Archive - Aug 5, 2013

Just like the incredulous surge in last week's Manufacturing ISM which exploded higher from 50.9 to 55.4 (as we predicted following the Chicago PMI plunge hours before that), so today its non-manufacturing cousin soared in a desperate attempt to give the "all clear" on the US second half economy (at least until the inevitable hangover of course): at 56.0, up from 52.2, and smashing expectations of 53.1 (supposedly the weather was neither too hot nor too cold this time), this was the biggest beat of expectations since January 2012, pushing the index to the highest since February 2011 (when as we now know GDP was negative) and the biggest sequential jump since April 2009. Those part-time workers must really be putting their shoulder into it even though the employment index actually declined from 54.7 to 53.2. New orders soared although at the expense of Backlogs which dropped sharply into contraction mode: pulling activity forward again to telegraph momentum? Long story short - until reality returns and the surge in various global PMIs is moderated, as happened in 2012 and 2011 before it - the Taper once again appears to be on. We expect the September number to plunge just to keep the Baffle with BS theme going strong.

While many people doubted early in the year that a 1994-style sell off in the Treasury bond complex is inconceivable, this is precisely what we got in the two months between May and July, as we showed previously.  But while the bond rout of 1994 is merely one example of a rapid Treasury selloff, there are many more, and many that put both 1994 and the (first?) great bond dump of 2013 to shame. Highlighting them all is the topic of the just released blog post by the NY Fed titled "The Recent Bond Market Selloff in Historical Perspective." The Fed's finding? Despite all the wailing from bond market participants, the "Great (first?) Selloff of 2013" only ranks 13th of all such Risk On (or is that Off for rate PMs?) episodes. Which means there is much more room to fall when the "big one" finally comes.

See if you can spot, on the chart below, why over the weekend Barack Obama (aka the Anti Patent Troll-In-Chief) intervened directly in the ongoing patent dispute between Apple and Samsung on behalf of the Cupertino company (which makes its products in FoxConn facilities in China), resulting in an unprecedented veto of a decision from the US Interantional Trade Commission - an outcome not seen since 1987.

Undated documents discovered by Reuters show that federal agents are trained to "recreate" the investigative trail to effectively cover up where the information originated, a practice that some experts say violates a defendant's Constitutional right to a fair trial. "I have never heard of anything like this at all," is one law professor's response to the fact that a secretive DEA unit is funneling wiretap, informant, and telephone database information to authorities across the nation in order to launch investigations of Americans (targeting common criminals, primarily drug dealers), "It is one thing to create special rules for national security, ordinary crime is entirely different. It sounds like they are phonying up investigations." One recently retired federal gent noted, "It was an amazing tool; our big fear was that it wouldn't stay secret."

Back in late 2012, Goldman's Jan Hatzius did precisely what he did at the end of 2010: predicted that after many years of delays, the US economy would finally soar higher on the back of the reignition of the virtuous cycle driven by now endless Fed micromanagement of virtually every aspect of the economy. We mocked him in 2010 (6 months later he pulled his call following a series of embarrassing mea culpas), and did the same in 2012. So here we are, 8 months later, and this much-delayed recovery has been "delayed" again - just as we thought. Of course, once bitten by the fringe blogosphere, Jan is not willing to pull his recovery call for the second time in a row despite deteriorating GDP and employment data, and instead (like everyone else) if placing his faith with the Fed, despite five consecutive years of disappointment from St. Ben. Maybe this time it will be different... although it won't. In the meantime, from a glass fully full (which is where it was supposed to be by this time in the year), the Goldmanite has now reduced his economic assessment to half that.

Between fast-food staff demanding higher wages, weather-related excuses, central-bank-impacted energy/feed costs, and protectionist policies, consumers (rich and poor) of beef in the US could soon face dramatically higher prices. As Bloomberg reports, US beef production is expected to plunge to 21-year lows (falling for the fourth year in a row) and the 'herd' on July 1st was the smallest for that date since at least 1973. Wholesale beef buyers from McDonalds (facing their own wage-cost demand pressures) to Ruth Chris are facing input prices rising at the fastest rate in almost 2 years even as agricultural commodities have dropped 18% this year. While the situation is not about to get better anytime soon, scientists in Holland are about to grill the world's first laboratory-grown in-vitro burger - forget Sirloin; Soylent Orange anyone?

When one thinks how easy it is to fool most people virtually all of the time, one must admit that the central planners, whose only remaining "policy transmission mechanism" is the manipulated stock market, are on to something. As the following chart from Nielsen shows, virtually the entire world is now more optimistic that "their country is in an economic recession" compared to last quarter for the simple reason that stock markets around the globe are much higher despite pervasive economic deterioration. Higher everywhere, except Latin America that is, and lo and behold, that is the only place where pessimism has increased.

Goldman Sachs and the London Metal Exchange have had a case brought against them both in a court in the US regarding anti-competitive behavior in aluminum storage, with a monopolistic effect thrown in for good measure.

That China's housing bubble, the direct result of decades of less than efficient hybrid "capi-munist" capital misallocation, is the largest in the world is known to most. What may come as news is that in its attempt to prevent the wholesale collapse of yet another sector, the Beijing politburo, which these days has a perfect analogue in the "Monetary Mandarins of the Marriner Eccles building", is preparing to blow up the latest and greatest Chinese bubble. We are talking about China's sprawling shipping industry, of course.

• Botulism toxin? There's an apology for that - Fonterra CEO apologizes, sees China dairy curbs lifted within days (Reuters)
• Patent troll-In-Chief strikes again: Veto of Apple Ruling Likely to Upend Big Patent Battles (WSJ)
• Because scapegoating means justice FTW - SEC Gets ‘Shot in the Arm’ With Victory in Tourre Case (BBG)
• Insider-Trading Probe Caught in a Washington Knot (WSJ)
• Miners return to hedging as gold  (FT)
• Toyota’s $37 Billion Cash Pile Means Turning Point for Abenomics (BBG)
• Inside the battle at Germany's Siemens (Reuters)
• ‘One million’ UK workers on zero hours contracts (FT)
• Wag the dog, part 1984: Iran Seen Trying New Path to a Bomb (WSJ)
• Tokyo Cheap to Hong Kong Luring Asian Bargain Hunters (BBG)

Compared to last week's macro-event juggernaut, this week will be an absolute bore, although with a bevy of Fed speakers on deck - both good and bad cops - there will be more than enough catalysts to preserve the "upward channel" scramble in the S&P and the zero volume levitation to new all time daily highs despite the lack of daily bad news. Speaking of Fed speakers, we have Fisher today, Evans’ tomorrow followed by both Plosser and Pianalto on Wednesday.  The key overnight data point was the continuation of July PMIs out of Europe, this time focusing on the service industry. As Goldman summarizes, the Final Euro area Composite PMI for July came in at 50.5, marginally above the Flash reading and consensus expectations (50.4). Relative to the June final reading, this was a sold 1.8pt increase, and building on consecutive increases in the past three months, the July Euro area PMI stands 4.0pts above the March print. Solid increases were observed across all of the EMU4 in July, most notably Italy. The July reading is the highest Euro area PMI level observed since July 2011.

In order to maximize their long-term profit, the Saudi`s will be watching the shale-boom in the US for an optimal oil price. This will prove a challenge for an oil dependent nation as the natural gas price implies a far lower oil price than the political elite is comfortable with.