Archive - Jul 5, 2012 - Story

The only reason the real wage and salary growth has improved at all this year (a real growth rate of 1.1%) is because inflation has been declining since January as TrimTabs' Madeline Schnapp notes specifically "the price of gasoline has dropped sixty cents a gallon since April giving consumers about $60 billion in extra cash to save or spend". While good news, it is hardly sustainable and acts as a much weaker boost to the economy where balance sheets are still crammed with trillions of dollars of mal-investments left from the real estate bubble that have not been marked-to-market. These non-performing assets are like a ball-and-chain around the neck of the economy and the quicker they are liquidated the quicker the economy can get back on its feet. Schnapp sees lower job growth than consensus for June and while her pre-July-4th ebullience is clear, her less-than-sanguine view on the economy and the "purging of mal-investments - destroying wealth and contracting credit" means wage-and-salary growth will be anemic at best.

For those Americans earning between $34,500 and $106,000, the real-world middle class tax burden in high-tax locales is 15% + 25% + 5% + 15% + 15% = 75%. Yes, 75%. Before you start listing the innumerable caveats and quibbles raised by any discussion of taxes, please hear me out first. Let's start by defining "taxes" as any fee that is mandated by law or legal necessity. In other words, taxes are what is not optional.  If we include all taxes, the real-world tax rate is much higher than the "official" income tax rate.

Earlier, we noted that Obama is about to take the trade war with China on car duties to a whole new level, be decrying "unfair" Chinese trade duties (which in turn were implemented only in response to US tire tariffs imposed in 2009 but you won 't hear about that). Now watch the president live from Ohio, telling his unionized voters precisely what they want to hear.

Despite the easing of collateral standards, ECB Margin Calls surged last week by their most in over 9 months (ex-Greece). As yields rose (and prices fell) pre-summit, so the collateral that European banks have lodged with the ECB fell in value and thus, the banks had to find cash to cover those margin calls. The rally from Friday may have eased that strain a little but today's give-back of all those gains (and in fact to a worse level) suggests that these margin calls will continue to rise and put further liquidity stress on cash-strapped European banks. Most critically, the ECB (while extending some of its collateral) reduced banks' ability to self-reference and post ponzi-bonds as collateral (i.e. a Spanish bank cannot get a government guaranteed issue off and then turn round and pledge it with the ECB). Between negative Swiss interest rates (and Denmark), stressed basis-swaps, and now rising ECB margin calls, things are going from bad to worse behind the scenes in Europe - no matter what reflexive perspective an equity market rally is telling you. Yet another unintended consequence of the LTRO/MROs as the most-stressed banks come under more liquidity stress - as evidenced by today's biggest deterioration in EUR-USD basis swaps in 7 months.

In Ohio today, President Obama will announce the latest World Trade Organization suit against China, this time addressing "unfairly" imposed duties on U.S. auto exports.  The Administration will argue that these duties violate international trade rules. Whether or not China will reply that buying US 10 year paper at 1.6% is also unfair remains to be seen. But at least someone is happy. As reported earlier, ADP reported just 4,000 manufacturing jobs were added in the US in the last month: these are the same people who are supposed to be doubling US exports in Obama's latest 5 year plan. Good luck. Anyway, here is the take of the Alliance for American Manufacturing to this simplistic attempt to trade union for long-term stability with America's largest trading partner.

The last two weeks have seen the largest drop in mortgage refinancings in over 7 months. While refis are trending generally higher as mortgage rates drop to all-time-record-lows, there is an odd reaction evident in the data. Each time interest rates tick up even modestly, the rate of refinancings plunges violently. In a sane world of rational actors, we would expect a rush of refinancings at the first sign of a rise in interest rates as they scramble to lock-in the last best deal. However, in our surreal world of extreme balance sheet inflation and seemingly infinite zero-interest rates from the Fed, the crowd (instead of seeing a blip up in rates as a signal to act) decides to hold off from refinancing as they await rates to continue trending down/lower (as per The Fed). So, does the Fed need to signal that rates will be rising soon, and lift its easing pedal to remove the perverse incentive that ZIRP has enabled, in order to improve the housing market (or household balance sheets)?

The post-EU-Summit exuberance has entirely worn off in everything that mattered to the EU-Summit 'bulls' as EURUSD and both Italian and Spanish bond spreads are now back wider than pre-Summit. However, there is one market that remains ignorant of anything aside from algo-driven VWAP reversion and the incessant hope for another round of central bank largesse. Can you guess which one?

Following today's two better than expected employment data points, it was only natural that the world's fastest revising bank would go ahead and promptly revise their forecast for tomorrow's NFP higher. Sure enough... "We are upgrading our forecast for tomorrow’s nonfarm payroll report to +125k, from +75k previously."

A few days ago we noted that the ECB may well be contemplating the monetary neutron bomb, which would see it lower rates to below zero, ushering in a Negative Interest Rate Policy. Today, Mario Draghi cut such speculation short promising the ECB has not discussed this. Yet one bank which certainly has is the Danish Central Bank, which just lowered its Discount Rate to 0%, joining China, England, the ECB, and, of course, Kenya in easing, but also went one step further and cut its deposit rate to negative 0.2%. Keep a note of this: NIRP is coming to a central bank, and shortly thereafter to a bank deposit branch, near you very soon.

After the manufacturing ISM printed in contractionary territory a few days ago, there weren't many high expectations for today's Non-manufacturing ISM number. Which is good: printing at 52.1, it was a miss to expectations of 53.0, and down from 53.7. This was the 3rd month in a row of drops, and the 3rd downside miss in the last 4 data releases. Spin: at least it was above 50. And also the employment number rose. Which of course is the last thing the market needs, because if NFP comes much better than expected tomorrow, kiss more NEW QE goodbye for a while.

After printing just under 6.20% on Monday, the Spanish 10 Year is back to satanic 6.66%. Time for another summit.

I understand the dream of the common socialist.  I was, after all, once a Democrat.  I understand the disparity created in our society by corporatism (not capitalism, though some foolish socialists see them as exactly the same).  I understand the drive and the desire to help other human beings, especially those in dire need, and the tendency to see government as the ultimate solution to all our problems.  That said, let’s be honest; government is in the end just a tool used by one group or another to implement a particular methodology or set of principles.  Unfortunately, what most socialists today don’t seem to understand is that no matter what strategies they devise, they will NEVER have control.  And, those they wish to help will be led to suffer, because the establishment does not care about them, or you.  The establishment does not think of what it can give, it thinks about what it can take.  Socialism, in the minds of the elites, is a con-game which allows them to quarry the favor of the serfs, and nothing more. There are other powers at work in this world; powers that have the ability to play both sides of the political spectrum.  The money elite have been wielding the false left/right paradigm for centuries, and to great effect.  Whether socialism or corporatism prevails, they are the final victors, and the game continues onward… Knowing this fact, I find that my reactions to the entire Obamacare debate rather muddled.  Really, I see the whole event as a kind of circus, a mirage, a distraction.  Perhaps it is because I am first and foremost an economic analyst, and when looking at Obamacare and socialization in general, I see no tangibility.  I see no threat beyond what we as Americans already face.  Let me explain…

The PBOC, the BOE and now the ECB all cut, and still futures are tumbling. This latest news however will certainly send futures soaring:

• KENYA CENTRAL BANK CUTS BENCHMARK RATE TO 16.5% FROM 18%
• KENYA INFLATION HAS FALLEN TOWARD SHORT-TERM 9% TARGET

However, the market response so far is remarkably tepid. Hopefully the one bank we are all waiting for: the Bank of Uganda, will follow suit and show everyone who's boss.

It is unclear if today's surprising beat in both ADP and, just released, Initial Claims, is supposed to set the stage for a much better NFP tomorrow, in order to justify the lack of QE, for at least a few more months, and to validate that Fed's ongoing silence even as the BOE, PBOC and ECB have all eased. What is clear is that after 6 weeks of misses, initial claims finally posted a beat, printing at 374K, better than expectations of 385K, and down from last week's 386K print which as always was revised upward to 388K. Those on EUC and Extended Benefits continued to decline with just under 30K dropping off the 99 week cliff. Finally, if indeed it is Bernanke's intention to telegraph that there will be no QE because the economy is, don't laugh, suddenly improving now, the market will be very, very unhappy.