Archive - Oct 2, 2012 - Story

While we already know how Spain's Prime Minister is celebrating the country's brand new austerity budget (From Bloomberg: "The premier and five staff drank 10 beers and seven bottles of wine with a dinner of filet steak and turbot on their flight back from a European championship soccer match the day after Spain asked its European partners for a 100 billion-euro bailout to recapitalize its banks, the weekly reported, citing catering bills from the Spanish Air Force.") there was little color on how the "other" country undergoing austerity (not really) for the common man was enacting belt-tightening and spending reductions. We say "not really" because as we have shown, Europe has yet to actually implement austerity. And yet the people suffer. Or rather, once again, it is the common man who suffers, and because of that is convinced that the government is spending less. It certainly isn't as we showed in the case of Spain whose tax revenues have increased even as spending has increased, promises to the contrary notwithstanding. But where is the money going then? Surely if the common man is suffering, everyone else must be too. Turns out the answer is no. As the following picture below shows, where previously a simple Lancia with the license plate "ITA1" once stood, the car that is now proudly parked in the same spot and drives around Italy's ambassador to the UK, Alain Giorgio Maria Economides (read his heartfelt message to all here), is a new Maserati Quattroporte.

If history is a guide, the rest of the year is destined to be a winner. As Barclays points out, thew typical election-year cycle is a first half of range-bound trading followed by a second half of acceleration higher. 2012 has followed this pattern but on a much higher beta scale, with the current year's performance more than 50% above typical election-year full-year performance. Of course, we have never had a debt-ceiling and fiscal cliff debacle that needs to be resolved between the election and year-end. What's more interesting to us, given the surge in P/E multiple expansion driven by central-bank largesse, is that P/E multiples have contracted notably in the latter half of election years in the last 40 years. So when your long-only manager says - you have to buy because of the election year cycle, maybe ask him about the election year 'valuation' cycle.

The policy of the Status Quo since 2008 boils down to this assumption: if we prop up an artificial economy long enough, it will magically become real. This is an extraordinary assumption: that the process of artifice will result in artifice becoming real. This is the equivalent of a dysfunctional family presenting an artificial facade of happiness to the external world and expecting that fraud to conjure up real happiness. We all know it doesn't work that way; rather, the dysfunctional family that expends its resources supporting a phony facade is living a lie that only increases its instability. The U.S. economy is riddled with artifice: millions of people who recently generated income from their labor have gamed the system and are now "disabled for life." Millions more are living in a bank-enabled fantasy of free housing. Millions more are living off borrowed money: student loans, money the government has borrowed and dispensed as transfer payments, etc. Assets are artificially propped up lest a banking sector with insufficient collateral be revealed as structurally insolvent. It's not difficult to predict an eventual spike of instability in such a system; the only difficulty is predicting the date of the instability. Hiding a broken, dysfunctional economy behind a facade of artifice and illusion can't fix what's broken, it only adds to the system's systemic instability as resources that could have gone to actually fix things are squandered on propping up phony facades of "growth" and "health."

In order to avoid social unrest and absorb the world's young people entering the global workforce, the World Bank Development Report states that 600 million jobs must be created from 2005 to 2020. As Bloomberg BusinessWeek reports, jobs should be at the top of governments' agendas or they could face  further uprisings such as toppled leaders in Egypt and Tunisia. "Demographic shifts, technological progress, and the lasting effects of the international financial crisis are reshaping the employment landscape in countries around the world, and those that successfully adapt to these changes and meet their jobs challenges can achieve dramatic gains in living standards, productivity growth, and more cohesive societies." However, those countries that don't adapt, face the kind of social unrest we have warned of again and again - and are starting to see in more and more civilized Western nations. Their findings:- 90% of jobs are created in the private sector and so Governments must create an environment that encourages investment - especially in small- and medium-sized business. So - a mere 600 milion jobs and all is well - amazing!!!

At its most fundamental level, SocGen's Dylan Grice notes that economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. Grice emphasizes that history is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. Dylan, like us, fears a Great Disorder.

Just in case there are still any hopes that the FT, or any other credible media outlet, may come up with a story, like it used to do almost daily back in 2011 and early 2012, that China, whose stock market continues to plumb 3 year lows, has some capacity to inject cash (that it doesn't have) into a broke continent (which would never repay said cash even if it existed), here comes none other than China's Sovereign Wealth Fund to make sure there is never again a rumor that China will bail out Europe. From Reuters: "China would be interested in buying into a Eurobond backed by core euro zone countries and considers investment in bonds issued by heavily indebted European countries unrealistic, a senior official with China's $480 billion sovereign wealth fund said. Jin Liqun, chairman of the supervisory board of the China Investment Corporation (CIC), said until fundamental problems of fiscal, social and monetary policies in euro zone countries burdened by debt are solved, there could be no investment." They never will be so scratch that possibility out. Now we can limit the universe of idiotic Europe is saved (it isn't - it is only a matter of time now before the ship sinks) rumors to at least one less.

GM's stock is not enjoying news that its September sales rose 1.5% from last year, on expectations of a 2.8% increase. And while this is surprising considering the government is now in the business of funding not only the student loan bubble but Government Motors' NINJA purchasers (someone has to make those labor union votes happy) making the cost of new vehicles essentially zero when netting out the debt, what is not surprising is that GM management has once again resorted to the age old gimmick which never fails to provide an artificial boost to the true condition of GM car sales, i.e., Channel Stuffing. Because after moderating in the past few months after peaking in March, dealer inventory has once again resumed rising, and is now higher for the third month in a row, increasing to 689,334 units in September. Expect this number to continue ramping into year end as less and less GM cars are sold as we enter the dead winter season.

"QE-whatever has created artificial numbers that the underlying won't support" is how Sam Zell sums up his view of the Fed's actions, adding that the Dow should be more like 9000, not 14000. The typically optimistic bottom-feeding real-estate magnate says he is not buying here, is gravely concerned about liquidity needs, and in his assessment "everything is massively too expensive." This epic CNBC interview-fest, where the less-than-cheer-leading Zell was allowed to speak, includes his views on a pending recession (as he sees capex planned projects being delayed) and while trying not to play the political card too strongly, he asks that we "stop this class warfare crap" and that the animal spirits are unleashed - as the game is being stacked against him. "We're kicking the can down the road... and with QE, there is now too much capital chasing too few opportunities - even when nobody has confidence in the future!"

Economic Surprise Indices have begun to drift back lower in recent days after a short-lived scurry into positive territory  as anticipation of Fed/ECB action supported equity valuations over the last few months in the face of deteriorating earnings. Critically though, as Deutsche's Jim Reid notes, headline PMIs (and the ISM) are still well behind levels that are consistent with current equity markets as the disconnect between rich equity prices and poor fundamentals remains very wide. Back around May/June they were broadly in line and since then liquidity has propelled markets but with the data at similar levels, and clearly the hope is that the current fundamental weakness corrects into year-end but at current levels the S&P faces a 9% correction, Europe 22%, and China 25% - hope is indeed a powerful thing.

Just because millionaires are people too, and they too can apparently lose their jobs, we now learn courtesy of the Congressional Research Center, that in 2009, 2,362 Americans making over $1,000,000 in income (and just shy of a million people making over $200,000) collected unemployment benefits. The amount of money allocated to evil, evil millionaire benefits in 2009 was $20.8 million, amounting to $8,806 each for the year (out of a total of $83.5 billion, of which 90% went to those earning less than $100,000). Cue tar and feather fury because these evil, evil millionaires also dared to use a legal system that, at least so far, does not discriminate based on wealth or income level. Just as the US tax system allows everyone to use the same loopholes. Note that we said so far, because it may soon "not be fair."

Think of it; twenty-two trillion dollars worth of assets and liabilities and accounted for nowhere. These are twenty-two trillion dollars ($22 trillion) of loans and securitizations and mortgages that are found and accountable for by no one. These are real assets and real liabilities that have been turned into cash by the ECB and it causes us to wonder just how accurate the Money Supply numbers are for Europe with this amount of cash being pumped into the system. We also wonder what anyone’s real balance sheet looks like and I wonder what kinds of losses are being incurred and by whom. This is what we are investing in when we buy European bonds? This is where we are putting our client’s money?

Slowly, the fund that made "information arbitrage" a household name, and almost singlehandedly created the expert network industry (first exposed on Zero Hedge in 2009 before the broader public had ever heard of them up on Part 1, Part 2 and Part 3 and all of which was summarized in Are Expert Networks About To Be Exposed As The Ringleader In The Biggest Insider Trading Bust In History?) only to watch it go up in insider trading flames (as we warned years prior), and which no regulator had dared to touch for decades, is coming unwound. The latest details in a story which once again began on the pages of Zero Hedge in 2010 come from Bloomberg, where we learn what everyone already knew, namely that when working for Stevie Cohen "it was “understood” that those assigned to give their best trading ideas to founder Steven A. Cohen would provide him with insider information." Because one doesn't generate 10-20% 'Alpha' (a term which no longer has any meaning in a market exposed to have been driven exclusively by insider trading in the pre-New Normal, and entirely by central planning in the post-New Normal era) year after year and charge 3 and 50 for being just smarter. Being first apparently counts too, but cheating beats all.

Some surprising winners and losers in the past month and quarter.

Equity markets continued to edge higher today as market participants grew hopeful that a full scale bailout of Spain will take place in the very near future. So much so that even though reports that Spain is to seek bailout this weekend was denied, the risk on sentiment held strong. As a result, SP/GE and IT/GE bond yield spreads tightened further, with IT 10s now yielding close to 5%. The renewed sense of security saw EUR/USD squeeze higher towards the psychologically important 1.3000 level, while GBP/USD also benefited from a weaker USD and is trading in minor positive territory in spite of another round of disappointing macro data from the UK. Going forward, the second half of the session sees the release of the latest ISM New York index, as well as the regular weekly API report. Both the BoE and the Fed are due to conduct another round of asset purchases at 1445BST and 1600BST respectively.

The highlights from Bill Gross' latest monthly piece:

• Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them.
• Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the “Ring of Fire.”
• If the fiscal gap isn’t closed even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears. The damage would likely be beyond repair.
• The U.S. and its fellow serial abusers have been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult.