week, causing French CDS to spike to the widest since January. In other news, goodbye Merkozy, hello Horkel as the power center shifts yet again to a new source of uncertainty and potential contagion.
The Cost Of Twisting (And The "Housing Recovery"): $100 Billion In Foregone NIM To The Primary DealersSubmitted by Tyler Durden on 04/22/2012 - 10:07
When Operation Twist began in late September 2011, Primary Dealers reported that their net position in bonds with a maturity between 1 and 3 years was ($23) billion or the biggest short since January 2010, while reporting holdings of bonds between 11 and 30 years of $12.4 billion, for a net carry position (Short minus Long) of $(35) billion. What a difference just over 6 months makes: courtesy of Treasury Primary Dealer data, we now know that in the preceding weeks, with the Fed selling paper maturing in under 3 years, the Primary Dealers have loaded up to the gills on short-dated maturities, and in the week ended April 11, they reported $54 billion in 1-3 Year Holdings. At the same time 11-30 Year Maturities declined from othe $12.4 billion at the start of Twist to just $7 billion: don't forget - this is the only type of bonds sold by the Fed (if also including short maturities than the explicit long-end that the Fed is buying). What is interesting is that with nearly 80% of Twist over, the 10 Year was at just under 2.00% the day Twist started, and was....just shy of 2.00% on Friday. In other words in order to "sterilize" the Fed's duration extension, keep rates, and the price of gold, low and promote a "housing recovery" Dealers have been "forced" to part ways with about $100 billion in Net Interest Margin generating units, as the Short minus Long position has risen from -$35 billion to +$54 billion, hitting over $60 billion a few weeks ago.
For those who have not been following the Bo Xilai drama unfolding with furious pace over the past month, we have some advice: you should be, as the fate of China will be defined by who is left standing at the end, which in turn will have momentous consequences for the entire Developed World. But where does one start? Luckily, Grant Williams' latest TTMYGH has one simple plot line: presenting the past, present and future of the epic power struggle between Wen Jiabao and Bo Xilai which has already claimed at least on death, and within China's top power echelon, the Politburo Standing Committee. "This week’s edition of Things That Make You Go Hmmm..... is a little different to those that have come before it in that it is more of a murder mystery/whodunnit and focuses on the machinations behind a very significant power struggle currently raging in the shadowy world of China’s ruling party. For those amongst you who like tales of drunken British businessmen, unexplained deaths, cyanide poisoning, swift autopsies, mysterious political figures, Lady Macbeth-type wives and police chiefs fleeing for their lives - read on. For those of you who prefer less sensationalist tales..... well read on anyway - this one’s a doozy!"
The focus has shifted. The all seeing orb is now focused on Spain but it may well turn back to Greece soon. The loan money is exhausted again and the Greeks have elections lined up on Sunday, May 6 which is coincidentally the same day of the French run-off elections. To answer the question of at what point Greece might leave the Eurozone and return to the Drachma is relatively simple; it will be the day when the European loan spigot is shut off. Greece will pander, promise and proclaim until that point and then they will say, “have a nice day and thanks for all the fish.”
Throughout the postwar period, banks have almost always lent out all the way up to the reserve requirement. So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis. Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection. But eventually — so long as you do it enough — the condom will break. As soon as banks start to lend beyond the economy’s inherent productivity (which lest we forget is around the same level as ten years ago) there will be inflation.
Krugman Rebutts (sic) Spitznagel, Says Bankers Are "The True Victims Of QE", Princeton-Grade Hilarity EnsuesSubmitted by Tyler Durden on 04/21/2012 - 15:54
At first we were going to comment on this "response" by the high priest of Keynesian shamanic tautology to Mark Spitznagel's latest WSJ opinion piece, but then we just started laughing, and kept on laughing, and kept on laughing...
22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...