Archive - Jul 28, 2010

As the prospects for a double dip recession in the US seem to increase by the day, just about every bearish market commentator has his or her reasons why we should beware the triumphant return of the Great Recession. Even though I am not usually one to follow the herd, in this care I figured I might as well join the party and discuss my 5 favorite reasons a double dip may be upon us.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 28/07/10

Some unpleasant possibilities to consider in the aftermath of what appears to have been an attack on a Japanese VLCC. And, of course, if this is another Cheonan in the making, why pick a Japanese false flag scenario? With two US aircraft carriers in the vicinity, one would imagine we should have a pretty good picture of what really happened. Something tells us the official explanation of an "earthquake" as responsible for the boat damage just won't fly.

The Washington Post recently did some excellent journalism about the expanding new industry Top Secret America. This new industry is unprecedented in American history and raises some critical questions about who reigns over our nation’s security and deepest secrets.

Which services are too important to outsource? Which services are “inherently government functions“?

At the moment, there’s a bull market in the private contracting of national intelligence. Here are some of the basic stats:

From David Rosenberg's Wednesday letter: "The primary purpose of this comment is to suggest what things may look like when the Great Bull Market in Bonds, which began in 1981 with 30-year Treasury Bonds yielding 15.25%, finally comes to its glorious end. For starters, I think it is safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that by far the major economic factor that correlates consistently with the direction of market-determined interest rates, at least for long term Treasury Bonds, is CPI Inflation (headline and core)...So what will be the cause of the next secular uptrend in inflation or hyperinflationary shock? It pays to look back at history. Prior to the inflation of the 1970s-early 1980s, periods of very high inflation were primarily associated with war. Increased credit demands to fund the war effort combined with the drop in productivity that goes along with blowing everything up is an inflationary stew." Alas, never before in the history of US society have we been at the point when noted economists, financiers, and socialites so frequently and openly compare the fate of our society to that of the Roman empire in its last days, when the Roman emperors, oblivious of personal harm, would debase the currency on a daily basis, and hike taxes, with the end result being the collapse of the empire itself. As we will demonstrate shortly, we ourselves may be getting quite close. And in those uncharted waters of the global economy and, in fact, civilization as a whole, where the central bankers fight for the very survival of the status quo on a daily basis, we are confident that prudence on long bond and inflation rates will be first to be jettisoned as the kleptocratic oligarchy fights to avoid the pitchforks and guillotines for at least one more day.

What most people believe today is that they can extrapolate trends and have great success at placing odds with certainty. Why is it then that most people fail to see that the long-term interest-rate trend is down and going lower? - Yves Lamoureux

After entertaining some potty humor for a page or two in his latest brief, Bill Gross conducts an interesting thought experiment in which he presents an anti-Malthusian economic hypothesis, which states that predicated by declining global population growth, the global economy will be unable to grow into its full potential, regardless of size (or usage) of any new trillions of stimulus. "This is not the Malthusian thesis, which maintained that at some point the world would run out of food to satisfy a growing population; it is an assertion that capitalism depends upon final demand and that if there ever comes a time when population growth slows, then the world’s most efficient economic system will be tested. If anything, my thesis is anti-Malthusian in its assertion that there will always be enough production to satisfy a growing population, but perhaps not enough new people to sustain growing production." Looks like all the Ph.D.'s from reputable universities just got a new challenge: look for many papers in peer reviewed publications (and we were wondering for a second why Gross used so much toilet humor initially) trying to refute this major kink supporting the new normal, and refuting a "special case" of Keynesianism, which of course was not relevant when the economist was alive, but is becoming the reality all too quickly. Could something as simple as a condom be the cog in the wheel that dethrones the religion of John Maynard Keynes?

You may have heard from the media lately that President Obama hates business, despises businessmen, and is derailing the economic recovery with his anti business policies. A close examination of the hard data delivers a different conclusion. Is Obama actually a closet pro-business president?

EUR Libor at 0.83063%, Euribor at almost 0.9%, and top tier European Commercial Paper are now at their worst levels since about a year ago. The stress test came and went, and the market couldn't care less. And this is despite the ECB's latest monetary operation, in which E23.2 billion was allotted in a 3-month long term refinancing operation (LTRO): the intervention failed to prevent the ongoing EUR Libor surge. It is starting to get very troubling for Europe, where banks, knowing all too well that only the ECB is the INDISCRIMINATE lender of first an last resort, refuse to lend to anyone else as without the primacy example of some other private party taking the first loss risk tranches, there is no incentive to go out and lend. In other words, the longer the ECB remains entrenched in the money market, the worse it will get. All of Europe is now caught in a pan-continental liquidity Catch 22, in which more intervention will just make the central banks even more critical to the continued functioning of the financial sector.

Bloomberg headline: "Capital Goods Orders in U.S. Climb, Signaling Investment Pickup"

Goldman Sachs: "Durable Goods Orders - Weaker than Expected"

Someone should explain to these people that propaganda is far more effective when everyone on the wrong team knows they have to lie.

Yesterday’s activity was a kick in the face to dip buyers like me. If you read yesterday’s post and just ignore the first line, I was spot on. But I ignored the signs and made an assumption that the pin risk was stronger than the bowling ball around Gold’s neck. Time to go back to just assessing events and risks and leave the prognostication to the tea leaf readers. On that note, take a look at this technical report out yesterday from Citi on our embattled yellow metal.

• Ratings Understate ‘Dangerous’ Chinese Local Government Risks, Dagong Says (Bloomberg)
• Arcelor Mittal warns on pace of global recovery (FT)
• Portugal Takes Eurozone Derivatives Set-Aside Decision (FT)
• Ready for the Next Trillion-Dollar Bailout? (Heritage Foundation)
• Drip after drip of deflation data (Telegraph)
• Atlas Didn't Shrug; He's just sitting on his hands while he confronts regulatory and tax uncertainty. (Barrons)
• Gold bears are wrong, smart money isn't selling (Minyanville)

The June US durable goods order is the latest disappointment in a streak of poor macroeconomic data that started well over a month ago, and which will soon enough begin to impact not only GDP but also corporate earnings, as the macro double dip which is now firmly in place, makes it all too clear why companies have been miserly conserving cash. Durable Goods came at -1.0%, a major disappointment toconsensus which had been hoping to a nice boost from the previous -1.1% number (now revised to -0.8%), and looking for a +1.0% reading. Better luck next time. Durables ex transportation came at -0.6% on expectations of 0.4. New orders of non-defense aircraft plunged by -25.6%, while the ever critical to the global economy Computers and Electronic products, dropped across both shipments (-4.1%) and New Orders (-1.9%). Overall, this was the largest Durable Orders decline since August 2009.

Markets in a Flash

· Asian equity markets closed up across the board overnight posting strong gains. The Nikkei 225 was up + 2.70%, while the Shanghai Index was up +2.26%.

· European equity markets started the day positive but at the European lunchtime the markets had fallen into negative territory. The FTSE 100 was down more than -0.25%.

Just in case there was any confusion which way SocGen's Albert Edwards may be leaning after the recent however many percent rally in the AUDJPY, sometimes known affectionately as stocks, it is hereby resolved: "My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows." In other words, according to AE the market is well over 50% overvalued.