Archive - Nov 30, 2012

Many politicians and commentators such as Paul Krugman claim that Europe's problem is austerity, i.e., there is insufficient government spending. The common argument goes like this: Due to a reduction of government spending, there is insufficient demand in the economy leading to unemployment, which means aggregate demand falls even more, causing a fall in government revenues and an increase in government deficits. European governments pressured by Germany then reduce government spending even further, lowering demand by laying off public employees and cutting back on government transfers. This reduces demand even more in a never ending downward spiral of misery. First of all, is there really austerity in the eurozone? One would think that a person is austere when she saves, i.e., if she spends less than she earns. Well, there exists not one country in the eurozone that is austere. Public austerity is a necessary condition for private flourishing and a rapid recovery. The problem of Europe (and the United States) is not too much but too little austerity — or its complete absence. The reduction of government spending makes real resources available for the private sector that formerly had been absorbed by the state.

Just like yesterday's atrocious second Q3 GDP revision needed at least 1 minutes of work (so about 60 seconds more than most algos are willing to put into it) before the true gist of the economic data ugliness could be truly captured, so the true story in today's Chicago PMI - usually a critical advance indicator to the Manufacturing ISM (except lately of course: under central planning any historical correlations make no sense) - only appeared into view following a more than cursory glance. Sure enough, while the headline number printed above 50 for the first time since August, 50.4 to be specific, on expectations of a 50.5 increase, up from 49.9, the bulk of this was driven by the most counterintuitive driver: i.e. Prices Paid, which directly correlates with collapsing profit margins, printing at a 16 month high - inverse deflation is everywhere these days it seems, while the all critical New Orders plunging to the lowest since June 2009 or 45.3 from 50.6, and finally inventories declining from 49.6 to 47.1: which makes sense after as disclosed yesterday it was inventory accumulation in Q3 that accounted for 36% of US economic "growth." What good news there was was in Production, Backlogs and Employment: the same Employment we have been told to ignore in all other data series due to the impact of Sandy.

Perhaps the Bureau of Economic Analysis was hoping that today's cornucopia of ugly income and spending data would be enough for those who keep track of the US government's Department of Truth shennanigans and ignore the meat behind the numbers. Whatever the reason, the real story in today's Personal Spending data was not the consumer weakness, but the unceremonious revision of historical data, which as the chart below mysteriously whacked away a whopping $40 billion in real (i.e., inflation adjusted) disposable income. Because as the chart below shows, somehow, somewhere starting in March and continuing through the last month just before the election (the September data was released on October 29 or a week before Obama's reelection), $40 billion in cumulative disposable income evaporated. Where it went, and/or why it had been counted in the first place is anyone's guess. But one thing is certain: 0.25% of annualized GDP was just whacked away. One wonders: how many more such retroactive revisions will we see before reality and economic propaganda myth are finally superimposed?

When no more money flows in, to fund outflows, then the jig is up for the pension fund ponzi. This, as evidenced by the 'punching, kicking, and tearing at clothes' that a Greek pension fund manager endured recently, is exactly what has begun in Greece. As Reuters reports, the fund manager "enraged" here audience when she asked the Greek journalists to 'double their contributions' to their social security fund, and spent the night in hospital for her efforts to keep the ponzi alive. It was a brutal sign of the fury many Greeks feel at the way the country's debt crisis has dashed hopes of a comfortable old age. As New Democracy's leader noted: "From July 2010 it was obvious that a debt restructuring would be inevitable. While foreign banks were unloading their Greek government bonds, no one moved to tell Greek pension funds to do something, that a haircut was coming." Under a law passed in 1997 and refined in 2007, pension funds have to place 77% of any surplus cash in a pool of 'common capital' which must be invested only in Greek government bonds or Treasury bills (T-bills). So the PSI saved German and French banks but crushed Greek pensioners...

It was only appropriate that on a day in which our chart of the day confirmed that the US consumer is getting increasingly more broke, we got an update of Personal Income and Personal Spending, both of which missed expectations and declined substantially. October income printed at 0.0%, down from 0.4% in September, and below expectations of 0.2%, while spending plunged from 0.8% all the way into negative territory at -0.2%, missing expectations of an unchanged print. Counterintuitively, the spin is that this miss was due to Sandy, when this makes absolutely zero sense: as a reminder Sandy only hit in the last 4 days of October, which means it had no time to impact income, and if anything it prompted an increase in spending as consumers stockpiled ahead of the landfall. But that's why they call it spin. Of course, none of this should come as a surprise: the implied savings rate in September hit a multi-year low of 3.3%, which means going forward the blend of spending and savings will be unpleasant for stocks as consumers have no choice but to rebuild savings once more. And finally, the most disturbing metric, and one which is a red flashing light for all those predicting yet another economic renaissance in 2013, is that real Disposable Income declined by 0.1%: the third decrease in 3 months, confirming that on an inflation adjusted basis the consumer peaked in the summer, and it is all downhill from here.

Romney's apparent victory in the first Presidential debate was the worst outcome for U.S. stocks, for it gave false hope to a Republican sweeping into the White House. A more gradual acceptance of the November result would give the market a better chance to absorb the news with minimal impact. We are presented with a similar scenario with Washington’s addressing the fiscal cliff.  Optimistic comments about resolving the crisis has spawned gains in equities that are sustainable while losses resulting from downbeat remarks have offered profitable short term buying opportunities.  While much of this price action the past few days has benefitted from typical calendar money flows that will disappear in the middle of next week, some of the positive sentiment arises from the overwhelming belief that both sides can consummate a deal on the budget ahead of the December 31 deadline. The longer investors anticipate such a compromise, the more violently shares will tumble upon recognition that assuaging the crisis with a comprehensive solution will take extra innings.

For a country in which the consumer is responsible for 70% of GDP, one wonders: without savings and without wages where will this "recovery" we hear so much propaganda about and which every investment bank this week went all in on (just like they did in the end of 2010 only to admit their error 4 months later) come from? Because every now and then it helps to step back from the trees and observe the forest. Behold: the forest.

• Turns out no free lunch after all: Greeks rage against pension calamity (Reuters)
• Athens banks told of debt buyback ‘duty’ (FT)
• U.N. Gives Palestinians 'State' Status (WSJ)
• Obama's Cliff Offer Spurned (WSJ)
• Republicans Reject Obama Budget as He Sells It to Public (Bloomberg)
• Macau Gangster Who Missed Boom to Be Freed After 14 Years (Bloomberg)
• China Economic Optimism Returns in Poll as Xi Beats Hu (Bloomberg)
• Spain May Escape European Bailout, Former ECB Board Member Says (Bloomberg)... but they won't
• After a bashing, BOJ weighs "big bang" war on deflation (Reuters)
• Recession Left Baby Bust as U.S. Births Lowest Since 1920 (Bloomberg)
• Japan unveils second Y880bn stimulus package (FT)

One of the indirect beneficiaries of the German generosity which allowed a token EUR44 billion to be released for Greece, with the bulk of the proceeds used to pay off hedge fund and Western Europe bank creditors, are Greek banks, who will fight for the remaining scraps and use them to plug their massively underwater balance sheets. However, as we reported yesterday, the same Greek banks not only want their cake, but they now have a set of conditions that must be met for them to eat it too.

With a vote of 473 in favor, 100 against, and 11 abstentions in the German Bundestag, Europe's AAA-club gets the formal green light to pay off hedge fund holders of Greek bonds, and to preserve the solvency of Deutsche Bank, also incorrectly known elsewhere as "the third Greek bailout." As for Greece, we expect a 4th "bailout" within 3-6 months. In fact after today's spectacular collapse in Greek retail sales which plunged 12.1% in October, make that 2-5 months.

There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."