Archive - 2011 - Story

It is a good thing that America has a functioning, objective and analytical media, as otherwise we might need David Rosenberg to point out that one of the key factors for the avoidance of the technical double dip was a completely unexpected number fudge courtesy of the Commerce Department which, at the most crucial stage in the economy's conversion into a re-recession, miraculously "found" $46.3 billion in personal income that "the consumer thought wasn't there before." In other words, the government literally pulled a number out of thin air which created a relative sequential boost to the economy, even though it was just a non-recurring accounting adjustment to continuous numbers and should have been completely ignored! By then it was too late (very much in the same way that the BLS has had 44 out of 52 adverse data revisions after the data has been reported, when it is too late for its to impact asset prices): it set off a chain of events which resulted in a jump in ISM, diffusion and various other indices (not to mention the BLS endless data adjustment) which caused a last second avoidance of the double dip becoming official. Oh and the Fed's QE2 did not hurt either...

Either someone in China is pumping out 100 capesize ships every single day, and doing their best to push charter rates to just below zero, or, gasp, transpacific trade is really falling off a cliff (i.e., Chinese inventory accumulation has been put on hold). Of course, if it is the second, we will know in February when China reports its January trade surplus (and the US respectively reports its trade deficit). Should the gross imports and exports number plunge, it may confirm that the BDIY which is only mentioned by the MSM when rising, and ignored when plunging, may actually be relevant. And speaking of plunging, today it dropped for the third consecutive day by more than 4%, hitting 1,544, a 4.8% drop overnight, and the lowest number since April 2009.

The seasonal adjustment in the last week's sub 400k initial claims is starting to water out, and the resulting jump in initial claims from 388K to 409K was to be expected. Of course, last week's 388K was revised as always to a worse reading of 391K. More importantly, as we have been noticing for the past 3-4 weeks, the Unadjusted claims continue to surge, and in the last week jumped by 52k to 577,279, nearly 170k more than the Seasonally Adjusted number. Those on continuing claims declined from 4,150,000 to 4,103,000 even as the NSA number again surged from 4,116,779 to 4,390,661. Lastly, those on extended claims were a wash as those on EUCs dropped by 134K while those on extended claims jumped by 110K.

• Foreclosures May Be Undone by State Ruling on Mortgage Transfer (Bloomberg)
• As expected, retail sales miss blamed on snow, although how icy conditions are preventing web surfing is beyond us: December retail sales dented by blizzard, frugality (Reuters)
• Boehner Vows to Cut Size of Government (FT)
• If at first you don't succeed... Obama renominates MIT economist Diamond for Fed Board (Reuters)
• PBOC Extending Biggest Cash Crunch Since Lehman (Bloomberg)
• Just a little more inflation: Coking Coal Contract Price May Rise 33% on Australian Floods (Bloomberg)
• Andy Xie: This year may start out looking like the last, dipping down later and then resurfacing with hope. (MarketWatch)
• Yes, banks really are doing everything they can to restore shadow banking: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again) (Naked Capitalism)
• BofA Introduces Fees to Replace Debit-Card, Overdraft Charges (Bloomberg) - we are confident Elizabeth Warren will have a lot to say about this...hopefully she has something to do as well
• Fed Should Stop Buying Bonds; It Is Falling Far Behind the Economy (David Malpass)

If you are not worried about the recent explosion in mass deaths of animal in "isolated" locations, you may be after seeing this map presenting the pan-global graveyeard of inexplicable mass deaths, which far from isolated, are literally taking the world by storm. Did the Mayans forget to carry the zero?

News again refuses to register, as reverse decoupling is the only relevant metric in the world: the US will pull the world out of its doldrums, and that's all that matters. That economic "growth" may actually mean the end of QE and the elimination of about 300 S&P point purchased via Brian Sack, is completely ignored.

The one man in finance, who after Buffett and Munger is way overdue for retirement, Blackstone's Byron Wien who at 77 is only made relevant once a year with his atrocious following year forecast, which due to its ongoing track record of being right approximately on zero out of ten predictions, provides Wall Street with an annual bout of uncontrollable laughter. So far this has been an innocuous exercise in worthlessness, but not any more. According to Bloomberg, Wien's latest forecast may have so infuriated the New York pension system that they may no longer invest money with Blackstone. "The New York City Comptroller’s office backed out of a scheduled meeting with Blackstone Group LP and trustees for the city pension funds who want the firm to repudiate chief strategist Byron Wien’s statement that public- employee retirement benefits are too high." The reason: "Last January, Wien, 77, said in his annual forecast that taxpayers 'literally can’t afford the benefits we have given our retirees in state and local governments and we have to change that.'" The result: New York State pension administrators are not amused.

Following this morning’s Monster Employment Index, we have claims, retail chain stores, and the Fed’s balance sheet. Speaking of the latter, there is $6-8 billion in 1/31/2015 – 6/30/2016 bonds to be monetized, which means futures are already levitating.

That whole reverse decoupling meme, where the US is supposed to bail out the world (courtesy of a "stimulative" payroll tax cut of all things) better work soon, cause after an insolvent Eurozone, and a tightening China where the interbank lending market is all but dead, now we get a UK PMI index which plunged from 53 to 49.7 (on expectations of 53). This was the lowest print in the index since April 2009. And confirming the trend that every single diffusion and manufacturing index in the US has been warning about, is that corporate input costs surged to the highest since September 2008 as average cost inflation accelerated markedly in December. Following in the footsteps of Walmart, Tesco will likely start selling 49 ounce coffee in 33 ounce coffee containers next (at the same price of course), hoping nobody will notice.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 06/01/

This morning China is forced to do some unpleasant diplomatic damage control. After an earlier report in Kyodo News disclosed leaked documents that China has revised its escalation doctrine to initiate a pre-emptive nuclear strike in response to a conventional attack, the country is now furiously scrambling to refute any such "interpretations." After all the last thing the already volatile North-South Korean theater needs is the worry of an unstable big brother next door who may just type in the launch codes if an artillery shell veers a few degrees off course. In its original report Kyodo announced that The Chinese military will consider launching a preemptive nuclear strike if the country finds itself faced with a critical situation in a war with another nuclear state, internal documents showed Wednesday. The newly revealed policy, called "Lowering the threshold of nuclear threats," may contradict China's strategy of no first use of nuclear weapons under any circumstances, and is likely to fan concern in the United States, Japan and other regional powers about Beijing's nuclear capability. Per obtained documents, the People's Liberation Army's strategic missile forces, the Second Artillery Corps, "will adjust the nuclear threat policy if a nuclear missile-possessing country carries out a series of air strikes against key strategic targets in our country with absolutely superior conventional weapons." China will first warn an adversary about a nuclear strike, but if the enemy attacks Chinese territory with conventional forces the PLA "must carefully consider" a preemptive nuclear strike. Of course, there is only one country that has "absolutely superior conventional weapons" and they know it. Which begs the question: why was this leaked now, and considering the recent spike in Chinese stealth fighter sightings, is China trying to send its biggest debtor "ally" a not so secret message?

"The 112th Congress just began today, but House Republicans have already laid out plans that are aimed at rolling back or not funding as many of the Obama programs as they can. As the Democrats control the Senate and the President has the veto as well, the programs are likely to survive the House challenges. However, these divisive tactics assure that pleasantries will be hard to come by in the Congress during the next year. Even the Fed looks like it will be dragged into this mud. If some decisions are necessary – the financial crises in state and municipal financing comes to mind – who is going to make the compromises to get the job done? God help the US if it goes into a recession and some real economic decisions, benefiting the workers or supplying capital or spending money, need to be made. It will be almost impossible to get a decision. Trench warfare is what we see and a deep recession is what we fear. Even growth below 2.5% would be very problematic and a big disappointment for the markets. Although we see equities down significantly, the dollar should rally and commodities decline as the US economy slows."

Today, despite the announcement by Chinese Vice Premier Li Keqiangin in Madrid that China is willing to buy as much Spanish debt as that of Greece and Portugal (but not Ireland), or roughly €6 billion each, CDS in both the core and the semi-periphery, are back to record levels (El Pais and Reuters sources). Spain was last seen trying to catch up with Illinois, somewhere in the mid 300s, while Belgium also took out record wides at 225 bps. On one hand this is beneficial news for Spain, now that China is seemingly instituting its latest sphere of influence, but in reality is just doing all it can to precent the euro from collapsing (and thus killing Chinese exports to its second largest trading partner, the EU) and with net issuance in the country expected at just €47.2 billion, Spain may have well gone the distance to plugging as much as 13% of its net funding needs for the year. However, and what is spooking markets more, is that, as we reported yesterday, today European Commissioner Michael Bernier will publish a “consultation
paper” outlining ways to shield taxpayers from banking crises, chief among which is the renewed floating of the debt haircut idea.

Well, that lasted all of 3 weeks: after ICI reported outflows in taxable bond funds for all of the prior four weeks (for a whopping combined $5 billion after hundreds of billions in inflows in the past year), the bond inflows are once again back in the last week of 2010, as bond investors placed $2.5 billion with taxable bond funds. The only category that saw outflows was mutual bond funds, which in itself is obviously quite troubling as it indicates that the state funding situation is about to get rather dire especially in light of the non-renewal of the BAB program. Basically this is exactly as we suspected would happen: following the major drop in bond prices in December, investors are now back and are in fact more interested in buying bonds at more attractive prices. Which of course means that that other trend: inflows into equities is about to taper off as well, as money flows shift out from equities and into bonds once again. Indeed, last week's inflow of $335 million in domestic equity funds was revised to just $14 million, and the last week of 2010 saw another token (and probably soon to be revised downward again) inflow of just $493 million. Should the equity inflow indeed reverse to an outflow shortly, the propganda machine will be doubly confused to explain how, a mere few weeks after it made such a story out of the first inflow in 33 weeks, outflows are again back.

Harley Bassman, who used to head Merrill's RateLab, and who was one of the most erudite sellside voices on rate matters, and doubly so on mortgage issues, and subsequently moved to Merrill's prop side, has kept a low profile recently. Which is why we are happy to present his model portfolio for 2011. Bassman is a firm believer in inflation (synthetic or real), and we for one would pay good money to see the redux of the Rosenberg vs Grant debate in 2011 be Rosenberg vs Bassman. Bassman's conclusion, even though obtained in a circuitous way to our own, is comparable to the Zero Hedge thesis that the Fed will have no choice but to eventually create inflation. "In a nutshell, the FED (with the help of the Govt), is going to
engineer some type of Inflation to reduce the value of both our Private
and Public Debt.  Since Inflation is the only solution, it will happen;
it is just a matter of time.  Since the entire G-7 is in the same boat,
trading in Euro or Yen is purely a short-term speculation since all
these currencies will be heading south." Where Zero Hedge and Bassman, however, differ, is that we are certain that the Fed will be unable to contain said inflation once it has finally been unleashed, resulting in a complete wipeout of all assets that are directly or indirectly a rate derivative (ref: a very notable reparation paying, post-WW1 central European state), which means all fiat derivatives, leaving only hard assets in the wake.