Archive - Mar 2013

Europe's VIX limped sideways and broadly speaking European stock markets also did the same on a relatively slow day. Intriguingly Spain's equity market was the best performer today (some high beta grab?) as Italy's was the worst -0.75% as the disconnect between the two grows in CDS markets also. Italian bond spreads pushed 8bps wider to 346bps over Bunds - a new three-month high. Credit and equity markets are moving in lockstep but chatter is that activity is quite mutes ahead of the EC meetings and their streams of useless anecdote due anytime. EURUSD is holding its lows as Europe closes - back under 1.2990.

Government Uses Law As a Sword Against Dissent

As the Franco-German divide grows wider (as we have noted here and here), it would appear the glaring differences being played out in public over monetary, fiscal, and sovereignty policies are spilling over into daily life in Germany. For the 11th month in a row German new car registrations of Peugeot (the large French car manufacturer) have plunged year-over-year. Now down over 40% in the last 12 months, registrations of the French car by German citizens is at its lowest since August 2009. Furthermore, since total new registrations of the otherwise stable German car market also posted a 10% drop, it is unlikely that any patriotic Germans will "pick French" any time soon. Perhaps this is why the effervescent French Industry minister Montebourg is so anxious to get Draghi to talk the EUR down to 1.10 to 'give oxygen to European economy' in order to juice his nation's non-European exports (though maybe not to the Japanese)...

Are we running out of time?  For the last several years, we have been living in a false bubble of hope that has been fueled by massive amounts of debt and bailout money.  This illusion of economic stability has convinced most people that the great economic crisis of 2008 was just an "aberration" and that now things are back to normal.  Unfortunately, that is not the case at all.  The truth is that the financial crash of 2008 was just the first wave of our economic troubles.  We have not even come close to recovering from that wave, and the next wave of the economic collapse is rapidly approaching.  Our economy is like a giant sand castle that has been built on a foundation of debt and toilet paper currency.  As each wave of the crisis hits us, the solutions that our leaders will present to us will involve even more debt and even more money printing.  And each time, those "solutions" will only make our problems even worse.  Right now, events are unfolding in Europe and in the United States that are pushing us toward the next major crisis moment.  I sincerely hope that we have some more time before the next crisis overwhelms us, but as you will see, time is rapidly running out. The following are 12 things that just happened that show the next wave of the economic collapse is almost here...

Will the Italian election impact ECB policy ?

Business as usual here perhaps - President Obama is set to announce some new nominations - but will he have a rant about sequestration?

Italian debt jumped in 2012 to 127 percent of gross domestic product from 120.8 percent a year earlier. As Bloomberg notes, that's the most since 1924, when Mussolini won 64 percent of the popular vote in elections that opposition members said were marked by irregularities. While the only irregularities in the current election were the electorates dismissal of the status quo - as Monti’s policy mix prompted 25 percent of voters to back the anti-austerity stance of comedian-turned-politician Beppe Grillo’s Five Star Movement, which was the single most voted party in the country - it appears people have misunderstood the concept of austerity as spending has risen almost 3% in the last three years and taxes have not kept pace.

While the mainstream financial media continues to trumpet the wonders of stocks closing in on all-time highs, larger, more sophisticated players are preparing for a financial meltdown in a much larger market: bonds.

Central bankers have been counting on "the wealth effect" to lift their economies out of the post-2009 global meltdown slump. The wealth effect concept is simple: flooding the economy with credit and zero-interest money boosts the value of assets such as housing, stocks and bonds. Those owning the assets feel wealthier, and thus more inclined to borrow and spend more money. This new spending creates more demand which then leads employers to hire more employees. Unfortunately for the bottom 90% who don't own enough stocks to feel any wealth effect, the central bankers got it wrong: wages don't rise as a result of the wealth effect, they rise from an increased production of goods and services. Despite unprecedented money-printing, zero interest rates and vast credit expansion, real wages have declined.

Grillo refers to Berlusconi as “the psycho dwarf.” Grillo’s vision of Bersani is a “dead man walking.” In an interview that Grillo had with the New York Times over the weekend he said he would support neither side and that doing so “would be like Napoleon making a deal with Wellington.” He went on to say that, “We can change everything in the hands of respectable people, but the existing political class must be expelled immediately.” He has called for a nationwide referendum on Italy’s participation in the European Union and indicated that while Italy will pay its debts; it might be done in Lira. Do not underestimate this man. Do not assume that Italy will go on as usual and that this is just a split between the Left and the Right because this is not the case. Grillo’s call is for a new order, a new way of doing business and a new spirit for the Italians.

Chairman Bernanke is losing the war to re-inflate the economy and stock market. 

Following up on Friday's abysmal consumer income data, we now take look at the spending side of the equation, without much optimism. Not surprisingly, as Bloomberg's Richard Yamarone summarizes, the consumer health picture in January was "grim" and "after adjusting for inflation and taxes, is simply insufficient to sustain the expansion." He adds that "over the last couple of weeks, no fewer than a dozen consumer-related companies made mention of the deterioration in incomes as a risk to  business and performances." Yamarone concludes: "Spending on discretionary items has softened in recent months. Four of our ‘Fab Five’ spending barometers fell or were unchanged in January from December. Comments from the Bloomberg Orange Book suggest further deterioration ahead." That this is happening with rates at zero, and with an effective countrywide mortgage payment moratorium allowing millions to live mortgage payment free, means that if and when things normalize, consumption - the driver of 70% of the US economy - will fall off the proverbial cliff.

China’s foreign currency reserves have surged more than 700% since 2004 and are now enough to buy every central bank’s official gold supply -- twice. The Bloomberg CHART OF THE DAY shows how China’s foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012. The price of gold has failed to keep pace with the surge in the value of Chinese and global foreign exchange holdings. Gold has increased just 263% from 2004 through to February 28, with the registered volume little changed, according to data based on International Monetary Fund and World Gold Council figures. By comparison, China’s reserves rose 721% through 2012, while the combined total among Brazil, Russia and India rose about 400% to $1.1 trillion.

• Must defend against Chinese colonial expansion and get the Nigerian oil: U. S. Boosts War Role in Africa (WSJ)
• BOJ nominee Kuroda sets out aggressive policy ideas (Reuters)
• China becomes world’s top oil importer (FT)
• Baby Cured of HIV for the First Time, Researchers Say (WSJ)
• Obama to nominate Walmart's Burwell as White House budget chief (Reuters)
• Wal-Mart Anxious to Combat Amazon’s Lead in Web Vendors (BBG)
• Nasdaq executing trades at a loss (FT)
• Spending cut debate casts pall over Obama's second-term agenda (Reuters)
• Russell Indexes to Reclassify Greece as Emerging Market (BBG)
• Bond Bears Collide With Swaps Showing Low Rates (BBG)
• Buffett Deputies Leaving Billionaire in the Dust Get More Funds (BBG)
• Brazil's leftist president fights to win back business (Reuters)
• U.S. Special Forces train Syrian Rebels in Jordan (Le Figaro)
• Carlos Slim Risks Losing World’s Richest Person Title as Troubles Mount (BBG)

Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear. In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.