Archive - Sep 19, 2011

A flurry of headlines out of China suggest global macro-economic volatility may be ready to take it to the next level. We discussed last week how China's oh-so-generous offer of help to Europe was merely a veiled threat playing US against Europe in a game of who-gets-the-funding. Well, tonight, it seems, they are making good on some of those threats. Aggravated by EU's lack of market economy recognition, they pull trading lines with French banks, express concern at the EUR's safety (preferring US Treasuries) and indicate a clear preference for bonds over stocks - all the while warning of growing trade tensions - consider the sabre-rattled.

UPDATE: Xinhua News claims Fitch bearishness on China's banking industry is 'suspicious' and the US and Europe should ditch 'protectionist' measures; Ambassador Locke then opines on China's business climate and policies casting doubt in investor's minds.

Hopefully it will never come to this ...

Where a million essays, debates, rants, and denials have been littered over the past month arguing whether or not Social Security is a ponzi or not, we believe one simple chart should suffice to explain to the reader just where we stand. As those who follow the data series know too well, outlays exceeded revenues in 2010 for the first time ever, for a backward looking basis, and so when applying CBO data on future SSTF revenues and outlays (as a % of taxable payrolls), using 10 year moving average data, for forward looking projections, outlays surpass revenues and basically never look back until at least the end of the century. In other words: this is a construct that relies exclusively on new capital coming in to keep it funded and from imploding under its own weight, something better known in literature as a pyramid scheme. But yes: it is not a ponzi scheme in that it most certainly is not voluntary.

As more developments arise in the Solyndra case, we find the specifics of how it was none other than Jacob Lew, the head of the Office Management Bureau, elsewhere known as the guy who puts together all those forecasts that Obama pulls out of his hat as seeing growth of 3.7% in 2012 here and budget savings of $4 trillion there, got subpoenaed, and not just over anything, but over the deal that is rapidly becoming Obama's Solargate: Solyndra. As a recap: the man who is the "expert" on how the US will get out of its multi-trillion deficit had to be subpoenaed by Congress to explain his secretive actions that ended up most likely harming US taxpayers for reasons still unknown (but not for long), and what is far worse, Congress has to subpoena the head of the OMB because it failed to exercise proper oversight of the stimulus money in the $787 billion American Recovery and Reinvestment Act... and all this under the tutelage of a White House which recently won an award for Anti-Secrecy....which was present to the president by among other Gary Bass of OMB Watch...And somehow we are expected to believe that fiscal stimulus in America has even a remote chance of being allocated productively (a fatal Keynesian flaw which Andy Lees described earlier) instead of pumping up crony capitalism schemes that enrich vested interests, and which drown in opacity and obscurity over which not even Congress has any supervision?

Day after day we are brain-washed with the mantra of equity dividend yields being greater than treasury yields implies 'cheapness' or "who wants a 2% return from treasuries?". While we have tried again and again to put this dead-end of apples-to-unicorns valuation to bed, SocGen has an excellent treatise on the subject that should make all but the most ardent Bill Miller fan comprehend the ultimate risk-reward trade-off. Yes, bonds at sub 2% offer miserable returns, but equities will always offer a higher probability of major losses and until we have an investor base that is able to take such losses, low yields and a systematic preference for bonds is likely to be with us for a while. Risk capital will also be in short supply - if you have it, better use it wisely.

Peter Schiff wraps his congressional testimony on the Obama jobs plan, which was one of the most memorable such Congressional hearings on the topic to date, with the following letter of caution to all Americans. To wit: "I don't think those few open minds in the Capitol are going to be enough to keep this ship from sinking. There just isn't enough time or a strong enough will for reform from the American people. That is why it is so important for you to act individually to protect yourself and your family from the new age of stagflation. Please take the time to view my testimony, understand the problems we face, and align your investments accordingly." We urge anyone who has not watched Peter's testimony yet to do so below.

President Obama's proposal to cut the deficit by x trillion dollars is another punch line in the serial joke that our political machinery has been telling us: that deficits will be "cut" in ten years, while the opposite is needed immediately.

As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative. Then again, this was pretty much telegraphed 100% earlier today as noted in "Italy Expected To Cut Growth Forecasts Further." Anyway, those incompetents from Moody's are next. Some of the choicest words: "In our view, weaker economic growth performance will likely limit the effectiveness of Italy's revenue-led fiscal consolidation program", "We have revised our base-case medium-term projections of real GDP growth to an annual average of 0.7% between 2011 to 2014, compared with our previous projection of 1.3%", "The negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy's real and nominal GDP growth, and implementation risks of the government's fiscal consolidation program" and so forth.

The real issues of my generation have unfortunately been glossed over. There have been the occasional articles chronicling how lifetime earnings are adversely affected for those who come out of school into a recession, but this downturn has already had a duration above and beyond the norm, and at present doesn’t appear to be ending any time in the near term. Meanwhile, the bills are stacking up, and even those of us who are working from Generation Neutral are starting to be concerned that the debts we signed on for at 18 will live to haunt us well longer than our worst projections. There is beginning to be a certain resigned malaise hanging over us, and as capitalism is a system predicated on growth and a healthy amount of optimism in the future, this is yet another headwind to our economic and even psychological well being...I’ve yet to figure out what will break our apathy, as our misspent optimism still keeps us believing, however fleetingly, that this too shall pass. The day that we collectively realize that better days aren’t coming could well be too late, but the debts amassed during our optimistic youth will still continue to knock on our door. If our generation doesn’t have it better than our parents’, I wonder what the narrative we tell our children will sound like.

Does anyone seriously believe that the reason we have high unemployment in America is because we have a substandard infrastructure? Apparently the politicians in Washington believe so.

Warren Buffet is at the top of my bloviator list since he and Bill Gates (Sr. and Jr.) have talked about how they are under-taxed, how estate taxes are too low, and how rich people should give all their money away for charitable purposes. Forget the fact that Warren Buffet is a great businessman, or, rather, was a great businessman. The man is a phony. He is a cheerleader for Obama's failed policies. And he has relied on bailouts to make his investments good.

It's hard to tell if the idea that Ron Paul cannot win in 2012 is more ignorant, in its complete lack of historical sophistication, or more arrogant, in its claim to certainty amid all the complexity of 300 million lives and the myriad issues that affect them.

While there was no news from the Greek-Troika discussions, 'deal' chatter was enough to juice S&P futures to day/night session highs (above 1200) on a significant rise in volume and average trade-size. All day we had 5-10pts swings in ES hinging on every headline from Europe and it was very clear that underlying equities themselves were being dragged in a very macro-manner (no surprise at the intraday correlation) with financials lagging most of the moves and ending down 2.7%. TSYs, 2s10s30s, and credit were far less impressed as ES spiked.

While we have heard rumors of a possible Greek referendum vis-a-vis IMF bailouts (i.e., Euro membership) in the past (as long ago as April 2010, or before the first Greek bailout, when life was actually acceptable and the retirement age was in the 50s) we have promptly dismissed such rumors: after all the EU/IMF/Troica/Status Quo^TM what have you would never leave the fate of its existence in such a democratic construct as a majority vote, especially with what would be a near unanimous vote to secede. Well, it may be time to start taking these rumors seriously. Actually no, never mind.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/09/11