Archive - Aug 2011 - Story

Think it's all just a US debt ceiling issue? Think again. The DAX futures just flash crashed. And judging by the broad HFT stop happening all around, this is coming to the US any second. After all, gotta make sure Congress does as they are instructed.

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

Remember all those idiots who claimed that Fukushima is contained, or better yet, the drama is exaggerated? Perhaps it is time to exile them all, starting with that moron from MIT, to Fukushima where the radiation measured at the base of the main ventilation stack just hit an all time high 10 sieverts/hour. The truth likely is much uglier: this is simply the highest reading the devices are able to record. In other words, there does not exist a device that can capture the true extent of the catastrophe at Fukushima!

Italy undergoing a slow motion crash, with bank after bank getting halted, first Intesa, then Monte Paschi, and most recently, main bank Unicredit. The FTSEMIB is now down a whopping 5.5% from intraday highs, led by the financial sector which may or may not last the week absent another EFSF expansion as we have speculated before. Of course, should that happen, Italy becomes a liability and not a funder, meaning the proportional obligations of Germany and France will surge, just as we explained two weeks ago. And more bad news: the spread between the 10 year Italy - Bund just hit an all time wide of 349, +16 bps on the session, as Italy CDS are now trading 328, +12, and Spain is 9 bps wider to 374. Time for bailout #3, this time to rescue Italy, then Belgium and Spain, then France and the UK, until finally the Fourth Reich, in the darkness, shall bind them. 

Consumption is our god, our faith and our religion. Like a cargo cult dependent on a magical connection to prosperity, we are terrified by the prospect that our religion is based on a false god--that is, that consumption and consumption alone leads to prosperity and happiness.  Like a cargo cult that we mock in our infinite industrious superiority, we worship the equivalent of rocks painted to look like radios that we can use to "call" the gods of endless prosperity. This rock that's painted to look like a radio is called "debt," and we call upon it to magically provide us with prosperity from over the seas. This other rock that's painted to look like a radio is called "aggregate demand," and it's carefully worshipped by a special troop of voodoo-wielding witch doctors called Keynesians. We are chanting magical phrases to these rock-painted "radios," pleading for a return to easy prosperity, but nothing's happening. We fear the magic no longer works, and that possibility terrifies us so much we can't even bear to speak of this loss.

No, there is no problem with the repo markets. None whatsoever. Absolutely none. Oh, uhhh, wait a second...

There is nothing that needs to be said about this chart which compares the histogram of "expert" Wall Street predictions and the final outcome. Everyone was above the final number! All Wall Street economists should be immediately fired, and the money saved from their multi-million bonuses should be used to fund the US deficit (after all the banks they work for only exist courtesy to the US).

Earlier today we said: "the reverse decoupling thesis will be tested once again today after the July ISM is released with consensus looking for a 54.9 print, and Zero Hedge looking for number just a tad above 50." (LaVorgna was at 54.0) Unfortunately, we were correct: the July ISM plunged from 55.3 to 50.9, or yes, "a tad above 50", on expectations of 54.9. This is the lowest ISM in two years, and confirms that the Fed's viagra no longer does anything to help the soft spot. The market took it in stride and plunged to late Friday lows. So much for the latest US debt ceiling raise market euphoria. Every single subindex dropped, with only exports and imports posting an increase, although with Imports +2.5, this more than offsets the benefits from Exports rising by just 0.5. Also, New Orders, Backlogs, Customer Inventories are all sub 50. The biggest drops occurred in Prices and and Employment, confirming that not only are employment conditions deteriorating but price making ability continue to erode.The Wall Street kneejerk commentary is hilarious, with TD's Green calling it a 'Freakshow': "TD chief economist Eric Green says in client note he is “struggling to find any silver lining” in July ISM “as the underlying components were, with the exception of export orders, lower across the board."

One big question is what will we do if the data continues to deteriorate? Another stimulus package seems like it would be hard to get done given we allegedly just agreed to keep spending in check. After the latest bits of data, even the most staunch supporters of QE must have some doubts as to its effectiveness. The Bernanke Put and the Obama Put may be difficult to implement going forward. The market has relied so much on government intervention that it will be interesting to see how strong it can be if investors lose faith in the government's ability to provide a strong backstop on any bit of weakness.

As we pointed out last week, the broad flattening in the Treasury curve, and especially in the short-end continues, with the 2s5s just dropping to 97.6 bps earlier closing below the 104 support line on Friday. Why is this important? Because as Citi chief technical strategist Tom Fitzpatrick wrote in a note released to clients, this is a "concerning development" as it is one of those "other" metrics watched by the Fed in determining when "intervention" is required (not like Goldman's note from Friday had anything to do with it). He adds: "2/5 broke below this level first week of August last year, the result of increasing guidance that QE2 was on the way. Here we do not have any such guidance and instead the curve reflects increasing concerns with the U.S. economy/slowdown." We may add that since cause and effect do not really matter much, it is only a matter of time before the Fed assumes that the market is pricing in not economic weakness but precisely another QE event and reacts accordingly. Citi concludes: "2/5 decline may continue, and could be a negative augur for stock market." It will be... until the Fed proceeds to do what it does best: monetize. Which, assuming today's debt deal passes before midnight, it will just have gotten permission to do. To the tune of about ~$2.5 trillion.

German daily Der Spiegel has conducted a rather unexpected interview with Mark Meckler, co-founder of the Tea Party Patriots, or about as right as they come, in which he discusses the US debt ceiling, the radical right's "uncompromising fight against the national debt" and the "complete economic disaster" he claims President Barack Obama has created. Naturally, the bottom line should not come as a surprise to anyone: the great reset is overdue, and it is all Obama's fault. What is curious is that Germany is giving such a prominent soapbox to one of the US administration's biggest critics. Is Germany becoming more actively involved in doing what ECB's Trichet and Noyer have done over the past month, namely deflecting Europe's own problems by pointing out the country which Europeans have said has even worse credit fundamentals? Will ridiculing America be the dominant theme in Europe's media over the next few weeks even as the second European bailout falls apart (Intesa Sanpaolo was halted again earlier, for the n^th time). Is the game of G-8 scapegoating about to take on a whole new dimension? And what does that mean for future consensus in an organization that has for now been largely submissive to every US whim? We will find out in the coming months.

The melodrama is not over yet. Here is what we have to look forward to out of DC on the debt ceiling crisis today, one day ahead of the Treasury running out of cash. The market assumes the deal is done. The market did the same with the "3 page termsheet" Tarp 0. Perhaps a real market flush is what is needed to really generate a "grand compromise."

Markets reacted positively to news that the White House and senior Congressional leadership had agreed, in principle, a deal to raise the US debt ceiling, which provided support to European equities, and weighed on Bunds, whereas the Eurozone peripheral 10-year government bond yield spreads narrowed across the board. A renewed appetite for risk provided strength to WTI and Brent crude futures, and spot Gold prices came under pressure. Elsewhere, commodity-linked currencies, including AUD, NZD and CAD, remained the prominent beneficiaries at the cost of safe-haven currencies, such as CHF, JPY and USD. In other forex news, GBP came under extensive pressure after manufacturing PMI data from the UK demonstrated a contraction, and reached its lowest level since Jun'09. Moving into the North American open, the economic calendar remains thin, however markets look ahead to the ISM manufacturing data from the US. With regards to the US debt debate, focus now shifts to whether the US debt ceiling deal can go through the House and Senate before an August 2nd deadline, and any reaction from major rating agencies pertaining to US's sovereign ratings.

Debt-Limit Deal to Get Congress Vote Today (Bloomberg)
Debt compromise favours Republican demands (FT)
An Agreement Is Struck, but the Deficit Isn't Solved (WSJ)
Hedge fund firm Lansdowne sells Goldman stake (Reuters)
China’s Official PMI Falls (WSJ)
Asia’s Economic ‘Soft Patch’ Jars With Inflation, Posing Dilemma on Rates (Bloomberg)
Lagarde Warns EU to Speak with one Voice (FT)
An Uncomfortable Final Stretch for Trichet (FT)

One of the most entertaining if absolutely flawed fables we have heard over the past several months is that Japan is currently undergoing some mythical V-shaped recovery, based on some even more mythical surge in car production and sales. Courtesy of a thing called "facts", summarized by Reuters, we can now effectively ignore this growth strawman for good. "New vehicle sales in Japan fell by a record in July, battered by production disruptions from the March 11 earthquake, while South Korean rivals extended their winning streak to report strong global sales. Sales of new vehicles, excluding 660cc minicars, in Japan fell 27.6 percent to 241,472 vehicles, with Toyota Motor Corp leading the decline. "Looking at the trend from April onwards, the situation hasn't changed much from June," said Michiro Saito, general manager at the Japan Automobile Dealers Association. "Vehicle supply won't return right away and we're looking forward to the production recovery at automakers from around September." Toyota's sales fell 37 percent, while Honda Motor Co's dropped 33.2 percent. Nissan Motor Co , which has been less impacted by the March earthquake and tsunami, fared better with a 17.6 percent fall." Incidentally, it is time to get an update of our own nationalized, taxpayer-subsidized union blackhole: Government Motors and specifically its record channel stuffing shennanigans due out shortly.