Archive - Aug 2012

Some in the markets think that the Fed effectively targets equity prices, meaning that to predict Fed policy, one merely needs to track the US stock market. There is a curious circularity to this view, however: the Fed will not launch QE3 so long as stock prices are high, yet the stock market is high because it anticipates QE3. BofAML's chart-of-the-day is intrguingly similar to our 'QE Hopeyness' chart as it shows that stock and bond prices have decoupled since the summer, as QE3 expectations overwhelmed the weaker macroeconomic data to buoy equities. Now that recent data have improved, yields have risen - but so too have stocks. This "heads I win, tails you lose" aspect of stock prices rising regardless of the macro backdrop, BofAML believes, makes them a far less useful signal for Fed officials. Moreover, it creates the risk that the equity market could sell off after the 12-13 September FOMC meeting if the Fed disappoints. Right now, however, we are in an anti-Goldilocks period in which the data are too hot for clear-cut Fed easing, but too cold to support a sustained rebound — anything but "just right".

This morning's update on the ECB's FX swap usage confirmed what those who care about this kind of stuff already know: the USD shortage in Europe, all Libor and other manipulated and fraudulent signs to the contrary, is getting worse: in the week starting August 23, the number of banks demanding a 7 day USD swap with the NY Fed, and intermediated by the ECB, rose to 12, or the highest since February, while the amount requested was $8.5 billion, or the second highest in 2012 so far. In other words, while everyone knows the EUR interbank market in Europe is slammed shut, most likely in perpetuity, courtesy of the trillions in EURs raining from the ECB, it is now once again time for the USD market to implode, something it last did in the beginning of 2012 when the advent of the short-term benefit from LTRO 1 and 2 fixed the funding situation, albeit briefly.

The easy choices are now behind us and the hard choices are in front of us and wild speculations hanging upon the syllables uttered by Mr. Draghi may bring disastrous results. In a very real sense Ms. Merkel is going to be hanged if she does and hanged if she doesn’t and it is quite difficult to find a safe place to stand when on the platform where the noose and executioner resides. The present situation has one certainty, one block of bedrock upon which you may plant your feet and that is that a storm is coming; of that you may be sure.

Gold’s remonetisation in the international financial and monetary system continues.  LCH.Clearnet, the world's leading independent clearing house, said yesterday that it will accept gold as collateral for margin cover purposes starting in just one week - next Tuesday August 28th. LCH.Clearnet is a clearing house for major international exchanges and platforms, as well as a range of OTC markets. As recently as 9 months ago, figures showed that they clear approximately 50% of the $348 trillion global interest rate swap market and are the second largest clearer of bonds and repos in the world. In addition, they clear a broad range of asset classes including commodities, securities, exchange traded derivatives, CDS, energy and freight. The development follows the same significant policy change from CME Clearing Europe, the London-based clearinghouse of CME Group Inc. (CME), announced last Friday that it planned to accept gold bullion as collateral for margin requirements on over-the-counter commodities derivatives.  It is interesting that both CME and now LCH.Clearnet Group have both decided to allow use of gold as collateral next Tuesday - August 28th. It suggests that there were high level discussions between the world’s leading clearing houses and they both decided to enact the measures next Tuesday.  It is likely that they are concerned about ‘event’ risk, systemic and monetary risk and about a Lehman Brothers style crisis enveloping the massive, opaque and unregulated shadow banking system.

European bourses are down at the North American crossover, all ten sectors in the red, on thin volumes and a distinct lack of data and news flow from the EU and the UK. The risk-off tone in part attributed to the much wider than expected Japanese trade deficit for July, whose exports also fell the most in six months, raising investor concern once again that Asian economy as a whole is stalling. Elsewhere, investor caution over the Greek debt crisis is once again mounting, as EU’s Juncker visits Athens today to meet with the Greek PM Samaras. Overnight it was reported that Greece would present EUR 13.5bln in budget cuts today, higher than the previous EUR 11.5bln, and whilst the country is not asking for more money, Samaras might request more time to implement them. Lawmakers in Netherlands remain critical of providing more aid for the country and continue to push for more reforms, such as spending cuts and privatization, with the Dutch Finance Minister de Jaeger commenting earlier that it is not a good idea for Greece to get more time.

• Merkel's Dilemma: Risk Euro Zone or Her Government (WSJ)... as first suggest by ZH 2 months ago, with only one resolution: referendum
• Russia warns West over Syria after Obama threats (Reuters)
• Consider keeping Bernanke, Romney adviser Glenn Hubbard says (Reuters)... Glenn Hubbard is the star of the movie Inside Job
• Spain Deficit Goals at Risk as Cuts Consensus Fades (Bloomberg)
• Czech Austerity Revolt Threatens Cabinet as Slump Bites (Bloomberg)
• Greek cuts to be deeper than trailed (FT)
• Akin rebuffs Romney, Republican calls to quit Senate race (Reuters)
• Obama Leads Romney in Poll Showing Disdain for Congress (Bloomberg)
• Greece needs more time to reform, PM Samaras tells paper (Reuters)
• UK banks face scandal over toxic insurance products (Reuters)
• Iceland Shelves Monetary Tightening as Krona Seen Appreciating (Bloomberg)
• India Considers $35 Billion Debt Revamp After Biggest Blackout (Bloomberg)

More pressure on food prices

Hopes that today may finally see an increase in trading volatility and volume following yesterday's reversal session will likely be dashed as the event wasteland on the horizon continues for the third day in a row. As DB explains, the FOMC meeting minutes and Juncker’s visit to Athens are likely the two main sources for key headlines today. While backward looking and certainly predating Lockhart's hawkish comments from yesterday, the FOMC minutes today are expected to shed further light on the kind of policy currently under consideration and the economic conditions required before easing is warranted. One thing that will not be discussed is the circularity of launching more QE even as gas prices have never been higher on this day in history, soy and corn are back at all time highs, and the market trading at multi-year highs. As repeatedly explained before, the option for the FOMC include pushing out the targeted exit date for fed funds, providing “exit guidance” on balance sheet measures (i.e. asset sales), various mixes of additional balance sheet expansion (including the possibility of an open-ended QE program) and  cutting interest on reserves. It is virtually certain that none of these will be enacted at the Jackson Hole meeting in one week, 2 months ahead of the presidential election, but hope springs eternal.

The sit-back-and-relax 'buy and hold' strategy that unqualified portfolio managers banked on for so many years has perished in this highly leveraged, central-banking-dominated environment. There is something, though, that is more troubling for the US economy, and specifically middle-class laborers: Robotics. The reality is that this atypical Great Recession has forced business owners to become savvy: businesses have learned how to operate--and even thrive--in this dry economic environment, and the main tool that has allowed them to do so is cost-cutting.  Unfortunately for the labor market, these cost-reduction techniques  are sticking, and for the time being business owners (particularly manufacturers) see no reason to add more human employees when they can purchase robots at a cheaper rate.

Somewhat disastrous trade balance data from Japan - with exports dramatically worse-than-expected (EU exports -25.1% YoY) and imports worse-than-expected (which will come as no surprise to any ZH reader given Europe's depression and our discussion of world trade here) - has crushed JPY crosses overnight (especially AUDJPY) which is exactly what we said at the close today was required to extend today's equity weakness. Sure enough, S&P 500 futures are down over 6 points from the close now - and trading below day-session lows.

Again

The fact that labour mobility is low in Europe is indicative of a fundamental problem. In any currency union or integrated economy it is necessary that there is enough mobility that people can emigrate from places where there is excess labour (the periphery) to places where labour is in short supply. Now, there is free movement in Europe, which is an essential prerequisite to a currency union. But the people themselves don’t seem to care for utilising it. Why? I can theorise a few potential reasons people wouldn’t want to move — displacement from friends and family, moving costs, local attachment.  Yet none of those reasons are inapplicable to the United States. However there are two reasons which do not apply in the United States — language barriers and national loyalty. It is those reasons, I would suggest, that are preventing Europe from really functioning as a single economy with a higher rate of labour mobility. The people who built the Euro realised that such problems existed, but decided to adopt a cross-that-bridge-when-we-come-to-it approach. But long-term and deep-seated issues like language barriers and nationalistic sentiment cannot simply be eroded away in a day with an economic policy instrument. No bond-buying bazooka can smooth the underlying reality that Europe — unlike the United States — is not a single country.