Archive - Sep 2012 - Story

It's becoming clear that there is only one sensible solution ahead of us as the Eurozone’s problems evolve: Germany and the other countries suited to a strong currency should leave. If they do, the European Central Bank (ECB) will be free to pursue the easy money policies recommended by Keynesians and monetarists alike. It's increasingly clear that Germany has no option but to behave like any creditor seeking to protect its interests – and do its best to defuse the growing resentment against her from the Eurozone’s debtors. If Germany is to abandon the euro, it has to do so as quickly and elegantly as possible. It must be able to demonstrate that it has no alternative and that it is the best solution for all parties involved. Germany’s politicians know this. For the moment they are frozen in a state of inaction, but there is a general election to concentrate their minds in about a year’s time - and Germany’s electorate is becoming acutely aware of the enormity of the task. It has become obvious to many people from all walks of life in Germany that the euro has done them no good, and, far from reaping benefits, they are actually less wealthy as a result of it.

As we noted earlier, the main reason for the surge in consumer "confidence" in September was the near record surge in sentiment for those making $15,000-$25,000, which soared from 43.5 to 62.4 in the month, the most since April 2009. And whether this was due to their forecast of the future, and expectation that things will get much better, or not, we don't know, what we do know is that half all of those people whose sentiment defined the market tone today, and who may be quite instrumental in the outcome of the upcoming election (per Mitt Romney), have less than $100 in cash savings. Other findings: both males and females reported similar savings patterns, however, 55 percent of Americans with children under the age of 18 reported having less than $800 in emergency savings compared to 42 percent of those without. Findings also reflect disparities across geographic regions, with 60 percent of individuals living in both the Northeast and the West having $800 or more in savings, yet 31 percent of those living in the North Central region reported that they had less than $100. Most importantly, 23% of all Americans have less than $100 in savings to cover any emergency expenses, and 46% have less than $800. One can see why when it comes to the discussion of whether or not financial assets should be taxes, soon 46% may be the new 47%. 

Draghi jawboned Zee Germans and rumors of another 'path to fiscal union' were enough to provide equity markets with some ammo to buy-the-dip following the ECB/Buba news that they were lawyering up over the legality of the OMT (and IMF doubting Greece's ability to fund). Rapidly, the high-beta 'options' on Europe - i.e. IBEX, ripped and that dragged stocks into the green across Europe. BUT - while EURUSD also improved (which provided US equity traders with their pre-European-close methadone), European sovereign spreads did not follow the same path of exuberance, Greek bonds tumbled off highs, and European corporate and financial credit spreads cracked wider and kept going in the biggest divergence since Draghi's Dream speech. It seems that post the CDS roll, positioning is becoming a little more nuanced and for sure - credit markets are not buying it...

Perhaps the IMF forgot, but nobody in Europe is allowed to rock the boat until the Obama reelection. Either way, this just hit:

• International Monetary Fund won’t agree to further aid payment to Greece before decisions taken on new debt restructuring, Athens-based Skai.gr reports on website, without citing anyone.
• IMF insists debt ratio come down to 120% of GDP in 2020
• IMF may stop funding Greece under bailout agreement

Since the credibility of those "without citing anyone" reports is more or less negative, expect an official IMF response in minutes. On the other hand, if there is no IMF response, look for the #Grexit hashtags to promptly reappear.

It's perhaps not the most shocking headline given the circumstances but as Bloomberg reports via DPA, the man in charge of handling the correspondence at Italy's upper house of parliament was arrested Tuesday by police on drug charges. While there is no suggestion he peddled his drugs inside the senate, it seems mild-mannered Orlando Ranaldi who managed the Senate's post office by day, was a Tony Montoya-like 'Italo-Albanian' gang-member cocaine-dealer by night. We are sure Monti will just let this 'blow' over, but from now on - any unusual white powder found in envelopes may not be sniffed at like it was in the past.

Ahmadinejad may well be playing the same long game as Osama bin Laden:

We are continuing this policy in bleeding America to the point of bankruptcy.

Osama bin Laden

And they may succeed (although those who believe that war is a stimulus that can end a depression will surely disagree — as Antal Fekete has noted, Western governments may look to a new hot war in the middle east as an opportunity to exit an economic depression that they cannot control).  But for Ahmadinejad and Iran, it may come at a huge, huge cost — a long painful invasion, ending in death in the street or on the gallows. Neoconservatism — and Obama and Romney are both to lesser and greater degrees neoconservatives — is a violent utopian ideology that seeks to force the entire world — by whatever means and at any cost — to conform to American foreign policy imperatives. As America should have learned a long time ago — and as Ahmadinejad may well soon learn — needlessly pissing off violent utopian ideologues creates blowback.

Forget foreign policy debacles; never mind the gridlock and polarization that is dominating a looming 'fiscal cliff'; ignore Super-PAC-dominated propaganda - it seems the well-educated American citizen is fully cognizant of what each Presidential candidate (and his party) truly stands for. As the chart below shows, priorities on Sunday night were extremely clear...

Confused why contrary to all public lies otherwise, Spain is Greece? Here's why

• TAX RECEIPTS THROUGH AUGUST FELL 4.6% ON YR, SPAIN DATA SHOW: perhaps their tax collectors were also on strike?
• SPAIN GOVT SPENDING THROUGH AUGUST ROSE 8.9%, BUDGET DATA SHOWS: missed the austerity by just thiiiiiiis much
• SPAIN JAN-AUG CENTRAL BUDGET DEFICIT 4.77% GDP VS 3.81% YR AGO

Luckily, there is always hope that the magic money tree will bloom eventually

• SPAIN EXPECTS HIGHER TAX REVENUE IN COMING MONTHS

So, to summarize: revenues down, spending up, budget deficit naturally higher than last year. Oh, stop calculating... and just buy their bonds. The Central Planners will make sure the math is irrelevant always and forever.

Somewhat under-the-radar amid the US media's attention to housing data is the growing chaos in Europe. UBS' Art Cashin ensures we do not forget that Europe still drives the bus as he reminds us of the rise of the 'Occupy Congress' movement in Spain and the protests later today. With youth unemployment over 50%, it is sure that Rajoy will be keeping a close eye on this demonstration and other European leaders (and Greek demonstrators) will also be paying close attention. As Art says "let's hope the streets don't explode," especially given the NY Times noting that the number of 'hungry' Spaniards rose to nearly one million this year, and even previously well-to-do middle-class citizens are now dumpster-diving for food.

The NY Fed is not the only place where Hopium grows anew. Moments ago the conference board reported its September confidence print, which soared by nearly 10 points to 70.3, from 60.6 in August, and expectations of a 63.1 print: this was the highest print since February when hopes that the European LTRO may work (it didn't), and the largest beat in seven months. Ironically, the February beat was driven by 6 month forward hope as well, hope which have been dashed by today's current conditions number as the spread between hope and reality once again collapses. Naturally, the driver for today's miraculous pre-election beat: 6 month outlook soared from 71.1 to 83.7. In other words, if the present did not quite work out as had been hoped, one can just defer hope one more time - surely this time the future will certainly be different. Finally, and as was to be expected, the "confidence" when broken down by income buckets: those with $50k and more in income feel better, those with $35k and less in income feel better. Who is worse off? Why the middle class of course, or those with incomes between $35-$50k.

Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.

Some time ago, before China's hard landing was virtually assured (see Iron Ore prices), there was a period when its data was a veritable cornucopia of Schrodingerian ambivalence, with various economic indicators representing either growth or contraction at the same time. It appears that the modified wave-particle duality has just shifted to the US, whose housing segment is the latest patient of wave function collapse as the July Case Shiller index printed both a beat and a miss at the same time. The Top 20 composite index beat in the NSA Year over Year price change, which was +1.2%, on expectations of +1.05%, and up from a revised 0.59. However, it missed in the sequential Top 20 Composite price change, which printed at 0.44%, below expectations and half off the June price increase of 0.91%. In fact, as the chart below shows, the July increase was now the slowest sequential increase in the past 5 months, and at this rate, the August, or September data at the latest, will show a sequential decline in prices, as the euphoria from the Rent-to-REO fades, and as the massively pent up foreclosure inventory is finally forced to come to market and drag prices far below where the currently artificially propped up market "clears" (read Foreclosure Stuffing).

"Dollars spent on entitlements dwarf those spent on discretionary items such as education, and tower over net fixed business investment, which is partially responsible for greater productivity, business expansion and rising living standards. Periods with greater investment as a share of GDP are highly correlated with both faster economic growth and rising living standards. One risk to the U.S. economy is that rising entitlement spending will require the government to borrow from the finite amount of capital held by private savers, thus squeezing out private firms that need the capital to expand businesses and increase productivity."

The final quarter of 2012 is going to prove increasingly challenging. All the issues the EU Elites were able to bury, smooth and bluster through the summer are coming back to the fore. The immediate challenges are Spain, contagion, and banks, and who knows how many sucker punches wait in the wings? It’s no wonder banks are de-leveraging by cutting lending (and accelaterating recession) instead of raising new capital. Well at least the Euro Elites understand it.. This morning we have Bank of Italy chief Visco saying “Italian Banks lowering Leverage Reduces Risk…”

Risk-averse sentiment was prevalent throughout the session, after both Spain and Italy sold bonds/T-bills, which attracted weak bidding and hence saw lower than exp. b/c. In addition to that, yields on 3m and 6m Spanish T-bills were higher, with some pointing to the fact that the Treasury has been forced to step up its T-bill issuance to meet its zero net funding target (higher supply). As a result, peripheral bond yield spreads are wider by around 9bps, with Italian bonds underperforming given the supply later on in the week. This underperformance was also evident in the equity space, where the domestic stock exchange is seen lower by over 1%, compared to DAX which is only lower by 0.4%. In the FX space, firmer USD weighed on both EUR/USD and GBP/USD, both trading in close proximity to intraday option expiry levels.