Archive - Jul 27, 2012 - Story

Europe is so fixed, and so jawboned to death, that the Italian regulator who launched this year's BanWagon episode of financial stock short selling bans with what was supposed to be just a one-week ban of shorting, has just extended the ban for nearly two more months, through September 14. The reason: "persistent conditions" - in other words Europe appears to be only  fixed and stuff on a transitory basis. But yes, absolutely nobody could see this coming.

Confirming what we described in detail in March, Bridgewater's Ray Dalio notes in his Daily Observations that "Spanish banks' collateral is running out in a way that could force them into an ELA." The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece - estimates that the Spanish banking system has only a few hundred billion euros left in eligible collateral and that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. Critically, if this occurs, then Spanish banks will need to turn to its own Emergency Liquidity Assistance (ELA) program. An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly. This increasing Balkanization of European central banks and funding capabilities only entrenches the impossible task of fiscal union as 'more' sovereign control transfer will be required in return for any core backstopping. Furthermore, those who are hoping for LTRO3: no collateral, no deal! Which the IMF just confirmed is a flashing red warning:

• IMF: COLLATERAL AT ECB VULNERABLE TO DOWNGRADES, MARGIN CALLS

The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.

America's transition into a welfare state continues, as May saw a new all time high number of American households, 22.3 million to be exact, enter technical poverty and collect foodstamps. At the individual level, 46.5 million Americans lived off foodstamps, a 222,157 increase in the month, or nearly three times the number of people who found jobs in June according to the BLS. Next month this too will be a record, as it is currently just 17,367 before the previous all time high set in December of 2011. The good news, and we use the term loosely, is that the average benefit per household rose from all time lows of $275.82 to $276.76. Surely, the bottom is in and just like housing, there is on blue skies ahead.

Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"

Presented with little comment as it appears Gold (and Treasuries) are not as ebuliently following the 'Hilsenrathian' path of most ignorance  to NEW QE - as GDP beats, stocks near multi-year highs, and housing recovering on its own just does not seem like the recipe for extreme Bernanke action.

While anticipation of the election cycle's 'can't lose' perspective on markets is widespread, there is a somewhat more concerning cycle that accompanies it that we suspect will be much more critical this election year than in recent times. As Barclays notes, the 'policy uncertainty cycle' into presidential elections is very notable - especially in the 4-5 months immediately prior to the election. The reason this is concerning is simple - in recent years 'policy-uncertainty' has been extremely highly correlated to market-uncertainty (VIX, for example) suggesting that we are due for a rather large risk flare over the next few months. Believing in the omnipotent capabilities of central banks (or governments) to levitate markets in an election year is all well but if the path to that 'outperformance' includes a 20% dip, does anyone stay to benefit? With fiscal drags of $200bn to $650bn based on election-outcomes, it seems the policy-uncertainty cycle is not priced in at all.

As noted before, courtesy of the GDP revision, all the kneejerk reactions in the past 3 years to various GDP headlines (preliminary, first and final revisions at that), were all for nothing. In fact, today's GDP number will be revised and re-revised in the next two months, then re-re-re-revised at the annual revisions in 2013, 2014 and 2015. In other words, the number after (and likely before) the decimal comma is irrelevant. One thing however stands, and that is the trendline change in actual GDP compared to the change in debt used to "buy" said GDP. Which is why we present our favorite chart showing how much more total federal debt was added per quarter over the GDP. Bottom line: in Q2, the US added $274.3 billion in debt while adding $117.6 billion in GDP (from the revised data: Q1 GDP of $15,478 billion rising to just $15,595 billion in Q2). Probably what is more indicative, is that in Q2 the delta change between debt and GDP rose from 2.28x in Q1. But that too is largely noise and will be revised. What won't be revised is that over the past two years, the US has added 2.42x more debt than it has added GDP.

Just after the GDP number was released, we joked that the only opinion on the sub-standard Q2 US economic growth that matters is that of Fed uberchairman Jon Hilsenrath:

Only Hilsenrath's take on the GDP matters

— zerohedge (@zerohedge) July 27, 2012

Turns out we were not joking: the Fed mouthpiece has just released his take on the GDP. His bottom line: Inflation Data Won’t Constrain Fed. In other words, the Fed ignores the modest beat to expectations, and has given the green light after all.

Well it had to come, hope was fading. Special delivery via telephone from her vacation (via Bloomberg)...

• *MERKEL, HOLLANDE READY TO DO ANYTHING TO PROTECT EURO REGION
• *MERKEL, HOLLANDE: EU INSTITUTIONS, STATES MUST MEET COMMITMENTS
• *PASOK'S VENIZELOS UNDERLINED NEED TO EXTEND PROGRAM TO TROIKA

Translation (for non-European-speakers): Europe promises to talk much more. Also promises to not actually do anything as long as it takes.

• Germany, France: must implement June summit conclusions quickly. Market ramps on hope that the event that ramped it in June, is implemented

In summary, the Eurozone is committed to preserving itself. Truly breaking news which will trigger all EURUSD stop losses

Presented with little comment - except to not that everyone's favorite social media site that will 'figure out mobile' is now down 40% from its IPO price...

From the swings and lows of historical revisions to beats across the board of GDP data this morning, it seems the market's pre-occupation with NEW QE is now being faded (modestly for now). Treasuries are 4-5bps higher in yield, S&P 500 futures down around 5pts, Gold down $10, and the USD up modestly. For now, it's QE-off, though no-one seems convinced as EURUSD falls - which fits better with the Fed won't print but ECB will perspective. Meanwhile, FB has a $22 handle.

US Q2 GDP printed at an annualized rate of 1.5%, just slightly above expectations of 1.4%, and a 25% drop from the Q1 rate of 2.0%, with personal consumption plunging as a key contributor from 1.72% to just 1.05%, and government once again being less and less a detractor from "economic growth." Inventories "added" 0.32% to GDP, a number which in Q3 GDP will subtract from economic "growth." Now whether this headline number is bad enough for the Fed to decide on more QE, is up to Hilsenrath to decide. But in a Bizarro world in which only horrible data boosts the market, today's modest beat will likely not make the market happy, nor sellers of newsletters in which the only strategy is hope and prayer. And just as important, today the BEA revised historical GDP data retroactively. Of note 2010 GDP was revised from 3.0% to 2.4%, while Q3 2011 GDP was revised from 3.0% to 4.1%, indicating that the slowdown we are experiencing is in fact far worse than previously expected. It also shows that HFT trigger buying or selling on GDP data is completely meaningless as today's data will be revised violently higher or lower in a year, making it completely irrelevant.

While the EUR was soaring, and Spanish bond yield were (very briefly) plunging in the past 48 hours, the reality behind the scenes was very different than what was blasted publicly in the headlines. Namely, Spain was on the verge of requesting a full blown sovereign bailout, one which would see it become the next country after Greece, Ireland and Portugal to fall under the Troika's control. From Reuters: "Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said. Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said. If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year." So why the sudden attempt to talk up European risk in the last two days? Simple - Germany did not agree to fund Spain's bailout. Which meant it was suddenly up to Europe's apparatchiks to jawbone markets into cooperation. "De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now," the official told Reuters."