Archive - Sep 6, 2012 - Story

Is bad, good still? Did Draghi's omnipotence obfuscate Bernanke's banality? Goldman's Jan Hatzius provides some color on what to expect for tomorrow's employment report. Forecasting a Goldilocks 'middling' print around 125k and flat 8.3% unemployment rate, he reminds us that this report is a very important one from both a monetary policy and political perspective. An upside surprise would raise more doubts about the Fed's determination to ease aggressively at next week's meeting and would strengthen President Obama's hand in the run-up to the November 6 election, and the converse is also true.

A free market is composed of people who produce and trade the products of their efforts in exchange for the products of others. The free market is able to coordinate the activities of everyone, and enable everyone to optimize his results. Unfortunately, governments interfere in the free market. They do so by the use of force. The government always justifies its intrusions on the grounds of helping people. Government officials and voters are not aware of the lessons of Frederic Bastiat. The attempt of all to live at the expense of all is doomed. There ain’t no such thing as a free lunch. Rather than helping people, the government’s interference inevitably causes distortion. As destructive as government interference is in the area of production, it is that much worse in the area of money and credit. Every aspect of production and trade depends on money, so distortions in this area are magnified. Unfortunately, the government has distorted the monetary system so badly that both are accelerating towards destruction. The solution, and the only hope for civilization, is to rediscover the principles of free markets, particularly on the monetary realm, and begin returning to a gold standard.

It’s easy to be pessimistic over the future prospects of liberty when major industrialized nations around the world are becoming increasingly rife with market intervention, police aggression, and fallacious economic reasoning.  The laissez faire ideal of a society where people should be allowed to flourish without the coercive impositions of the state is all but missing from mainstream debate.  In editorial pages and televised roundtable discussions, a government policy of “hands off” is now an unspeakable option.  It is presumed that lawmakers must step up to “do something” for the good of the people.  Thankfully, this deliberate false choice will slowly but surely bring the death of itself.   Illogical theories can only go on for so long before the push-back becomes too much to handle.  For those who desire liberty, it’s a joy that the statist economic policies of the Keynesians become even more irrational as the Great Recession drags on. The two following examples will illustrate this point.

Peter Schiff pulled an OccupyWallStreet (remember that whole Occupy movement?) at the Democratic National Convention. What he did, was succeed in exposing some very disturbing prevailing beliefs about the government's role in establishing the 'utility' value of the free market as manifested by corporations, namely that according to a broad cross-section of society, it is the government job to "explicitly outlaw profitability."  We wish to remind readers that this has been done on numerous occasions in the past, but most "effectively" in the Soviet Union's centrally planned regime. Until the USSR's failure of course. The premise of eliminating profitability is also quite popular, and even has its own name: nationalization, and its result in a business "manager" who is perfectly ambivalent if the state owned enterprise makes or loses money. After all the wage is determined by a politburo, and is not a function of the profits, or losses, a business may engender. Furthermore, it is probably worth reminding that the primary tenet behind capitalism is the production of goods and services for a profit. Sadly, quite a few of these concepts appear to have not been made clear to not just one or two Americans as the following clip demonstrates.

The first rule of Fight Club? You don’t talk about Fight Club.

Obama isn’t a member of Fight Club; he’s a member of Drone Club — which targets individuals in foreign lands, including American citizens and their families, for extrajudicial assassination by drone. And the first rule of Drone Club?

You don’t talk about it.

Over the past several months (and years) we have been warning that the ongoing collapse in trading volumes, in part due to the lack of faith in capital markets that now have all the integrity of a rigged Vegas casino from the 1960s, in part due to investors' need to monetize assets in a world in which wages simply refuse to keep up with prices, will have not only irreversible implications on the shape of market structure, but also substantial consequences when it comes to the layout of modern banks, and associated up and downstream variables, such a jobs, real estate, support professions, municipal taxes and much more. Nowhere is this more evident (for now at least) than in the massive corporate reorganization taking place at Nomura's American division, which among many other things is about to lose its brand new $270 million trading floor even before a single trader set foot in it.

A world of ongoing global integration leads to rising global trade and to rising competition between companies from different countries and to some degree also between the countries themselves. Some countries have benefited from rising global trade and strengthened their positions, expressed by rising trade surplus; other countries have come under pressure, expressed by rising trade deficit. These global trade imbalances are a consequence of competitive differences. Deutsche Bank note that investors invest in companies and the countries are the platform of the companies. Therefore, an understanding of global competiveness of countries is key for investors. It is most helpful to look at the combination of competiveness and hourly wages. The more competitive a country is, the higher its wages can be justified. There is a clear relation between the two variables. Countries below the regression curve have a strong competiveness rank relative to their labour costs while countries above the curve have a lower competiveness rank relative to their labour costs. Greece is one of the most extreme outliers, but Italy, Spain, and Argentina are also above the curve. They have a long way to go to get close to competitive - but then again - why would they care?

The attached chart of Smith and Wesson revenues needs no comment.

While the fact that the stock market soared to new highs hours ahead of Obama's DNC speech may be a pure coincidence, we eagerly await to find out if while it is Bush's fault the economy is in the dumps 4 years after Obama took control, it will also be Bush's fault that the S&P just printed at 4 years highs. Something tells us that the answer is a resounding no. One thing we know for certain is that as of this moment the incumbent candidate knows precisely what seasonally adjusted nonfarm payroll number will be when it is announced tomorrow at 8:30 am. And since the TOTUS is very good at highlighting marginal moves in the economy, expect a leak or two during today's DNC speech. Then again, since the August number will not have to be discussed at the DNC, which ends this evening, there is a chance that the number of part-time workers added will be substantially below the 150,000 latest whisper number. Naturally, if whatever is reported tomorrow had any bearing in reality, the actual number would be negative. But there is an election to be won in two months, and naturally there are NFP reports after the election which can catch up with that trendline. In the meantime, here is why Obama knows precisely what only those select few other funds that are very, very close with the BLS, know.

Draghi spaketh and the bulls taketh. Risk assets re-correlated in a hurry as Draghi stopped speaking and the US day-session opened (and buoyed by better than expected - though implicitly QE-off - data) risk was on like Donkey Kong. We ripped through recent swing highs, up to the year's highs, and then on to 4-year highs in the S&P and 12-year highs in the NASDAQ. But it wasn't all faeries and unicorns; after the European close, CONTEXT (our proxy for risk-assets) diverged notably lower as stocks extending their trend for the day; Oil dropped hard on rumors of an imminent SPR release and Gold and Silver trod water (after a busy night admittedly). The S&P 500 e-mini futures (ES) stayed in a very narrow range just above early August highs for the rest of the day as Treasury yields also started to stabilize at last Friday's levels with the 30Y up around 12-13bps on the week (notably more than the front-end). JPY weakness (carry-driven) as Draghi spoke, faded in the afternoon and along with the drift lower in TSY 2s10s30s there was a much less ebullient feel to everything - even as stocks decided to close at their highs of the day (as VIX fell back below 16% in the last few minutes down around 2 vols on the day). Volume was mediocre, average trade size above average, as the vinegar-strokes at the cash close saw bigger blocks come through.

Yesterday, when Bloomberg leaked every single detail of today's ECB announcement, which thus means today's conference was not a surprise at all, yet the market sure would like to make itself believe it was, we noted that everything that was leaked, and today confirmed, came from a Goldman memorandum issued hours before. Simply said everything that happens at the ECB gets its marching orders somewhere within the tentacular empire headquartered at 200 West. Which is why when it comes to the definitive summary of what "happened" today, we go to the firm that pre-ordained today's events weeks ago. Goldman Sachs.Perhaps the most important part is this: "September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support." In other words, Rajoy has one more week before he is sacked and the Spanish festivities begin.

The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination. As Powell notes: Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that - as economies remain hugely divergent.

The dividend theme has hardly run its course. As David Rosenberg of Gluskin Sheff illustrates in his latest note, the income-starved retiring boomers are being forced to garner income more and more via the equity market where dividends are up more than 8% over the past year. Because of ultra-low interest rates, interest income growth has vanished completely. And here is the great anomaly. Back in the early 1980s, investors bought equities for capital appreciation and they purchased Treasury securities for yield. Today it is the complete opposite.

Please sit down before reading the stunning list of new features that Amazon has unveiled this morning for the new Kindle Paperwhite:- (ready)...

Front-Lit
Changeable Fonts
Better Resolution
Better Battery

Compelling stuff! No happy-ending? No buying of Spanish bonds, and (pseudo) sterilized money printing? No coffee-making attachment? Odd, it seems the news is being sold as AMZN slides from intraday highs...