Archive - Sep 2012

• China Output Growth Slows as Leadership Handover Looms (Bloomberg); Weak China trade data raises Beijing spending stakes (Reuters)
• Italy Q2 GDP revised down to -0.8% year-on-year on weak domestic demand (Economic Times)
• Troika disagreed with €2 billion in Greek "cuts" (Reuters)
• No Greek bottom in sight yet: Greek IP, Manufacturing Output plunge compared to year earlier (WSJ)
• France's Hollande sees 2013 growth forecast about 0.8 pct (Reuters), France plots tax hikes of up to 20 bln euros (Reuters)
• Euro Crisis Faces Tests in German Court, Greek Infighting (Bloomberg)
• Geithner sells more AIG stock (FT)
• Japan infuriates China by agreeing to buy disputed isles (Reuters)
• Euro crisis to worsen, Greece could exit euro: Swedish FinMin Anders Borg (Economic Times)
• ‘Lead or leave euro’, Soros tells Germany (FT)
• German MP makes new court complaint against euro plans (Reuters)
• Obama super-Pac in push to raise $150m (FT)

Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.

Even Bill Gross Admits that Gold Holds Its Value, While - In an Era of Central Bank Money Printing- Paper Money Doesn't

In closing, the new ECB program will ultimately prove to be Mario Draghi’s big bluff. By presenting an old, failed program as something “new” and “unlimited” in scope, the ECB has actually shown that it’s essentially out of firepower.

A place incapable of supporting life as we know it – a good description of where ECB monetary policy is leading us. In its current form the euro is a busted flush and is being held together solely by political intransigence and ECB connivance. From the very beginning the rules of engagement were ignored because without political and fiscal centralisation they weren’t going to work anyway. We now have OMT to ponder upon - Outright Monetary Transactions - which is just another short term breathing space to allow the PIIGS to refinance their maturing debt at less penal rates, but does absolutely nothing to solve the longer term problems of creating growth in economies stifled by ECB "conditionality"; a very sterile landscape indeed. But cheer up! QE3 will be along any day now to help the banks remain solvent for a while longer. 'Can' exits stage right after another good kicking...

Ken Burns and Alfred Hitchcock are movie makers. 'The Ken Burns Effect' - panning and zooming to focus attention on a certain isolated piece of the full picture; and the 'Hitchcock Zoom' - a 'shocking' dramatic change in perspective; keep the viewer occupied and entertained by material that would otherwise look a little staid and to ensure that attention is paid to the precise piece of the picture that the director wishes to be the center of focus. As Grant Williams ruminates on the Draghi Scheme (The Dreme), the devices of Burns and Hitchcock came to mind as central bankers attempt to either unsettle the viewers or make them focus on a specific part of the whole, rather than the big picture. For the last eighteen months, we, the viewers, have been manipulated by a seemingly never-ending procession of Eurocrats, bureaucrats, technocrats and who-said-thats to look at a very precise part of the economic picture rather than be allowed to step back and try to take in the wider situation. Accordingly, we thought this week we would take a step back, ignore where the Ken Burns Effect of Draghi’s words were pointing our attention, turn a blind eye to the conflicting rhetoric emanating from the various actors in the Theater of the Absurd and concentrate on the big picture - to try and make sense of the broader reality in Greece, Spain, TARGET2, and The Dreme. It damned near gave us vertigo.

During the height of the 'Goldilocks economy' of the mid-1990s, Mat Stein wrote When Technology Fails: A Manual for Self-Reliance, Sustainability, and Surviving the Long Emergency , a master compendium of do-it-yourself preparation skills. Fast-forward to today's Great Recession, drought-stricken, $100+ oil, post-Katrina, post-Fukushima world -- many are realizing the prudence of taking basic precautionary steps to reduce their vulnerability to whatever the future may bring. Whether you're concerned about the fallout from a breakdown of today's weakened global economy, or simply want to be better able to deal with the aftermath of a natural disaster if you live in an earthquake/hurricane/flood/wildfire/tornado-prone part of the world, the personal resiliency measures Mat recommends make sense for almost everyone to consider. It's important to note that Mat isn't a doomer bent on fanning fears of a zombie apocalypse (though those concerned about social collapse will find much utility in his work), but believes that our current fossil fuel-driven, hyper-consumptive, and over-leveraged way of life is not sustainable.

The cracks in the Fed's narcissism started to show at Jackson Hole, where Bernanke's speech did nothing for the market; and as the FT points out, the biggest worry on display was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand. Lurking behind many debates was this question: if central bank policies are so omnipotent effective, why is the global economy not growing faster? Everyone's favorite honest-dwarf Fed Governor, James Bullard, summarized perfectly:

"I am a little – maybe more than a little bit – worried about the future of central banking. We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalize but it’s not really happening so far."

 

"What I’m worried about is this creeping politicization."

With monetary financing of governments on the increase (unconditionally by the Fed and conditionally by the ECB), it is clear that more radical options are increasingly mainstream as the textbook is not providing the answers. If the Fed itself is admitting it is becoming irrelevant and obsolete, then perhaps regimes are changing.

With both political parties having concluded their respective rah-rah-fests and each vehemntly proclaiming "The Other Side" as failing miserably; it appears, as Raghuram Rajan points out in his latest article that while America’s presidential election campaign is superficially a debate about health care and taxes; it is much more fundamentally about democracy and/or free enterprise. As he notes, democracy implies regarding individuals as equal and treating them as such, with every adult getting an equal vote, whereas free enterprise empowers individuals based on how much economic value they create and how much property they own. What prevents the median voter in a democracy from voting to dispossess the rich and successful? And why do the latter not erode the political power of the former? The answer relies upon the 'dream' (American or otherwise) of a level playing field and hard-work paying off...

Continuing with the theme of the secular shift in the labor pool (not cyclical, as the Fed still mistakenly believes: it will take it at least one more year to understand it has been wrong about this aspect of the New Normal economy too, just as it was wrong for decades about the Flow vs Stock debate), it is not only men who are fresh out of luck. As a reminder, we observed earlier that the labor force participation rate for men has just dropped to an all time low. It turns out there is another class of workers whose participation rate is at the lowest in series history: that of "25 year olds with a Bachelor's degree and higher", i.e. college grads. At 75.5%, it is the lowest since this data has been kept by the BLS. But not all is abysmal in America's labor force. While the share of workers with a college degree has plunged to all time lows, a bright spot can be found when observing the labor force participation rate of those who never bothered with college, and for whom high school was their last known degree-granting institution. At 59.9%, the participation rate is well of its 2012 lows of 59.0% and steadily rising, in fact, to borrow a term from the housing bulls, it may well have "bottomed". Now there is some truly great news for the future of America's highly educated workforce.

While there is still some debate whether the proper alternative nomenclature of the Greek ultranationalist party Golden Dawn is "neo-nazi", there is no debate that the party, which is a manifestation of every broken Greek hope and dream, after posting a shocking result in the recent Greek parliamentary election which saw it coming in fifth and entering parliament after, continues to soar in popularity and is now the third most popular party in Greece with 12% of the vote. Above it are only two other parties: the conservative New Democracy which won the June elections with 29.6% of the vote, which is now down to 28%, and on top, in an ominous development for EUR-bulls, is the anti-bailout and anti-memorandum leftist coalition Syriza, which has threatened to end the bailout, and effectively to take Greece out of the Eurozone, setting off the much dreaded dominoes.

There are two key events in the coming week: first, on September 12, is the decision of the German Constitutional Court, aka the Krimson Kardinals of Karlsruhe, whether the ESM, or the ECB's primary market bond monetization program, is legal. A no vote would severely cripple the European "make it up as you go along" bailout and leave Europe's peripheral nations with little recourse, and Spain with even less cash as it faces a wall of bond maturities in both October and 2013. Then, on Thursday, the Federal Reserve will most likely underwhelm the market which is expecting a new substantial round of outright Asset Purchases, aka NEW QE, which however as we explained will almost certainly not occur due to various reason first described here last Friday. A third, and perhaps far more important event, will be the Dutch parliamentary election also on September 12, but more on that in a further post. For now, looking at Germany, and the piecemeal attempt to put back together the European house of monetary cards, we find that in Germany - the country taksed with funding the European implosion - the population has decided, by a 2 to 1 margin - that the constitutional court should just say "nein" to the ESM, and let Europe go on its merry way without German backing (because as a reminder, the primary source of ESM funding is Germany). From Spiegel: "A survey shows that the majority of Germans hope that the judges in Karlsruhe reject the permanent rescue fund ESM. 54% want a reversal of the Bundestag decisions on the ESM and Fiscal Pact, which should be legally halted. Only 25% believe that the court should dismiss the urgent appeals of the Euro-skeptics."

A summary of this week's charts of note, that were 'neither here nor there', yet which all have a story of their own.