Archive - Apr 2012

"They know we're in here now."

As if our recent discussion of Austerity were not enough, Citi's Steve Englander invokes 'String theory' to open the door to multiple universes, and in one of them Paul Krugman is undoubtedly Fed Chairman. Start with the assumption that a Paul Krugman Fed would advocate strong fiscal and monetary measures and tolerate a significant run-up in inflation. The question is how the USD would respond in this world. The presumption is that the Krugman Fed would cooperate by financing the fiscal expansion, allowing government spending or (or in a very strange Republican Krugman parallel universe) tax cuts to have a real impact without affecting government debt, making a strong distinction between pumping liquidity into the banking system and directly into the real economy. In conventional terms,  this is Financial Repression 101, but inflation is desired, achieved and beneficial. As Krugman points out there is a cost to an extended period of long-term unemployment. The bottom line is that unless you make low inflation a canonical virtue, you have to compare the long-term losses from lower credibility (if they exist) against the long-term gains from moving to full employment quicker (if they exist).

I was approached recently by a member of our Sovereign Man community who filed the paperwork to relinquish US citizenship some time ago. Long story short, after an incomprehensibly long wait, the US government finally sent him a reply: Application DENIED. Absolutely shocking. That you even have to ‘apply’ to relinquish what you never signed up for is intellectually insulting. That you cannot do so freely, and immediately, is nothing short of totalitarian. It’s still an embryonic movement, though more and more US citizens are being driven to divorce their country. Last year nearly 1,600 people gave up US citizenship, up from 1,485 in 2010, 731 in 2009, and 226 in 2008. While some renunciants have philosophical misgivings about being American, most do it for tax reasons. There’s a growing number of expats who, despite living abroad for years, are still paying huge portions of their income to Uncle Sam.

Just as we predicted this morning, as soon as Europe FX/Credit markets closed, US equities proceeded to meltup celebrating the claims data 'improvement week-over-week' in this bizarro world we live in. ES (the S&P 500 e-mini future) has broken up and out of its 3-week range to run the stops above the pre-Non-Farm-Payroll close levels from 4/5. Gold has been relatively outperforming today and on a beta-adjusted basis, the S&P has just melted up to meet Gold's enthusiasm. Ahead of tomorrow's GDP data, it seems the worst-case scenario (from a market meltup momentum perspective) is a small miss - not quite cool enough to kick Bernanke into QE action and not quite warm enough to juice the self-sustaining recovery bulls into action (especially as the earnings picture is starting to fade a little here). 1400 next? 1404 for April green? ES volume is considerably lighter than average once again - as it has been for the last 3 days of exuberance.

Eyeless Shrimp and Other Grotesque Deformities In Gulf Seafood Cause Alabama to “Temporarily” Shut Down Shrimping

Suddenly, everywhere you look, “austerity” has become a 4 letter word.  Clearly it wasn’t excessive spending that caused too much debt.  Surely we didn’t hit a financial crisis in spite of excessive spending, nope, it is all the fault of austerity. In the rush to avoid supporting anything that could be viewed as “austerity” we have lost sight of what austerity is, and how it can impact the economy.  Let’s not let politicians get away with claiming everything that is “austerity” is bad. We too often confused “conjecture” with “fact”.  Lately I have seen a lot written about how much better the job situation is today than it would have been without all the policies of Obama, Geithner, and Bernanke.  It is treated as fact, yet it is merely conjecture.

As we noted (here and here) earlier this week, the world increasingly looks like 'Japan' with little aggregate way out. The following chart perhaps confirms the repressive wave of ongoing intervention across the developed world. Extrapolating trends into the future implies that since the world's central banks will need to have a short-term rate of negative 2% by 2020, there is a lot of QE-equivalent easing still to come. As Simon Black noted, "The ironic triumph of the Keynesians means that, in trying to save the economy, our central banks may end up destroying it completely by means of the printing press; as a consequence, we now get to experience some of the full-on horror of the Japanese malaise."

The symbiosis between the Keynesian expansion of the economy and the growth of suburbs in US cities has been ably discussed by Beauregard (2006). Sprawl was driven by the flow of money, the "American dream" of owning a home in the suburbs, and facilitated by the widespread ownership of cars. The suburbs were designed with cars in mind. The growth of suburbs fulfilled two roles. Lots of houses were available for new buyers, which kept prices down; and city governments discovered that developer's fees and the new land taxes initially exceeded the maintenance cost of the new roads and infrastructure built to support them,. Unfortunately, as time passed and the infrastructure aged, soon maintenance costs exceeded tax revenues, necessitating another round of growth. Suburbs were able to maintain the required level of growth for a few decades, but we are reaching the point everywhere (it seems) where there cannot be enough new growth to maintain our crumbling infrastructure. The mindset of the "ownership society" really drove demand for housing, and the best places to expand were in the southwest, so that cities like Phoenix and Las Vegas really grew. Low interest rates plus easy money led to a bubble in house prices and an explosion of sprawl. The Austrian school of economics teaches us that easy money leads to malinvestment. Suburban growth certainly seems to qualify. Our urban sprawl malinvestment has left us with the interwoven problems of unlivable cities, financial crisis, and increased death and destruction from natural disasters.

Holland entered the bond vigilantes' radar screens abruptly this weekend, following some vague rumbling that it may be downgraded if it doesn't get its deficit in order, and culminating with a cabinet collapse once the critical austerity deal was unable to be reached. Subsequently the cabinet resigned en masse. It seems it may have to be now reappointed en masse with headlines blasting that...

• DUTCH PARLIAMENT MAJORITY BACKS BUDGET DEAL, ANP REPORTS

The paradox is that in this market, in which more European turbulence is actually good for risk assets as it brings the inevitable next LTRO/easing event closer, any diffusion of Dutch tensions would be market neutral. Yup: enjoy the Constanza market.

Confirming the lack of decoupling in major developed economies (which we noted yesterday), US macro data (as tracked by Citigroup's ECO Surprise Index) has turned negative for the first time in six months. Having trended lower (i.e. missed expectations to the downside) for much of the last few months, this shift now puts aggregate US macro data in the deteriorating case and infers considerable risks of downside to equity prices in the next three months - or did Bernanke raise his put strike yesterday?

TedBits:  The Economic and Financial NO SPIN Zone
Global Macroeconomic Analysis Through the Austrian Lens
By Theodore (Ty) Andros

An underwater earthquake has occurred in Spain and is quite possibly occurring now in Italy.  Killer waves are now headed directly at the central banks and financial systems throughout the developed world and at Europe in Particular.  How long until they hit and do the financial equivalent of Japan’s recent tsunami?  Socialist bureaucrats and progressives on both sides of the Atlantic are locked in death struggles with Mother Nature.  THEY WILL LOSE.

Socialist public servants and banksters in Brussels and Washington are DESPERATELY trying to repeal the law of nature:  You MUST produce more than you consume or PERISH.  Economic systems which are predicated upon the consumption of wealth rather than the production of it are now on their deathbeds.  The obscenity of counting consumption as production, as does Keynesian economics, is exposed for its fundamental flaw -- it counts wealth consumption and destruction as wealth production.  How absurd. 

I do not believe that China or Russia are in any position to dump the US dollar, at least not in the near-term. The US Dollar may one day no longer be the reserve currency of the world. But that day is years and possibly decades out. But the notion that China or Russia could just dump the Dollar and move around the US in terms of trade is unbelievably naïve and greatly underestimates the importance of the US to the global economy.

Support for gold is at $1,612/oz and resistance is at $1,663/oz and $1,684/oz.

Common sense suggests that if employment is rising, the stock market should follow as more jobs means more wages, sales and profits. We see this correlation in the overlay of the S&P 500 (SPX) and employment until the latest recession and stock market Bull run-up: this is clearly a jobless "recovery" yet the stock market has more than doubled. Is this decoupling of employment from the stock market "the new normal" or an aberration that's about to revert to historical correlation? To do that, the market would need to fall in half or the economy would need to add 10+ million jobs in short order. If we combine Peak Oil with Peak Credit, we get a household sector with stagnant disposable income burdened by servicing monumental debt loads. Here is a chart of household liabilities and wages/salaries, unadjusted for inflation. Household debt has completely outstripped income. These charts do not paint a picture of robust recovery, they sketch a grim picture of stagnant household incomes and rising costs for fuel and debt service.

Given the dominance of the machines, do flesh-and-blood traders have a chance?