Archive - Aug 2013

The headline Chicago PMI, as leaked by the subscribers when it was released at 9:52 am, came just as expected at 53.0. And once again the story, if any, was in the components, with New Orders rising from 53.9 and Inventories finally increasing from 37.7 to 45, however this was offset by a decline in Employment from 56.6 to 54.9, a 4 month low. Perhaps the most notable line from the release is that some respondents reported "supply chain disruptions" - one wonders how much this is due to the recent and ongoing drubbing in emerging markets.

The economic theory behind why minimum wage hikes are not good for prosperity is so simple and has been repeated so many times, it’s almost not worth addressing anymore. Yet every year, some ill-informed politician comes out loudly proclaiming that higher wages mandated by the government will help the poor and reduce income inequality, so apparently we have to keep going down this road until it sinks in.

Tick Tock... Tick Tock... Tick Tock...

There’s too much of a sameness about Japan and the USA today. The Land of the Rising Sun and good old Uncle Sam have been copying each other far too much and now it seems as if they are railroading on the same train to the Land of Debt.

On the surface, today's Personal Income and Savings data was not pretty: with Incomes and Spending both rising at 0.1% in July, both missed the expected growth rate of 0.2% and 0.3% respectively. This also meant that the US consumer's savings rate was unchanged at 4.4% in the month, and the downtrend from recent highs continues as more and more of the savings buffer has to be depleted. But it was once again below the headlines that the truly ugly data lay. A quick look at the components of income showed something very disturbing. After holding relatively firm for the past five months (excluding the violent swings surrounding the 2012 year end accelerated bonus payouts), compensation of employees - the core component of personal income - tumbled by $21.9 billion. This was the biggest monthly slide since May 2012, and as the chart below shows, the downtrend in sequential wage growth has now resulted in a sequential decline in wages.

The Germans "haven't considered any military participation... and are still not doing so." The Brits unexpectedly voted 'not' to join Obama in an attack on Syria , with Cameron adding that he didn't think "it's a question of having to aplogize" to Obama. But Obama can rest assured as the French remains undeterred. After France refused to join the US-led invasion of Iraq in 2003, but was quickly aided by the US in the military intervention against Islamist militants in Mali earlier this year, Hollande is vehement of the need to "punish" Damascus, "France will participate. It is ready." Sounds like a resounding 'we're in,' right? It seems Hollande is dead set on lower French unemployment... by making every jobless person a soldier in Syria (packing at least one backup white flag of surrender). But, don't get too excited since, with lukewarm public support, Hollande has said he will summon the French parliament to vote on the debate... on September 4th (no rush...).

Europe may be a union, but when it comes to the distribution of unemployment rates across its 27 member nations (and as of July 1 with the addition of Croatia, 28), it is anything but.

• Al-Qaeda Links Cloud Syria as U.S. Seeks Clarity on Rebels (BBG)
• Administration Tells Lawmakers of Evidence Linking Assad to Attack (WSJ)
• Director of National Intelligence James R. Clapper to publish numbers of secret spying orders (CBS)
• U.S., Switzerland strike bank deal over tax evasion (Reuters)
• Another Budget Deal Bites the Dust (WSJ)
• Contemplating Summers Drives Investors to Seek Beltway Expertise (BBG)
• Austerity Test Looms in Australia as Abbott Pledges Cuts (BBG)
• Gay Spouses in All States Now Married Under U.S. Tax Law (BBG)
• Shadow banks face limits to securities trading (FT)
• EU's Rehn sees European recovery strengthening in 2014 (Reuters) ... or 2015... or 2022... or never?

Overnight, the market continued to digest news out of the UK that the formerly solid pro-war alliance has splintered following a historic vote by the House of Commons, leaving Obama to "go it alone." The result was a rather sizable slamdown in both crude and gold, accelerating as Europe opened for trading, and pushing gold back under $1400. This happened even as data out of Europe showed that European unemployment remained at a record high 12.1%, while inflation missed expectations and printed at 1.3%, or below 2% for the seventh month. Earlier in the session, headline data out of Japan showed that inflation had risen at the fastest pace since 2008. However, before the deflation monster is proclaimed dead, the core-core figure (excluding foods and energy) of the Tokyo CPI was down 0.4% yoy, unchanged since June for three months, suggesting that prices are still largely driven by energy-related costs. In other words cost-push inflation is rampant, which is the worst possible scenario and means the BOJ's QE is going to all the wrong place.

Will a US led war in Syria be the precursor to a multi year run in Gold?

Events Are Moving Quickly In Syria … Here’s What You Need to Know

As everyone is now completely distracted with the looming prospect of yet another illegal war to be waged by the 2009 Nobel Peace Prize recipient, let’s look at a few other things going on while no one is looking.

There has been much confusion in the past several months relating to the US debt ceiling, and specifically the fact that total debt subject to the limit has been at just $25 million away from the full limit since late May. As we explained first in January 2011, there is nothing sinister about this. Any time the Treasury hits its physical debt cap, it activates its available "emergency measures" which include such money releasing options as disinvesting the Civil Service Fund, Suspending reinvestment in the G-Fund, Selling securities from the Exchange Stabilization Fund, and others, which cumulatively free up around $300-$350 billion. In essence the "emergency measures" act like a revolving credit facility that is slowly but surely being drawn down. Add to that sporadic cash creation over the past few months from cash inflows from the GSEs and one can see why the US has been able to be in breach of the debt ceiling for as long as it has. And why it still has just under two months of capacity.

Early-year tax increases and higher gasoline prices have probably dented U.S. consumer expenditures and as Bloomberg's Joseph Brusuelas notes, tomorrow's report of July’s personal income and spending report may illustrate the weakness that poses a significant risk to the much-anticipated economic growth renaissance in the second half of the year.

Gold looks to have found a base. Citi's FX Technicals retain a view that we can see a “low to high” percentage move in this gold bull market similar to what we saw in the bull market of 1970-1980. They add that if we extract the final leg of that move in December 1979-Jan 1980 which was totally driven by the USSR invasion of Afghanistan - almost doubling the price of Gold over 5 weeks - then we end up with a target of around $3,500 over the next 3 years or so. The charts below are compelling in that respect, but before we look at them we will indulge in some pontification...