Archive - Dec 5, 2011 - Story

A few days ago we presented an analysis by ConvergEx showing that due to the very close historical correlation between home prices and employment, it is the Fed's view that the only way to stimulate employment (aside from such BLS shennanigans as pretending that despite the natural growth of the labor force by 90k a month to keep up with population, those willing to work are in fact declining) is to raise home prices. Raising home prices be definition means either reducing supply - an event which is proving impossible with shadow inventory in the millions and rising, even as thousands of new delinquent mortgages appear each day while homebuilders keep on chugging out new homes that remain vacant for years, or increasing demand. It is the latter that the Fed targets, by attempting to make mortgage rates ever cheaper via LSAP, Operation Twist or other Treasury curve interventions that attempt to push down long-dated yields ever lower. This works in theory. In practice, however, as the chart below demonstrates, the Fed's entire ZIRP-targeting policy over the past several years has been one abysmal failure (for everyone expect those with immediate access to the Fed's zero interest rate capital - i.e., the Primary Dealers). As proof of this we present the following chart, which maps the SAAR in New Home Sales against the 30 Year Fannie Cash Mortgage. What appears very clearly on this chart is that despite ever declining mortgage rates, there is simply no interest in home turnover, and sales are at record low levels due to lack of demand, and lack of desire to sell into a bidless market, in essence causing the entire housing market to halt.

It appears the GOP candidates are dropping like flies: first that one crazy guy, then Cain, and now... Mitt Romney? According to a Boston Globe article, paraphrased by Reuters, the GOP frontrunner (or is that second after Gingrich now: nobody really knows any more), spent $100,000, not of his own money but state funds, to "replace computers in his office at the end of his term as governor of Massachusetts in 2007 as part of an unprecedented effort to keep his records secret. When Romney left the governorship of Massachusetts, 11 of his aides bought the hard drives of their state-issued computers to keep for themselves. Also before he left office, the governor's staff had emails and other electronic communications by Romney's administration wiped from state servers, state officials say. Those actions erased much of the internal documentation of Romney's four-year tenure as governor, which ended in January 2007. Precisely what information was erased is unclear." Odd: almost as if he had something to hide... Yet something tells us the other side of those emailed correspondences will still be there: alive and kicking, somewhere on the archived servers of Bain Capital, and a few prominent health insurance companies (and of course Goldman Sachs, because Goldman Sachs is everywhere). Naturally, one would need a subpoena to get those. And for that one would need a reason to assume something is illegal. Luckily, wiping your hard disks while a servant of the people is perfectly normal in a banana republic. Now just who does Ron Paul have to murder in broad daylight while having sex with Snooki before the general media finally decides he is worthy of a shot at this whole farce?

In the world of finance, there is always talk of bubbles – mortgage bubbles, tech stock bubbles, junk bond bubbles. But bubbles don’t develop only in financial markets. In recent years, there's been another one quietly inflating, not capturing the attention of most observers. It's an education bubble – just not the one of student debt that has graced the pages of the New York Times and so many other publications in recent months. The problem is not that we are overeducating ourselves as many would have you believe. Rather, it’s that we are spending a fortune to undereducate ourselves. The United States has always been a very educated country. But it is becoming less and less so, especially in the areas that matter to our individual and collective economic futures. Our undereducation begins with a stubbornly high dropout rate among secondary education students. About a quarter of those who begin high school don't finish. In an educational system where graduation from high school at a minimum level often means no grasp of mathematics beyond basic arithmetic, no training in basic personal finance, and no marketable professional skills, this is an obvious problem We can and should do more to prepare high school graduates for the world they now live in. The big problems aren't rooted in high school education, however, but with the decisions we as a nation are making in the education we get beyond the compulsory level.

Now that the USPS is teetering on the verge of bankruptcy every day, there are those who say the post office is simply not charging enough for its services. On the other hand, there are those who say no matter what the USPS charges it would always, being a government institution, immediately drown out any revenue increase with a more than commensurate surge in headcount (i.e., expenses) that offset any increase in postage stamp prices, and drown out any possibility for it to stay cash neutral (being non-profit), forget turning a profit. So at the end of the day the age old question arises: should the USPS merely keep hiking prices, or should it do what the US government should have done long ago and cut overhead across the board. Because as the chart below shows, while the nominal surge in stamp prices is more than obvious, it has managed quite successfully to stay indexed with inflation. In which case the question becomes: what would Americans be willing to pay for a stamp?

While the BLS unemployment number, fudged strategically to lower the denominator, or the total labor force, may have come well better than expected (as somehow miraculously ever more people find the shadow economy a more hospitable place where to make their money and drop off the BLS roll forever) we once again go to that trusty fallback, the monthly Gallup poll of underemployment. What we find here is rather different from what the BLS, and the administration would like us to believe, namely that "underemployment, a measure that combines the percentage of workers who are unemployed with the percentage working part time but wanting full-time work, is 18.1% in November, as measured by Gallup without seasonal adjustment. That is up from 17.8% a month ago and 17.2% a year ago." Said simply, "many employers appear to have chosen to hire part-time rather than full-time employees for this holiday season." Naturally, this should come as no surprise: it was first discussed here in May, when we said: "As the attached chart shows, since the start of the depression, America has lost 9.1 million full time jobs, offsetting this by a gain of 2.3 million part time jobs. No need to outsource to Asia any more: America now outsources jobs to temp agencies. And so the transition of America into a part-time worker society, first discussed in December of 2010 continues." (the attached chart can be seen here). As for the Gallup chart which comes from the real economy, not from some seasonally fudged, birth/death adjusted grotesque model deep in the bowels of 2 Massachusetts Ave NE Washington, here it is.

While we are not completely shy of saying we-told-you-so, in the case of the players in Solyndra's fantastic rise and fall, we are more than happy to. Back in September we highlighted Goldman Sachs' key role in the financing rounds of the now bankrupt solar company and this evening MarketWatch (and DowJones VentureWire) delves deeper and highlights how the squid has largely stayed out of the headlines (what's the opposite of lime-light?) in this case despite its seemingly critical assistance and support from inception to pre-destruction. Goldman's involvement in Solyndra, and its lofty valuation projections, lent credibility to the company and helped rouse investor interest and it was this private interest that was cited by DoE officials as a considerable factor in its loan guarantee program. As we said before, anywhere you look, Goldman has been there and left its mark...

Prior to 2008 it was generally understood that the profession hardly merited its claims of its own predictive utility. So the failure to assign enough risk to such a crisis as befell the developed world in 2008 was, frankly, no surprise. But in the aftermath of the crisis, economics, in its professional form, has revealed itself to be damagingly disconnected from observable reality. A glaring example of this is how it cannot come to any agreement as to how the debt crisis occurred, and accordingly remains quite confused in its proffered solutions. Mostly the profession remains curiously naive about the nature of debt, an understanding of which is more critical than ever as the developed world enters a 'slow' to 'no-growth' phase of its history. Indeed, many of the papers, interviews, and op-eds from central bankers and economists in the face of our present-day sovereign debt crisis are little more than an eerie restatement of the discussions which took place about private-sector debt from 2006-2008.

Last week, while the market was soaring as news of the upcoming Fed's FX swap lines was being leaked, the general media's narrative goalseeked to the stock spike was that it was a function of "record" Black Friday sales. Alas, as often the case, there is some unpleasant fine print to go alongside this seemingly bullish proclamation. David Rosenberg explains why the shopping bonanza hangover is coming, and why, just like in the cash for clunkers case, it means that a late November shopping record means an imminent plunge in retail traffic...as soon as the bills come in.

As the Duke of Cambridge is due to be deployed to the British territory south of Argentina, the tensions are rising within Falkland Island waters as the Argentinians board Spanish fishing vessels as President Cristina Kirchner has adopted a steadily more belligerent stance towards Britain’s South Atlantic possessions. The Telegraph is this evening reporting that 29 years on from the last major tensions, Argentina has launched a naval campaign to isolate the Falkland Islands that has seen it detain Spanish fishing vessels on suspicion of breaking the country’s “blockade” of the seas around the British territories. Are we really starting to see escalations in global geopolitical tensions? Our recent discussion of the Black Swan of Cairo perhaps points to this not being as surprising as one might believe. Perhaps most worryingly, Argentina’s claim over the Falklands was backed by a newly formed block of South American and Caribbean countries, CELAC, on Saturday with unanimous approval.

Standard & Poor's Ratings Services today placed the 'AAA' long-term sovereign credit ratings on the Republic of Austria on CreditWatch with negative implications....weakening asset quality in Austrian banks' securities and loan portfolios, particularly in Central and Eastern European subsidiaries, could in our view increase the risk of the need for additional capital injections by the Austrian government, or similar interventions.

The CreditWatch placement is prompted by our concerns about the potential impact on France of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, France's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in France....If we change one or more scores, we could lower the long-term rating by up to two notches. Conversely, if the above concerns were mitigated by what we consider to be appropriate policy action, we could affirm the long-term rating at 'AAA'.

Standard & Poor's Ratings Services today placed its 'AAA' long-term unsolicited sovereign credit rating on the Federal Republic of Germany on CreditWatch with negative implications. At the same time we affirmed the 'A-1+' short-term unsolicited sovereign credit rating on Germany.... The CreditWatch placement is prompted by our concerns about the potential impact on Germany of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, Germany's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in Germany.

From S&P: "Standard & Poor's Ratings Services today placed its long-term sovereign ratings on 15 members of the European  Economic and Monetary Union (EMU or eurozone) on CreditWatch with negative implications. .. We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one  notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments.  [THIS MEANS FRANCE]"

High yield credit spreads were the first to show signs of disappointment this morning but this seemed more due to technical relationships in the CDS index market as HYG stormed ahead with stocks. Commodities had notably cracked early on this morning and were trending lower already as we broke the FT rumor of broad S&P downgrades in euro sovereigns. All markets reacted instantly, no questions asked, and while IG, HY, and the S&P dropped together, it was the drops in commodities as the USD strengthened that were optically of the highest magnitude. TSYs also instantly reacted and were another major outperformer - drastically beating Bunds on the day. ES (the e-mini S&P 500 futures contract) was much less volatile than broad risk assets overnight but as Europe opened markets started to move closely together in a positive risk mode. CONTEXT (the broad risk basket) was less positive that ES in the US morning session but as we sold off and closed they were closely in sync once again as every member of the basket was contributing to risk aversion. Financials outperformed but were well off their intraday highs as a sector with the majors closing mixed (e.g. BAC near lows and MS near highs) but we note that financials were the most net sold (especially the majors) in corporate bond land.

Some late day covering lifted 30Y TSY yields and EUR strengthened against the USD (European banks repatriating ahead of their open?) helping CONTEXT and elevating ES into the close. ES was on its own relative to credit though as it tore back up to try and regain VWAP.