Archive - Oct 2012 - Story

We know it is sometimes difficult. Europe puts out the numbers which many assume are real. Then they talk about the data as if it was real. Then they point to the numbers time and time again as if they were real and finally people make decisions and act upon the figures thinking they are real and then the train begins to go bump in the night and derailment is possible on the next track and people wonder how it happened. We are at that point where “bump” is about to happen because there is nothing left that can happen. The dream is about over. Soon everyone will be waking up. It will not be a good morning.

When we reported on the 34th consecutive month of Greek unemployment increases, following the June number hitting a record high 24.4%, the only good news was that the May number had been revised higher from 23.1% to 23.5%, making the monthly jump seem just under 1%. Well, that revision was re-revised, with Greek Statistic Service ELSTAT reporting that the original 24.4% number has now been revised to 24.8%, meaning in June unemployment rose officially by 1.3%. That's in one month! ELSTAT also reported the July number, and at 25.1% (pre-revision higher next month), it just hit a new all time high, increasing for the 35th month in a row. More than one quarter of those eligible for work in Greece (not many), are working. THis means labor related taxes are now being levied on a record low percentage of the population. Indicatively, Greek unemployment at the end of 2011 was "only" 21.2%. It also means that in order to restore even a tiny iota of confidence, the Greek labor department needs to hire a BLS consultant or two, or least license an old version of the ARIMA goalseek software, to find a seasonally adjusted decimal comma in there somewhere, and report that the jobless rate is really only 2.5%, which would be on par in credibility with everything else out of Europe these days. Finally, our question is at what point does anyone finally admit the Greek situation is not only a depression but outright economic death and the merciful thing to do at this point is to just pull the plug?

• Global easing deluge resumes: Bank of Korea Slashes Policy Rate (WSJ)
• And Brazil: Brazil cuts Selic rate to new record low of 7.25 pct (Reuters)
• With Tapes, Authorities Build Criminal Cases Over JPMorgan Loss (NYT) Just don't hold your breath
• IMF snub reveals China’s political priorities (FT)
• Add a dash of trade wars: Revised Duties Imposed by U.S. on Chinese Solar Equipment (Bloomberg)
• IMF calls for action as euro zone crisis festers (Reuters)
• Dubai Losing Billions as Insecure Expats Send Money Abroad (BBG)
• Softbank in Advanced Talks to Acquire Sprint Nextel (WSJ)
• Lagarde calls for brake on austerity (FT)
• EU lambasts Turkey over freedoms (FT)
• Race Tightens in Two States (WSJ)

The overnight session started with broad weakness following last night's downgrade of Spain to BBB- by S&P, once again led by Egan Jones, due to fears that an outright junking by one or all rating agencies is on deck, now that the status quo means business and is hard pressed to advice Mariano Rajoy that the ECB will not be toyed with, and if need be the same tactics used to oust Silvio Berlusconi just under a year ago can be applied to Spain which is now proving very difficult to handle: all Spain needs to do to ensure at least a few more months of banker pay is to demand a bailout. And yet it remains unwilling to stick to the simple script so far. Sure enough, Spanish bond prices tumbled, as did the EURUSD. Yet sometime around 4 am Eastern, a levitation commenced across all risk assets, EURUSD, and US futures, with Spanish bonds retracing the entire earlier loss, showing that the ECB has now once again shot itself in the foot and that any attempt to recreate the same playbook as was used to remove Silvio, will be far more problematic when applied to Spain.

Ireland's total real economic debt runs at a staggering 524% of our GDP and 650% of our GNP. At 4.5% per annum cost of funding overall debt, the Irish economy interest-rate bill on the above levels of real economic indebtedness runs at circa 29.2% of our GNP. Do the comparison here - Ireland's interest-rate bill is equivalent to the total annual output of the Irish Industry (that's right - all of Ireland's Industrial output in 2011 amounted to less than 29.3% of our GNP). This is deemed to be 'long-term sustainable'... right... Ireland's real economic debt is 14.4% ahead of that of Japan!

We have been very active in our discussions of the impact of the pending rise in food prices around the world (from central bank largesse to weather-related chaos). As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years. Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly in the October prints at the latest. While the effects, for now, are expected to be less extreme than the 2010-2011 episode, the timing as the US enters its fiscal-cliff-prone malaise, could mean a further round of easing will reignite this critical inflationary concern.

UPDATE:*JPMORGAN CFO EXPECTED TO STEP DOWN: WSJ

Jamie "The Europeans have the will, but no way; The US has the way, but no will." Dimon had a very open and wide-ranging discussion with the Council on Foreign Relations today. The conversation ranged from the unfairness of the Bear Stearns' deal (poor chap - all that very limited downside from $2/BSC share, at least initially) to the immediate threat of the pending Fiscal Cliff - and his $100mm-debt-ceiling-preparedness war-room bunker, and America's longer-term fiscal profligacy (vigilantes moving against the US bond market is virtually assured - question is when and how). He also discussed the London Whale 'error' and went on to discuss the Greeks and the Eurozone's political and economic debacle in general. Some significant anti-administration rhetoric (ironic really), summed up with the veiled threat "Hey folks, if you think Washington and American Business can go to war with each other and it ends good - terrible error!"

Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that -  to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming  years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.

Starting shortly will be the initial press-conference of the Tokyo IMF meetings. We hope Ms. Lagarde has her pre-requisite reading done, is tanned appropriately, and has the teleprompter turned to autocue... live webcast below - will she take questions from any Irish reporters?

The US economy grew at a 1.65% pace in the first half of the year and, according to Bloomberg Brief's chief economist Jo Brusuelas, is now tracking at a 1.5% pace of growth. The IMF's dour outlook for the world's economy has been shoulder-shrugged by many but in this compendium of everything you need to know about the US economic outlook but were afraid to ask, Brusuelas provides the facts and nothing but the facts. From slack in the labor markets, to a slowdown in investment and soft household spending, even the Fed's unprecedented QEternity is unlikely to grab us back from the edge of a malaise-like sub-2% consensus forecast for Q4.

It seems our recent re-introduction of the world to Robert Triffin has struck a note among a number of market participants. The gold-convertible U.S. dollar became the global reserve currency under the Bretton Woods monetary system, which lasted from 1944-1971. This arrangement ended because foreign central banks accumulated unsustainably large reserves of U.S. Treasuries, threatening price stability and the purchasing power of the dollar. Today, central banks are once again stockpiling massive Treasury reserves in an attempt to manage their currency values and gain advantages in export markets. We have, effectively, returned to Bretton Woods. The trouble is, as Guggenheim's Scott Minerd notes,  that the arrangement is as unsustainable today as it was during the middle of the last century. None of this should come as a surprise given the unorthodox growth of central bank balance sheets around the world. The collapse of Bretton Woods in 1971 caused a decade of economic malaise and negative real returns for financial assets. Can anyone afford to wait to find out whether this time will be different?

A critical - and under-asked - question for investors and 'believers' in Europe is "in what way the new 'fiscal compact' is actually different from the Maastricht treaty when it comes to enforcing compliance". It turns out, there really isn't any difference, and it is for the very same reasons that stood in the way of countries respecting the Maastrich treaty's limits. If there are 'no constraints on public spending', then why negotiate another 'fiscal pact' at all? As Philip Bagus has shown, the euro area is a good example for the 'tragedy of the commons'. Evidently that is not going to change until the monetary union simply falls apart.

Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:

• *S&P MAY CUT SPAIN IF POLITICAL, EUROZONE SUPPORT WANED
• *S&P MAY CUT SPAIN IF NET GOVT DEBT RISES ABOVE 100%/GDP '12-'14
• Doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization are, in our view, a destabilizing factor for the country's credit outlook.
• In our view, the shortage of credit is an even greater problem than its cost.

Is the Federal Reserve really doing such a bad job… or does it actually do exactly what it's supposed to do, but the average American is in the dark about what that is? In this explosive video, Casey Summit speaker G. Edward Griffin, author of The Creature from Jekyll Island, talks about the Fed's real role in the US economy and why – contrary to common belief – it is not this banking cartel's mission to act in the best interest of the American public.