Archive - Oct 2012

This October, as the presidential election nears, we witness the strange intersection of the worlds of the gambler and the policy wonk. Daily, our best political observers reference the current prices of the presidential betting market. Unfortunately, we think their lack of knowledge of gambling mechanics leads them astray. This brief introduction to betting mechanics brings us to the first uncomfortable tension between gamblers and policy wonks: policy wonks love to quote Intrade, and gamblers think it’s by far the least important and least informative presidential betting market.

Just like a bad case of crabs, no matter how much you try to wash it away, it just keeps coming back to bite you. The U.S. Energy Department objected to Solyndra LLC’s bankruptcy plan, saying it fails to protect the government’s interest in collateral; via Bloomberg:

• *DEPARTMENT OF ENERGY OBJECTS TO SOLYNDRA'S BANKRUPTCY PLAN
• *SOLYNDRA HAS SPENT VIRTUALLY ALL SALE PROCEEDS, U.S. SAYS
• *SOLYNDRA PLAN FAILS TO PROTECT COLLATERAL INTEREST, DOE SAYS

We are going out on a limb here but the over/under for a Solyndra 'recovery vs Greece 'recovery' is going the wrong way for the US government we suspect.

The Fed's Zero Interest Rate Policy has side-effects. Savers are punished but determining the financial impact poses some difficulties. The conservative and cumulative effect is a loss of just over 9 trillion in savings during the entire period.  This represents the current account loss of nearly 2.8 trillion as of Oct 12.  Savers could be garnering nearly three times the current amount in interest income if interest rates represented the long run historical mean. But at least the banking system is saved.

It takes all of three seconds on the ground in Spain to realize that this country is hurting. Big time. It’s amazing what the combination of debt, deceit, and a bona fide banking collapse can do to a nation.  Consequently, depositors are moving money out of the country en masse, often to the tiny principality of Andorra next door - a highly capitalized, low tax banking jurisdiction. This leaves the already thinly-capitalized Spanish banks in an even weaker position. As we have painstakingly pointed out a number of times, the way the banking system works in most of the world is a complete fraud since most banks only hold a tiny percentage of their customers’ deposits in cash. The moment there are more than a handful of depositors wanting their money back, the bank has a big problem. This is happening nationwide in Spain. As such, the IMF is now recommending that Spain (and other nations in the eurozone periphery) take action “at the national level” to stem this flight of funds and prevent people from moving money abroad. Capital controls by any other name should smell so foul.

Stocks popped on some bloomberg flashing red headlines from the Fed's Beige Book but quickly faded as bonds did not move. The reality - summed up in the worldcloud - is 'mixed' - for sales, for prices, for demand, for jobs:

• *FED DISTRICT BANKS SAID `CREDIT STANDARDS WERE LITTLE CHANGED'
• *FED DISTRICT BANKS SAID MANUFACTURING WAS `SOMEWHAT IMPROVED'
• *FED DISTRICTS SAID `OVERALL LOAN DEMAND INCREASED SLIGHTLY'
• *MOST FED BANKS SAID `WAGE PRESSURES REMAINED MODEST'
• *FED BANKS SAID `EMPLOYMENT CONDITIONS WERE LITTLE CHANGED'
• *FED DISTRICTS SAID CONSUMER SPENDING WAS `FLAT TO UP SLIGHTLY'

As class-warfare implicitly breaks out - trumpeted by our political leaders - it seems that there is another, much more relevant, trend that is occurring that strikes at the heart of our nation. With Friday's jobs number still fresh in our minds, Citi's Steve Englander takes a look at one small slice of the demographics subject and found a rather concerning and little discussed fact. Employment-to-population ratios among older individuals have gone up in recent years, in contrast to the so-called prime-aged 25-54 cohort, where employment-to-population is much lower than earlier. It seems the real divide in this nation is not between rich and poor but old and young - as the 55-plus (and even more 65-plus) are forced to stay in the workplace as retirement remains a dream (thanks to ZIRP and Keynesianism's excess crises from boom-to-bust leave median wealth well down - even if the rich are 'ok').

Much has been made lately of Jack Welch's "turn" on the Administration regarding the BLS data for September.  It seems a bit odd that Jack would be worried about this now since Zerohedge readers have been exposed to reports that this has been going on for a few years.  Why now Jack?

The greatest and most often exploited weakness of any revolution for freedom is the inability of the downtrodden populace to identify the true enemy. Even the most successful battles against despotism, like the American Revolution, often only had a distant sense of who they were really fighting against. In the coming years, the American people will face numerous threats; some real, some imagined in the sterile conference rooms of a black-hearted think tanks.  But, the most terrifying threat to our cultural roots of free thought, expression, and prosperity is wielded by a very particular and exclusive group of thin-blooded ego-maniacs.  Identifying them is not difficult.  Hiding their true nature is nearly impossible for a person or institution whose narcissism is so pronounced.  They adore their own insanity and wish to share it with the world.

Still long-term bullish as nobody notified us that the Fed has withdrawn QE3.

We had the knee-jerk reaction spike. That was faded. Then we had the retest as hope remained - though it was led by the most defensive sectors as we have pointed out. That was faded. Double-top? S&P futures now sit at the top of the Draghi/ECB spike cliff...

Some prefer to see the 'employment' glass half-full, some half-empty, and others see the glass smashed into a million shards on the keynesian kitchen floor. The zealousness with which the 'number' has been dismissed and praised has generated more questions than answers. Goldman's Jan Hatzius addresses the question of the pace of progress in the labor market, the reasons for the contrast between GDP and employment, the amount of slack left, and the implications for Fed policy.

As we all know, what matters isn't our nominal earnings, it's what our earnings can buy that counts. If it takes an hour of labor to buy four gallons of gasoline, it doesn't really matter if we're paid $1.60 an hour and gasoline costs 40 cents a gallon or we're paid $16 an hour and gasoline costs $4 per gallon. Ditto $16,000 an hour and $4,000 per gallon. What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons. This is called purchasing power, and rather naturally the Status Quo has worked mightily to cloak the reality that our purchasing power of the bottom 95% of wage earners has been declining for decades. Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.

Eerily quiet after yesterday’s post-ECOFIN cacophony…

No real take-away today: sometimes you need a breather and everyone agrees.

Between the IMF's European growth expectations and deleveraging needs, it seems reality is sinking in a little in Europe. All equity indices are closing red today with Spain and Italy worst and banks underperforming. The most interesting feature we noticed is that once again - now the seventh day in a row - European sovereign spreads have deteriorated notably from the US day-session open to the European close. Spain and Italy 10Y bond spreads are 15 and 8bps wider (only) on the week but notably Spanish and Italian equities are down 3.2% and 2.8% respectively this week. EURUSD is practically unch at the EU close - up 60 pips from overnight weakness.

Something changed in the FX market after QEternity was announced. As CitiFX notes, active traders in the EURUSD market had generally behaved as trend-followers throughout the summer - in the lead up to QE3; but in the last few weeks, that pattern has changed dramatically. The heavy selling of EUR which took our positioning indicator from a record high in mid-September to negative territory came despite resilience in spot. Thus investors now appear more inclined to sell into strength from EUR. This could reflect frustration with EUR’s inability to sustain breaks beyond recent ranges and desire among investors to lock in gains among longs. Combine this positioning with the fact that EURUSD is trading over 300 pips rich to its swap-spread-implied fair-value and perhaps trading the range - as opposed to looking for breakouts - is a better bias currently.