Archive - Jul 2011

Even as the political posturing over who spent what, how much and when reaches ridiculous levels, courtesy of the St. Louis Fed it is a short 5 minute process to fact check (thanks to the St Louis Fed's Fred) what the average annual federal expenditures, investment and consumption were/are under the regimes of Bush and Obama respectively. It also allows us to see what the average government saving, or rather, borrowing has been under the two administrations. The result, or rather the step function contained therein, may surprise some. Furthermore, we present a few observations from Sean Corrigan's latest later on the proclivity of the Obama administration to spend.... and spend... and spend... which demonstrates that while there certainly may be carryover from the previous administration, the eagerness of the current one to fund a record amount of disposable income via state transfer funding can not be blamed on the Bush by any sane person.

Sen. John kerry comments that the Chinese "are laughing all the way to the bank" on a downgrading of US Treasury securities.  China owns about 8% of the U.S. debt, so does that mean the rest of 92% debtors, including the U.S. taxpayer, would also be "laughing"?  

After the Senate promptly voted down Boehner's congressional plan, now it is the GOP's turn to return the favor after a House vote on Reid's bill is imminent at around 2:30 pm EDT, and will result in a vote down in kind. Furthermore, as The Hill reports, virtually the entire Republican block in the Senate has sent a letter to Reid expressing their opposition to his proposed legislation. "Their unified opposition to the bill leaves Democrats at least three votes short of the 60 needed to a clear cloture and virtually assures its defeat when it comes up for a vote tonight or tomorrow morning. Only moderate Republican Sens. Susan Collins (Maine.), Olympia Snowe (Maine), Scott Brown (Mass.) and Lisa Murkowski (Alaska.) did not sign on the letter." This is not surprising and it means that the only potential plan is one based on compromise, most likely using the uber-toothless McConnell plan which essentially just raises the ceiling by $2.5 trillion or so and envisions nothing else, as a framework. That said, we doubt a compromise plan is feasible especially since Wall Street refused to take the bait and umble at least 10% in the past week. In other words, we may well enter the Asian open again, not to mention FX in 26 hours, with absolutely nothing firm on the table. Only this time, there will be 24 hours until the Treasury runs out of cash, sales of Fed tungsten notwithstanding.

That David Rosenberg - the skeptic - threw up all over the Q2 (and revised Q1) GDP in his note to clients yesterday is no surprise. Even Joe Lavorgna did it (which makes us quietly wonder if America is not poised to discover cold fusion, perpetual motion, nirvana, a truly edible iPad, and peace on earth). That David Rosenberg - the deflationist - makes light fare ("ceiling will be raised") of the ongoing debt debacle is also no surprise: after all should the US default, the long bond strategy the Gluskin Sheff strategist has long been espousing will go up in a puff of smoke. What, however, is surprising, is the fact that as of yesterday's Breakfast with Rosie we get to put a political face to the financial man, and it very well may be... David Rosenberg - Tea Partier.

Q1 2011 GDP was revised one final time from 1.9% to 0.4% and Q2 2011 GDP the first estimate was 1.3%. Before analyzing the data I have one very simple question. Economic growth slowed during Q2 as acknowledged by the Fed and indicated by regional Fed surveys, ISM, durable goods, etc so how could Q2 GDP be higher than Q1 GDP? That would imply the economy accelerated and clearly that has not happened. In other words just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions... Don't be fooled by the state of the US economy. In reality we never left recession but regardless we are clearly back and the data points to anything but a soft patch. This report and the Q1 revision was truly horrible. In my view it shows the US far more vulnerable to a prolonged period of contraction versus a Japanese style period of rolling recessions.

As Goldman's David Kostin summarizes in his latest weekly kickstart chartology, the market continues to be a dueling story between slightly better micro (although certainly not in Europe) and deteriorating macro. "Two weeks ago the narrative of the market was the triumph of politics and profits. News from inside the Beltway suggested a deal to curtail spending and raise the federal debt ceiling was in sight and a steady sequence of very strong earnings reports led by the Information Technology  sector combined to push the market higher. However, the news this week was decidedly less market-friendly....Our client discussions indicate investors are in full “risk-off” mode and they plan to continue that posture until sovereign uncertainty subsides. Lack of conviction regarding the outcome of politically-charged fiscal negotiations has compelled hedge funds to reduce risk by lowering gross exposure and mutual funds to stay close to benchmarks. Investors are refocusing on corporate balance sheet strength as a key factor in the stock selection process and we re-balanced our strong and weak balance sheet baskets. 331 stocks have released 2Q earnings and the results have been strong although several firms slashed 2H guidance during the past week." And as a reminder, the bulk of the upside has come from one company alone: Apple. Also, it is gradually getting uglier on the earnings front: "During the past week a number of firms reduced EPS guidance for 2H. Examples include ITW, JNPR, MUR, and SO. Several firms specifically commented that business activity slowed sharply in June and July." And with a slew of financials reporting shortly, next week is sure to tip investor sentiment further into derisking mode.

Your one stop summary for all the major bullish and bearish events in the past week.

Back in May when we presented our humble and succinct analysis on what the preliminary 1.8% GDP looked like, we said "Ex the now traditional inventory build [of 1.2%], Q1 GDP growth was sub 1%" basically being the only party who said that aside for the "old faithful plug" better known as the traditional BEA fudge to get GDP to whereever the administration wants it, growth was where it ultimately ended up being: 0.4%. And the kicker? The primary cause of the downward revision was, you guessed it, Inventories, which imploded from 1.31% to 0.32% (see chart). In other words, the next time we are skeptical about government data in any format, believe us, and not "them." Which also goes for our skepticism when it comes to the predictive ability of one Goldman Sachs, most notably our take on Goldman's December 1 2010 "watershed" report in which Hatzius said: "This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years... Five years ago, we became very pessimistic about the US economic outlook...So why do we now expect growth to pick up?  In a nutshell, it is because underlying demand has strengthened significantly" Total and utter fail. Our summary then was also rather spot on: "Much more hopium inside. This is unfortunate. Jan Hatzius used to have credibility." Indeed, after waiting for so long, the firm once again capitulated per its most recent report released last night: "Our forecasts for 3%-3.5% growth in Q4 and 2012 are under review for probable downgrade." So with apologies for the self-backpatting, this brings us to the topic of this post. As we have said for over a year, the catalyst for QE3 will be none other than Goldman. Which is convenient because the title of Goldman's report is "The Fed's Easing Options." Pretty much as subtle as it gets.

Hyperinflation.....

The Banana Debt Republic saga continues

In 1978, the year China emerged onto the world stage with its four modernizations, China, a country with four times the population of the United States, had a paltry gross domestic product of $216 billion, less than eight percent of the United States. China exposed her strategy of four modernizations to the world as if to say, “Please invest in China and we will ensure that our workforce is educated, and that our business infrastructure is stable for your investment.” Yet, this openly expressed strategy, that may have seemed to the rest of the world as a difficult but noble goal for China to achieve, was only the tip of China’s Grand Plan, and only the part she wanted the world to see.

EurAmerica’s history with China was one of gunboat diplomacy, exploitation, and forced trading. When China opened her borders again in 1979, EurAmerica’s merchants were enthusiastic to exploit an opportunity again. Yet, China had not forgotten EurAmerica’s role in the Opium War, the Sino-Japanese War, and the Boxer Rebellion. China would never open her border again to be exploited. When she finally opened her border in 1979, it was from a position of power, deep strategy, and long lived planning that suggested EurAmerica was finally ripe for reverse exploitation. China’s grand plan was to emerge as the 21st century world power.

Via The Sceptical Market Observer.

As expected, the revised revised Boehner plan has passed the Congress garnering the required 216 votes to be successful (218-210 to be precise). And now that the ball is in the Senate's court, here is was happens over the next 3 days...

Citizen Warriors Radio | Foreclosure Fraud Special w/ June Clarkson & Theresa Edwards Hosted by Michael @ 4closureFraud.org and Lisa @ ForeclosureHamlet.org

As to the longer-term outlook on the rating, the limited magnitude of current deficit reduction proposals suggest that even a timely increase in the debt ceiling will lead to the assignment of a negative outlook on the rating. The direction of the US government's debt rating will largely be determined over time by our projections of its deficits and stock of debt, but the focus of our current review for downgrade is the more narrow and more immediate "event risk" associated with a possible debt-ceiling-induced default and the precedent that such a default would carry. We will make an assessment of the government's efforts to stabilize the future path of its debt ratios when the review is concluded.