Archive - Jan 1, 2011 - Story

It was the night before Christmas Eve, and CNBC trucked out TrimTabs' Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: "If the money to boost stock prices by almost $9 trillion from the March
2009 lows did not come from the traditional players, it had to have come
from somewhere else.  We believe that place is the Fed.  By funneling
trillions of dollars in cash to the primary dealers in exchange for
debt, the Fed has given Wall Street lots of firepower to ramp up the
prices of risk assets, including equities." And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: "...stock prices will be higher by the time
QE2 ends, but economic growth will not be sustainable without massive
government support.  Then even more QE will be needed, and stock prices
could keep rising for a while.  In our opinion, however, no amount of QE
will be able to keep the current stock market bubble from bursting
eventually." Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market's fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don't need no stinking QE...). Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demands someone finally bring Paul Volcker out of the fridge.

Yesterday on Tom Keene's always informative show, two of the world's most important economists, Goldman's Jan Hatzius and BofA's Ethan Harris presented their respective defenses for why GDP in 2011 would rise by nearly 4% as per their recent predictions. The straw man for the upside case: recently adopted fiscal stimuli which, however as David Rosenberg notes, are not really stimuli as much as lack of governmental disstimuli. Yet what is interesting is that both ceded that both employment and housing, the two key traditional drivers of economic growth and prosperity, would likely continue deteriorating, with employment ending the year over 9%. In other words, all growth in 2011 will be predicated upon very much more of the same: transfer payments and government stimulus (not to mention inventory accumulation) especially in the form of incremental debt to offset consumer deleveraging. No surprise there. After all the only reason why the economists of the world have expressed an unprecedented amount of bullishness in recent months is that the US is currently experiencing a rare confluence of both fiscal and monetary stimulus: an even that last occurred in March of 2009. The issue is that as we have noted previously, the benefit from the fiscal stimulus has already been negated by the jump in oil and other commodity prices, whereby the token weekly paycheck increase has been more than offset by gas price increases, while the monetary stimulus is already priced in, and absent rumors of another episode of QE in advance of the June end of QE2, the temporary stock market strength will quickly turn into weakness. Which leaves us with the hangover effect of federal deficit... and its funding. The chart below presents some interesting observations in this regard, and also makes us wonder just what will happen to risk assets if Bernanke does not leak the announcement of QE3 by May at the very latest.

It has been a good year for Goldman's David Kostin: not only did the strategist make partner this year, but virtually all of his analysis is simplistically goal seeked based on what New York Fed favorite Jan Hatzius says is bound to happen (which one way or another, does), and the entire Wall Street herd of C-grade economists follows suit. Nonetheless, he, or rather his subordinates, sure create some pretty charts. Below are the main charts summarizing both the last week and year, and the cheatsheets for Goldman's outlook on 2011, as well as some other Easter eggs.