Archive - May 2, 2012 - Story

The last two nights we have been bombarded with headline data on manufacturing in China - one good and getting better and one bad and consistently contracting. Credit Suisse digs into the reality underlying these indices and notes three reasons why they feel the positive PMI trend is unsustainable as cutting through the "baffle-'em-with-bullshit" macro data is critical in understanding the sad reality we face. Critically, as CS conculdes, the bifurcation implies the economy is not doing entirely badly and hence the hopes of a substantial stimulus should be tempered in the near future - as should the market's optimism of a quick rebound in Chinese demand.

Modern economics is obsessed with modelling. An overwhelming majority of academic papers on the subject work like so: they take data, and use data to construct formal mathematical models of economic processes. Models mostly describe a situation, and describe how that situation would be changed by a given set of events; a very simple example is that as the supply of a good diminishes, its price will increase. Another is that deficit spending increases the national income. A mathematical model is a predictive tool created to demonstrate the outcome of events in a massively simplified alternate universe. As someone who rather enjoys voyages of the imagination, the use of mathematical models in economics is intriguing. The pretension that through using formal mathematical techniques and process  we can not only accurately understand, but accurately predict the result of changes in the economy is highly seductive. After all, we can accurately predict the future, right?

Wrong.

After a peaceful relaxing public disturbance or two during yesterday's May-Day holidays in Europe, the overnight data was disastrous and European risk markets responded in kind. Spain's IBEX traded below the March 2009 closing lows (though shy of the intraday lows) as it is almost back to levels not seen since Q3 2003 (with an intraday low today of 6776.5 versus 3/9/09's low of 6702.6) with its biggest drop in 2 weeks. Spanish and Italian bond yields (and spreads) pushed notably higher - back near last week's worst levels as the whole of the sovereign complex leaked wider today and financials, in their entirely consumed and joined-at-the-hip manner fell the most in 2 weeks - also near recent lows which would take EU bank stock values back beyond March 2009 levels to mid 1998 lows incredibly. It would appear some profit-taking in the LTRO-Stigma trade is occurring, rightfully so after a more than double, but non-LTRO banks outperformed today as LTRO-encumbered banks leaked back wider. European credit markets were open yesterday (since UK was not on vacation where the bulk of CDS market-making occurs) and we note that today saw investment grade credit (along with stocks) underperform (below Monday's close) - as we suspect 'cheap' hedges were grabbed while crossover credit and financials remain modestly tighter than Monday's close (even as their stocks are worse). Whether this is an up-in-capital-structure rotation on the back of hopes for new capital or merely a reflection of liquidity this week is unclear but it is worth watching as subordinated financial spreads are the outperformer off the 4/23 lows now.

The phrase “New World Order” is so loaded with explosive assumptions and perceptions that its very usage has become a kind of journalistic landmine.  Many analysts (some in the mainstream) have attempted to write about and discuss this very real sociopolitical ideology in a plain and exploratory manner, using a fair hand and supporting data, only to be attacked, ridiculed, or completely ignored before they get a chance to put forward their work.  The reason is quite simple; much of the general public has been mentally inoculated against the very whisper of the terminology.  That is to say, they have been conditioned to exhibit a negative reaction to such discussion instinctively without even knowing why....  The Liberty Movement has always defined the NWO as a concerted effort by elitist organizations using political manipulation, economic subversion, and even war, to centralize global power into the hands of an unelected and unaccountable governing body.  The goal; to one day completely dismantle individual, state, and national sovereignty.  However, what I and many others hold as fact on the New World Order is not enough.  We must examine the original source and how we came to our mutual conclusions.      

That the market is merely yet another transitory sugar high bubble creation of the Chairsatan and his central planning colleagues in various marble buildings around the world is no surprising to anyone, at least not anyone who maintains a pretense of objectivity, is not desperate to sell a weekly newsletter, and has a frontal lobe. What however is not only surprising, but outright shocking, is that such embedded members of the aristocratic status quo elite as Martin Feldstein - a professor of economics at that bastion of Keynesianism Harvard as well as president emeritus of the NBER - the folks who tell us when recessions start and end, are starting to get it. To wit: "The economy is slow and weak. We are not doing very well. The economy is just coming along at a snail's pace. The first quarter numbers that we just got last week were not very good at all" and warns "if we are going to see that jump in taxes, that is going to push the economy next year into a serious recession" but the punchline: "The stock market is, I think, responding to the Fed. I think the real danger is that this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered....The danger is, like all bubbles, they burst at some point" Well, uh... if it is now common knowledge that everything is manipulated, and that the economy is collapsing, and would be outright imploding if it weren't for the Fed's goosing of the stock market, does that mean it is time for Zero Hedge to hang up our hat?

At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that "All of Europe has defaulted", the canny-wee-fella (translation: shrewd and cautious young chap) explained that "The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected." Between France's election of Mr. Hollande and Luxembourg's 'when times get tough you have to lie' Juncker, Hendry says the only inspiration for Europe is fiction as "you just can't make up how bad it is" as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Wiemar happened, why the transfer union will never happen, Ayn Rand's reality, and fear politicians are feeling - ending with his view that "we are single-digit years away from the most profound market clearing moment".

Every quarter as part of its refunding announcement, the Office of Debt Management together with the all important Treasury Borrowing Advisory Committee, which as noted previously is basically Wall Street's conduit telling the Treasury what to do, releases its Fiscal Quarterly Report which is for all intents and purposes the most important presentation of any 3 month period, containing not only 70 slides worth of critical charts about the fiscal status of the country, America's debt issuance, its funding needs, the structure of the Treasury portfolio, but more importantly what future debt supply and demand needs look like, as well as various sundry topics which will shape the debate between Wall Street and Treasury execs for the next 3 months: some of the fascinating topics touched upon are fixed income ETFs, algo trading in Treasurys, and finally the implications of High Frequency trading - a topic which has finally made it to the highest levels of executive discussion. It is presented in its entirety below (in a non-click bait fashion as we respect readers' intelligence), although we find the following statement absolutely priceless: "Anticipation of central bank behavior has become a significant driver of market sentiment." This is coming from the banks and Treasury. Q.E.D.

The dispersion across European nations in terms of growth and unemployment (as we noted earlier) are just two indications of the dramatic amount of economic hubris, as JP Morgan's Michael Cembalest describes it, associated with the belief in a sustainable European monetary union. Using the World Economic Forum's multitude of competitive factors (across economic, social, and political characteristics), the JPM CIO notes that compared to hypothetical and actual monetary unions in the world that the EMU exhibits the largest differences between member nations of any (current or historical), and still Europe soldiers on. "Countries in the European Monetary Union are more different than just about any other monetary union you could imagine" so it’s hard to know how it will turn out. It’s a tough road, and this data helps explain why. Europe’s problem is not just one of public sector deficit spending differences, but also of deeper, more fundamental differences across its various private sector economies. Whether it’s equities, credit or real estate, EMU valuations need to be considerably more attractive than US counterparts to justify investment given the challenges of the European project.

The pathway of dissent is to resist financial feudalism and its enforcer, the expansive Central State. Here are twelve paths of resistance any adult can legally pursue in the course of their daily lives:

1. Support the decentralized, non-market economy
2. Stop participating in financialization
3. Redefine self-interest to exclude debt-servitude and dependence on consumerism and the Central State
4. Act on your awareness that the nature of prosperity and financial security is changing
5. Stop supporting distant concentrations of capital that subvert democracy by using their gargantuan profits to buy the machinery of State governance and regulation
6. Stop supporting the debt-and-leverage based financial aristocracy
7. Transfer your assets out of Wall Street and into local enterprises or assets that do not enrich and empower Wall Street.
8. Refuse to participate in consumerist status identifiers and the social defeat they create
9. Vote in every election with an eye on rewarding honesty and truth and punishing empty promises
10. Stop supporting inflationary policies such as “money creation” by the Federal Reserve and Federal deficit borrowing
11. Become healthy, active and fit
12. Embrace self-directed coherent plans and construct a resilient, diverse ecology of identity and meaning

That March factory orders declined 1.5% was not very surprising: the market was expecting a decline of 1.6%. However, this is not good news as the prior February increase of 1.3% was revised lower to 1.1%, netting out as a negative two month change. Where this number was troubling is that this 2.6% swing brought the index to its biggest decline since March 2009 when the pumping of trillions started.

We were the first to note the dire state of youth unemployment in Europe here, and reiterated here, as this terrible social situation just goes from bad to worse this month. Whether youth unemployment is a proxy for sales of PlayStations or for the much more critical likelihood of widespread social unrest and eventually the dissolution of Europe's political compact is unclear but one thing is for sure - Europe's leaders will be watching this chart and quaking as nation after nation breaks to all-time high levels of joblessness for the critical tinder-box of Under-25 year-olds. The Euro-zone youth unemployment rate is back over 22% for the first time since September 1994. With Spain and Greece over 50% (and rising) and Italy now joining Ireland over 35% at the same time as Germany's youth unemployment falls below 8% for the first time since May 1993 - one can only surmise the rising tensions between the haves and the have-nots (even as Germany's PMI disappoints).

As we suggested yesterday, the Treasury Borrowing Advisory Committee (basically Goldman Sachs and JP Morgan, and the rest of the buy and sell side) did indeed come out with a unanimous decision, having decided to recommend FRNs. This simply means that Wall Street is either desperate to telegraph a surge in short-term rates, or, even worse, if actually anticipating a surge in short-term rates and is doing all it can to hedge before it happens. Nonetheless, "system limitations would prevent any possible issuance of FRNs until 2013" while those wondering what the reference rate will be will have no answer for a while: "In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate." Finally, anyone wondering why the market acted odd yesterday, i.e., experienced a freak sell off in the afternoon, the reason is that Brian Sack was also present at the TBAC meeting, and away from his trusty BBG terminal.

No need for much commentary here, suffice to say that those who thought Italy's massive drop in PMI from 47.9 to 43.9 in April was bad, apparently have not seen Hungary, Australia, Norway or Switzerland. The good news? Turkey is doing well to quite well... which likely explains why they are trying to confiscate the people's gold.

We have said, for months now, that Europe and the United States were heading in two different directions. That became quite clear today as the manufacturing numbers for Europe were dismal while unemployment for the entire Eurozone reached 10.9% which is up 9.1% from last year. The entire Continent is in a recession, with the exception of Germany, and we think their next release, in mid May, will show that they have joined the rest of their brethern. Austerity has its costs and two of them are increased unemployment and a decline in demand for goods and services which is then exacerbated by the drop in the number of people that are working. In the months ahead, for both political and economic reasons, we will see a flight back to American assets as the picture in Europe becomes both clearer and obviously worse. All of this, however, will affect American corporations and our banks so that expectations should be lowered in coming quarters for American earnings and profits. As “no man is an island,” no region of the world will be exempt from the European recession just as Europe was not exempt from our financial crisis.

Those hoping Goldman's NFP forecast of 125,000, well below consensus, is wrong, may have to reassess their thesis following the just released ADP number which came as a big disappointment to consensus of 170,000, instead printing at only +119,000, to 110,590. (The previous improvement was also downward revised from +209K to +201K). This was the lowest sequential change since September 2011, and confirms once again, the declining trends last seen in... 2011. It was also the biggest miss in 11 months. Luckily, as the scatterplot below shows, ADP is completely meaningless when predicting NFP so our gut reaction would be to expect a beat in NFP based on this print considering the whole Schrodinger economy and what not (see China). However, on an apples to apples basis, one thing is certain: record warm winter payback is a bitch. And finally, that whole Obama export renaissance is not doing all too hot: goods producing sector: -4,000 in April, while manufacturing jobs declined by -5,000. But, but, the soaring ISM..... oh forget it.