Archive - Aug 24, 2011

Once again we get a strong durable goods numbers report at the headline level, but far weaker when one actually reads it instead of just scanning it: with the July Durable goods printing well above expectations, at 4.0%, double expectations of 2.0%, and up from an upwardly revised -1.3%. Ex-transportation, the number was up 0.7%, beating the estimate of -0.5%, virtually unchanged with the previous upwardly revised 0.6%. What is, however, not good is that cap goods non-defense ex aircraft dropped by -1.5%, in line expectations, and a plunge from an upward revised 0.6%: this shows that actual CapEx is plunging. The bulk of the beat comes due to stronger than expected automotive-related production. Futures surge on the news because a continent wide liquidity squeeze is less important than the future channel stuffing of more unsellable cars.

Germany is likely to push for European gold reserves to be used as collateral. The Deputy Chairwoman of the Christian Democrats is an astute woman and politician and knew exactly what she was saying. Indeed, she echoed other senior lawmakers who in May called for Portugal to consider selling their gold. Two leading governing party members - Norbert Barthle, Germany’s governing coalition budget speaker and his counterpart Carsten Schneider from the Social Democrats, the biggest opposition party, urged Portugal to consider selling some of its gold reserves to ease its debt problems. They called for a review of Portugal’s request for financial aid to include gold and other potential asset sales. The German people and lawmakers realize that the euro is being debased and lawmakers realize that gold may offer protection from the debasement of the euro but also from sovereign default and systemic contagion. Some of the PIIGS (to use the unfortunate and unfair acronym) have very sizeable gold reserves – especially Italy which alone has some 2,452 tonnes of gold. Portugal has 421.6 tonnes, Spain 281.6 tonnes, Greece 111.7 tonnes and Ireland has just 6 tonnes. The ‘German PIIGS gold collateral’ story is a very important one that is unlikely to go away. Indeed, it may be the story that helps educate those not familiar with economic and monetary history and with monetary economics and who do not understand gold and why gold remains valuable and remains a safe haven asset and currency today.

• Moody's downgraded Japan's long-term sovereign rating by one notch to Aa3, with a stable outlook
• Financials came under pressure during the early European session after figures from the ECB revealed a sharp jump in lending to banks, re-igniting funding concerns
• The Greek/German spread widened partly on news that Troika has warned Greece on public payroll and public mergers
• The German IFO report was not as bad as some analysts expected, which provided appetite for risk

Durable goods orders for July and FHFA house prices. Also another $35 billion in 5 Year bonds to be auctioned off.

We wish we had some good news to report this morning.... But we don't.

Following yesterday's plunge in the German ZEW investor confidence reading, today we got yet another confirmation that Germany's economic in freefall, after the IFO Business Climate survey printed at 108.7, the lowest in more than a year, down from 112.9, and a big miss to consensus of 111.0. The 4.2 drop was the highest since November 2008, when it plunged by 4.2. In summary, today’s disappointing Ifo data, if repeated in coming months, points “at least to sharp deterioration of growth, perhaps even recession,” Ralph Solveen, head of economic research at Commerzbank says." And unlike America, where hope is the only thing pushing investors forward, in Germany it is the inverse with the expectations component dropping belopw the 10 year average of 100.5, for the first time since July 2009, while the current assessment component is still above the 102.7 long-term average. Should this collapse in hopium consumption jump across the Atlantic, watch out America. Furthermore, while as was noted before, Merkel's continuing refusal to adopt Eurobonds is nothing new, today we got a new kink after German president Wulff questioned the legality of ECB bond purchases during a conference at Lindau, claiming that bond buying damages the ECB's independence. Wulff cited an article in the European Union's fundamental treaty, which prohibits the ECB from buying bonds directly from governments. "This ban only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market," he added. "What independence?" might add anyone who has seen the global printing cartel in action over the past 3 years. Yet the recent expansion in the SMP, which has bought about €40 billion in Spanish and Italian bonds, is the only thing keeping Europe afloat now: if this were taken away, it is the beginning of the end. Another complication to any sustained EUR rally, is that the Finnish government announced overnight it is sticking to its collateral side deal with Greece, a move that apparetly has Germany fuming. Expect headlines as  Finland’s govt will meet this afternoon to discuss Germany’s rejection of collateral agreement the cabinet struck with Greece on Aug. 16, newspaper Helsingin Sanomat reported on its website without saying where it got the information. This may well be worth 200 pips in the EURUSD... to the downside. And lastly, the cherry on top is that Greek 2 Year bonds, just soared above 40% for the first time ever! So much for bailout #2. Time to star pricing in the 4th iteration as the 3rd one is now a certainty. All this means that iTraxx Fins Senior is now at an all time high of 255, +4 bps, while the Sub Index is also at a record of 453, +9bps. Look for a resumption in the serial close of trade of all Italian banks before Europe shuts down at 4:30 pm local.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
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We truly can only hope that this Google Plus account of Paul Krugman is merely a well-orchestrated parody, because if it is indeed that of the self-styled uber-Keynesian, the time for the public outrage, his economic beliefs aside, has arrived. In a blast post on Google's imitation of twitter and facebook, which should immediately result in the termination of the Nobel prize winning economist if it was indeed penned by him, this particular account of "Paul Krugman" writes: "People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage." Translation...well it's pretty obvious, but for those laboring under the aftermath of a full frontal lobotomy, the person who tweeted this essentially yearns for his voodoo economic religion to be validated following countless failures of Keynesianism (no, really, after this latest injection of X^x *illion dollars into the economy things will really be well), at the expense of death and destruction. Even more poignant translation: "Krugman" would like nothing more than to put an equal sign between the death of a human being and its proportional GDP replacement value. What next: Krugman lamenting that only certain races end up getting killed in conflict, those whose replacement potential is too low, demanding more death? Or that X number of deaths would have been more stimulative if it was really XXX? This is about as close as we will get to a Keynesian admitting that reparations for death and destruction are the only two special clauses under which fiscal stimulus does work. Which of course means that with idiots such as the poster of the above who actually thinks this, be it Krugman or some of his countless voodoo brethren, and with their proximity to the president, the only logical explanation is that a war is coming, and is being welcomed by all these s[h|c]am "economists", for whom human death and suffering is a fair tradeoff in preserving their tenure or modestly-paid, liberal publication blogging jobs. If this indeed Krugman's account, it is imperative that the NYT immediately terminate this pathologically deranged and homicidal psychopath. Institutionalization in a mentally insane ward may be a proper subsequent action.