Archive - Sep 2012 - Story

In very real terms the ECB is now no longer an independent institution. The ECB has promised not to act unless the EU assents. The ECB is now totally subject to the whims of the politicians in Europe and whether the markets ignore this for the moment or not that is the truth of it. In promising redemption the ECB has also traded away its ability to act on its own and it will be interesting to see how this plays out.

When it comes to corporate cash flows, profitability and actual trade and product demand, central banks still appear to have little to very little ability to jawbone immediate results, as Fedex found out three days ago, and Intel has just confirmed.

• INTEL SEES 3Q REV $12.9B-$13.5B, SAW $13.8B-$14.8B, EST. $14.2B
• INTEL WITHDRAWS YEAR FORECASTS FOR GROSS MARGIN, REVENUE

Fear not: the ECB may still promise to bailout Intel revenues, if Intel only requests a bailout.

We came across this rather telling chart showing the net petroleum imports of the US and China. We present it on a standalone basis, as  the price of oil, and certainly gas, will once again become a key sticking point in the days and weeks ahead, as always happens whenever there is either global coordinated monetary intervention, or relentless jawboning thereof. To present some context to the chart, which forecasts China overtaking the US and becoming the world's largest net oil importer in the world, the official US GDP number presented for public consumption is just under $16 trillion (or 98% of US debt), while China's is, publicly, less than half this number.

• Jobs Gauge Carries Election Clout (WSJ)
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0 (Blooomberg)
• Rajoy stance sets stage for EU stand-off (FT)
• China Approves Plan to Build New Roads to Boost Economy (Bloomberg)
• Hollande faces questions on tax pledge (FT)
• Putin Looks East for Growth as Debt-Ridden Europe Loses Sheen (Bloomberg)
• Strike Grounds Half of Lufthansa's Flights (Spiegel)
• The weakest will win in the euro battle (FT)
• Hilsenrath: Fed Economic, Interest Rate Forecasts Will Include 2015 Outlook (WSJ) - because he just figured that out
• Obama Presses Plan for U.S. Resurgence (WSJ)
• Hong Kong to Restrict Sales of Homes at Two Sites to Locals (Bloomberg)
• Drought Curbs Midwest Farm-Income Outlook, St. Louis Fed Says (Bloomberg)

Just over three months ago, George Soros said the Eurozone has three months to come up with a master plan or else face disintegration. Two months into this countdown, Spanish bonds at both the long and short ends soared to record wide levels, approaching the predicted "game over" state as they nearly inverted, only to see the world's most powerful jawboning intervention by the ECB commence in late July when Draghi delivered his famous "believe me" speech. As of today, Spanish 2 and 10 years bonds have retraced a lot of the priced in doom, with the short end collapsing by a record 350 bps, leading to the steepness on the Spanish bond curve to hit unseen historical levels. However, as the chart below shows, this is not the first, nor even second time that the Spanish bond curve has reacted violently to promises (and even actions - something we have yet to see from the ECB for all its endless talk) that all shall be well, coupled with further promises that this time it's different. It isn't. But enjoy the euphoria while it lasts. 

The EURophoria which commenced yesterday after the repeatedly pre-leaked Mario Draghi speech, has continued into the overnight session, this time getting a helping hand from China, whose Shanghai Composite index is up by just under 4% or the most in eight months following an announcement that The National Development & Reform Commission, China’s top planning agency, said it approved plans to build 2,018 kilometers (1,254 miles) of roads, a day after it backed plans for subway projects in 18 cities. In other words China's empty cities will still be empty but will now be connected and have even better infrastructure. Irrelevant of how the extra money has been injected, or for what ends, the stock and bond markets around the world are enjoying the news, with the EURUSD rising to 1.2700 recently, the Spanish 10 Year sliding to under 6% and the lowest since March despite Industrial Output sliding 5.4% or more than the 5.2% expected, even as German 2 year yield rise to the highest since July despite strong German trade surplus and Industrial Production data, with European equities green across the board and the EURCHF in mid-1.21 territory on louder unfounded rumors the SNB will hike the peg to 1.22/1.23. And with the European action in teh rearview mirror (more below), all eyes turn to today's key report, the August Non-Farm Payrolls.

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.