Archive - Mar 29, 2012

It is funny to hear the talking heads preface virtually every bullish statement with "the US economic data is getting better." It's funny because it's wrong. We have been tracking economic data based on our universe of indicators and as of today we have seen a miss rate of about 80%. And now, Deutsche Bank has joined us in keeping track of economic beats and misses, with their own universe of 31 economic indicators. The results are shown below and the verdict is in: the US economy has officially turned the corner... lower, now that the seasonally adjusted boost from a record warm winter fades and becomes an actual drag (not to mention the fading of the $2 trillion in central bank liquidity).

All you need to read and more.

When I first attempted to find a more realistic debt to GDP ratio for Spain, Belgium, Italy et al I did it on a stand-alone basis; no inclusion of their European liabilities. When I approached Germany, given their size and importance in the EU, I focused upon their liabilities to the European Union. Several institutions have since asked me to consider the total liabilities for each country as every nation in the European Union has national debts as well as debts for their percentage of ownership for the EU and the European Central Bank. Using the combination of national liabilities and any nation’s percentage of EU/ECB liabilities one then could ascertain a final and complete picture of a real debt to GDP number that, unlike the Eurostat data, would be inclusive of sovereign guarantees, contingent liabilities and their responsibilities to the EU and the ECB. This schematic then would tell each of us what a given country actually owed so the total reality could be assessed for judgment.  Given that Spain is currently in focus and that nowhere that I have ever seen has there been an accurate national debt coupled with Spain’s European debt schematic; I have decided to provide you one.

Jobless claims still are good news but their newest news is not so good news. The progress on claims falling is less than we thought and the current momentum is diminished.

The big broad downtrend is still there but the recent downtrend which saw the pace of claims falling faster has had its wings clipped. Too soon to say if this is a key development or not. But it could drive optimists to drink.

The sad reality of an austerity induced slowdown in Europe and an ESFS/ESM as useful as a chocolate fire-guard seems to be creeping into risk asset premia across Europe (and implicitly the US). GGB2s are all trading back under EUR20 (that is 20% of par), Sovereign yields and spreads are leaking wider despite the best efforts of their respective banks to back-up-the-truck in the 'ultimate all-in trade' and the LTRO Stigma has reached record levels as LTRO-encumbered banks' credit spreads are the worst in over two months. Spanish sovereign spreads are back at early January levels and with Italian yields comfortably back over 5% and the bonds starting to reality-check back towards the much less sanguine CDS market. It seems apparent that much of the liquidity-fixing LTRO benefits are now being washed away as investors realize nothing has changed and in fact things are considerably worse now given encumbrance and subordination concerns and the increased contagion risk that the LTRO and the Sarkozy trade has created.

The Greek central bank - whatever that is: some local subsidiary of the ECB? - released February corporate and household deposit data. The chart below explains it all: back to May 2006 levels and the run shows no sign of abating And remember Venizelos' sage February words of advice? "VENIZELOS SAYS NOW IS THE TIME FOR DEPOSITS TO RETURN TO BANKS"... that didn't work too well.

The threat of a gas tanker-driver strike has brought out the best in British political double-speak to calm a fearful nation. Queues Lines are forming at every and any gas station as fears of an Easter-break strike has the blokes back in blighty filling up every and any container they can to stockpile petrol. In response to a panic-worthy statement by Cabinet Minister Francis Maude who said "People should take precautions, just in the way the Government has taken precautions doing some sensible planning," and drivers should keep their tanks at least two-thirds full in anticipation of a shortage, sales of Jerry cans have risen this week. This pre-emptive stockpile-driven panic-buying to avoid real panic-buying should the strike occur spurred some calming words from Energy secretary Ed Davey "I don't think they (drivers) need to queue, I don't think they need to change their behavior very much,". Too late mate! More economically concerning were comments, cited by The Telegraph from the government that "We are under no illusion, the impacts of a tanker strike could be very severe for our economy, could really disrupt the lives of millions of people." As the head of the retail motor industry federation noted "I think the government have mishandled this from the very start" and in the pun-of-the-day, Sky News notes the government "made a crude decision to play politics with petrol without regard for the consequence." When will the Fed's actions finally lift sales of currency-stockpiling wheelbarrows we wonder? Or alternatively, a Toilet Paper run based on the Treasury's relentless "actions"?

Following last Thursday's weekly claims release we said "Initial Claims Beat Expectations, To Miss Next Week Following Revision" and sure enough, last week's 348K beat of 350K expectations has been revised wildly higher, to 364K, meaning the initial beat was not only a miss, it was wide by a mile relative to the 350K preliminary expectation. But robots do not care - all they care is the current print, which however this time also missed, printing at 359K on expectations of a 350K number. This is the first 4 week increase in the 4 week SMA since September as the weather impact of the record warm winter starts to fade away, as explained yesterday. Same gimmicks in the continuing claims number too which like everything out of the BLS is so meaningless for concurrent data, we will probably just wait until the next week revision to get a sense of what is truly happening. More troubling is that 78K people fell of extended and EUC claims as more and more drop out of the workforce. This means the unemployment rate just dropped courtesy of even more people giving up on finding work. Thank heavens for BLS math. In other news, the final Q4 GDP revision came unchanged at 3.0%, in line with expectations. There were no major changes to the components, however Personal consumption did decline modestly from the second revision's 1.52% to 1.47%. It also appears that the government has been consistently taking away less and less from "growth", detracting 0.93%, 0.89% and 0.84% with every consecutive revision. Overall, a wash, meaning March is about to close with about with 17 misses out of 19 key economic indicators.

Much noise has been emanating out of Israel vis-a-vis its Iranian intentions, with some opinions suggesting an attack is imminent, while others claiming that Israel will ultimately defer to D.C., and postpone an attack, and the eventual gasoline price shock, until after the election. The truth is nobody but a few select generals, knows: in warfare surprise is the key factor, so outright flashing invasion intentions is usually an indicator of just the opposite. That said, the most recent update that Azerbaijan has granted Israel access to its airbases along the Iran border is hardly encouraging for Nobel peace prize winners and other pacifists. Yet as we have been claiming for the past two weeks, ever since the launch of CVN-65 on its last tour of duty, the true catalyst will be the arrival of the USS Enterprise at what may well be its last place of anchor - somewhere in the Arabian Sea, just off the side of CVN 70 and CVN 72 both of which are patrolling the Straits of Hormuz. And as the map from Stratfor below shows, the Enterprise is about to cross the Suez Canal, from which point it will be at most days from entering its catalyst location, namely supporting the Israel air force. Just because the US has never had 3 concurrent aircraft carriers in proximity to Iran before.

Austerity hasn’t worked for countries.  So far the austerity path has made situations worse, rather than better.  Without stimulus, economies have seen their problems compound.  So now virtually everyone is against the idea that austerity is helpful. That takes us back to spending.   Maybe it’s just me, but spending is what got us into this mess in the first place.  If spending worked so well and was so easy we wouldn’t have a sovereign debt crisis in the first place.  Virtually every country was spending, yet deficits grew and economies shrank.  Why is there any faith that spending now will work?  Are we so good at targeting specific things that will really, truly, work?  Not a chance.  Spending will ensure debt grows just as fast, make the problem even bigger in the end, but will make people slightly happier in the near term. So if austerity doesn’t work, and spending hasn’t worked, what will? PSI, or Default, or Restructuring.

Iran's oil exports have dropped in March as buyers prepare for sanctions, and shipments are likely to shrink further if Obama determines by Friday that markets can adjust to less Iranian oil and tightens sanctions even further. Sanctions could eventually leave half of Iran's oil output cut off from international markets, according to analysts and officials. Iran is also being excluded from global commerce and the global economy by being locked out of the international payment system – SWIFT. SWIFT, the Brussels based clearing house, announced last week it will cut services to Iranian banks on foot of European sanctions, in order to comply with the EU Council. The service denial includes Iran’s central bank, which processes Iran’s oil revenues. Some 30 Iranian banks will be blocked from doing international business. History suggests that the trade, economic and currency war with Iran may soon degenerate into an actual war. Increasingly, the regime in Iran has little to lose in engaging in a more aggressive foreign policy – including attempting to close the strategically important Straits of Hormuz.

• Obama budget defeated 414-0 (Washington Times) yes, the Democrats too...
• German Central Banker: ECB Loans Only Buy Time (AP)
• Baku grants Israel use of its air bases (Jerusalem Times)
• Japan May Understate Deflation, Hampering BOJ, Economist Says (Bloomberg)
• BRICS flay West over IMF reform, monetary policy (Reuters)
• Five Portugal Lenders Downgraded by Moody’s (Bloomberg)
• SEC Registration Captures More Hedge Fund Advisers (Bloomberg)
• EU Nears One-Year Boost in Rescue Fund to $1.3 Trillion (Bloomberg)
• Consumers plot emergency oil release as Saudi decries high prices (Reuters)
• Japan Plans to Draft Stopgap Budget for First Time in 14 Years (Bloomberg)

Sometimes, the biggest threat comes from within...

After two months of quiet from the old world, Europe is again on the radar, pushing futures in the red, and the EURUSD lower, following a miss in March European Economic and Consumer confidence, printing at 94.4 and -19.1, on expectations of 94.5 and -19.0, as well as an Italian 5 and 10 Year auction which seemingly was weaker than the market had expected, especially at the 10 Year side, confirming the Italian long-end will be a major difficulty as noted here before, and pushing Italian yields higher (more on the market reaction below). The primary driver of bearish European sentiment continues to be a negative Willem Buiter note on Spain, as well as S&P's Kramer saying Greece will need a new restructuring. Lastly, the OECD published its G-7 report and reminded markets that Italian and likely UK GDP will shrink in the short-term. This was offset by better than expected German unemployment data but this is largely being ignored by a prevailing risk off sentiment. In other words, absolutely nothing new, but merely a smokescreen narrative to justify stock declines, which further leads us to believe that next week's NFP will be worse than expected as discussed last night.