Archive - Feb 19, 2013 - Story

Governments have refused to accept the necessity of a period of economic re-adjustment following the credit-bubble. The bubble burst about five years ago and economic progress has been effectively suspended ever since. Reduced to its bare bones, the choice has been either to accept that unviable businesses and over-extended banks must go bust, or to ignore the problem and hope it goes away. This is a decision for markets, not governments, which brings us back to the necessity for economic re-adjustment. Governments have simply not faced up to the reality that we are in a post-credit-bubble mess: they still hope the problem will be resolved by time. We are long past the point of no return. Governments are now reduced to screwing their electorates for their own survival, which is their last refuge from reality.

Precisely a month ago, when we last looked at the ongoing French campaign in Mali, whose diplomatic justification before the people of the "democratic" world was the eradication of "insurgents", and various other "Al Qaeda rebels", we asked readers, rhetorically, to look at a map of Mali and tell us what they see.  We even provided an answer: "Nothing. Mali is one of the most irrelevant countries in West Africa from a resource standpoint, and what happens inside of it is certainly irrelevant from a greater geopolitical standpoint. What is more important is what this map doesn't show, specifically the name of the country located a few hundred miles to the south: Nigeria. Now Nigeria is important: very important. Or rather, Nigerian light sweet, one of the highest quality crudes in the world, is. And thanks to the "bungled" French peacemaking attempt, the US now has a critical foothold in what is the most strategically placed stretch of desert in Western Africa, a place where US "military trainers" will now be deployed at will. Be on the lookout for curious escalations in violence around the capital Abuja, and key port city Lagos, in the coming months once the current Mali fracas is long forgotten." It appears that Nigeria will be drawn into the fray far sooner than even we expected following today's news that Islamist militants from neighboring Nigeria abducted a French family of seven, including four children, in northern Cameroon on Tuesday, French President Francois Hollande said. Next up: Al Qaeda is mysteriously discovered to be aiding and abetting "evil" insurgent Malians out of Nigeria, and the French campaign, with the generous and stealthy support of the US, shifts slowly but surely southward to its ultimate destination: liberating all that Nigerian light sweet oil.

Just under a month ago, the mainstream media and blogging coat-tail-riders all hailed the miracle that was a huge windfall rise in California's tax receipts as a sign; a glimpse of what was to come from our centrally planned utopian recovery. Surpluses, taxes up, life is good. Unfortunately, as is always the case in reality, if its too good to be true, then it is! The LA Times reports that the historic $5bn revenue bump appears to have been an accounting anomaly! Just as state accountants were starting to allocate the magical inflow of tax receipts, Governor Brown's administration says the extra money was "likely the result of major tax law changes at the federal and state level having a significant impact in the timing of revenue receipts." Taxpayers were paying a share of their bill early, getting income off their books in the hope of limiting exposure to the tax hikes that recently kicked in. The administration was expecting that money to arrive in April. Now, officials are saying it won't, and that just as January's receipts soared, they'll be offset by a spring plunge. We need another miracle, stat!

As silver suffers its biggest one-day drop of the year, following a February of strange 'spikey' behavior, we thought it might be useful to show just what has been going on for the last few weeks. It appears that from the open of US equity trading pre-market to the close of Europe's equity markets (~0730ET to ~1130ET), Silver has been offered non-stop. Out of that four-hour window, on average, Silver has not moved in the month of February. With the dramatic nature of physical demand at the Mint, this serial slam-down of Silver just seems a little too premeditated and predictable.

And now for a quick blast from the past: on November 26, moments after Mark Carney was announced as the Bank of England's next "shocking" head (confirming our prediction that just this would happen), we made a very simple prediction, one which ran contrary to the conventional wisdom of the day, that Carney would pursue a sensible policy of preserving the strength of the British pound, namely the following:

It took Goldman's Mario Draghi about 3 hours to launch an epic EUR destruction campaign. Anyone going long the GBP here needs therapy

— zerohedge (@zerohedge) November 26, 2012

Sure enough, after rising very modestly in the days after Carney's coronation, cable has since imploded and moment ago touched on a new seven month low. Those who have been long the GBPUSD throughout the ensuing 700 pip plunge, can invoice Goldman Sachs with their therapy bills.

When the global financial pie is expanding, there's plenty of swag for everyone, so competition is limited and cooperation is rewarded. If we step back, what is most striking about China's emergence in the global economy over the past 30 years is how little actual conflict between global players this generated. To fully understand why this period of cooperation is ending and competition is heating up, we need to understand two key dynamics of global capitalism.  Either way, the game of depending on ever-expanding debt and exports for growth is over. This global competition is playing out on multiple interlocking levels.

While Italian bank and sovereign bond markets have showed a little weakness in recent weeks, they remain largely in limbo - supported on one side by an inexorable promise by ECB's Draghi outweighing the crushing reality of economic fundamentals. The transmission mechanism, claimed to 'fixed' by Draghi, is simply not. In fact, as the ABI notes, loans to families and companies dropped by record amounts in January. As ANSA reports, the continuing recession is not only weighing on loan demand but banks are unwilling to lend their ECB-funded reserves as delinquent loans continue to surge year after year (at record highs up over 16% YoY). Deposits rose - theoretically a positive - and yet as we have noted this is a preference for liquidity not a signal of confidence in Italian banks. However, all this terrible news, weakening economic climate, and plunging credit creation is described by the Banking Association as "no cause for alarm." Phew...

Earmuffs time for those people (all utterly clueless three or so of them) that the Fed does not monetize the US debt.

We suspect that if one combines all the most apocalyptic scenes from 'Day After Tomorrow', 'Armageddon', 'Planet of the Apes', and '2012', then President Obama's address (scheduled for 1045ET) on the impact of the sequester will come close. Of course, he could merely comment on the fact that we need to cut spending (not slow spending growth) in order to revert to sustainability but we suspect this is not 'silver linings playbook'. Young children and pets should probably be removed from the room as our leader explains just how cataclysmic things are going to get unless we all just get along... As a gentle reminder, here is the very same President threatening to veto any effort to stop spending cuts - oh well, it seems there really are no easy off-ramps.

While the rest of the developed (read trade deficit) world's foray into the currency wars was completely predictable and expected, there was one country that had so far kept very silent on the topic of Japan's attempts to crush its currency: its main export competitor, South Korea. Recall that for this Asian nation exports are everything, and as Yonhap reminds us, "exports of goods and services amounted to 538.5 trillion won (US$506 billion) in the January-September period, or 57.3 percent of the nation's gross domestic product (GDP), according to the data by the Bank of Korea. The reading was higher than 56.2 percent tallied for all of 2011 and the highest since the central bank began compiling related data in 1970, and South Korea's exports accounted for 13.2 percent of its GDP." The reason for South Korea's relative silence is that, as we showed yesterday, in the global race to debase launched with the end of the Bretton Woods, it was the undisputed leader, outdoing even the US. Moments ago South Korea may have just had enough and broke the seal on its code of silence. As Reuters reports, "South Korea said that while the Group of 20 nations at their meeting last weekend did not single out Japan for monetary and fiscal measures that have weakened the yen, the group did not exactly endorse Japan's quantitative easing policy, which in fact stirred controversy."

With the honey badger market continuing to be completely dislocated from absolutely every piece of underlying data (except for German hope and confidence reported earlier this morning), moments ago the NAHB housing market index printed at 46, on expectations of an increase from January's 47 to 48. This makes it the first drop in the index in 10 months, and the first drop to expectations since April 2012, which in turn sent the ES to fresh highs (don't ask). And while we are confident the decline will be blamed on such unpredictable aberrations as snow in January and February, a meteor shower in Russia and, of course, Bush, despite last February's print posting a solid rise from 25 to 28, perhaps the more worrying indicator was that the component gauging traffic of prospective buyers slipped a whopping 4 points to 32. The drop matched the biggest sequential declines going back all the way to 2007. And now back to your pre-spun housing recovery.

European car registrations had their worst January on record - an 8.7% year-over-year decline - as consumers hit by austerity are likely to continue to limit spending on big-ticket items. The Association of European Automakers notes the 918,280 new cars ('tagging' aside) is the slowest January since 1990 and makes the 16th consecutive month of year-over-year drops, as perhaps past car-scrapping schemes may also have hampered sales by encouraging buyers to bring forward planned purchases. During the Great Recession, European auto sales only fell 12 consecutive months. The weakness is broad based with Ford (a record 26% plunge), Peugeot Citron (down 16%) and Toyota (down 16%) as it seems the hopes and dreams of a troughing in the European economy has absolutely not shown up in the car industry. As Reuters reports, citing a CS analyst, "Hopes of an earnings and cash recovery in the second half are misplaced."

A month ago, when we reported that Abe's reflation effort was "succeeding" if maybe a little too much by sending gasoline prices through the roof, the Nikkei's conclusion was that  "Households are beginning to feel pinched by the weaker Japanese currency." Today they are pinched that much more as we find that the effectiveness of the plunging Yen has just forced luxury titan LVMH to hike prices in Japan by the most ever. From Bloomberg: "LVMH Moet Hennessy Louis Vuitton SA raised some prices by an average 12 percent at its flagship brand in Japan, the unit’s biggest price hike, to offset the impact of the yen’s slide on sales. The Louis Vuitton brand raised prices Feb. 15, spokeswoman Kaori Fuse said. Retailers such as LVMH, the world’s biggest luxury goods maker, are confronting a plunge in the yen that undercuts the value of sales in Japan, the second-biggest market for personal luxury goods." And where ultraluxury goes, everyone else is sure to follow.

Freight shipment volumes are rather obviously seasonal, but as Bloomberg Brief notes, the Cass Freight index shows shipment volumes have slumped for four consecutive months and are back to their worst levels in two years. This is the first year-over-year contraction since the 2007-2009 Great Recession - and places the reality of the dismal Q4 GDP print in context. If that wasn't enough good news about the real economy, the cyclicality of the shipments are losing momentum (i.e. each seasonal rebound in the last three years has been weaker - just as we saw in the lead up to 2008) and freight expenditures fell in January leading to a 1.6% drop over the last year - compared to a 27.2% rise in January 2011, and 22.2% rise in January 2012. As Cass noted, these volumes will not be enough to "have a significant impact on the unemployment numbers."

The financial world, at the moment, is a scary place. The signs of this are all about us and yet the consensus view is to worry about nothing. This has been caused by one singular action which is the orchestrated input of cash into the financial system by every major central bank on Earth. Money will go somewhere as it is created and so it has which is exactly why the markets are at or close to all-time highs while economic conditions have crumbled precipitously. It is not this market or that market which is in a bubble but all of them and it is systemic by its very creation. Politics, economics and the debauchery of the truth. There are consequences; there are always consequences. The world has subsisted on fantasies for four years but I think this spring will bring on the vengeance of the Fates for the demagoguery that has transpired.