Archive - Jun 1, 2011 - Story

Richard Koo is back with his latest piece titled, not surprisingly, that "Fiscal Consolidation is Not the Answer" - alas, a decimated by (previously secret) debt European continent, and even America, is rapidly starting to disagree with this assessment, which stems from the faulty assumption that the economic "balance" achieved after 30 years of endless balance sheet expansion courtesy of ever declining interest rates is sustainable. Hint: it isn't. And until the world realizes that it is precisely this Fiscal Consolidation that is the answer, we will continue seeing bankers sell bits and pieces of Greece to each other, transfer payments in the US from the government ending up straight in Wall Street pockets, and broadly the Big getting Ever Bigger to Fail. Yet for those who still believe (Krugman) that one last hit is all it takes and after that it will be better, here is Koo's summary, on why Japan, which we continue to believe is the key macroeconomic variable over the near term, may be in very deep trouble unless it commences yet another (what number is that, #20, #50, is anyone even keeping score?) round of fiscal or monetary stimulus: "Fortunately for the Kan administration, Japanese institutional investors have been dealing with this surplus of private savings on a daily basis for more than 15 years and understand its macroeconomic implications. It is only because of their calm and calculated response to these conditions that the yield on 10-year JGBs remains at 1.2%. To prevent this natural disaster from becoming a man-made calamity (ie a recession), the government needs to push ahead with reconstruction efforts. With private savings surging, the necessary funds can be borrowed for now. Later, once businesses and households start looking to the future, funding can and should be shifted to tax hikes and budget reshuffles." That is the conventional wisdom. For all those who wish to read what will happen if and when Japan continues on this unsustainable path of converting private savings into public funding without regard for demographics, please read Dylan Grice (here, here and here).

About a year after Tim Geithner literally top-ticked the economy with his first Op-Ed, "Welcome to the Recovery", which came days ahead of the QE 2 announcement, he has just released his Op-Ed #2 "A Rescue Worth Fueling" in the WaPo, in which he praises the administration for using billions in taxpayer capital to save a few hundred thousand union jobs. His bottom line: "The domestic automakers are getting stronger. For the first time since 2004, each has achieved positive quarterly net income." Perfect release timing: just as both GM and Ford announce a drop in monthly sales, and GM discloses record channel stuffing. If there is one call to fade and short all the US automakers, this is it.

We really hope that the guy who bought LNKD at $122 on its first tday of trading has sold, because while one may debate the merits of gold and silver as an alternative currency to the infinitely dilutable linen/cotton contraption that has become enemy #1 of every central planner alive, there is absolutely no debating that LNKD is and will be nothing short of a dot com bubble until it drops to its fair value, somewhere 60% lower than current prices...where its fwd PE will be at most triple digits. Yet that will hardly be a consolation to LNKD longs: since everyone who got an allocation at the IPO has since sold, the entire LNKD long base (that has not booked a profit) is now at a loss.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge
Weakness in CAD evident after mixed Canadian economic data

At this point it looks bad for the working middle class and it looks
like they aren’t going to make it through the next banker made financial
crisis. The middle class just wants the chance for a new beginning.
They want jobs. They know the country has been hijacked by the banking
corporatocracy, supported by the corrupt political class in D.C. It is
time for the middle class to channel their inner Josey Wales and get
plumb mad-dog mean. It is not time to lose your head and give up. The
middle class are being pursued by Wall Street bounty hunters and
government crooks trying to finish them off. It is time to make a stand
and fight. It is essential that we know our enemies and how they
achieved their power. It all began in 1913 with the creation of the
Federal Reserve and the implementation of the personal income tax. I’ve
previously detailed how the baby boom generation contributed to our
fiscal plight in Part One – For a Few Dollars More,
how the actions of the Federal Reserve’s over the last few decades have
impoverished the middle class and placed the country at the brink of
collapse in Part Two – Fistful of Dollars and addressed the nefarious creation of a central bank in Part Three – The Good, the Bad, and the Ugly.

There is little we can add to what can only be classified as career suicide facilitated by terminal incompetence from one of CNBC's most beloved "economists" (in this case, naturally, Deutsche Bank's Joe LaVorgna), who just cut his NFP estimate from 300,000 to 160,000 in two days. From yesterday: "Our preliminary estimates were for +300k on payrolls and a three-tenths decline in the unemployment rate to 8.7%. However, in light of the softer tone of the data—particularly the inability of initial jobless claims to recover below 400k—we trimmed our projections. We lowered our May payroll estimate to +225k and raised our unemployment rate target to 8.9%." And from 10 minutes ago: "In light of the significant downside surprise in the ADP employment numbers earlier today, as well as the equally important slowdown in the ISM employment component, we are trimming our May nonfarm payroll projection to 160k from 225k as we previously estimated. We project private payrolls to increase 185k. We continue to anticipate a one-tenth decline in the unemployment rate to 8.9%."

That GM sales declined in May by 1.2% on expectations of a rise of 1.5% in May is not really surprising: as we have been saying for a nearly three months now, the Japanese earthquake, far from adding points to US GDP, is now impacting every aspect of the US and global economy (yes, Japan is and will be the global economic wildcard for a long, long time: should we get Shirikawa to agree to a $250 billion QE the dynamics of the global prisoner's dilemma will change promptly). Furthermore, the bulk of these purchases are the government-funded equivalent of subprime home purchases from 2005-2006: take away government funding and the sales collapse would be historic. Yet what is surprising, and what continues to be the only important metric in the monthly GM sales report, is the monthly channel stuffing update, aka the "month-end dealer inventory." We hope nobody will be surprised to find that it just hit another all time record of 584,000, 7k more than April and 177 more than a year ago. Although in reality, considering that GM car assembly should have been impacted by the Japanese earthquakes, one would have hoped for this inventory to decline. Which is the truly surprising part. In other words, In May, channel stuffing at GM went into overdrive.

Remember when the European Stress Test round 2 was supposed to be "credible" and restore "confidence", this time for realz? Well, as Reuters reports, "A second round of data gathering is needed for the European Union's health check of banks because of "errors" and "unrealistic assumptions", the European Banking Authority said on Wednesday. Arising from the peer review and quality assurance process, the EBA is currently assessing and challenging the first round of results from individual banks," the EBA said. "This will mean that another round of data will be required from banks. Errors will have to be rectified and amendments made where there are inconsistencies or unrealistic assumptions."  Data from the second round won't be received until mid to late June -- the time when the EBA had indicated it would publish the results of the test. What else could one expect from a continent which is run by a bureaucrat who has openly admitted he lies to prevent a crash in the EURUSD.  Plus really: who gives a flying fornication? At this point nobody, and we mean nobody, believes that any bank in Europe is even remotely not bankrupt. It is time for the kleptocrats to actually save the taxpayers some money and just pull the whole farce.

From a note just released by Sanford C. Bernstein & Co. Brad Hintz:

"Goldman Sachs wont face criminal precaution related to sales of mortgage linked securities because such a move could threaten the US financial system."

Really, that's all you need to know.

So finally, after much delay, the market lemmings realize that after QE2 comes QE3.

If you think this through, there is only one ethical thing for the maiden to do: toss the spiked sugary drink in the face of the predator and deliver a swift, hard kick between his legs "where it counts." Greece should respond to this planned predation with complete and total default: not a "haircut" or "extended terms," a complete and total refusal to pay any of the debt. We are constantly warned that the resulting collapse of the "too big to fail" banks would trigger a global implosion. That is false; life would go on after the predators declared bankruptcy and were liquidated. What the predators fear most is an awareness that any disruption in normal life would be brief and relatively painless compared to the vast suffering imposed to render them their pound of flesh.

Not even 5 mintues ago we predicted that Goldman would lower its 150,000 NFP forecast to 125,000. Well, even we were off. Hatzius just cut his Friday NFP forecast to 100,000. Just like last August when the horrendous NFP number set off QE2, so Wall Street is in full panic mode, as it tries to find a way to crush stocks enough to give Bernanke validation for QE3, but without getting retail to throw in the towel for the last time. Still to come: the firm trimming H2 GDP to under 3%. We give it a few days. "We are lowering our forecast for May nonfarm payroll employment to +100,000 from +150,000 previously. While the ADP report has a mixed tracked record in forecasting payroll growth, our research indicates it should receive some weight. Moreover, the weakness in the ADP report follows a streak of weaker-than-expected news on both the labor market and activity as whole. We are holding our forecast for the unemployment rate at 8.9% and for average hourly earnings growth at 0.2% mom." Elsewhere, Joe Lavorgna is dry heaving in a corner somewhere, trying to find a way not to look like a complete idiot for having to cut his NFP forecast two days in a row, from 300,000 to under 150,000.

Yesterday we had the biggest monthly drop in the Chicago PMI since the Lehman collapse. Today, the Lehman bankruptcy is invoked again, after the critical ISM Manufacturing index plunges to 53.5, far below expectations of 57.1, and from 60.4 previously: this is the lowest number since September 2009. At this level of "growth" stall , the US economy will be in an official contraction (Sub 50) next month. From the report: "The PMI registered 53.5 percent and indicates expansion in the manufacturing sector for the 22nd consecutive month. This month's index, however, registered 6.9 percentage points below the April reading of 60.4 percent, and is the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. Slower growth in new orders and production are the primary contributors to this month's lower PMI reading. Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs." Surprisingly, inventories declined from 53.6 to 48.7, refuting yesterday's PMI data. The only good news: Prices Paid dropped from 85.5 to 76.5. Too bad it is taking more than 15 minutes. Next up: Goldman to (i) lower NFP to 125,000 and (ii) H2 GDP to under 3%.

A month ago, Zero Hedge first posted (well, technically we read it at Stone McCarthy but beat everyone else to copying and pasting it first), that according to the Taylor Rule, so widely abused by the lemming central planners in the Marriner Eccles building, the effective Fed Funds rates should, for the first time since the GFC, be positive. This is what SMRA said: "For the second consecutive quarter, the original-specification, quarterly version of the Taylor rule, based on real GDP figures and the GDP price deflator, produced a positive result. The previous day, the BEA released its advance estimate for real GDP figures in Q1 2011. Based on those numbers, the Taylor rule prediction for the federal funds rate target in Q1 2011 is +0.4%. In the previous quarter of Q4 2010, the Taylor rule prediction was +0.1%." Now, Taylor himself, in his blog, confirms that not only should the Fed Funds rate be positive, it should be 1%.

Typically we don't do this, but since our inbox continues to be flooded with a story posted in EUTimes.net, which unfortunately did exactly zero fact checking and source validation, sourced by famous internet hoax master "Sorcha Faal" aka David Booth, titled "Russia Says IMF Chief Jailed For Discovering All US Gold Is Gone" and which is 100% non-factual and based on a loose scattering of data. A quick google check of the source would have been sufficient for everyone who has been fooled by this complete fabrication, to quickly dismiss it. Alas, with the world now approaching The Onion in factual headline flow, we can see how it is easy for many to have been fooled. We just wish to caution readers to be wary, and always, and that is absolutely true for anything read on Zero Hedge as well, always, to validate and double check the factual veracity of anything read on the Internet, especially if it sound like a B-grade Hollywood thriller and cites "sources."