Archive - Dec 22, 2011

And so the year ends not with a bang but with an economic whimper, as the final Q3 GDP is revised lower from 2.0% to 1.8% on expectations of an unchanged print. The reason: Personal Consumption contributed only 1.24% instead of the 1.63% in the second revision and 1.72% in the advance forecast. No bias there at all. But sure enough, here comes the inventory kicker, which subtracted just 1.35% instead of the 1.55% seen previously. What this means is that the inventory kick which was expected to come in Q4 2011 was pushed forward to prevent a 20% collapse in GDP today as keeping inventory change fixed would have resulted in a 1.6% Q3 final GDP. Net net - very weak report and one which portends weakness from Q3 is spilling over in Q4, where in addition to everything we will soon see the NAR existing home sale adjustment hit the economy with a double whammy of historical adjustments.

No kimchee zone...

Just as Blythe Masters' (yes, that one) team suffered huge trading losses in the middle of 2010 following the abysmal RBS Sempra purchase, showing that when traders of scale lose, they lose big, so today another big commodities trader, Barclays, is reported to have gotten crushed on copper and other base metals bets gone wrong. Dow Jones says that Barclays is set to reshuffle its base metals trading team following a series of significant financial losses made by the desk this year. "The base metals trading team is run by Iain MacRae, who is currently still working at Barcap. The company has been unravelling a number of its copper positions recently, traders and brokers said, along with positions in other base metals it trades. The majority of the losses were in forward copper spreads, people familiar with the matter said. Although these positions were in-the-money a year ago, the market has since gone in the other direction, forcing Barclays to close the positions out at significant loss, these people added....The investment banking division of Barclays Bank, Barclays Capital has been a category one ring dealing member of the London Metal Exchange since May 1997 and is traditionally a high volume participant in base metals futures and options trading. It also owns a 2.3% stake in the LME." As to who the most likely beneficiary of this collapse is Goldman, which in tried and true fashion told its clients to be buying copper throughout the carnage, only to close its copper position at a 20% loss a few days ago. But not before indicating that even more bloodbathing is in store for the future, having concurrently reopened future bullish positions in copper.

While volume today will be rather abysmal with virtually everyone now gone, the robots will be quite busy kneejerking themselves to a variety of economic reports, starting with the final Q3 GDP revision, consumer sentiment, index of leading indicators and ending with FHFA. On the political front it is unclear if there is any progress to the payroll tax extension negotiations, which has huge implications for if not the Q1 market, then definitely economy.

Credit calling, are you listening?
On the horizon, defaults are looming
A dreadful sight,
To see high yield's plight,
Walking in a weaker Euroland.

Without a pledge from the German,
Credit spreads are gonna widen
Who wants to pay?
For the peripheral disarray
Walking in a weaker Euroland.

• The watchdogs that didn't bark (Reuters)
• Italy's Monti faces key final vote on austerity (Reuters)
• Finland 'finds Patriot missiles' on China-bound ship (BBC)
• Swiss Panel Studying Measures to Curb Franc’s Gains, Widmer-Schlumpf Says (Bloomberg)
• U.S. exporters brace for cutbacks in European bank lending (WaPo)
• Gundlach fears debt ‘crescendo’ (FT)
• China accuses US of protectionism (FT)
• China banks eye easing as household inflation view cools: PBOC (Reuters)
• Obama Gets a Lift From Tax Battle With Republicans (NYT)... yes, the NYT

Credit Suisse has been producing country-specific and global risk appetite indices for years, offering a quick-and-dirty perspective on the market participant sentiment in global risk assets. By empirically tracking the relationships between 'safe' and 'risky' asset classes, they have created a useful contemporaneous view of current market perceptions. The index swings between euphoria and panic modes and shifted to full-scale panic around mid-year. Since then the index has gradually improved as the psychological bias of 'it can't get any worse, right?' seems to have kicked in until recently where CS notes a recent downturn. So while we have 'improved' back to only Panic Mode, the expectations are for a prolonged risk-off session in the short- to medium-term.

Since the 2012 Outlooks have now slowed to a drip, its appears retrospectives are the stocking-filler of choice for the week. Goldman's economist group reflects on their '10 Questions for 2011', released at the end of December 2010, and finds they were correct seven times. The tricky thing about judging the 'score' is the magnitude of the error - or more importantly the magnitude of the question's impact on trading views. Jan Hatzius and his team have had their moments this year, for better or worse, in economic sickness or health but they have largely been accurate at predicting Fed policy (or should we say 'directing/suggesting' Fed policy), but were significantly off (along with emajority of the Birinyi-ruler-based extrapolators from the sell-side) on growth (high) expectations and inflation (low) expectations. Nevertheless, the lessons learned from over-estimating the speed of healing from the credit crisis and the disin- / de-flationary effects of a large output gap (which BARCAP would argue is not as wide) when inflation is already low and inflation expectations well anchored are critical for not making the same overly-optimistic mistake into 2012.

12 Scary Economic Facts to fill your Festive Boots