Archive - Aug 2, 2010

• Asian stocks rose, extending 4 consecutive weekly gains, on improved earnings outlook.
• Banks in Europe’s most indebted nations need to refinance $122B of bonds this year.
• China's manufacturing activity expanded at the slowest pace in 17 month in July.
• European stocks rise on strong manufacturing data, solid start to banking reporting season.
• Executives at US Cos expect revenue improvements in next 12 mts- KPMG Survey.
• German machinery industry sees powerful 62% increase in June orders.
• Iraq to sweeten contract terms for its 3rd bidding round for its natural gas fields.
• Luxury-home prices in central London declined in July for the first time in 16 months.

With the US well on its path to an increasingly socialist (if not worse) system, yet still home to one of the world's highest GDP per capita metrics in the world, Goldman's Erik Nielsen presents an interesting matrix in which he plots GDP per capita versus the Gini coefficient - a measure of income inequality. Countries that have the lowest Gini are those in which incomes are more or less flat across the board. The US, on the other hand, has the highest income inequality per its Gini of 0.38, a phenomenon about to be blatantly abused by changes in the US tax code. A relevant question here would be whether greater income inequality leads to a higher GDP? As Nielsen points out, "correlation does not imply causation" (a fact long-lost on the market dominant HFT market makers), although an important question is whether an attempt to grow US economic output should be predicated by a push toward further income equality, or a world in which the rich get richer. As the regression in the chart below would seem to suggest, the latter is what the Obama administration should be aiming for, and may explain why Obama's advisors have been so hell bent on perpetuating the wealth of those who should have lost everything in the crash of 2008. Of course, the one exception to the rule is socialist Norway, which has a higher GDP/capita than the US, but which however also happens to be one of the most resource rich countries in the world.

After 3 Month Euribor dipped on Friday for the first time in 3 months from a 2010 high of 0.899% to 0.896%, the critical interbank lending metric has once again resumed its steady advance higher, with the August 2 fixing coming in at 0.898%. And as has been postulated previously, a rise in overnight funding immediately leads to a rise in various EUR pairs. At last check the EURUSD was up to $1.3071, as the pair mimics each tick in (deteriorating) money market conditions.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/08/10

Now that the Greek striking truckers have been placated and the obliterated critical tourist season can attempt to salvage itself with just one month left as gas is finally once again (partially) available, some were hoping for at least a brief return to normal in the ECB/IMF-subsidized country. Alas, no such luck, as Greece has now become an accelerated version of the US' own slow progress to all out insolvency. As the country's foreign debt hole has been plugged for the time being with limitless cash infusions, and the financial system lives day to day as Greek banks are allowed to pledge whatever trash they find in the dumpster to the ECB, the next flash point are defaulting local governments, the equivalent of our own state and municipal crisis. Late last week, Kathimerini disclosed that the Athens port town of Piraeus has decided to stop "all payments following a central government decision to stop funding the debt-ridden authority. Having seen the kind of moral hazardallowed to his sovereign equivalents, the mayor Panaytois Fasoulas essentially says he believes he is owed a preferential debt restructuring: "Fasoulas said his municipality was not seeking privileged treatment but wanted to renegotiate the payment of its debts, paying larger installments at a lower interest rate." Surely, he is fully entitled to his ludicrous demands after what happened in Europe in the first half of 2010, and in the US in the past two years. We are only surprised that our own bankrupt cities haven't figured out that the right approach is precisely this: refuse payments unless demands are met. In fact, as reported in St. Louis Today, the near bankrupt city of East St. Louis, which just laid off 30% of its police force, has announced it would not make a scheduled $500,000 payment. "On Friday, the city approved a proposal to defer bond payments until next year in order to free up $500,000." In realizing that creditors don't really have a loaded gun pointed at their heads, US cities are finally waking up to what has been all too obvious to Europe for many months now. Look for the domino chain of state and municipal failures to really pick up in earnest over the next several quarters now that the creditor vs debtor battle lines have been openly set.

Global macroeconomic policy seems to be veering between world-historic deficit spending (as is the case in the U.S.) to near-Dickensian austerity measures (as is the case in the United Kingdom). But both policies fail to understand what got us to the current mess—which is why both policy prescriptions are misguidedly trying to recapture the good ol' days before the current depression. But those days of Hummers and McMansions are not only gone—they were a lie. Here's why. - Gonzalo Lira