Archive - Apr 28, 2011

The bottom line: Q1 GDP ex-inventories came at 0.8%, the lowest since Q3 2009. The economy has hit stall speed, and absent another fiscal (nope) or monetary (QE3) stimulus, we will go negative in Q2, now that the full impact of the Japanese economic collapse has forced even the ostriches to pull their heads out of the sand. Alternatively, Bernanke will be stuck with the worst case of stagflation since the 1970s. Rock and hard place: just as we predicted in December 2010. The chart below shows the ugly collapse in the economy in Q1: recall that up to a month ago it was supposed to grow by 4%! Now, ex inventories, it is 0.8%. And most importantly, the strong US consumer, in the form of the Personal Consumption Expenditures, sees his share of economic growth drop by over 30%, from 2.8% to 1.9%.

Key highlights:

• US GDP Price Index (Q1 A) Q/Q 1.9% vs. Exp. 2.3% (Prev. 0.4%)
• US PCE Core (Q1 A) Q/Q 1.5% vs. Exp. 1.4% (Prev. 0.4)
• US Personal Consumption (Q1 A) Q/Q 2.7% vs. Exp. 2.0% (Prev. 4.0%)

and the kicker:

• US Initial Jobless Claims (Apr 23) W/W 429K vs. Exp. 395K (Prev. 403K)

More coming

• Most Dealers See Fed Keeping Rates Near Zero (Reuters)
• Japan Economic Data Underscore Impact of Disasters (WSJ)
• China’s Population Flocks to Cities, Grows Older, Census Shows (Bloomberg)
• China Property Slowdown Poses Growth Risks, World Bank Says (Bloomberg)
• Asian Currencies to Appreciate Against Greenback in Second Half, ‘Mr Yen’ Says (Taipei Times)
• Syria's Assad Facing Dissent over Deraa Crackdown (Reuters)
• Spain Calls Draghi ‘Excellent’ Choice for ECB President, Isolating Merkel (Bloomberg)
• German Unemployment Falls Below 3 Million to 19-Year Low (Bloomberg)

Well, the statement was more dovish than I thought - leaving in the extended period language, offset only a little by a slightly more direct reference to inflation. This was the first sign that the conference would be positive for stocks. As soon as it became clear that no questioner would really be allowed any follow up questions, the Q&A took on the 'Does this dress make me look fat?' tone. A few reporters tried to ask some tough questions, but the format made it far too easy for the Chairman to avoid answering in any great detail. There are a few useful takeaways from the conference...

First Q1 GDP estimate, Initial Claims, and Pending home sales. Expect a deterioration in all.

The Chinese yuan is going strong again, breaking the 6.5-dollar-level over night: Thanks Ben! In the meantime, gold demand in China is surging... what does this all mean?

While we still await Jan Hatzius to lower his full year outlook any second now, to keep in line with Bernanke's drastic growth outlook reduction from yesterday's press conference, here is Goldman's Sven Stehn sharing his interpretation of the Fed's "color" from yesterday. The conclusion: "Taken together, Bernanke’s remarks were consistent with our forecast for no rate hikes for a long time to come." And we would go further: just as in 2010, which 2011 has so far been an identical replica of, the second there is a 15% drop in the Russell 2000 (which hit a new all time high yesterday) following the end of the liquidity pump, "economic conditions" will deteriorate, necessitating another loosening episode. And it will come - sooner or later.

It's Not You, It's Money McBags

At the current rate of collapse, in a few more days the dollar will take out all time lows. Currently holding at 73, after hitting 72.8 overnight, the DXY appears set to test the last support from when the dollar carry trade was all the rage again back in 2008. Of course, for that to happen crude will have to be north of $130, which not even the most incompetent CNBC pundits will be able to spin as positive for corporations (let along the US consumer). It will also mean that any opex inspired corrections in precious metals will not be a frequently recurring phenomenon. But at least Bernanke's plan of inflation our way out of insolvency through a complete currency devaluation is working: after all for all who listened to the Bernanke conference, the only way to rescue the flailing dollar, is first to kill it...

Is the L word the pension fund industry's dirty little secret?

Black swan avoided ... this time