Archive - Nov 5, 2010 - Story

America, that grand experiment created to probe the limits of human freedom, liberty and equality, has succumbed to its many injuries and passed away. The exact time of death is uncertain, the causes many. America was always, until its demise, a work in progress, but that progress stopped. The country lost its way, forgot where it was headed, and fell prey to a host of enemies, all of them coming from within.

As usual, those who want the truth behind the cheery, and misleading, headlines don't have many options. David Rosenberg continues to be one of the best options. Here is his take on today's NFP, recent market action, impact of D.C. gridlock (bad for fiscal policy, no impact, we believe on monetary - all hail emperor Ben), and why $5 trillion in total QE means Goldman's estimate for $1,650 gold may need to soon add an extra zero to it.

Gold continues its push to $1,400. The catalyst: Goldman's David Greely has just released a report on gold saying that: "we expect that gold prices will continue to rise over the next 12 months to our $1650/toz target as US monetary policy remains accommodative and US real interest rates remain low. Further, the Federal Reserve’s return to quantitative easing and the movement of gold prices to these new record highs could spark renewed investor demand for gold, which has been remarkably subdued in recent months. This represents upside risk to both our forecasts and to gold prices." As Goldman's last call on gold marked a temporary peak in the appreciation, as we expected, this time the top ticking effect will likely be lost. We believe that $1,400 gold to be breached as soon as today.

FUG (as Goldman's Francesco U. Garzarelli signs his emails) has released another note with his outlook for the Treasury curve over the next several months. As readers will recall, it was Goldman's call that the long-end would be bought up by the Fed, leading to an implicit flattening of the curve. Nonetheless, the New York Fed disclosed that, as Morgan Stanley expected, the bulk of purchases would occur around the belly, resulting in, as we highlighted yesterday, what turned out to be a record steepening of the 5s-30s, which could merely be the last trump card the Fed has to generate some profitability for the banks, whose core business model, now that the hedge fund and sales and trading model is in shambles with plunging market participation, is the treasury curve trade (long near, short far). Despite Brian Sack's attempt at giving taxpayer capital to banks in this last attempt to goose the banking sector, Goldman continues to be skeptical about further steepening of the curve: "Our best guess (corroborated by our GS Curve estimates) the slope between 10-yr and 30-yr will retrace to around 110-125bp, from 160bp currently." The explanation for why the Fed would ignore purchases of the long bond even as it bids up everything else is as follows: "While arguably increasing transparency and predictability, the Fed has also lost degrees of freedom, and the costs and benefits are yet to be seen. In the eyes of many, the long bond now appears to have been orphaned by the Fed. One explanation for this may be that the FOMC wanted to have some quantification of the potential costs of the asset purchase policy under future interest rate scenarios before its launch." Well, it now knows. And now that the UST curve look literally like a hockeystock, and the Fed is about to be accused of massive telegraphing of intentions by Ron Paul, we expect that Goldman will be proven right as the yield chase game continues, and the Fed ultimately makes it clear that it will have no choice but to gobble up the long-end as well, especially since if as we expect, MBS repurchases will be far higher than expected, resulting in a far greater contribution to monetization due to QE Lite, and leaving far less available for purchase across the balance of the curve.

Another highlight you may not hear in the President's address from this morning: according to the last Department of Agriculture update, Americans on foodstamps has increased by over half a million in August, hitting a fresh all time high of 42.4 million people relying on the government for basis sustenance. At least now we know where that labor force is going. The August number is a 17% rise from the same time a year ago. That number is up 58.5% from August 2007, before the recession began.

Some more facts emerging from a look at two more sub-headline indicators: the persons not in the labor force, which we noted in the prior post, is now at the highest ever, at 84,626K, an increase of 462K from September. This odd change conveniently allowed the unemployment rate to stay low. And more importantly, the number of people who want a job now per Table A-1 is now the highest in 2010, and the second highest in history: 6,255K, an increase of 53K from the month prior. Good thing that none of the 462K other who dropped out of the labor force had any desire to work, as otherwise both the U-3 and U-6 would have painted a far uglier picture than presented.

The inverse silver lining to today's jobs report that will be lost in the shuffle of what is perceived as a good NFP (despite consistent initial jobless claims of around 450K, which means that either there is a massive data error, or the rate of job creation has somehow surged) is that labor force participation has now dropped to the lowest rate it has been since 1984, at 64.5%. Assuming a reversion to the long-term average participation rate of 66%, means that the civilian labor force is in reality 157.4 million as opposed to the disclosed 153.9 million, a delta of 3.5 million currently unaccounted for. Maybe someone can ask the president during his imminent press conference what happened to the unemployed population, which would have been 18.3 if this labor force delta was incorporated, resulting in an unemployment rate of 11.6%.

• Unemployment rate: 9.64%, just shy of 9.7%, compared to September's 9.58%
• U-6 Rate at 17%, down 0.1% from September
  
• September data revised from -95K to -41K
• US Change in Nonfarm Payrolls (Oct) M/M 151K vs. Exp. 60K (Prev. -95K, Rev. to -41K)
• Change in Private Payrolls (Oct) M/M 159K vs. Exp. 80K (Prev. 64K, Rev. to 107K)
• Birth/Death adds 61K after adding just 11K last month
• Those unemployed for over 27 weeks increases to 6,206, represents 41% of total unemployed
  
• Change in Manufacturing Payrolls (Oct) M/M -7K Exp. 5K (Prev. -6K, Rev. to -2K)
• US Average Hourly Earnings (Oct) M/M 0.2% vs. Exp. 0.1% (Prev. 0.0%, Rev. to 0.1%)
• US Average Hourly Earnings (Oct) Y/Y 1.7% vs. Exp. 1.6% (Prev. 1.7%)
• US Average Weekly Hours (Oct) M/M 34.3 vs. Exp. 34.2 (Prev. 34.2)

With just 20 minutes left until the real deal, Goldman highlights its case for ongoing economic weakness, in this case manifesting in an NFP number due at 8:30 am that is about 35K below consensus, at 60K, and Private Payrolls at 75K, also below exp of 80K. The three reasons for Goldman's bearishness: 1. State and local cutbacks, particularly in education; 2. The remaining wind-down of temporary Census employment; and 3. Little change in federal non-Census employment. Will they be right? Check back in 20 minutes to find out.

• Dollar steady against euro, which buys $1.4211.
• Eurozone retail sales down .2% for second month in September.
• Gold rallied to $1,393.40, the highest ever, in after-hours electronic trading.
• Japan's central bank kept its key interest rate unchanged at near zero.
• "Material failure" or "faulty design" the likely cause of A380 engine blowout – Qantas CEO
• Amkor 3Q earnings fell 4% to $78M.
• BHP Billiton to build its Canadian potash business despite Ottawa blocking its $39B bid for Potash Corp.

For those who still care about the economy, now that it has no bearing at all on the market, which is merely Bernanke's plaything, today we have payrolls, pending home sales, consumer credit, and a horde of Fed speakers, though only a couple of which are apt to provide any insight into this week's decision…No POMO: enjoy it - starting next week the floodgates open.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 05/11/10