Archive - Aug 2012

Last week Obama insinuated that in the aftermath of the "amazing" post-bankruptcy GM recovery, his next plan is to bailout, well, everyone: "I believe in American workers, I believe in this American industry, and now the American auto industry has come roaring back... Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry." Also, as it appears, the Bailout'er-In-Chief has taken the saying "make it rain" a little too close to heart, and is now taking the worst drought in decades as a personal central planning challenge. Just because he can. There is one thing preventing him for bailing out US farmers: that thing apparently is evil congress. From his weekly address: "This is an all hands on deck response...  But my administration can't do it alone. Congress needs to do its part too. They need to pass a farm bill that not only helps farmers and ranchers respond to these kinds of disasters, but also makes necessary reforms and gives them certainly year round.... So call your members of congress, write them an email and tell them that now is the time to come together and get this done. Too many Americans are suffering right now to let politics get in the way." All righty then GOP - you heard the president: stop blocking the man who would end the drought if not for your disturbing lack of faith, and vote promptly for "Let's All Make It Rain: It's Only Fair" bill. How else can the systematic bailout of everyone and everything proceed as planned?

More "Source" Input On Coming Precious Metals Price Explosions

Baupost's Seth Klarman sums it all up:

"It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplishes virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic."

The debt levels of advanced economies remains unsustainably high - bringing with it the considerable risk of renewed crisis - and while strong growth is the best way to deleverage, this solution appears out of reach for most (if not all) economies. Financial repression, austerity, inflation, or default are the remaining options - all of which come with considerable costs to economic growth and employment. While 'muddling-through' appears to be heralded as a positive by many market-savants currently, SocGen notes that the line between a virtuous (expansionary fiscal contraction) and vicious austerity trap comes down largely to policy confidence. Most (if not all) advanced economy politicians entirely lack the public's or market's confidence in credible policy direction (and in fact we are seeing policy uncertainty at extremes) which leads to SocGen's conclusion that the muddle-through strategy (which comes with a high price tag economically and socially) is too high a burden politically and will inevitably lead to spillover to core-Europe and the global financial system.

Many folks were surprised Friday night as rumors began leaking that Romney tapped Paul Ryan of Wisconsin, for the prestigious VP slot. The surprise came largely because many were expecting a more mundane pick like Tim Pawlenty or Rob Portman.  The reactions from the GOP base is positive overall, although the story is still fresh and drawing conclusions is difficult.  The reactions from the Democrat/Liberal base are predictable and we are guessing that the Obama campaign is licking its lips over the prospect of skewering Ryan like a kabob. We have a slightly different take, my feeling is that this pick is an indication that the Romney team is struggling and sees the prospect of winning in November diminishing with each passing day. People like Pawlenty and Portman is the equivalent of swinging for a base hit - the selection of Ryan is swinging for the fences.  It is desperation and an attempt to shake things up substantially in the hopes of energizing a splintered and unimpressed Conservative base. However we prefer to focus on the economics of politics, not the politics of politics - so lets take a look at what exactly makes Ryan such a risk.

Several months ago it seemed that not a day could pass without someone, somewhere making fun of GM's biggest post-bankruptcy flaming failure to date: the Chevy Volt (gross and net of channel stuffing). Of course, since it was all in the name of ecological progress and carbon footprint reduction, most media observers let it go as merely one of the peculiar hurdles on the way to an utopian future in which America would no longer rely on crude imports from evil petroleum cartels. The time has come to redirect ridicule to that other $102,00+ MSRP object of electric aspiration, and henceforth - mockery: the Fisker Karma supercar.

With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.

What is high-frequency trading? We will never exhaustively address this issue here. We recommend that you do your own research on the subject. There are numerous articles on this topic. High-frequency trading (HFT) consists in using sophisticated technology to trade securities. It is highly quantitative, employing algorithms to analyze incoming market data. HF investment positions are held only very briefly, with HF traders trading in and out of positions intraday tens of thousands of times. The important feature is that at the end of a trading day there is no net investment position. Processing speed and access to the exchanges are critical.

While Frau Merkel remains beach-bound somewhere, hence the lack of 'Neins' recently, her deputy chancellor Michael Fuchs made it unequivocally clear this morning in a Handelsblatt interview that Germany had "reached the limit of its capacity" over additional EFSF payments to Greece and reiterated the double-whammy that the ESM should NOT receive a banking license and that the ECB should NOT act as "money printing press in disguise" by extending emergency loans and bypassing EFSF/ESM. A decision about whether Greece should be given the second tranche of its loan will not be made until October, after the Troika finalizes its first review of the second rescue program in September. However, BNP Paribas notes that there have been a couple of developments worth noting over the past week and more are likely in the coming weeks.

“Join me in welcoming the next President of the United States, Paul Ryan.”

A week ago we explained quite clearly why instead of encouraging self-defeating, short-termist behavior by promising to save Europe's insolvent countries if and when needed, which does nothing to resolves Europe's problems and make it worse in exchange for a brief respite from bond selling, the ECB should be doing precisely the opposite: encouraging local governments to understand that there is no magic bazooka from the central banks. Specifically we said that "this Catch 22 of confounding cause and event can continue seemingly indefinitely, although in reality it can't. Because fundamentally what the bond market does is keep sovereigns "honest" - just as Schauble said a week ago, Spanish yields at 7% are not the end of the world - instead what they are is a signal to the country to get its spending in control in order to reduce its deficit, and fundamentally get its house in order - yes, that means getting government spending to a sustainable level and firing hundreds of thousands of workers, as well as probably raising taxes even more. It also means pain all around, but the pain is inevitable and will only be worse the longer reality is denied." This logic is so clear that only a lifelong economist, PhD or Goldman apparatchik can not grasp it: sadly that accounts for most of the people "in charge." Which is why we were delighted to read that at least one person "gets it" - Belgian national bank governor Luc Coene, the same Belgium that is also the heart of the bureaucratic labyrinth known as the EU, who told Belgium's two largest newspaper that "buying the bonds of these countries would only serve to weaken the ECB and do nothing to resolve underlying issues of competitiveness.  “It makes no sense for the ECB to start financing those countries,” said Mr Coene, “It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet." Bingo. And not a moment too soon - we really were starting to pull a Mogatu here.

Weekend economic indices of dubious value

All major macro data from China over the last 2 days have been disappointing. The third quarter started on a surprisingly weak note for China despite all the talks (and hope) on stimulus and monetary policy easing. The macro data pretty much confirm our view that economic growth did not reach a bottom in the second quarter as the consensus used to believe. If anything, the economy seems to be worsening somewhat again. We hope that the consensus is (finally) right and that we are wrong. We hope that we will not be repeating the joke that “the consensus is expecting a recovery in next quarter during every quarter”. Unfortunately, we just don’t see that, and we doubt if the government has the willingness at this point to do much more, and we doubt whether the government really has the ability as the market thinks. We do not see convincing signs of recovery (except, perhaps, Wen Jiabao making waves every other week), and we even struggle to see signs of stabilisation. If we see anything, we are seeing a bottomless pit.

While still of the belief that a wholesale disintegration of the European Monetary Union remains a distinct tail-risk event, Citigroup's chief economist Willem Buiter succinctly summarizes his core view as "the euro-area will stumble and bumble towards an eventual resolution." However, that 'final' solution does not look like your grandma's European Union as he expects nothing more than a "continued Monetary Union, probably without Greece, having undergone both major sovereign debt restructurings in the periphery and financial debt restructurings for banks in the periphery and core." Transcribed from a three-minute clip, Buiter eloquently answers three key questions: How is the Euro crisis (and its consequent solution) shaping up? Does Germany have the upper-hand? and What sort of moral hazard issues might we see in the near future? He concludes "we won't have a smooth solution to this crisis."

Perhaps summarising best how so many of the back-to-school shoppers feel, Reuters cites this insightful 18-year-old thus: "I feel like the economy is messed up [and it] feels like we are still in recession." The equity market's response, of course, is "whatev'" and while it has been three years since the 'official' end of the recession, unemployment among teenagers is the highest since 1964! The anecdotal evidence is starting to pile up as we see retailer after retailer cut outlooks - which is especially concerning since the back-to-school period is the second-biggest selling season after the winter holiday season and as the head of BizDev from Mall of America notes: "We used to see people starting [back-to-school shopping] in late July but I don't see that anymore" as "consumers have shown tentativeness in their spending habits" and are likely to push off the spend until September, and "just shopping when there is a good sale." Once again, consumers have become conditioned to wait for discounts - and sure enough 20%-plus price reductions and more aggressive promotions are planned according to Accenture's retail practice. However, one quote on 'thriftiness' struck a chord: "We are borrowing this year to fund a lot of things that we normally would not have borrowed to do. It makes me nervous, we are selling our second home to help pay for things" - oh, no - not your second home!