Archive - Jul 8, 2010

The Baltic Dry, which contrary to what some may claim, actually is one of the best leading indicators on global trade and thus the health of the economy, continues to plunge, and is now below 2000, hitting fresh 14 month lows, at 1940. It is now at the levels last seen during the March 2009 "generational" low, and just after the Lehman bankruptcy. Yet futures are up as initial claims beat expectations by 6,000 very statistically relevant people.

Bullion dealers provide liquidity for clients seeking to add or subtract risk from their own portfolios. They operate as brokers, advisors, and counterparties to their clients at various times during dealings. For our example today, we are focusing on the counterparty aspect of a dealer/ client relationship.

• Jim Willie: Road to Perdition (Financial Sense)
• Paper gold versus the dollar? Interview with Jim Rickards (Institutional
  Risk Analytics)
• Reid so toxic his son campaigns without last name (Bloomberg)
• ECB holds rates at 1%, faces liquidity grilling (Reuters)
• And somehow the IMF raises growth expectations as the world enters a
  double dip (Bloomberg)
• Hedge funds "frozen in headlights" cut trading as markets swing (Bloomberg)

Initial claims dropped to 454k from 475k. Continuing claims drop by 224,000 to 4,413,000. This is as expected courtesy of the end (for now) in unemployment benefits for many cohorts of unemployed. Of course, with claims over 400k it means continued losses in the broader work force. Also, Not Seasonally Adjusted Claims Rise by 22,560. Most notably, this has impacted EUC claims which plunged by 368k to 4,147,551 for the week ended June 19. Look for EUC to drop by up to a million as the delayed EUC data thru the end of June trickles in.

A few months ago we disclosed that based on its campaign contributions in Q1, Goldman Sachs had turned from Democrat to Republican, as "its campaign spending favored Republicans over Democrats by a margin of 58 percent to 42 percent both for March and the first three months of the year." Furthermore the animosity between the firm and the president is not exactly top secret. So, being the smartest guys in the room, would it not behoove Goldman to endorse precisely those policies which while unlikely to have much economic impact (for the growing futility of Keynesianism see here), are most at odds with prevailing popular opinion of what next steps for the economy should be? We pointed out first two days ago that Goldman is now openly rooting for QE 2.0 and another round of unbridled fiscal stimulus: precisely the kind of behavior that increasingly more people realize is the primary reason why this country is in its current sad place. Today, Goldman economist Alec Phillips continues the shadow attack on the administration, pointing out in excruciating detail what will happen if unemployment benefits are not extended (a topic also discussed previously here), and that some form of passage of the bill is critical, in essence putting the high hurdle strawman before the administration, and boxing it in a lose-lose corner. Regardless of the political sideshow, and we will keep an eye on it, with this week's Initial Claims out due later today, and a likely collapse in Extended Unemployment Compensation and Extended Benefits now that there is, at least for now, no extension, here is how Goldman envisions the over 4 million plunge in those eligible to receive benefits, and the implication of this to the economy.

• Asian stocks rally as growth in US retail sales eases concern.
• China bought a record $7.9B in short-term Japanese debt in May
• EU stress tests will cover 91 banks, accounting for 65% of the area's banking industry. Assume bond value drop.
• Hoenig, Fisher say stimulus isn't needed to assure recovery.
• IMF sees rising risks slowing recovery pace.
• Japan's Machinery orders slump 9.1%, most since 2008.
• AES Corp announces a $500M stock repurchase program.
• BP aims to fix leaking Gulf of Mexico oil well by 27 July

For all those who need confirmation that i) Keynesianism does not always work and that ii) we are living through an economic outlier, take a look at the below chart. While it is obvious that all previous recoveries used to "bloom" on their own after a modest debt/GDP increase, in essence validating the musing of John M Keynes, this time sure is different: the change in the ISM manufacturing, widely seen as a precursor to economic growth, will just barely surpass the increase in the debt/GDP, confirming that no more marginal debt will stimulate the economy. Extending this chart also shows that shortly the marginal change in the debt will surpass that of the ISM. This begs the question: why keep drowning the country with new and more debt when it is now obvious that incremental debt is no longer creating a virtuous growth loop?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/07/10