Archive - Mar 2012

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.

In a double-whammy of mounting geopolitical tension, Channel News Asia reports that North Korea has started fueling a rocket in preparation for a launch date set for April 12 or 13. The supposed 'satellite launch' is being considered a missile test by the West and in the meantime snubbing Nobel Peace Prize winner Obama for his 'confrontational mindset'. In retaliation Pyonyang will not be receiving food aid (according to a Pentagon official). Meanwhile, Israel National News highlights that the Israeli Defense Forces (IDF) have taken the unprecedented step of canceling the long-customary leave for Passover and will instead remain on full alert. Careful to point out that this action did not stem from any planned military action (though soldiers dismissed that as obfuscation), IDF chief of staff Benny Gantz said Wednesday he gave the order saying he "does not accept" the notion of an army-wide vacation during Passover. A growing cadre of senior security officials and former IDF chiefs have called for a major Gaza incursion to uproot the terror infrastructure there. Gantz himself has described such an operation as "increasingly inevitable."

Yesterday we presented what the balance sheet of the developed, or better known as insolvent, world- recall there was over $21 trillion in excess debt as of 3 years ago, looks like, and the curious to some observation that trillions in liabilities also double up as assets, in what is easily the world's most confounding (to central bankers at least) global circle jerk. After all, one can not inflate liabilities, without also destroying the assets these double count as  at the same time. Yet while informative, that chart did not tell us anything we did not already know. However, the next chart we will present today will show a different aspect of the developed world, namely by indicating how the households of the three "richest" economies - Japan, the US and the Euro Area, have invested their money in various financial assets. And while this is merely the asset side of the ledger it shows how distinctly different the approach to capital allocation has been for countries in different stages of growth or ungrowth. What is most notable is the distinct distribution of capital in shares and equities within the three regions: it also shows why a sustained downtick in the US stock market is the deathknell of the modern economic experiment. What is also curious is that the investment of Japanese households into Insurance and Pension reserves, which in turn are then funneled into JGBs, is no larger than the US or European equivalent: it means that the true funding cost of the welfare state is roughly a third of all modern financial assets.

Three months ago, this site was the first to discuss the impact of abnormally high temperatures on "better than expected" economic data, which the mainstream media in its perpetual permabullish bias attributed to economic "growth", and not even to $1.3 trillion in ECB liquidity, which today even the ECB's Constancio admitted was nothing but QE: "The purpose of the European Central Bank's two three-year longer-term refinancing operations was to address banks' short-term funding issues and "nothing else." "The sole aim of the LTRO was to cater to the funding stress of euro area banks in general," Constancio said at a colloquium on macro-prudential regulation here. "It never crossed our minds that we were solving the sovereign debt crisis" with these measures. Hence QE, albeit masked by worthless collateral exchange to make the naive Germans believe the ECB was not outright printing money. It was. Now that the 'economy', and by that we mean the stock market of course, is finally turning over, the topic of the weather will start being far more prominently featured, as there will have to be a validation to unleash QE at either the April or the June FOMC meeting (something which the Chairman hinted at on Monday, and which Bill Gross has been saying for months). Why blame it on the weather of course. It is in this context that we show the latest Goldman Sachs economic outlook piece from Zach Pandl who now states that "unseasonably warm temperatures have lifted the level of nonfarm payrolls by 70,000-100,000 as of February." Call it erroneous seasonal adjustments (as we have for the past two months), call it a trigger happy BLS, or just call it people leaving their home more than if there was 6 feet of snow outside, the point is that now up to 100,000 jobs will have to be "given back." Which in turn means that next Friday's NFP forecast of +213K may just end up being as low as 113K, with the print coming just in time for the Chairman to commence warming up the printers, and soon enough to where more QE will give the president the sufficient bounce in stocks he needs to mask the debt ceiling breach in September.

It’s tough out there. The giants are losing. But there is an astonishing winner....

Rising geopolitical tensions and high oil prices are continuing to help renewable energy find favour amongst investors and politicians. Yet how much faith should we place in renewables to make up the shortfall in fossil fuels? Can science really solve our energy problems, and which sectors offers the best hope for our energy future? To help us get to the bottom of this we spoke with energy specialist Dr. Tom Murphy, an associate professor of physics at the University of California. Tom runs the popular energy blog Do the Math which takes an astrophysicist’s-eye view of societal issues relating to energy production, climate change, and economic growth.

In the interview Tom talks about the following:

Why we shouldn’t get too excited over the shale boom
Why resource depletion is a greater threat than climate change
Why Fukushima should not be seen as a reason to abandon nuclear
Why the Keystone XL pipeline may do little to help US energy security
Why renewables have difficulty mitigating a liquid fuels shortage
Why we shouldn’t rely on science to solve our energy problems
Forget fusion and thorium breeders – artificial photosynthesis would be a bigger game changer

How long will this last?

For the last month or so, despite ongoing fund inflows, high-yield credit's performance has been generally muted. Compared to the exuberance of the equity market it has been downright flaccid and given how 'empirically' cheap it is on a normalized spread basis through the cycle (and the fortress-like balance sheets we hear so much about) some would expect it to be the high-beta long of choice in the new-new normal rally-to-infinity. However, it is not (and has not been since late January). There are some technical factors including a bifurcated HY credit market (between really 'good's and really 'bad's and illiquids and liquids), low rate implications on callability and negative convexity affecting price but the lack of share creation in the HYG (high-yield bond) ETF also suggests a lagging of support for high-yield credit. This is a very similar pattern to what was seen in Q1/Q2 last year as equity kept rallying away from a less sanguine credit market only to eventually collapse under the weight of its own reality-check. European credit and equity markets are much more in sync together as they have fallen recently but financials in the US exaggerate this credit-signaling-ongoing-concerns trend while equity goes on about its bullish business. Another canary dead?

Moody's may never downgrade the US or France for that matter, but when it comes to its stable assessment of Dong Energy, its rock solid analysis truly stands out.