Archive - Apr 9, 2012 - Story

NOAA just released confirmation that the first quarter of 2012 was the warmest on record. The fact that we rely on 'seasonal adjustments' in macro data that are so critical in our seeming belief in the recovery of the US economy (and its extrapolation into how many iPads will be bought next month) when the temperature is 20% hotter than average is simply incredible.

As we all know, the "unsinkable" Titanic suffered a glancing collision with an iceberg on the night of April 14, 1912. Ten minutes after the iceberg had opened six of the ship's 16 watertight compartments, it was not at all apparent that the mighty vessel had been fatally wounded, as there was no evidence of damage topside. Indeed, some eyewitnesses reported that passengers playfully scattered the ice left on the foredeck by the encounter. But some rudimentary calculations soon revealed the truth to the officers: the ship was designed to survive four watertight compartments being compromised, and could likely stay afloat if five were opened to the sea, but not if six compartments were flooded. Water would inevitably spill over into adjacent compartments in a domino-like fashion until the ship sank. The financial system of the United States of America is like the Titanic. Hubris led many to declare it financially unsinkable even as its fundamental design was riddled with fatal flaws and the human pilots in charge ran it straight into the ice field at top speed. We have some time left before the ultimate fate is visible to all. Ten minutes after the collision, the Titanic's passengers had 2 hours and 30 minutes before the "unsinkable" ship sank. How much time we have left is unknown, but the bow of the ship will be visibly settling into the icy water within a year or two--and perhaps much sooner.

It was NOT different this time...

The shortfall in US labor union pension funds is huge and growing rapidly. The latest data, from 2009, from the PBGC showed that these multi-employer plans were 48% underfunded with $331bn of assets to support $686bn of liabilities - and it has hardly been a good ride for those asset values since then. Critically, as the FT notes today, recent changes by FASB has enabled Credit Suisse to estimate shortfalls more accurately and it paints an ugly picture. The critical difference between reality and what is being reported is the ability for firms to use actuarial 'facts' to discount liabilities or compound assets at a 7.5% annual growth rate - as opposed to the sad reality of a financially repressed investing environment where returns swing from +20% to -20% in a flash forcing all funds into market timers and not long-term buy-and-hold growth players. These multi-employer pension schemes cover over 10 million people concentrated in industries with highly unionized workforces such as construction, transport, retail and hospitality but of the shortfall only $43bn lies with firms of the S&P 500 - leaving the bulk of the burden on small- and medium-sized businesses once again. It seems the number and size of unfunded (implicitly government) liabilities continues to rise or does this force pensions to follow Ben's path and increase exposure to hedge funds (which are underperforming in this serene rally so far this year) in an effort to meet these hurdle rates? Either way it appears this under-appreciated drag on the real-economy as one after another small-, medium-, and large- (Safeway faces shortfalls larger than its market cap) businesses will need to eat into earnings to fund this shortfall.

We have been mis-lead first by the short term effects of the LTRO and then by the political commentary that everything had returned to normal. Hard data will show that things now are about as normal as 9/15/08, the day Lehman filed for bankruptcy... It is just not Greece and Ireland that are experiencing huge drop-offs in the M-1 money supply but Portugal -14.00%, -13.80% in Italy and Spain is quickly approaching double digit numbers.  Even in developed countries the signs are worsening as the Henderson Global Investors gauge, the Real Narrow Money Supply, peaked at 5.1% in November, then dropped to 3.6% in January and was 2.1% for February. This is comparable to the declines seen in mid-2008 and so I bring this to your attention. Equally as worrisome is M-2 in the United States which fell below 1.6% last month for the first time since records have been kept in 1959.

There are numerous methods for growing vibrant gardens in less than perfect weather, and growing in colder northern areas with longer winters is absolutely possible, given the gardener has some brains.  In the video series below produced by The Survival Podcast, they showcase a very straightforward no nonsense experiment which proves that with a little ingenuity (and rudimentary greenhouse methods) you can indeed grow vegetables regardless of the temperature or the region in which you live. 

Tomorrow will bring the end of a two-day policy meeting at the Bank of Japan which SocGen expects will result in the announcement of additional easing measures. Whether medium-term macro-economic issues or short-term risk tolerance fading weighs heavier on their minds as their efforts from the previous easing announced on Feb 14 are rapidly losing their effectiveness - especially evident in their recent inability to restrain JPY appreciation (which notably JPM believes will continue on the back of a disconnect between Commitment of Traders positioning and the JPY carry divergence - via Bloomberg's chart-of-the-day). Critically the exchange rate is a cornerstone of BoJ policy and while risk-off will drive JPY appreciation via carry unwinds (in a purely technical world) the political, currency, and economic factors that SocGen lays out suggests strongly that the BoJ (under increasing attack from politicians for its failure to reflate the economy) will bring out yet another bazooka to show its worth - and prove this time is different even as we noted here with inflationary concerns rising. Lastly, will JPY lose its carry-trade attractiveness and implicitly its impact on US equities even if they do ease dramatically or when will the market/politicians lose patience with a drip-drip-drip approach and side with China's view of a rising devaluation risk as we noted here recently.

One can write lengthy essays, op-eds, and client letters explaining both why the labor force participation rate is plunging due to innocuous reasons such as everyone over 40 retiring yesterday full of jouissance and excitement to begin the sunset phase of their lives using copious life savings earning 0.0001% in interest, or, inversely, why this is one great big propaganda ploy by the BLS to make Obama look good a few short months ahead of the pre-election debt ceiling breach, pardon, his re-election date. We prefer cutting to the chase. Here is today's chart of the day from BofA, which begs one simple question: when will the two time series recouple, because recouple they will, and how will America react to the realization it was lied to for 2% worth of unemployment "improvement"? The chart says it all.

Last Friday saw the release of a below-expected US Non-Farm Payrolls figure, causing flight to safety in particularly thin markets, with equity futures spiking lower and US T-notes making significant gains. Data from this week so far in Asia has shown Chinese CPI is still accelerating, coming in above expectations at 3.6% against an expected 3.4% reading. Looking ahead in the session, there is very little in the way of data due to the reduced Easter session in the US and the European and UK markets closing for Easter Monday.

Nothing is going on this morning that did not already happen at 8:30:01 am on Friday. As a result, the three robots who are the sole churners of stocks this AM will keep risk where it was just after NFP, because that is part of the new regime, one in which USD weakness is now stock weakness, and one where stocks have a ways to drop before NEW QE is greenlighted. Also with Europe offline all day, the robots won't even be able to frontrun the European close. Bank of America summarizes the lack of events shaping the market this morning.

With Iran supposedly sitting down on the bargaining table for one last, soon to be failed, effort at diffusing the nuclear situation, the key geopolitical event this week will be the launch of North Korea's Unha-3 rocket, which the country insists is a peaceful launch, and the satellite contained is for scientific research. Others are not as optimistic, and Japan has already taken precautions to intercept the rocket should it get precariously close to Tokyo. Even China has cautioned against such a launch. The tentative launch window to commemorate the 100th birthday of NK founder Kim Il-Sung is set for April 12-16. So what does the rocket look like? Here it is: up close and personal.

• JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets (Bloomberg), but, but, he is just proividing liquidity, and serving JPM's clients
• Short on tools, central banks left with words (Reuters)
• And the mainstream media finally catches up: Investors braced for fall in US profits (FT)
• Iran rules out pre-conditions to talks: Salehi (Reuters)
• North Korea ‘planning third nuclear test’ (FT)
• Japan to Hold Talks With China on IMF Contributions (Reuters)
• American Universities Infected by Foreign Spies Detected by FBI (Bloomberg)
• Is the Fed Promoting Recovery or Desperation? (Hussman)
• In Europe, Unease Over Bank Debt (NYT)
• Banks test ‘CDOs’ for trade finance (FT)