Archive - Sep 2012

Draghi floods the Eurozone with new money. The Bundesbank says it's like printing banknotes and won't solve the problem. Who is getting sterilized?

If the point of quantitative easing was to provide enough  liquidity to keep the massive, earth-shatteringly large debt load serviceable, then quantitative easing succeeded — but the “success” of sustaining the crippling debt load is that it remains a huge burden weighing down on the economy like a tonne of bricks.  This “success” has turned markets into junkies, increasingly dependent on central bank liquidity injections. After QE3 will come more and more and more easing until the market has either successfully managed to deleverage to a sustainable level (and Japan’s total debt level as a percentage of GDP remains higher than it was in 1991, even after 20 years of painful deleveraging — so there is no guarantee whatever that this will ever occur), or until central banks give up and let markets liquidate. Quantitative easing’s “success” has been a junkie recovery and a zombie market.

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Much has been said about Apple's recent victory over its key component supplier, Samsung, in a recent US court decision the direct result of which has been the halt of sales of several Samsung products which are already obsolete in cell phone year terms. The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company. Alternatively the Chinese politburo can one day decide to pull FoxConn's operational license, in the process bankrupting AAPL overnight. But these are of course M.A.D. scenarios which in rational, non-centrally planned market would never take place, and so we have no reason to worry about them. That said, it is increasingly becoming clear that patent warfare fought in partial domestic judicial systems, will be the next form of protectionism as pertains to that most faddy of technology: the ubiqutous smartphone. And while Apple may have won the first battle, the outcome of the war is still very much unclear: in fact, the return salvo after Samsung's big defeat on US soil may come quite soon, this time courtesy of another Chinese Apple "clone", HTC Corp, which if it goes against the Cupertino company, could have a large impact on revenues.

Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin? Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008. However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD. If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?

When it comes to the NEW QE, everyone has an opinion, and most seem to believe that the NEW QE will come next week, now that the US economy added "just" 96,000 people (but, but, the unemployment rate 'fell'). Certainly, and far more importantly, if the most recent FOMC minutes are any guide, the Fed shares this view. Sadly, as so often happens, most, and this includes the FOMC's various voting members, have once again made up their minds without actually evaluating the limitations posed by simple math. After all it is far easier to form an opinion, and actually think about the underlying facts later. The math, for those who actually have looked at the numbers behind the scenes, is scary (in UBS' words, not ours).

Here is the math.

Central Banks United have the upper hand these days. So don’t mess with them…

At least not this week…

There is so much stuff floating around America that we end up with stuff we didn't buy or even ask for--old laptops, bicycles (abandoned on our property, left by neighbors moving away, left to us by elderly neighbors who passed on, etc.) and clothing, to mention but a few of of the things that we have "inherited." I make a point to be a "good citizen" by taking outdated printers, modems and other electronics to the recycling yard; others aren't so civic-minded, as proven by the piles of high-tech detritus that litter street corners and dumpsites around the nation. When the university students leave town in May, dumpster after dumpster is filled with broken Ikea furniture and old mattresses, many of recent vintage. It isn't worth hauling any of it home. They will buy more future-landfill at Ikea when they settle down somewhere else. My new mantra is "please don't give us anything we won't consume in a few days."

One look at the short squeeze in the EURUSD, coupled with the endless jawboning out of Europe, and one may be left with the faulty impression that Europe has been magically fixed and that Greece couldn't be more delighted to remain in the Eurozone. One would be wrong. This is what is really going on in Europe: "As a pharmaceutical salesman in Greece for 17 years, Tilemachos Karachalios wore a suit, drove a company car and had an expense account. He now mops schools in Sweden, forced from his home by Greece’s economic crisis.“It was a very good job,” said Karachalios, 40, of his former life. “Now I clean Swedish s---." That more or less explains everything one needs to know about the "fixing" of Europe.

Total meltup panic and confusion in all but the US equity market where the INTC punch has sent stocks reeling, as an epic, Volkswagen-like short covering squeeze has taken the EURUSD up well over 100 pips in the past few hours (with technicals now running rampant as predicted three months ago), and where gold has now soared by nearly $40 on the day, sending it to just shy of $1740 and at the highest level since February. And all of this is happening without the Fed having announced QE, which it very well may not as it would then be seen as a largely political organization, or the ECB having bought a single bond under its restarted conditional monetization program, which paradoxically still needs Spain to crumble and demand a bailout before any of its bonds are eligible for purchases. In short: total centrally planned confusion, whose ultimate achievement will be to scare the last remaining non vacuum-tube based traders out of the market. 

Today's reported unemployment rate: 8.1%. The reason: the labor "participation" dropped to a 31 year low 63.5% as reported earlier. Of course, this number is pure propaganda, and makes no sense for one simple reason: despite the economic collapse started in December 2007, the US civilian non-institutional population since then has grown by 186,000 people every month on average hitting an all time high of 243,566,000 in August. These people need a job, and the traditional shorthand is that at least 100,000 jobs have the be generated every month for the unemployment rate to merely stay flat, let along improve. So what does one get when one uses the long-term average of the past 30 or so years which happens to be 65.8%? One gets an unemployment number that is 45% higher than the reported 8.1%, or 11.7%. That is what the real unemployment rate is assuming the US labor participation rate was realistic and not manipulated by the BLS cronies and the Bank of Spain assisted Arima-X-13 seasonal adjustment models. It also means that, as the chart below shows, the spread between the real and propaganda data hit an all time record, which was to be expected two months ahead of America's banker muppet presidential election.

Since there have been tens of thousands of lawsuits filed internally in Germany with its constitutional court alleging the ESM is illegal, it was only a matter of time before the Germans decided to sue the ECB as well for its "unlimited" bond buying. The time has arrived. From Bloomberg:

• TILLICH SUPPORTS LEGAL STEPS AGAINST ECB BOND BUYING: WELT
• TILLICH SAYS ECB BOND BUYING SIGNALS EFSF, ESM NOT ENOUGH: WELT
• TILLICH: ECB MANDATE SHOULD NOT INCL. UNLIMIT. BOND BUYING:WELT

Perhaps all those rumors of the Bundesbank's death were, as we expected, rather exaggerated.

As we continue spreading today's NFP report, here are two chart summarizing which sectors are hot, and which are not. In another indication of just how weak the US jobs market truly is, as the second chart from Bloomberg Brief confirms, the bulk of the job additions have been in low-wage sectors. The one highest paying, and thus greatest tax-generating, sector - financial jobs - will continue to bleed more and more workers as the credibility of the broken casino formerly known as the capital markets continues plumbing negative territory.

This chart probably needs no explanation. Number of employees engaged in the construction of buildings just dropped to 1,217,000 down from July's 1,220,000, and the lowest number in a year. Just as telling is that the number was a mere 5,600 workers above the depression lows of 1,211,400 recorded in May of 2011.