Archive - Nov 2012 - Story

GMO, Boston's $104bn asset-management firm, has 'given-up' on the bond market. However, this is not a clarion call for equity bulls, as the FT reports, GMO's head of asset-allocation Ben Inker notes the only time he has held more cash was in late 2007, before the financial crisis. Today's equity valuations, he notably points out, are predicated on today's profit margins being sustainable and he thinks US corporate profits are set to fall - even if growth picks up. Critically, this smart-money cash-hoarder rightly sees the problem as one prominent during the presidential election - that of income inequality. "One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there's a natural tension that forms there from a societal perspective." So far, Inker adds, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits. So that's where the dry powder is Maria - in the smartest investors' hands.

There is no deal here. There is a fantasy of projections and some wishful thinking but no deal. There is not even an agreement on disbursement as codified in the last paragraph of the statement (here). The odds on Greece reaching a primary surplus in the next several years are about 1 degree off of Kelvin's Absolute Zero. There is not even a definitive agreement yet to give Greece more money. What we have here are more promises, a concocted ruse and an agreement on a concept that is actually no deal at all. What we have here is one more "huff and puff" and no agreement by any definition that we suspect anyone (aside from self-referential European bankers) would find acceptable. After EURUSD's initial 'headline'-driven surge, it is fading now.

We remain in the throes of a secular era of disinflation. We also are in a long-term period of sub-par economic growth and below-average returns. This has become so well entrenched that U.S. pension plans now have more exposure to bonds than to stocks, as we highlighted two weeks ago. Look, this is not about being bearish, bullish or agnostic. It's about being realistic and understanding that in our role as market economists, it is necessary to provide our clients with information and analysis that will help them to navigate the portfolio through these stressful times. Our crystal ball says to stick with what works in an uncertain financial and economic climate — in other words, maintain a defensive and income-oriented investment strategy.

The words commitment, support, hard-work, and reform are popular among these talking heads. Here are the details and the press conference - though do NOT try and use your calculator.

As Lagarde adds: "The initiatives include Greek debt buybacks, return of Securities Market Programme (SMP) profits to Greece, reduction of Greek Loan Facility (GLF) interest rates, significant extension of GLF and European Financial Stability Facility (EFSF) maturities, and the deferral of EFSF interest rate payments."

In mid-December, the U.S. military will have only one aircraft carrier positioned in the Persian Gulf region for the first time in two years. At the same time, the Iranian navy said it was kicking off a 10-day exercise in the region. Oil prices spiked when Iran early this year threatened to close oil-shipping lanes in the region. If talks scheduled for December between Tehran and the IAEA turn sour, there exists for Iran the potential to exploit the security vacuum in the region and use its defensive position for geopolitical gain.

Earlier we noted the dismal volume in the markets today, it turns out we under-estimated just how dismal... Today was the lowest Monday-after-Thanksgiving Day NYSE volume since 1996! We suspect you will not hear that 'fact' on your favorite business media channel when they crow of the 'well off the lows' performance today...

Sure enough, it seems, the much aggrandized statement was merely more undecided 'leaked' actionless garbage from the EU's leaders:

*EU OFFICIALS SAY UNCLEAR HOW LONG EUROGROUP GREEK TALKS TO LAST
*EUROGROUP DISCUSSIONS OF GREEK AID STILL ONGOING, OFFICIALS SAY

EURUSD slumped immediately on this new news. The Eurogroup has set up the live webcast access point - below - though start times are 'estimated'.

No 4:00 AM morning session this time, as the general revulsion to even pretending to work on behalf of a totally destroyed country is tangible:

• EURO ZONE MINISTERS, IMF REACH DEAL TO CUT GREEK DEBT TO 124 PCT/GDP IN 2020 THROUGH PACKAGE OF EXTRA STEPS TOTALLING 20 PCT/GDP -OFFICIAL

Phew - great, Greece is fixed or something. The only problem, of course, as we explained earlier, is that Greece has to magically grow its GDP by EUR 50 billion from EUR 184 billion to EUR235 billion by 2020 for this 124% debt/GDP to be hit (and another EUR 20 billion in the next two years). No, really.

Many economists are suggesting that the second estimate of Q3 GDP, which showed an initial estimate of 2.0% annualized growth, will be revised sharply upward to 2.8%. The problem is that the surge in demand isn't materializing at the manufacturing level.  The month-over-month data has begun to show signs of deterioration as of late which doesn't support the idea of a sharp rebound in economic activity in recent months. The headwinds to economic growth are gaining strength as the tailwinds from stimulus related support programs fade. This has been witnessed not only in the manufacturing reports, such as the CFNAI and Dallas Fed Region surveys where forward expectations were sharply reduced, but also in many of the corporate earnings and guidance's this quarter.

Broadly speaking, risk markets seemed stuck in tryptophan-mode today but as always it was stocks that used a mediocre volume day to squeeze the odd name here or there. Facebook and Apple were the wunder-kind once again (with the latter now up almost 17% from its swing lows at its 30DMA and a 38.2% retrace of the high-to-low move). The Apple gain moved the Nasdaq into the green (for the sixth day in a row) but the S&P 500 (despite its best efforts into the close) was unable to reach green after overnight weakness. S&P 500 futures did managed to cross into the green (fill the gap) as the day-session closed but Treasury yields were lower all day and signaled considerably less exuberance. FX markets oscillated in ever-decreasing ranges as everyone waits for the next eurogroup bullgasm. Commodities wondered aimlessly with Oil down and Copper up and gold/silver either here nor there. VIX rose modestly to 15.5% by the close as credit markets overall underperformed stocks. 

As you glare hopefully at the critical 1400 level on the S&P 500, we thought a gentle reminder of that vertically challenged relative performance of economic fundamentals would be worthwhile...

An article by David Weiner on the MarketWatch site reminded me of just how weak the economic arguments against the gold standard are. Its title: "A Fool's Gold Standard." We examine this article here. The issue that divides the anti-gold bugs from the gold bugs is simple to state. The gold-coin standard places monetary authority in the hands of millions of economic participants who own gold. The gold bugs favor this. The anti-gold bugs oppose it. The rival camps are divided by rival systems of economic sovereignty. The gold bugs favor the sovereignty of the free market. The anti-gold bugs favor the sovereignty of the banking cartel, which is the joint creation of the federal government (Federal Reserve) and the states (state bank licensing). This is a replay of the arguments of Adam Smith against the arguments of the mercantilists. It is the logic of widespread, decentralized private ownership and voluntary contract versus the logic of government licensing, barriers to entry, and the legal right to counterfeit money. The anti-gold bugs do not want to put it this way. This is why gold bugs should always put it this way. Ultimately, this debate is between the logic of the free market as a social organization versus the logic of central planning. The battlefield is monetary theory and monetary policy.

Many people complain about their jobs on a regular basis - but, remember, it could be worse - far worse. While the hands-dirty role of central bank head or SEC chair are taken, the following infographic highlights jobs and salaries that really resonate with the phrase "there are dirty jobs but somebody’s got to do it." From garbage collector to crime scene cleanup technician and from proctologists to parents -- which stomach-turning jobs will have you running for the shower the minute you get home?

Since September, the Currency Wars have escalated. It isn't just because of the seminal monetary events of the Federal Reserve's QE III "unlimited" and the ECB's OMT "Uncapped". It is more likely about the fact that China announced its eleventh agreement that effectively bypasses using the US dollar with China's strategic trading partners. The latest agreement with Russia places trading oil, in non-US dollars, into the spotlight. The infamous petrodollar has had its destructive profile raised. The Petrodollar has long been the cornerstone that solidified the US dollar as the key currency reserve holding. The Petrodollar strategy is arguably more important that the Bretton Woods agreement which officially made the US dollar the world's reserve currency at the end of WW II. This is now being called into question. Minimally, it suggests a weakened requirement for holdings of the current levels of US dollars in sovereign reserve accounts.

Following the almost total lack of movement on the ECB 'savior' rumors, now we have IMF 'pain' rumors:

IMF WANTS EURO ZONE TO CUT GREEK DEBT BY 20 PCT OF GDP UP FRONT, COMMIT TO FURTHER REDUCTION LATER - Source

*IMF MAY WANT 40B EURO CUT IN GREEK DEBT, MORE LATER: REUTERS

EURUSD is just coiling and coiling here - but of the two rumors, t's EUR40bn write-down makes the most sense in a rational world of trying to help Greece (and therefore must be discounted as 100% not what will happen). We can only imagine that the EU tactic is now to throw each strawman to the rumor-mill to see what reaction is generated by the market - so far - #FAIL.