Archive - Jun 2010 - Story

As we reported on Friday, a critical bill that was unable to pass this past week was the extension of unemployment benefits to millions of Americans currently collecting a $1,200 average monthly stipend from the US government for sitting on their couch and not paying their mortgage. As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week." Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising: as a reminder the DOL reported over 5.2 million Americans currently on Extended Benefits and EUC (Tier 1-4). The net result is yet another hit to the US ledger, as soon 2 million Americans will no longer recycle $1,200 per month into the economy. In other words, beginning in July, there will be $2.4 billion less spent each month by America's jobless on such necessities as LCD TVs (that critical 4th one for the shoe closet), iPads and cool looking iPhones that have cool gizmos but refuse to hold a conversation the second the phone is touched the "wrong" way. As the number of jobless whose benefits expire grows, the full impact of lost money will progressively increase, and absent some last minute compromise, the monthly loss will promptly hit $5 billion per month. Annualized this is a hit of $60 billion to "consumption", and represents roughly 120 million iPads not purchased, and about half a percentage point of GDP (ignoring various downstream multiplier effects). Worst of all, as these people surge back into the labor force, the unemployment rate is about to spike by nearly 1%, up to 10.5%.

Toroto's G-20 meeting is shaping up as the most impotent yet most confrontational of all recent summits so far.  As Bloomberg reports, "Group of 20 leaders will agree to targets to tackle deficits in their final statement without prescribing when nations should begin to move to balance their books, according to officials with knowledge of the document." Due to the escalating schism between US and Europe, or Geithner and Merkel (incidentally, for definitive proof Merkel is spot on, Argentina just joined the pro-Keynesian chorus saying Europe's focus on cutting deficits is "absolutely wrong" - and if anyone knows anything about top notch economic policy, it is surely Argentina), it is likely that neither will push their own agenda on others, and with the yuan's recent symbolic depegging, everyone will be able to go home pretending victory was achieved. Yet despite the complete lack of consensus, somehow the leaders have decided to cut deficits in half by 2013, even though this target is beyond ridiculous, coming at a time when the entire world is spending with a profligacy that would make a drunk sailor blush (even one that has access to Bernanke's printer). "The draft of the statement includes targets championed by Canadian Prime Minister Stephen Harper to have countries halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016, the officials said. There is a consensus to maintain stimulus now with the focus on deficits in the “medium- term,” Harper said in a June 21 interview." In other words, nothing will change, and eventually, when the entire world has over 5 times its entire GDP encumbered in real cash debt (as opposed to the $1.2 quadrillion in pseudo-metaphysical debt), and interest payments alone account for well over 30% or more of economic production, the G-20 might, just might, consider debt cutting approaches. In the meantime, initial protests which had been largely peaceful, quickly turned violent as over 30 arrests have been made in Toronto so far, coupled with burning police cars, the use of gas masks, and direct police-protest engagements.

Welcome to the new servers! We've upgraded hardware to help us through the next phases of development. As with any move of this size, there's bound to be (minor) issues; feel free to email us @tips if you notice anything -- we'll be working hard to get everything ship shape as quickly as possible.

Update: We really need to thank Portlane (portlane.com) for helping us make this happen; they're a phenomenal resource.

We appreciate your continued support!

-ZH.

Economists are individuals who study the production and consumption of scarce resources amongst societies. They refer to marginal utility and subjective value theories in analyzing the choices individuals make in their patterns of production, consumption and exchange to arrive at conclusions about economic efficiency and the economic value of courses of action pursued by the various actors within an economy. Galbraith does none of these things. In fact, he explicitly discounts the value of studies of economic value, in favor of his "social value" and "social rate of return" on investment. Galbraith, then, is not an economist studying the economy but rather a socialist studying society and how it responds to the various arbitrary dictates of the political elite that have captured it. Yet, "study" is perhaps too kind a word to describe what Galbraith does on an intellectual level, because it implies something academic or scientific in nature when the truth is that Galbraith, as a socialist, is a politician, not a scientist.

The complete June edition of Sundaram BNP Paribas' monthly newsletter. A great compendium of the month's macro news with a useful slant on Indian economics and markets. (We are, of course, honored to have made the firm's Top 10 Must Read blog list).

Goldman's Andrew Tilton has laid out a useful framework of the most relevant factors to keep an eye on as the double dip unfolds in its entirety. While Goldman's bias is traditionally bullish, we are confident that as more and more economic indicators surprise to the downside (and June so far has been an unmitigated disaster - we will post Goldman's macroeconomic "surprise" tracker as soon as the latest version is released - it will be a bloodbath), which will eventually pull H2 GDP far below the administration's expectations for a number well north of 2%, and even Goldman's more tame forecast of 1.5%. Our thesis from the beginning of the bear market rally has consistently been that both the economic "rebound" and the market surge have all been a dollar for dollar translation of fiscal and monetary largesse, which in turn is just borrowing from future growth, via assorted credit mechanisms and an adherence to a Keynesian philosophy that eventually growth pick up will be large enough to overtake the incremental debt funding costs. We know from Reinhart and Rogoff's studies that this is no longer the case when you get into stratospheric sovereign debt levels. And as this is a closed loop, there is no way to get out of this Keynesian toxic spiral without inflicting terminal damage on the economy - perhaps in September 2008 there may have been a different outcome, but now it is too late. Which is why anyone looking for any modest economic bounce will be satisfied for only a quarter or two, as yet another greater stimulus flows through the economy. However, with the marginal utility of any new debt at or below zero, even the government's fiscal stimulus is now becoming useless (even when assuming a perfectly efficient distribution system, which in this corrupt political environment is a stretch). Which only leaves monetary stimulus as the last bastion of the reflation attempt, and we are certain it will be abused over and over by Bernanke, as America slowly careens to the unwinding of the current iteration. Which is why fiat paper will become increasingly worthless, and tangible, undilutable assets: vice versa.

Tropical Storm Alex has officially been promoted. According to the NHC, the cyclone, which is due to pass over the Yucatan Peninsula in 12-24 hours, and once in the Gulf of Mexico is expected to become a hurricane by the end of the forecast period. Trajectory projection maps are still inconclusive as to just how much of an impact the hurricane would have on BP clean up operations.The chart below provides a snapshot of the three major storms currently in both the Atlantic and Pacific, where both hurricanes Celia and Darby appear to be no major threat.

Is Goldman AJ Cohen-replacement David Kostin in need of a dosage increase in his daily hopium uptake? "The positive price action from the CNY revaluation announcement was fleeting as the market appears to have turned to more domestic concerns, with the Consumer Discretionary sector leading the way down. The fears seem to be well-founded as 1Q GDP was revised down today to 2.7% from 3.0%, primarily based on weakness in final demand, which came down to 0.8% from 1.4%." When even he can't spin the data positively, it may be time to buy... or at least do the opposite of his recommendations. To wit: "Our recommended sector weightings have generated -23 bps of alpha YTD. Our overweights (Info Tech, Energy, and Materials) generated -34 bps of alpha while our underweight Consumer Discretionary position is down 14 bp. Underweights in Health Care, Telecom, and Utilities have added +24 bps of alpha."

I lived in Chile during the Pinochet dictatorship—I can spot a fascist police-state when I see one. The United States is a fascist police-state. Harsh words—incendiary, even. And none too clever of me, to use such language: Time was, the crazies and reactionaries wearing tin-foil hats who flung around such a characterization of the United States were disqualified by sensible people as being hysterical nutters—rightfully so. A police-state uses the law as a mechanism to control any challenges to its power by the citizenry, rather than as a mechanism to insure a civil society among the individuals. The state decides the laws, is the sole arbiter of the law, and can selectively (and capriciously) decide to enforce the law to the benefit or detriment of one individual or group or another. In a police-state, the citizens are “free” only so long as their actions remain within the confines of the law as dictated by the state. If the individual’s claims of rights or freedoms conflict with the state, or if the individual acts in ways deemed detrimental to the state, then the state will repress the citizenry, by force if necessary. (And in the end, it’s always necessary.)

In case you just can't get enough of of Barney Frank simply oozing truth, integrity and unbribable honesty (in other words, everything that defines the American Congressional way) in every interview he does, this Bloomberg TV clip is for you. It is also for everyone else who would rather not read the 2,000 pages of FinReg reform yet wants to get some sense if they will be sued next Monday for lifting a 5MM offer of UK CDS. Overall, Barney mumbles about this and that, discusses whether the bill will make banks less profitable (it won't), clarifies the 3% loophole for JPMorgan's investment in Highbridge,  notes the surprising $19 billion bank levy, yet runs like a scolded schoolgirl the second Fannie and Freddie (also known as the one biggest disaster of his career, and the only thing he will be remembered for) are mentioned. "My Republican colleagues like to forget the fact that during the 12 years they controlled Congress, they did nothing about Fannie Mae and Freddie Mac. When the Democrats took power in 2007, we passed a bill that gave them the power to put them into conservatorship. Fannie Mae and Freddie Mac today are not what they were, thanks to a bill passed by a Democratic congress…They are in conservatorship. The notion that we haven't done anything is a lie, and they know that." The more important thing Barney, is that the American are fully aware that any pretense of reform coming from you is a lie, and they most certainly know that.

Summary of the weekly's events and macro observations courtesy of RCS Investments

Several days after the Romanian parliament passed a law to cut pensions by 15% in order to qualify for a critical $20 billion IMF loan, the Romanian Supreme Court found this law was not only unconstitutional, but unappealable (along the lines of what our own SCOTUS will do once the Fed's transparency appeal gets to the very top, resulting in confirmation once and for all that American laws are only made for the benefit of the Federal Reserve). The decision was reached hours after dozens of Romanian citizens stormed the presidential palace "to get an audience with President Traian Basescu." As a result of the Constitutional Court's decision, the IMF loan "may now be delayed, and this will be a big blow to the government of Prime Minister Emil Boc, the BBC's Nick Thorpe reports." Also as a result, Romanian (and by association, neighboring Bulgaria) CDS blew up today and closed +30 to 410 for Dracula's host country, and +20 to 360 bps for the country that served as the reverse engineering center of the former Communist Bloc.

A week after the EUR posted the biggest short covering rally in history, expunging every single weak hand after a move wiped out 44% of all net shorts, the bearish speculative bets on the EUR are once again rising, according to just released CFTC Commitment of Traders data. After dropping from net -111,945 to just -62,360 contracts in the past week, net non-commercial EUR shorts are once again rising, and have increased by 8,614 in the week ended June 22, to -70,974. The easy short covering is over: at this point shakeouts, as claimed last week, will require something much more effective than aGoldman downgrade of the EURUSD. In other COT news, gold fans will be happy to know that the number of commercial gross and net short positions in the precious metal has hit a new all time record of 475,678 gross and 288.916 net shorts. It is getting increasingly more expensive to the commercial players to preserve the price of gold at current levels, even with unlimited paper shorting capacity. As ETF's such as GLD accumulate increasingly more (hopefully real) gold inventory (yesterday's record number of 1,316 tonnes in GLD has not be updated for today yet), it will, in turn, become increasingly more difficult to push down gold price even as all the big players try to gold paper gold down.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 25/06/10

As we speculated previously, the sudden and unprecedented departure of Peter Orszag, the day prior to the US Budget's formalization (which incidentally never happened as now the US will likely not have a 2010 budget at all, for fear of disclosing to most Americans just how broke the country is ahead of mid-terms) was due to Orszag's disagreement with the administration's, and particularly Larry Summer's, inability to fathom that reckless spending is a recipe for bankruptcy. As the FT reports: "Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House." And so, as any remaining voices of reason realize they are dealing with a group of deranged Keynesians, soon there will be nobody left in the administration who dares to oppose the destructive course upon which this country has so resolutely embarked, which ends in one of two ways: debt repudiation, or war. And with the only remaining economic "advisers" being the trio of Summers, Romer and Geithner, you know America will somehow hit both of these mutually exclusive targets.