Archive - Dec 2012 - Story

• Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
• Oracle sends shareholders cash as tax uncertainty looms (Reuters)
• GOP Makes Counteroffer In Cliff Talks (WSJ)
• Iran says captures U.S. drone in its airspace (Reuters)
• IMF drops opposition to capital controls (FT)
• Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
• Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
• Australia cuts rates to three-year low (FT)
• Europe’s banking union ambitions under strain (Reuters)
• EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
• Frankfurt's Ambitions Get Cut Back (WSJ)
• House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)

Bill Gross' latest monthly missive begins with some political commentary on the latest presidential election, pointing out the obvious: after the euphoria comes the hangover, completely irrelevant of what happens to the Fiscal Cliff: 'whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. “Happy days are here again” was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments “It’s getting hard to be someone but it all works out.” Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably?" And while political campaigns were just that, the truth is that nobody has the trump card to a perfect quadrangle of problems which will mire the US economy for years to come, among which i) debt/deleveraging; ii) globalization, iii) technology, and iv) demographics. Gross' outlook is thus hardly as optimistic as all those sellside reports we have been drowned by in the past 2 weeks, hoping to stir the animal spirits one more time: 'We may need at least a decade for the healing.... it is getting harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will “take you down” and lower your expectation of future asset returns. It may not last “forever” but it will be with us for a long, long time." Sad: looks like it won't be different this time after all...

Quiet session so far, with a notable move higher in the last block of trading in China pushing the SHCOMP for its first gain in 6 days, and off post-2008 lows. What precipitated the buying is irrelevant, although we got a good glimpse into the state of the Chinese economy thanks to Australia prior where the RBA cut rates by 25 bps to a historic low 3.00% (a move that sent the AUD higher), a level last seen during the financial crisis, and confirming that not all is well for the Chinese derivative economy despite loud promises from the Chinese politburo that growth is back. Bypassing the bullish propaganda were Renault Nissan's Chinese car sales for November which fell by 29.8% Y/Y. Some "recovery" there too. In Europe, the status quo continues, with chatter out of Germany's Merkel who begins her 2013 election campaign today, that Germany wants a strong Eurozone (it doesn't), and a strong Euro (it doesn't), but that nobody can predict when the Eurozone crisis will end (not even Hollande or Monti who did just that yesterday?). Otherwise sentiment there is still driven by the formal Spanish re-request of aid (and imminent receipt of €39.5bn in bank recap funds) from the EU by mid-December. As a reminder Spain did this originally in June but the algos were so confused yesterday they thought this was an official sovereign bail out request sending risk soaring only to tumble later (only in the New Normal is admission of sovereign insolvency a "good thing"). Nonetheless, despite the massive overvaluation of European markets (more on that later), the EURUSD continues to the upward momentum (in the process further curbing German exports and assuring the German recession), and was last seen trading up to 1.3075, about 30 pips higher.

Investors once knew: Focusing on assets without understanding monetary matters can get you into trouble. They have since forgotten this. Ironically, then, there’s great value in remembering it. As “Vermont Ruminator”, Humphrey B. Neill, wrote in The Art of Contrary Thinking: "[Money] is a study in itself and one which still confuses the great minds of the world... ...because monetary problems are not comprehended by the public or by the average businessman, “money management” will continually cross up public opinions concerning economic trends... ...If you make it a point to become posted on some of the more common practices of monetary management you will …be able to discern trends that are opposite to those commonly discussed..." This addogram delves into the evolution of the two most prominent reserve currencies of the past 350 years: The pound sterling and the dollar.

Three months ago, as part of our ongoing explanation of what happens next to the Fed's balance sheet (which is now established as official canon in advance of the December 12th FOMC, when Bernanke will effectively announce QE4 consisting of $40 billion in MBS and $45 billion in unsterilized TSY purchases as we predicted the day QE3 was announced), we said that "the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years." Most looked at the bold sentence without it registering just what it means. Perhaps, now that the "serious" media has finally taken on the topic of applying a calculator to the one driver of all marginal risk demand, it will register a little better: in a Bloomberg story titled, appropriately enough "Treasury Scarcity to Grow as Fed Buys 90% of New Bonds" we read that "the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co." Actually that's incorrect and it is more like 100%. What is however 100% correct is what the bolded means in plain language: it is now accepted that the Fed will outright monetize all gross US issuance. Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt. So what did the Chairman say about this absolutely certain eventuality back in 2009 to Congress...

Although its interests in the continent are broadly similar, India’s engagement with Africa differs significantly from China. Will it prove sustainable? Close ties between India and Africa are not new. Trade has flourished between East Africa and India’s west coast for centuries. New Delhi’s interest in Africa waned in the 1990s, but rapid economic growth and soaring energy requirements, however, forced India at the turn of the new millennium to rethink its neglect of Africa. The domination of oil and natural resources in India’s imports from Africa and of manufactured goods in its exports to the continent has drawn criticism that India is indulging in a “neo-colonial grab” for Africa’s resources. "This is an uninformed view. Africa of today is not the same as during colonial times. When countries exploit the resources of Africa today, the terms are set by the African nations and not by outsiders. The deals are mutually beneficial." India hopes that its capacity building, people-centric approach and efforts to build a sustainable partnership with Africa will keep such allegations at bay.

Much has been made of the rise in relative positive surprises in US macro data as a support for the equity market (even as bottom-up earnings and outlooks suggest otherwise). This has as much to do with macro-strategists overly-emotional downgrades and upgrades as the data itself (in all its manipulated glory). However, four times in the last six years, the macro surprise index for the US has reached two-standard deviations above its mean - and each time has marked a top in macro surprises. Just this past week, the US macro surprise index reached two-standard deviations from its mean once again - and while bond markets have started to reflect that reality (as we noted here), the rest of the market appears not to have got the message that, perhaps, this iss as good as it gets this cycle around.

Obama has always claimed to want to spread the wealth around. Yet, as I stressed this June (and in my first ever blog post way back in July 2011!) that’s the exact opposite of what he has achieved. And it’s getting worse, not better. The truth of Obama’s policies (and successive administrations prior to Obama) is more concentrated wealth within the financial elites and Wall Street. Banks get bailed out. Campaign donors get stimulus money. And the middle class and future generations pay for it in taxation and the Cantillon Effect. The Obama reinflation is a rotten bubble built on rotten foundations. And the growing gap between the rich and the poor is steadily beginning to resemble neofeudalism.

N as in "Nominal". Nominal GDP targeting, the latest burlesque of monetary fiction. But first things first. There is a land, where people calculate a "potential GDP". How do they do that? By simply extrapolating trends. Potential GDP is "the level of economic activity achievable with a high rate of use of its capital and labor resources". In the past, the differences from observed GDP were not very large, though now we are growing "below trend". But what if that trend has changed? With a flawed measurement of economic activity, leading to an imaginary output gap, what else might our economic elite come up with? Stagnating real GDP and high unemployment are no fun. After exhausting every traditional and non-traditional tool of monetary and fiscal policy, what else could be done to make that GDP grow? Nominal GDP equals real GDP plus inflation. So if real GDP doesn't want to grow... Eureka! you just have to cause more inflation, and nominal GDP will obediently join its potential GDP. Except for one little error of judgment: if elevated inflation led to wealth creation and jobs, Zimbabwe would be the richest country on earth. As real incomes of US employees have stagnated for more than a decade, rising prices would either lead to falling volumes, or force households further into debt. Also, how would this be different from a communist command-style economy?

The recent release of the ISM Manufacturing index continues to point to signs of a slowing economy. This (49.5) reading, which is what is reported by the bulk of the mainstream media, is fairly meaningless. Remember, economic change happens at the margins.  Since the PMI is more of a "sentiment" index (it is a diffusion index that measures positive versus negative sentiment on various areas from employment to production to inventories) it is a better used as a gauge about what businesses will likely do in the future based on their current assessment of conditions. The importance of the change in sentiment is lost on most economists who have never actually owned a business.  However, it is clear that the fiscal cliff, the recent storm, and the continuing Eurozone saga are continuing to erode business sentiment.  This erosion in sentiment in turn affects economically sensitive actions such as production, employment and investment.

And so the US debt ceiling of $16.394 trillion is now just $64 billion away.

Europe started to bleed after the Spain bailout debacle but from the open, US markets fell. They plunged on the ISM miss, bounced to VWAP in their wonderfully efficient way, and then spent the rest of the day shaking off the idiocy of last week's window-dressing. S&P 500 futures (ES) fell from 1424 highs to close at the day's lows around 1407 (still around 10 points rich to short-term Treasuries). When the ISM hit we saw Gold rally and Stocks dump to recouple the two assets for the day but overall it was stocks that were harder hit than other risk assets today - though evidently they were also major outperformers last week, so this is catch down as opposed to over-pessimism for now. Stocks were weak today in the face of a weaker USD (correlations breaking down) and a relatively unchanged Treasury market. Gold, Copper, and Oil all closed clustered together just in the green with Silver outperforming and VIX jumped 0.75 vols to 16.6% (highest in two weeks). High-yield credit had quite a day...

Those curious why Goldman Sachs felt compelled to undertake a quiet an unexpected by most (if not us) peaceful coup of the Bank of England, it is because the oldest central bank still has among its ranks people such as Andy Haldane, who in a world populated by deranged textbook economists who don't understand that it is the central bank policies' fault the world will be forever mired in substandard growth and soaring unemployment, is a lone voice of reason (recall BOE's Andy Haldane Channels Zero Hedge, Reveals The Liquidity Mirage And The Collateral Crunch). And since the BOE has no choice but to join all its peers in a global race to the bottom (largely futile in a world in which currencies exist in a closed loop, and in which if everyone devalues, nobody devalues as even Bill Gross figured out yesterday), it is prudent to listen to Haldane's warnings while he is still in the employ of Her Majesty the Queen. Such as his latest one, in which he says that the scale of the loss of income and output as a result of the crisis started by the banks was as damaging as a "world war."

No matter what you were told by the media (or your friendly 'stay fully invested' local wealth-manager), the equity market's exuberant surge of the last few days is evidently one of the clearest month-end window-dressing efforts (to desperately avoid redemptions) that we have seen recently (when put in context of the rest of the world's markets). Who is wrong? Who is right? We suspect we will see the truth (3 F's of US Fiscal Policy) shortly.