Archive - Sep 2012

With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.

• Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
• As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
• Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
• Euro zone factories faltering as core crumbles (Reuters)
• Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
• French jobless tops three million, minister says (AFP)
• Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
• US investor is Ireland’s biggest creditor (FT)
• Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
• China's steel traders expose banks' bad debts (Reuters)
• NY probes private equity tax strategy  (FT)

In addition to the daily NEW QE/LSAP/ZIRP On again/Off again rumors, one of the most memorable aspects of a vacation-heavy August was the pervasive weakness in corporate top lines, coupled with a substantial portion of the S&P guiding lower into a very uncertain future. Perhaps this explains why when looking at the best performing asset classes of the past month, it is precisely those 'barbeque relish' vqrietals silver, and gold that shone, despite offering no dividends, and despite having not a single earnings call or forecast revision between them. Or perhaps in spite of.

AUDJPY is getting smacked hard in this evening's admittedly thin trading given the US holiday. China's double-whammies of PMI data (both official and HSBC versions - with the latter revised lower from Flash to its lowest level since March 2009) and some weak Aussie retail sales data is weighing very heavily on the critical carry trade pair. S&P 500 futures traded down in line with AUDJPY from Friday's close but once the China PMI came as weak as it was so the 'Good is Bad', the PBoC have to do something crowd started buying and dragged ES up a few points. Juxtaposing these dismal macro data was a better than expected China Services PMI and Aussie manufacturing index - as the Schrodinger 'economy is good and bad' headlines continue to confound. For the 'bad-is-good' crowd who see stimulus as the solution, we offer three words 'steel overcapacity' and 'malinvestment' and a must-read story from Reuters on the Chinese turning on themselves...

Over the past months (and particularly in the last weeks), we have increasingly read negative comments on the ongoing zero-interest rate policy (ZIRP) and in some instances, negative-interest rate policy (NIRP). Today, we want to examine the origins of the idea that ultra-low rates of interest can exist, how this idea came about, why it was flawed and how it leads to an informal economic system. It was a fallacy based on misunderstanding of the rate of interest and human action. Another way of examining this is the following: The zero interest rate indicates that time is free. And as anything that is free is wasted, time will also be wasted. It should be clear that there is an inconsistency in simultaneously believing that investment demand and savings are mainly driven by income but that it is necessary to lower the interest rate to boost investment, as the Fed does... and the Fed is Keynesian! Finally, we note one last thing: As productivity, employment and production decrease, even a steady and low rate of inflation has the potential to morph into hyperinflation.

The Summer of hope is over. Analysts return to their desks amid a grand-tour of conferences, industry gatherings, and company meetings, and - as has happened on average for the last twelve years - expectations are notched down from first-half-of-the-year 'hope' that this-time-is-different. Barclays' Barry Knapp notes that while macro risks seem more balanced than last spring, equity investors face a considerably higher risk in that of elevated earnings estimates. Since 2000, the worst month for analyst estimate revision momentum (net revisions) is also October, followed by September and December (tied). It stands to reason (though it’s tough to statistically ‘prove’) that equity investors and analysts return from vacation, attend conferences, and cut their earnings estimates. This, in turn, contributes to increased volatility and negative returns. While many will be focused on broader concerns – the ECB meeting, German Constitutional Court, presidential polls and macro data – equity investors are likely to hear a consistent message from the ~180 conferences: the global and domestic economic outlook is not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013.

Two weeks ago we showed dramatic footage as striking miners at Lonmin's Marikana South Africa platinum mine were fired upon by local the local cops, killing dozens of protesters in the process. Aside from the implications of what happens when the establishment loses control and desperate  workers revolt with complete disregard for their own safety, the strike has crippled the world's third largest platinum maker, and has cut daily production of the precious metal by 2,500 ounces. Since then the Lonmin situation has remained critical, with just 6% of the South African company's workers turning up for work last week. In the meantime, the strike bug has gone airborne, and has now impacted Gold Fields, the world's fourth largest gold mine. From the FT: "Some 12,000 workers at a gold mine operated by Gold Fields have gone on strike, in the latest industrial strife to hit South Africa’s mining industry. Sven Lunsche, a spokesman for Gold Fields, said the wild-cat strike was not directly related to the crisis at the Marikana platinum complex, where 44 people have been killed in violence after rock drill operators downed their tools to demand higher wages on August 10. But he acknowledged that “the atmosphere in the mining industry is very volatile at the moment and this may have had an indirect impact on the situation". The bottom line: "The strike was costing the company 1,660 gold ounces of production a day, Mr Lunsche said." In other words in addition to the fear of a resumption in money printing by central bankers, the gold price will now have to deal with the added fear that supply disruptions just may hamper China's stealthy hording attempts to become the world's biggest holder of physical gold, or at least at sub $2000/oz prices.

With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.

At the end of December 2010, Philipp Bagus (he of the must watch/read 'Tragedy of the Euro') provided a clarifying and succinct rebuttal or Bernanke's belief in the extreme monetary policy path he has embarked upon. Bernanke's latest diatribe, or perhaps legacy-defining, self-aggrandizing CYA comment, reminded us that perhaps we need such clarification once again. Critically, Bagus highlights the real exit-strategy dangers and inflationary impacts of Quantitative Easing (a term he finds repulsive in its' smoke-and-mirrors-laden optics) adding that:

Money printing cannot make society richer; it does not produce more real goods. It has a redistributive effect in favor of those who receive the new money first and to the detriment of those who receive it last. The money injection in a specific part of the economy distorts production. Thus, QE does not bring ease to the economy. To the contrary, QE makes the recession longer and harsher.

Or we might name it after the intentions behind it: "Currency Debasement I," "Bank Bailout I," "Government Bailout II," or simply "Consumer Impoverishment."

Corporates are in relatively good financial shape and theory says should respond to high profits and cheap debt by investing more. However, while high 'profits' and low cost of debt are reasons for capex and opex to be rising more quickly than they are, these two critical drives of recovery show no signs of responding to these profit/debt incentives - and so as Citigroup notes "recovering is not booming". Top-down, compared to history, capex is low, following P/E's sentiment - especially in Europe (indicating a lack of confidence in the future). However, at the sector level this reverses: high capex has been given a low PE, while low capex has a high PE. The market is effectively encouraging companies to invest less and return more money. Longer term the consequences for economic growth, inflation and earnings growth are negative - as we trade (once again) short-term equity gain for long-term sustainable economic gain.

Poison the country's well.

To use the analogy offered by Senor Cervantes we would say that Rodrigo, as representing Spain, is about to be devoured by the snakes. The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not. We are now at the virtual epicenter of the European Crisis where decisions will have to be made; avoidance is no longer possible. We have reached the end of the road where there is no more path left for can kicking.

Some scary Ponzinomics...