Archive - May 17, 2012 - Story

We have seen three very loud and very clear messages this week on the state of the US consumer's mind. After a few months of extravagance, on the back of what can only be described as depression-fatigue, reality is biting once again. The Bloomberg Consumer Comfort index just missed expectations by its greatest amount in three years and has plunged over the last 5 weeks by the most in four years - dropping back to four-month lows. Do these two messages explain the catastrophe that is JCP's results this quarter? We suspect so as the outlook for the economy (sub-index) has plummeted by the most in 14 months - once again echoing the last two years and the end of the central-bank easing periods exposing the sad reality beneath.

One for the "You can't make this stuff up" folder...

What comes after Banana Republic? Because America is it - after last week Facebook co-founder, and native Brazilian, Eduardo Saverin announced he would denounce his US citizenship, America has decided to make it virtually illegal to denounce one's citizenship in what can only be classified as the dumbest proposed law in recent history: meet the Ex-PATRIOT Act (Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy) proposed by Chick Schumer and Bob Casey. One wonders just how much taxpayer money was spent to pay naming consultants to come up with this witty acronym for a law that can only be classified as utter idiocy. Here is our suggestion for the follow up law: The "GULAG" Act: Get Ur Laughable Asses Gone (although we are open to any other non-taxpayer funded acronym suggestions).

The days have passed since January 13, 2010 when we first expressed opinion that Greece would default. Weeks and months have come and gone; Athens has been rescued by the Troika, private bondholders were forced into a Draconian swap as the Germans attempted to soothe their citizens and boatloads of money has been dumped into the Greek economy and into the Greek banks. The demands for “austerity measures” heaped upon the citizens and the economy of Greece has sent the marginally poor into the streets and into bread lines and caused a Depression in Greece based largely upon the imposition of the Troika’s demands that Greece must curtail the standard of living which was initially granted by Greece joining the European Union. Almost everyone has focused upon the sovereign debt, that it is no longer placed at the European banks and that it is resident at the European Central Bank which is protected by all of the nations in Europe. This is true, as far as it goes, but the summation does not go nearly far enough. The hit, when it comes, will require the ECB to be recapitalized, will be felt at the IMF where the United States will take 16% of the hit or around $16 billion which will be trumpeted in the Press by the Republicans and waved like a banner in the Press. The EIB will also take a hit and it may get downgraded but all of this just focuses upon the sovereign debt and is non-inclusive of the rest of the story or even of the truth of the sovereign debt. Greece has $90 billion in derivative contracts that will likely default and the losses will then have to be taken at the French, German and American banks. The number is approximately $1.3 trillion in total and all of it is going to default as Greece heads back to the Drachma.

While claims were expected to improve from last week's pre-revision print of 367K, we got not only a miss but a deterioration, with the print coming at 370K on expectations of 365K. But all is well, for the media already has its spin: "Unchanged", because you see last week's number was as usual pushed up higher to 370K, hence no change. Of course, next week this week's 370K will be revised to 374K or something, but the algos will be long past caring. What is worse is that the exodus from the cliff continues, as those off EUCs and Extended benefits declined by another 68K (and down by 1.14 million from this time last year): people who no longer get their weekly allowance from Uncle Sam and having been without a job for 99 weeks are pretty much guaranteed to not find a job, thus making them rely exclusively on disability and foodstamps.

The World Gold Council has released the Q1 2012 Gold Demands Trend report. Gold demand grew 16% over the past 12 months to 1,098 tonnes. This had a US dollar value of just $59.7 billion spent on gold, globally, in Q1 2012. While global demand was down 5% from the record high of Q4 2011, it was significantly higher than demand in Q1 2011 suggesting that global demand may be consolidating at these higher levels.  Probably the most important aspect of demand and one of the most important fundamentals in the gold market is that of still very robust and increasing Chinese demand. In this the Chinese Year of the Dragon – China is becoming a fundamental driver of the gold market. Global demand was boosted by China posting a quarterly record of 98.6 tonnes of investment demand up 13% from Q1 2011. This increase was a result of investors’ continued move to preserve wealth amid ongoing concerns over inflation, volatility in equity markets and price falls in some property markets. Jewellery demand in China, much of which is also store of wealth demand, increased to 156.6 tonnes – 30% of the global appetite.  This increase places China as the largest jewellery market for the third consecutive quarter.

European cash equities are in the red across the board at the midway point, as the bourses fail to reverse the trend of the past few sessions. With data points very light today, participants continue to focus on the macroeconomic themes as speculation regarding a Greek exit maintains focus. A medium-term maturity Spanish bond auction slightly eased fears, selling to the top of the indicative range, however the appearance of solid demand was countered somewhat by limited supply and sharply higher yields across all three lines. Following the auction results, EUR/USD saw some modest support and the Bund exhibited slight weakness, but this was short-lived as the macroeconomic concerns took over once more. Unexpectedly, the 3-month Euribor rate fixing came in with its first increase since December last year, prompting some selling pressure on the Euribor strip. This move was retraced as it was rumoured that one bank had not submitted a rate due to the Ascension Day market holiday across certain European markets, prompting the incline.

• As ZH warned last week, JPMorgan’s Trading Loss Is Said to Rise at Least 50% (NYT)
• Spanish recession bites, may be prolonged (Reuters)
• Obama Lunch With Boehner Ends With Standoff Over Budget (Bloomberg)
• Hilsenrath: Fed Minutes Reflect Wariness About Recovery's Strength (WSJ)
• N. Korea Ship Seizes Chinese Boats for Ransom, Global Times Says (Bloomberg)
• Greece Plans for June 17 Vote Under Caretake Government (Bloomberg)
• Hollande turns to experience to fill French posts (FT)
• ECB Stops Loans to Some Greek Banks as Draghi Talks Exit (Bloomberg)
• Spain Urges EU to Provide More Support (WSJ)
• North Korea resumes work on nuclear reactor: report (Reuters)
• Fed’s Bullard Says Labor Policy Is Key to Cut Joblessness (Bloomberg)
• China Expands Scope for Short Selling, Securities Journal Says (Bloomberg)

It was such a promising morning for Spain which sold some €2.5 billion in 2015 and 2016 bonds earlier in yet another meaningless and symbolic LTRO-covered exercise, when things went from bad (bank run, pardon, withdrawal meme) to worse, as local Expansion newspaper says Spanish bank ratings will be downgraded in a few hours.

The problem with bank runs is that once they start, they don't stop. And while the world was conveniently distracted by events in Greece, debating whether or not people were withdrawing money in droves (they were), the real bank run happened elsewhere, namely in Spain, where just nationalized bank Bankia moments ago plunged 30% and was halted following an El Mundo report that "customers had withdrawn €1 billion over the past week." In other words -  a bank run (but whatever you do, don't call it that - it's not the politically correct and accepted nomenclature) which has sent shockwaves through Europe, pushed the EURUSD under 1.27, and bond yields in their traditional "Europe is open" direction - wider.