Archive - May 2012

Three important things occurred today: 1) US equities converged down to high-yield credit's less sanguine view of the world; 2) US equities converged to US Treasuries hope-less view of the world; and 3) Gold was the leading indicator for where risk assets should be today - as its stability was the only rock upon which to anchor expectations of intervention once again. The equity market fulfilled every technical analyst's wet dream today with a low volume gap-fill - which notably left today's VWAP at almost exactly the closing price from Friday (i.e. gave bigger players a chance to get out without losing their short - which was exemplified by the sell-off into the close on much bigger than average trade size). Never have we heard just whimsical exuberance at the market closing practically unchanged (ES +2pts) but critically risk markets in general did nothing but revert ahead of tomorrow's real action as the UK (and that means the European credit market) comes back from a long-weekend. Broadly speaking - US equities outperformed risk-assets modestly until the late-day give back dragged them back to reality but overall - IG credit underperformed, HYG outperformed (inflows dominant), and HY and S&P 500 e-mini futures (ES) stayed in sync.

The entire bogus recovery is again being driven by subprime auto loans being doled out by Ally Financial (85% owned by the U.S. government) and the other criminal Wall Street banks. The Federal Reserve and our government leaders will continue to steer the country on the same course of encouraging rampant speculation, deterring savings and investment, rewarding outrageous criminal behavior, purposefully generating inflation, and lying to the average American. It will work until we reach a tipping point. Dr. Krugman thinks another $4 trillion of debt and a debt to GDP ratio of 130% should get our economy back on track. When this charade is revealed to be the greatest fraud and theft in the history of mankind, Ben and Paul better have a backup plan, because there are going to be a few angry men looking for them.

In a recent NBER paper, Ken Rogoff and Vince and Carmen Reinhart address the long-lasting consequences of high public debt loads. The authors findings are shocking to many - especially those who choose to look at 10Y Treasury rates as an indication of stress (as opposed to our earlier note on the stresses beginning to occur in the less financially repressed USA sovereign CDS market). Across 50 countries, they find 26 periods of public debt overhangs where the government has pushed gross public debt to GDP over 90% and held it there for at least five years. The stunning reality of their empirical work is four-fold: 1) the median duration of these overhang periods in 23 years (that's a lot of can-kicking); 2) real GDP growth averages 1.2% lower than trend during these overhangs; 3) real GDP drops by on average around 25% at the end of the deleveraging episode; and 4) most critically, "waiting for markets to signal a problem may be waiting too long because governments have the ability to suppress market signals." So while all the chatter of renewed growth in Europe has us ebullient with an unchanged US equity market today, the longer-term reality is - unless this time is different, there's a long and painful road ahead.

That US consumer credit soared by $21.4 billion in March on expectations of $9.8 billion rise, or the fastest monthly expansion since March 2001 would have been commendable and memorable if one did not dig through the actual components. Which sadly are atrocious: of the entire surge, a modest $5.1 billion was from real credit, or revolving, credit-card type debt. This brought the total revolving debt to $804 billion or to a level first crossed in January 2005. The balance, or $16.2 billion, was non-revolving debt, or the type of debt used to fund GM car purchases by subprime borrowers and push the student loan bubble well into its $1+ trillion record territory. The total non-revolving debt is now $1.739 trillion: an all time record. As for the source of such debt? why the US government of course, in what is the supreme ponzi scheme, whereby the US government allows US consumers to purchase Government Motors products and to keep the Higher Learning status quo in power. In other words, the US government has become the final enabler of the consumer spending bubble with proceeds used to keep the US auto unions happy (as channel stuffing is already at record high levels), and of course, to fund such ancillary student purchases as iPads. As for whether any of this debt will ever be paid off? Don't be silly.

BANZAI7 BEVERAGE WARNING APPLIES...

As can be seen in the attached clip Warren Buffett, as part of his anti money tirade, both real (gold) and fiat, the Chairman of Berkshire is certainly not a fan of holding cash in any form. To wit: "cash is as risky an asset you can own over time." In other words, the opportunity cost of not owning something else with that cash is indicative of even more risk in the equities arena. So one wonders: is the fact that Buffett's firm now has a record amount of cash on its books more an example of senility or hypocrisy.... Or is all hell about to break loose as per Buffett's own words? We can't decide.

Well, that lasted far less than the three days expected:

• SAMARAS SAYS WAS UNABLE TO FORM GOVERNMENT
• SAMARAS SAYS DID ALL POSSIBLE TO FORM GOVERNMENT
• SAMARAS HANDS BACK MANDATE TO PRESIDENT PAPOULIAS
• SAMARAS SAYS AIM TO KEEP GREECE IN EURO

And now the broad-left coalition Syriza gets the mandate to form a coalition government. If successful, and with nearly 60% of the parties in parliament being anti-bailout it would not take much for differences to be resolved, all bets are off as the anti-bailout powers will finally gain control of Greece, effectively ending European control over Greece. Alternatively, if nothing is achieved, then it is very likely that Greece will have another election within 3-4 weeks. And then another. And then another.

There was a little mentioned tangent to last Friday's very disappointing NFP print of +115,000 (driven by a surge in temp jobs offsetting a collapse in full time positions): as David Rosenberg notes, the jobs number was about half of another far more important number - that of Americans applying for disability, which in April was +225,000. He continues: "this is the new stealth stimulus program - so far in 2011, nearly one million Americans have applied for disability and year-to-date, 333k have actually enrolled (covering 539k family members). In total, more than five million people have been added to disability coverage since President Obama took over three years ago." The punchline will make all those who adore (insolvent) welfare states shake with giddy delight: "So look - either safety standards at work have eroded dramatically or the "99%" have found a creative way to milk the system and turn the economy into a quasi welfare state".... Yup. What he said. Because remember: the BLS assumes that any amount up to the total 53 million people, is not in the labor force as they have other "wefare" based forms of government handouts and see no need at all to look for a job. Is there any wonder why US unemployment is realistically 20% if not much higher? As for the other chart, food stamps, we know that story all too well.

In France, no one can hear you scream.

Here I issue an old school challenge to Goldman Sachs, both the Morgans, and the tabloidal MSM in regards to the Facebook IPO and simple fundamental valuation!!! Have at Thee!

In a little over 80 seconds, this animated clip provides everything you need to know about exactly what Hollande's victory today means to Europe's glorious future.

While there may be a plethora of geopolitical reasons to be 'cautious' of getting over your skis in US equities, there are a number of more quantifiable reasons for not buying-the-f##king-dip here. Between the sustainability of US earnings and the sell-in-May mantra, we highlight five foods-for-thought before you push all-in this morning. Of course the only bullish reason left is Central-Bank-driven and remains the elephant in the room but as we get closer and closer to the election, the Fed will be increasingly snookered and require a market plunge of more than 1.5% to step in and save the civilized world with S&P 500 1285 as a target for Fed action based on last Summer's excitement.

Dollar vs. Stocks 

The global economy is facing a structural surplus of labor and a scarcity of paid work. Here is the critical backdrop for the global recession that is unfolding and the stated desire of central banks and states everywhere for "economic growth": most of the so-called "growth" since the 2008 global financial meltdown was funded by sovereign debt and "free money" spun by central banks, not organic growth based on rising earned incomes. Take away the speculation dependent on "free money" and the global stimulus dependent on massive quantities of fresh debt, and how much "growth" would be left? The Internet has enabled enormous reductions of labor input. A mere 15 years ago when I first learned HTML (1997), you had to code your own site or learn some fairly sophisticated website creation/management software packages, and you needed to set up a server or pay a host. Now anyone can set up a Blogspot or equivalent blog for free in a few minutes with few (if any) technical skills, and the site is free. The other trend is the cost of labor in the developed West is rising as systemic friction adds cost without adding productivity. Workers in the U.S. only see their wages stagnate, but their employers see total labor costs rising as healthcare costs rise year after year. In effect, the U.S. pays an 8% VAT tax to support a bloated, paperwork-pushing, inefficient and fraud-laced healthcare system that costs twice as much as a percentage of GDP as other advanced democracies. No wonder many entrepreneurs are selling their high-overhead businesses and becoming flexible, low-cost one-person enterprises.