Archive - Feb 2012 - Story

Two weeks ago when discussing the latest lunacy surrounding America's exponential curve #1 also known as its debt balance, we suggested what the GOP election strategy should be: "[if] the debt ceiling becomes a sticking point at the election, Obama's chances of reelection plunge. Which makes us wonder - will Republicans grasp that the paradox of defeating Obama is precisely in giving him a carte blanche on all the stimulus programs he wants? Because if Congress approves another $200, 300 or even $400 billion in stimulus pork (the only thing better than one Solyndra? One thousand Solyndras!) the Treasury will drown in the need to raise hundreds of billions more, and will in fact hit the ceiling well in advance of the elections. As for the stimulus projects themselves, they will crash and burn just like all centrally planned endeavors, and actually result in a far worse outcome than if they had never been attempted. [Because] the best way to finally get back to a fiscally prudent regime? Why go to town, of course." We were delighted to discover that our policy anti-recommendation has finally been adopted. Because as the WSJ reports when it comes to the latest payroll tax extension we find something quite stunning: "House Republican leaders said Monday they would introduce a bill extending the payroll-tax break for the rest of the year without finding spending cuts to offset the program's cost. The proposal marks a major shift for Republicans, who previously had insisted that the costs of extending a trio of provisions expiring at the end of the month be offset with spending cuts." That's right - no offsetting spending cuts. Which means one thing - much more debt.  How much more? At least $160 billion much. Which means that the debt ceiling discussion will hit not in November as we speculated previously, but potentially as soon as September.

As the Germans ponder the truthiness of Greece's planned austerity measures it will perhaps come as a shock to many that since the start of the Euro (Dec 1998), Greece (followed closely by Spain and Ireland) has experienced the highest nominal GDP growth rates (rebased to USD) among a sample of large global economies (ex-China). As Deutsche Bank's Jim Reid points out from this surprising fact, these three nations (and to a lesser extent Portugal) have been major beneficiaries of the Euro and have seen their economies improve their international wealth position at a faster rate than their developed market peers since 1999. In the current environment, post the leverage super-cycle, this creates stress (as is all too obvious) and in the medium-term we would expect mean-reversion of this 'fake' wealth/growth. The dilemma is whether the peripheral nations see large and negative GDP growth to revert down or if Germany is willing to accept far higher growth and inflation (maybe 7% nominal) to adjust upwards to the seemingly unsustainable levels of the peripherals. Austerity versus Growth/Inflation. It seems from Ireland's suffering and Greece's slide that the former (peripheral deleveraging and austerity) is the path chosen for now though ongoing appetite (Papademos/Samaras aside) for this seems as unpalatable as German's accepting socialized losses via firewall and the specter of high inflation.

Those who actually recall the nuances of the endless Greek bailout may remember that at one point in 2010 and 2011, one of the main sticking points that threatened to derail the Greek bailout was the demand by Finland to collateralize its contribution to the Greek bailout package. Well, guess what: it's back. Kathimerini reports that "Finland may sign a deal on securing collateral in exchange for its commitment to Greece’s second bailout in the “next few days,” Finance Minister Jutta Urpilainen said on Monday. A vote in parliament on Finland’s participation in the bailout could follow next week, she told reporters in Helsinki." Translation: monkey wrench was just thrown into the Greek bailout in the 11th hour as now everyone else will follow in Finland's footsteps and demand equitable treatment. And it was all going so well...

Update 3: Market reopens - "perfectly normal market"

Earlier today, Obama formally proposed his 2013 budget (link) which sees a $1.33 trn budget deficit in the 2013 fiscal year - more than the $1.296 trillion 2011 budget deficit, which unfortunately indicates that even with rather rosy assumptions, the deficit hole continues to grow, which also means that the debt plug will be higher in the next year compared to the prior, which in turn lends even more credibility to the US debt clock analysis which assumes a nearly 140% debt/GDP ratio by the end of a potential second Obama term. While that will likely end up being an optimistic estimate, for near-term discussion purposes, the probability of even this particular budget passing is slim to none as the GOP reaction in the republican controlled Congress has been swift and brutal. Per the WSJ: "Republicans moved quickly to denounce Mr. Obama's budget plan. "This proposal isn't really a budget at all. It's a campaign document," Senate Minority Leader Mitch McConnell (R., Ky.) said... Rep. Paul Ryan (R., Wis.), the chairman of the House Budget Committee, said, "Again the president has ducked responsibility, he has punted again, he has failed to take any notable action on this crisis." "All we're getting here is more spending, more borrowing and more debt that will lead to slower economic growth," Mr. Ryan said on a conference call with reporters. Republicans are expected to offer their own budget plan in the next month. The president's populist message is weaved throughout his proposal. "For many Americans, the basic bargain at the heart of the American dream has eroded," the president said while reiterating a call for nearly $1.5 trillion in tax increases on higher-income Americans over 10 years. He added he is seeing "signs that our economy is on the mend" and that this is a "make-or-break moment for the middle class, and for all those who are fighting to get there." So while this "budget" is not even worth the paper it is printed on (unlike reserves, they actually still use paper for these things) here per the WSJ, are the key charts that form the foundation of the budget forecast.

There is something just so femininely "fin de Keynesian siecle" about those clenched orange fists... But at least Schauble is happy.

As President Obama discusses the fact that budget cuts can't restore economic growth and House Speaker Boehner says the Budget Plan is 'bad for job creation', perhaps the two parties have something they can actually agree on? Sarcasm aside, as this incredible chart, via JP Morgan's Michael Cembalest, shows, Congressional polarization is at an all-time high. In some strange Keynesian way, we are to believe that a 0.2% increase in the $3.8tn fiscal 2013 budget is belt-tightening and of course we await the M.A.D. argument for extensions here and there that has been so successful back in the heart of democratic Greece.

With nothing but mute silence out of Germany in the aftermath of last night's "historic" Greek vote, the EURUSD is getting nervous trading down to just above 1.3200 minutes ago, well below the level reached last night following the passage in the Greek parliament of the vote with 199 out of 300 votes. As such, everyone is starved for some clues of what Merkel and Germany thinks at this point - will they simply leave Greece to flounder, by demanding even more "reality" and implementation of measures from the first bailout - something Greece obviously can not do? Or will Germany relent for at least one more payment (of €210 billion). We don't know, at least not yet. But the following Spiegel interview with German Foreign Minister Guido Westerwelle may provide some insight. The key part: "Q. The second aid package will presumably be more expensive than anticipated, partly because the Greeks haven't kept their promises. How much longer will the German public put up with this?...Westerwelle: It's undoubtedly a moment of truth for Greece. If a sustainable and correct course is set in Athens now, Greece can expect our support -- but only then. There will be no more advance payments. Only actions count now." Like we said, hardly the ringing endorsement people expect. Then there's this: " I am more than dissatisfied with the political impasse in Greece in recent weeks. I'm also addressing the German opposition when I say this: You can't solve a debt crisis by constantly incurring new debts." And yet that is precisely what Bailout 2 is doing as we have patiently explained over and over. Yet Guido said something else which may be of interest to everyone else in Europe: "I don't want a German Europe. Q. What do you want? A. A European Germany." Aaaand, enter lost in translation interpretations.

Since last Wednesday, European financials have seen credit spreads widen dramatically. After some initial gains today, they once again retreated and traded out to their widest levels in two weeks as both financials and non-financials closed wider and at their worst levels of the day in European credit. Sovereigns also deteriorated significantly after around 8amET with 10Y BTPs for instance adding 20bps or so to close unch (as the rest of the major sovereigns saw de minimus +2 to -4bps changes). Bunds and Treasuries stayed close together and we note TSYs rallied 7bps (from +4 to -3bps) from early morning Europe trading and leaked off a little into the close. WTI is holding above $100 even as Copper is down 1% while Gold and Silver's gains are in sync with USD's modest losses - though EUR is leaking back lower (holding just above 1.32) into the close to around unch. While this post-Thanksgiving Day rally was perhaps predicated on global growth (US decoupling, China soft landing) and extended by LTRO (contagious bank insolvency runs risk containment), the underperformance of banks' credit risk in the last few days should be very worrisome with Senior unsecured credit wider by over 30bps in 3 days, its largest deterioration in two months.

It seems like it was only yesterday [technically it was September] that David Bianco "departed" his latest employee, Bank of America, where he landed following his "departure" from UBS back in 2007. Today, courtesy of Business Insider we learn that following an extended garden leave, or just a rather choppy job market, Bianco his finally found a new happy place: right in the cave of joy and happiness, also known as Deutsche Bank (aka the bank whose assets are about 80% of German GDP and which recently 'magically' recapitalized itself). Here he will be joined by the two other pillars of perspicacity - Binky Chadha and Joe LaVorgna. What to expect? Who knows - but lots of twisted humor is certainly in store. For the sake of simplicity we present some of the salient soundbites from Bianco and his colleagues over the past 5 years.

On Friday, we gave the skinny on some of the more amusing and/or aggressive key assumptions in the president's 2013 budget. Now hear the TOTUS, as presented via the president.

Okun's rule-of-thumb relates the long-term empirical finding that a country's unemployment rate is closely related to a country's output (or GDP) - perfectly sensible and comprehensible. In fact to be a little more explicit, it is the change in unemployment that is more notable in its relationship to the potential GDP (the output gap). His original work noted that a 3% increase in output corresponds to a 1% decline in unemployment rates (and/or rise in labor force participation, rise in hours worked, and rise in labor productivity) but as Goldman Sachs notes this week, Okun's Law has broken. As they point out, even though US real GDP growth has averaged a meager 2.5% pace since the end of the recession, the unemployment rate has fallen almost two percentage points from its peak. There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth). It seems to us that none of these are good for growth as the reality of a higher unemployment rate (BLS adjustments aside) is negative, lower potential for growth impacts earnings expectations (as we are already seeing in company and analyst outlooks which has perplexed those market watchers pinning their hopes on the jobless rate), and the balance sheet recessionary impacts of the 'employed' minimizing debt rather than maximizing potential gain is a further drag. Either way, as Goldman notes the potential growth rate going forward (2012 and 2013) is likely to remain quite weak, in the neighborhood of 2% in line with the CBO's dismal views and this could be further exacerbated by the drop in labor force participation we have noted vociferously.

Greece is the epicenter of a drama that threatens to unwind with all the intrigue and subterfuge of ancient Greek myths and tragedies. As with the legend of Icarus, big, and now bigger, transnational banks provoked the gods with their wax-and-feather financial fabrications to create the appearance of soaring wealth. Now that they have flown too close to the sun and their wings have melted, these banks are being brought to earth by the obligations and consequences imposed by their fabrications. Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves. They clothe themselves in their indispensability and shield themselves from accountability with tales about how many innocent citizens will be hurt if they don’t get their next bailout. It is as if they say, “We are above the law… We are the law.” Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris. In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart.