Archive - Apr 20, 2012 - Story

While one can talk until one is blue in the face about the pros and cons of the current central bank's (mis)deeds over the past 7 years, the reality is that most people are backward-looking (i.e., economists), not forward (which of course explains the prevalence of speculation as to whether the Fed's exponentially rising balance sheet will result in hyperdeflation or hyperinflation). As such, one can, for now at least, judge the Fed merely in the context of what it has achieved to date, not by the seeds of destruction it has planted. So how has Ben Bernanke performed so far when compared to his previous 4 predecessors, at least based on those two now completely irrelevant, but still oddly believed mandates: inflation and unemployment (because by now we all know that even the Chairman himself admitted the only thing that matters to the Fed is the Russell 2000 closing value). Below we present the Fed's accomplishments in the arena of inflation and jobs in the context of the past 60 years split by Chairmen starting with Martin (remember the 1951 Accord?), then going to Burns/Miller, Volcker, Greenspan and finally Bernanke. So who has been the fabbest among the Fed-est? You decide.

While virtually everyone has opined on the topic of the massive fiscal "cliff" set to take place on January 1, 2013, which could crush US GDP unless American politicians manage to find a way to end their acrimonious ways, most forget that a far more tangible cliff is set to take place much sooner, specifically over the next several months, as those currently collecting handouts from the government in the form of extended unemployment benefits (i.e., those who have been out of a job for a year) are about to get as angry as Germants pre-funding TARGET3, once the free money stops. Goldman explains why: "First, more than 150,000 workers per month exhaust their allowed benefits. Second, recently legislated thresholds will reduce benefit eligibility in many states with below-average unemployment rates beginning in June. Third, apart from legislative changes, labor market improvement in some states has taken the state-level unemployment rate below eligibility thresholds, with many states looking at likely expiration of one or more tiers of benefits around mid-year." In other words, unlike the bulk of other transfer payment programs (read government subsides) which could be extended with the flick of a switch at the end of the year following the now traditional 1+ month congressional theatrical impasse, extended claims can not. The net result: by June some 700,000 people who are currently collecting benefits will lose everything. It seems that the old faithful EBT card is about to be denied- and while one can assume that extended benefits are not a core source of marginal aspirational product (read AAPL) sales, we all know the truth. Is the time finally coming to short the one company that is and has always been the primary beneficiary of government transfer payment largesse? Because if AAPL's recent shakiness has been, by some, attributed to the expiration of EBTs, what will happen when Americans are again forced to pay their mortgages?

Wholesale gasoline futures are down around 8% from their late March peak. This follows the late February peak in WTI crude prices. Joseph Brusuelas of Bloomberg's Economics Brief today asks whether this signals a peak in retail gas prices - which are up around 20% this year. In a very similar seasonal and monetary cycle manner to last year, energy prices are rolling over but will retail follow again this time as it did before. For sure this would provide direct releif to households, as Brusuelas notes, that have seen average hourly earnings decline for 13 consecutive months. The typical lag is 2-4 weeks before wholesale improvements start showing up in retail prices and while we wait with baited breath for that spending relief, we note that at the same time, the average price of gasoline in Europe just broke back above $10 per gallon (equivalent) to its highest in almost a year showing no signs of retracing at all.

European sovereigns peaked in spread yield early this morning before the surprisingly positive German confidence data but while France, Belgium, Austria and more significantly Portugal are all improving, Spain and Italy remain far less positive in this small downtrend after two days of significant selling pressure. Both are now around 35bps post the US non-farm-payroll data with Spain cracking back above 6% yield (and remains above 500bps in 5Y CDS). For those wondering what is going on in Portuguese spreads, it appears CDS-Cash basis traders are very active, according to desk chatter, with the spread between extremely 'cheap' bonds and CDS compressing to 7 month narrows here - bonds remain 232bps wide of CDS though as liquidity, ECB subordination, and CDS trigger concerns remain (though this is in from over 700bps difference at its worst in late January 2012).

Over the past month, the world has finally awakened to the reality that when it comes to easing, there is more than just one central bank (i.e., the Fed). in fact, as we have been showing since early this year, the bulk of the easing over the past 5 months has happened elsewhere, primarily in Europe with LTRO 1+2, and subsequently at the BOE, and more recently at India and Brazil. Yet some holdouts still remain. One of these naturally is China, which everyone would love to see cut RRR or even the benchmark rate, yet which as recent CPI data has shown still has lingering packets of inflation precisely where it hurts: food (and of course recall China's Schrodinger economy). Which leaves Japan, which already eased more a few months back when it expanded its LSAP program... but it is never enough. Needless to say strategists, in their quest to shake any and every central banker here or there for some free money, have been seeing imminent BOJ easing in the form of yet another Y5 trillion LSAP any second now. Yet it is one thing for bankers to do what they are programmed to do, which is demand more free money, it is something very different when politicians step in and defuse the myth that any central bank is even remotely independent, especially when reelection is at stake. As Bloomberg points out this morning, the fight for the BOJ's "independent" balance sheet is starting to get lethal.

In all of the polls for the last six months the socialist, Francois Hollande, is ahead in the run-off election between 6 and 16 points. The first bout is April 22 and the Concours d’Elegance is May 6. Now no one that is not French can understand the French well. The psychology of this nation is singular. What Mr. Hollande’s win will mean for France is something to be carefully considered. A tax rate on the wealthy at 75%, renegotiate the EU fiscal pact, raise the minimum wage, impose more governmental spending, a decrease in the retirement age and a hostility directed at the banks and other financial institutions that may be described as combative or perhaps virulent and a complete change in attitude and direction from Napoleon’s strutting reincarnation also known as Sarkozy. Furthermore, no one is paying particular attention to the announcement of an upcoming EU meeting to propose reintroduction of border controls between France and Germany but it is a clear sign of Federalism on the wane and of Nationalism coming to the fore.

Back in July of last year, before it was even remotely acknowledged (and in fact it was roundly denied) that Greece would set a debt haircut precedent, which despite all the rhetoric has merely given all the other PIIGS ideas about debt haircuts of their own (and how to achieve these as fast as possible), Zero Hedge was the first media outlet to cut to the truth, with "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Note we said "soon to be" because it was obvious that the modestly complicated math of Germany bearing the cost of keeping the Eurozone alive would take quite a while to trickle down to the common German man. We did, however, underestimate the Bundesbank's mathematically helping hand in the form of one chart, most recently observed here, which makes the math far clearer than anything we could ever do to explain: namely the exponentially grown Bundesbank TARGET 2 balance, which is essentially Germany's way to fund, via the ECB, account imbalances across the Eurozone (explained in gory detail here), and put the national economy on the hook in ever greater amounts to a sudden and disastrous collapse of the Eurozone, because should a fat tail even occur, a solid 25% of German GDP would be Corzined. Today, The Telegraph's AEP does a bring down on the current status of this one biggest wildcard for Europe's future: namely, German anger, or as he puts it "tempers" which it appears have finally begun to boil.

Japanese Finance Minister said an IMF funding increase to USD 400bln is "coming into sight", and that he expects the BRIC nations to offer funds to the IMF at the appropriate time. The finance minister sees funding figures to be released as early as tomorrow. (Sources) The IMF looks set to reach or pass that target, with USD 320bln secured yesterday and many of the largest emerging economies still to contribute. ECB’s Knot and EU’s Rehn have said IMF commitments may have to be up to USD 500bln, and expects China to boost resources.  Brazil’s finance minister has said his country is still not ready to give numbers on their IMF contribution. The Indian finance minister has said he will take time to provide an answer to the funding question for the IMF. China also remains undecided on an increased IMF contribution.

• Current account surplus recycling goes global: BRICS demand bigger IMF role before giving it cash (Reuters)
• Obama oil margin plan could increase price swings (Reuters)
• Britons Abandoning Pensions Amid ‘Outdated’ Rules (Bloomberg)
• Hedge-Fund Assets Rise to Record Level (WSJ)
• Way to restore confidence: SEC considers case against Egan-Jones (FT)
• Qatari wealth fund adds 5% Tiffany stake  (FT)
• "Do we file?" Dewey Pitches Plan for Rescue (WSJ)
• French president slips further behind Socialist challenger Hollande (ANI)
• Nine U.S. Banks Said to be Examined on Overdraft Fees (Bloomberg)
• Capital Rotation: Investors fret on emerging markets and look to U.S. (Reuters)
• Verizon's Answer to iPhone: Windows (WSJ)

When in doubt how to cause an algorithmic buying spree, go for the lower common denominator: issue bills, or have a confidence index beat expectations. We had Spanish Bills cause a 200 point DJIA melt up earlier in the week, which means today we get confidence, specifically that of Germany's Ifo Business Survey. While Germany's various PMI may still be declining, and the market going nowhere in a hurry, not to mention international trade especially involving China sliding, if there is one thing German manufacturers have in copious amount, it is confidence. In April, the Ifo index edged higher in April to a level of 109.9 after 109.8 in March, defying consensus expectations of a decline to 109.5, and climbing to the highest level since last July. The assessment of current conditions also increased slightly to 117.5 after 117.4 (close to two standard-deviations above the long-term average). Business expectations remained stable at 102.7 (0.6 standard deviations above historical average).  And since algos only care about headlines on the margin this was enough to light a rocket under the EURUSD, however briefly and send it, and the US futures by implication, over 1.3200. Once again, even Goldman warns against reading much into these data: "The somewhat more muted signals coming from the PMI surveys caution against taking the Ifo at face value and there are not enough hard data available for Q1 that show which survey is the better guide at this point to the underlying momentum of the German economy." That's ok, A desperate for any good news Europe will take it.