Archive - Sep 29, 2011 - Story

When it comes to financial collapse documentaries, the public canon has one well-deserving Oscar Winner, "Inside Job", and one straight to HBO exercise in ass kissing and name dropping which shall remain nameless. Ironically, just like during the Arab Spring, it is that "dubious" Al Jazeera that shows US media how coverage of various matters, either geopolitical or financial, is done. Herein we present the first episode of Meltdown, in which we hear about four men who brought down the global economy: a billionaire mortgage-seller who fooled millions; a high-rolling banker with a fatal weakness; a ferocious Wall Street predator; and the power behind the throne. Considering we are about to experience the next Great Financial Crash, since nothing has changed at all since 2008, this should serve as a prominent reminder of all that happened, and a flashback to the future, of all that is certain to occur all over again.

Of all cunning linguists, Bloomberg's Jon Weil may be the cunningest. You see, the savvy news reporter has figured out that the reason there is zero policy coordination, and whenever Tim Geithner gets involved, negative, is not so much due to the fact that we have two broke ponzi continents trying to outsmart each other as to who is least broke, but, lo and behold, because we speak different languages. In Weil's cunning words, "It’s bad enough for average Americans that most European leaders speak English with heavy accents. What’s worse, even when we can make out the words they utter, it’s almost always impossible to figure out what these officials are really saying. That’s because they’re speaking in Euro-ese. Fortunately, there is an answer to their endless riddles: a Euro-to-English dictionary, excerpts of which I have included below. (Click here to read about its close linguistic cousin: the Goldman Sachs dictionary.) To truly see the meaning of the seismic events rapidly reshaping Europe, you must know what the following 10 Euro terms of art mean in plain American English:" So for the sake of the future of the great Developed Nation KomIntern, here are the ten most misinterpreted phrases...

Once again equities are responding to events with more excitement than the credit markets. Yes, Germany approved the changes to EFSF first announced back in July.  That was fully expected and a No vote would have been a shocking disaster at this stage.  The level of cynicism has hit a new high.  I have heard a lot of chatter that now that Germany has jammed this through, they can stop pretending that they are against levering up the funds.  I am not a fan of the politicians or political process, but betting money that Schaeuble and Merkel made such bold-faced lies seems like an act of desperation.  The risks from pursuing the leveraged EFSF strategy are real and high - downgrades of all the top European countries and inability to stop any renewed selling pressure in the future.  Germany has the sense not lose their rating in a futile attempt to defend a perimeter that can no longer be defended.

A little under a year ago, with much pomp and circumstance, Goldman’s economic team proclaimed its multi-year long bearish outlook on the economy over, and on December 1 of 2010, issued a report in which it noted that it was turning a new leaf in its “bleak” perception of the economy, based in big part on its expectation that the combination of an ebullient monetary environment (QE2 has just been launched) and a cornucopic (sic) fiscal stimulus (the first, of many, payroll tax cuts had just been passed) would lead the economy to a sustained growth of not less than 4% (and led Zero Hedge to officially proclaim Goldman as having jumped the shark in conjunction with our prediction that a year hence the US economy would be contracting yet again). Zero Hedge was right, and Goldman was 100% wrong. Today, we however witness something different: in what seem to be a major paradigm shift within the firm’s strategic research team (not Jan Hatzius’ group but that of Dominic Wilson), the firm appears to officially give up on “recovery” as a modal outcome for both the US and the developed world, and instead aims a little lower. Far lower. The report is titled “From the 'Great Recession' to the 'Great Stagnation'” and in an extended analysis looking at 150 years of historical data, it concludes that “those historical lessons suggest that the probability of stagnation in the current environment is much higher than usual, at about 40% for developed markets. Trends in Europe and the US are so far still following growth paths that would be typical of stagnations.” Looks like Goldman just proved us at least half right when we said in January that the keyword of 2011 would be “stagflation.” Luckily, the Fed and the world’s central banks still have 3 months in which to prove the second half of our prediction correct as well.

As ES levitates 20-30pts off overnight lows on 'incredible' macro data and 'hope' in Europe, Bloomberg's Consumer Comfort Index just printed the second-lowest reading ever as 93% of those surveyed had a negative opinion of the economy. In almost every demographic, sentiment has fallen to near record lows (except we do note that in the last week those earnings 75k or more modestly improved their outlook though still drastically low). Perhaps the most critical sub-index, given the dependence on a consumer who is not paying his mortgage and living off food stamps, is the Buying Climate, which has only been lower during Q3 2008. We assume the congressional 'super-committee' is paying attention.

Stone & McCarthy just posted a brief interpretation of the better-than-expected 3rd revision to Q2 GDP noting that the magnitude of revisions do little to improve expectations for Q3. Key takeaways include: Upside Q2 GDP revisions driven in large part by PCE Services; Inventories revised downward setting stage for Q3 restocking; and Q3 GDP looks to be in the 2.5% area. Little wonder markets are hardly overwhelmed and talking heads aren't spinning this into 2012 recovery and Fed Funds futures didn't budge - though for now ES keeps pushing higher into the open - though admittedly feeling squeezed right now by the apparent slew of better-than-expected news - brought to you via Sesame Street and the letter 'J': [J]ermany, Jobs, and [Jee]DP.

We grow weary of reporting the consistent statistical anomaly that is the prior revision UP in the initial jobless claims. Headlines will read of the impressive job 'improving' situation as initial claims fell 37k on the week (a two standard deviation improvement which seems extremely unlikely given the macro/micro backdrop). Once again proving their ineptitude, the claims print was massively better than even the most optimistic economist estimate - an incredible six standard deviations better than consensus. This is the lowest initial claims print since April 1st (ironic really) and below 400k for only the second time in 25 weeks - though for a moment we must have some hope that this is a trend as ES pops 10pts.

UPDATE: Via Bloomberg (we couldn't resist) from TD Securities' Eric Green: "If its too good to believe, it probably is, and the BLS says as much"

Ever the thoughtful wordsmith, Governor Perry just noted on CNBC that he would not reappoint Bernanke. He reiterated his inflationary expectations line-of-reasoning and added that monetary policy shouldn't "cover bad fiscal policy". Once again the topic of independence and transparency was tripping off his tongue - Ben better start printing soon as time seems to be running out.

• The German lower house passed the EFSF amendment bill with a leading conservative lawmaker noting that the coalition did not need to rely on opposition votes.
• Fed’s Bernanke said the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
• German BDB confirms that the 90% target rate for private sector involvement in the second Greek bailout has been met adding that the ECB is well prepared to assist EU banks.
• Greek PM will travel to Paris on Friday to discuss debt crisis with French president Sarkozy according to a source.
• Banks and other private sector bondholders are resisting the idea of taking larger haircuts on Greek debt by lobbying countries such as Germany and the Netherlands.

As Europeans sell-the-news of EuroTARP's beginnings, we cast our eye to the macro data likely to spew forth this morning in the US. While markets have typically been ignoring much of the ECO data recently in favor of rumor and rumor-of-rumor and denial, there are some prints that may trigger human activity today.

• White House Reviewing Bill on China Currency, Carney Says. (Bloomberg)
• China Economic Growth Seen Less Than 5% by 2016 in Global Poll. (Bloomberg)
• German MPs back euro crisis powers, Merkel support unclear. (Reuters)
• Greece Faces Auditor Verdict, Fresh Aid at Stake. (Reuters)
• Business Attacks Transaction Tax Plan. (FT)
• Bernanke Tells US to Heed Emerging Economies. (FT)
• Bernanke: Unemployment Poses ‘National Crisis’. (Bloomberg)
• SEC Probes Banks Over Mortgage Loans. (FT)

A very small initial rally has given way to more significant selling now as credit and equity markets pull back, EUR drops, and Bunds have rallied 1-2bps. Selling the news makes some sense but is hardly confidence-inspiring...especially given subordinated financials decompression.

The German "TARP equivalent" EFSF expansion vote has passed with a resdounding majority of 523 votes For and 85 Against. Obviously this was largely priced in judging by the rapid sell off in the EURUSd on the news. And now, back to focusing on the structural failure of the Eurozone which no vote can fix.