Archive - Feb 25, 2011 - Story

After we presented a micro-themed, static primer on the impact of the price of oil on the US consumer earlier, here is a macro picture perspective from Reuters, which correlates the change of oil prices to the corresponding change in world GDP (indicatively every $10 change in in crude results in an estimated range of 0.5-1.0% inverse change in global GDP).

Is it about the time that everyone agreed that all "consumer confidence" is politicized, circular, irrelevant, and just as credible as the next lie to come out of Larry Yun's mouth? While a few days Thomson Reuters/University of Michigan "found" that Consumer Confidence had surged to a According to Rasmussen, "investor confidence sinks to another 2011 low." Ok, enough. It is more than obvious to anyone with half a brain that "confidence" is nothing more than a gamed, goal seeked indicator, which is a function purely and entirely of the political agenda of the entity collecting the data. Another great example: while the Consumer Comfort index was managed by ABC until last week, it was scraping all time lows. Then the week it starts being managed by Bloomberg, and, lo and behold: "Consumer Comfort Increases to Highest Level Since 2008." A surge in confidence? Really? On gasoline passing $4? Luckily even Bloomberg admits the credibility of this latest propaganda index is suggest to say the least: "The four-point gain last week follows a five-point increase
in early January. The gauge dropped five points in the week
ended Feb. 6, the biggest setback since January 2010. Movements of that magnitude are unusual because the index
is based on a four-week average, Langer said. Nonetheless, the
gauge is mimicking the shifts seen in a 10-week span in mid-
1993, when the economy was also recovering from a recession." Ah, the good old Bloomberg "assumption taken as fact" Jedi mind trick.  Last time we checked the only "recovery" was that in the debt ceiling, er, target, assuming its achievement of $100 trillion in under 10 years is considered "recovery." Was the "also recovery" driven by the biggest global deficit spend in the history of the world, and the first outright debt monetization episode since the advent of Weimar? Guess we won't read that in the Bloomberg piece.

Wondering how surging oil prices will impact the average American? Forgotten what life was like in the first half of 2008? Then this chart is for you.

Japan has found out the perils of a long term zero interest rate policy means the banks have no incentive to assume credit risk and lend to each other or anyone else, so they trade their own book. The performance of the FTSE 100 and S&P500 suggest the true extent of the banks continuing to use cheap government money to trade bonds and equities. Japan knows what happens when the “extend and pretend” gravy train stops rolling. Equities should continue to rise while government stimulus money can find no other home. This is why politicians are irked at bankers bonuses, because they wouldn’t be making fat profits without cheap government money raised at the expense of the tax payers. All tangible assets, commodities (metals, energy, agricultural) and rare artifacts are likely continue rising until growth is undermined. The threat of rampant inflation and civil unrest will eventually cause the US, UK, Eurozone, Japan and China to rethink stimulus packages.

As we reported yesterday, Saudi Arabia which following its latest recreation of Helicopter Ben's money parachuting experiment to buy its people's love, suddenly has found itself in a fiscal crunch, has no choice but to increase general oil sales revenues. Which is why as Reuters reports the kingdom, which many speculate may be next to see a spike in protests in early March, has just hiked its oil output by 8% to over 9 million barrels per day. The move, in addition to yesterday's margin hikes by both the CME and ICE, has forced oil prices to decline modestly, bringing some stability to an otherwise extremely jittery market, which would also further exacerbate geopolitical tensions. "The Saudi move follows reassurances from Riyadh earlier in the week that it was prepared to act to prevent shortages as a result of the rebellion in Libya against leader Muammar Gaddafi that has sharply reduced the fellow OPEC producer's 1.3 million bpd of exports." What is unclear is how Iran, an OPEC member, will respond to this unilateral action out of an otherwise "collective" oil cartel. We continue to expect that as a result of a widening political schism between the OPEC member nations, and the ongoing turbulence in Libya, that OPEC will be soon "restructured" materially.

And so the sunset of the QE2 inspired Golden Age begins: From JPM's Michael Ferolli: "We are revising down our projection for the annual growth rate of real GDP in Q1 from 4.0% to 3.5%. Prior to this week, first quarter growth had already been tracking a little soft relative to our forecast. In particular, consumers stumbled a bit to start the year, and while we expect them to pick up the pace some in coming months, the recent rise in energy prices poses a notable headwind. Most cyclical indicators remain quite favorable, and the unwind of adverse weather effects could support next quarter growth; for these reasons we are maintaining our second quarter growth forecast of 4%. If energy prices remain at their elevated level, however, this would pose a challenge to our outlook for next quarter. Another downside risk to Q2 GDP growth comes from the federal government sector, which could see a faster move to austerity than is in our current forecast. We've also revised our headline CPI forecast, particularly in Q1 where we now see the CPI increasing at a 4% annual rate. Below is our updated forecast spreadsheet."

David Rosenberg shares his updated list of the now 6 (formerly 4) drivers of stock performance: "Well, we use to say there were four key drivers: 1. Fundamentals; 2. Fund flows; 3. Technicals; 4. Valuation. Then we introduced another one last week: 5. The Fed’s balance sheet; And now there is a sixth: 6. Corporate earnings surprises. No wonder St. Louis Federal Reserve Bank President Bullard is opting for QE3 — he’s probably long the market!"

After having surged for 6 days starting with a major jump on February 16, from €1.2 billion to €15.8 billion, borrowings under the ECB's 1.75% Marginal Borrowing Facility plunged overnight from €14.9 billion to €2.2 billion. As was reported previously, the supposedly responsible banks for this surge in borrowings were Ireland's two most insolvent financial entities: "The FT reports that "Anglo Irish Bank and the Irish Nationwide Building Society, Ireland’s two most troubled lenders, were behind a spike in overnight borrowings this week from the European Central Bank, according to people familiar with the transactions." A senior figure familiar with the transaction said it was “to facilitate” the sale of deposits by Anglo Irish and Irish Nationwide under the restructuring plan. Under the ECB’s normal refinancing operations, the collateral is locked up for a week. Tapping the ECB’s overnight or “marginal lending” facility, although more expensive “gives the banks the freedom to have the assets at their disposal immediately if there is a quick sale" he said." So does this mean that AIB and the INBS have completed their asset sales and the collateral has been unwound from overnight activity? That would be the logical explanation, especially as today is an important day for Ireland with Enda Kenny expected to become Taoiseach imminently. What will be curious is if the MLP borrowings surge once again in the coming days: at that point the "Irish" excuse will no longer be applicable.

There are two key datapoints to present in this week's Fed balance sheet update: the surge in excess reserves, and the comparative Treasury holdings between the Fed and other foreign countries. But first the basics: the total Fed balance sheet hit a new all time record of $2.5 trillion. The increase was primarily driven by a $23 billion increase in Treasury holdings as of the week ended February 23 (so add another $5 billion for yesterday's POMO) to $1.214 trillion. With rates surging, QE Lite has been put on hibernation and there were no mortgage buybacks by the Fed in the past week: total MBS were $958 billion and Agency debt was also unchanged at $144 billion. The higher rates go, the less the QE Lite mandate of monetization meaning that the Fed will be continuously behind schedule in its combined QE2 expectation to buy up to $900 billion by the end of June. Yet most notably, as we touched upon yesterday, the Fed's reserves with banks surged by $73 billion in the past week, as more capital was reallocated from the unwinding SFP program. As noted previously, we expect the total bank reserves held with the Fed to jump from the current record $1.29 trillion to at least $1.7 trillion by June.

As we had been expecting, Q4 data once again continues to take downward revisions. Second revision of Q4 GDP prints at 2.8%, widely missing of 3.3% widely, compared to a 3.2% reading previously. US Personal Consumption came at 4.1% on expectation of 4.2% (Prev. 4.4%). Core PCE was 0.5%, on expectation of 0.4%. The attempt at getting the consumer to releverage, at least according to the BEA, is working: personal outlays increased from $10,736.3 to $10,883.2 resulting in a decline to savings of $55 billion. And still the economy refuses to either generate jobs to keep up with the rate of population growth, or to grow at the required rate of 4-5% nearly 2 years following the "end" of a recession. Make room for QE3.

As recent developments out of Libya have demonstrated, when geopolitics and oil production mix, the resultant product is quite explosive. And as more protests are sure to spread to other countries in the region (with Saudi of course being the key domino whose potential fall would send crude well over $200), below we present a summary atlas of the key production capacities in both crude and gas, as well as proven reserves of all the countries in the MENA region. At this point, with Libya largely priced in, all attention should once again shift to developments in Bahrain, which contrary to the media black out, have not been put under control even remotely. The rumored fact that Al Jazeera may have allegedly received a "request" from Saudi Arabia to not cover recent events is a different story altogether.

• Irish Voters Set to Take Revenge on Ruling Party (FT, Bloomberg)
• Saudi youth call for protest in solidarity with Libyan uprising (Monsters and Critics)
• Wisconsin Assembly approves plan to curb unions (Reuters)
• Special report on Glencore: The biggest company you never heard of (Reuters)... actually that would be the DTCC
• US Warns Extreme Food Prices Will Stay (FT)
• Gotta love Bloomberg headlines: Fannie Mae, Freddie Mac Seek $3.1 Billion Amid Improved Earnings (Bloomberg)
• More completely expected criminal fraud out of Citigroup: What Vikram Pandit Knew, and When He Knew It (Bloomberg)
• CFTC, SEC halt criminal investigations, blame lack of money (WSJ)
• Sentance Says BOE Must Tighten Now to Prevent Tough Moves Later (Bloomberg)
• House Republicans Move to End U.S. Foreclosure Aid Criticized as Harmful (Bloomberg)

Markets up again this morning. Wisconsin’s state assembly passed the highly debated legislation that weakens state workers’ unions and the bill will now head on to the state senate. In a meeting with outside economic advisors, President Obama acknowledged that current rates of unemployment will continue in the near term. St. Louis Fed President James Bullard told reporters yesterday that he supports a more flexible quantitative easing program that would change the amount of bond buying based on the health of the economy. Bullard’s comments were not limited to QE2, and said a third easing program is a possibility. Today will see the release of 4Q GDP, estimated at 3.3% v 3.2% prior.

Following a surprising confirmation of a double dip in the UK a few weeks ago, after GDP was reported to have dropped by 0.5%, today the economic growth number was revised even lower, coming in at -0.6%. Per Bloomberg: "Gross domestic product fell 0.6 percent from the previous three months, compared with an initial estimate for a 0.5 percent drop, the Office for National Statistics said today in London." Yet how pathetic would a country be seen if it didn't blame a weak winter data point on the snow: "The statistics office said its “best estimate” for the impact of cold weather on the data remains 0.5 percent. The slump was led by construction and investment. The coldest December in a century hampered the recovery, dragging the economy to its worst performance in more than a year. The Bank of England kept its key interest rate on hold this month as inflation at twice the 2 percent target led to a four-way split among officials. Recent surveys suggest the contraction may have been a temporary setback, with services resuming growth in January and manufacturing strengthening." Of course, with no additional money printing (for now) it may well have been permanent. We will need to wait until spring showers are blamed for another 1% or so drop. And it wasn't even half an hour later that the entire London Stock Exchange crashed. "Investors were left in limbo as the London Stock Exchange halted trading due to a technical glitch, dealing an embarrassing blow to its new systems. The LSE, which launched its new trading system last week, suspended dealings before the opening bell on Friday morning in the latest in a string of technical problems." Snow was not blamed: "It blamed issues with the market data technology and said it was investigating the problem." So once again, just like in the case of the Italian market a week ago, the second there is the potential for massive market volatility following disappointing data, a market wide "circuit breaker" comes in preventing anyone from selling. Truly an effective solution to retain asset price stability.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 25/02/11