Archive - Jul 8, 2010 - Story

A few months ago we disclosed that based on its campaign contributions in Q1, Goldman Sachs had turned from Democrat to Republican, as "its campaign spending favored Republicans over Democrats by a margin of 58 percent to 42 percent both for March and the first three months of the year." Furthermore the animosity between the firm and the president is not exactly top secret. So, being the smartest guys in the room, would it not behoove Goldman to endorse precisely those policies which while unlikely to have much economic impact (for the growing futility of Keynesianism see here), are most at odds with prevailing popular opinion of what next steps for the economy should be? We pointed out first two days ago that Goldman is now openly rooting for QE 2.0 and another round of unbridled fiscal stimulus: precisely the kind of behavior that increasingly more people realize is the primary reason why this country is in its current sad place. Today, Goldman economist Alec Phillips continues the shadow attack on the administration, pointing out in excruciating detail what will happen if unemployment benefits are not extended (a topic also discussed previously here), and that some form of passage of the bill is critical, in essence putting the high hurdle strawman before the administration, and boxing it in a lose-lose corner. Regardless of the political sideshow, and we will keep an eye on it, with this week's Initial Claims out due later today, and a likely collapse in Extended Unemployment Compensation and Extended Benefits now that there is, at least for now, no extension, here is how Goldman envisions the over 4 million plunge in those eligible to receive benefits, and the implication of this to the economy.

• Asian stocks rally as growth in US retail sales eases concern.
• China bought a record $7.9B in short-term Japanese debt in May
• EU stress tests will cover 91 banks, accounting for 65% of the area's banking industry. Assume bond value drop.
• Hoenig, Fisher say stimulus isn't needed to assure recovery.
• IMF sees rising risks slowing recovery pace.
• Japan's Machinery orders slump 9.1%, most since 2008.
• AES Corp announces a $500M stock repurchase program.
• BP aims to fix leaking Gulf of Mexico oil well by 27 July

For all those who need confirmation that i) Keynesianism does not always work and that ii) we are living through an economic outlier, take a look at the below chart. While it is obvious that all previous recoveries used to "bloom" on their own after a modest debt/GDP increase, in essence validating the musing of John M Keynes, this time sure is different: the change in the ISM manufacturing, widely seen as a precursor to economic growth, will just barely surpass the increase in the debt/GDP, confirming that no more marginal debt will stimulate the economy. Extending this chart also shows that shortly the marginal change in the debt will surpass that of the ISM. This begs the question: why keep drowning the country with new and more debt when it is now obvious that incremental debt is no longer creating a virtuous growth loop?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 08/07/10