Archive - Apr 2013 - Story

Despite expectations that following several months of subpar income growth offset by rampaging spending and thus a plunging savings rate, March incomes would rise by 0.4%, while spending would be flat, this did not happen, and instead both spending and incomes rose by the same amount, or 0.2% in the past month. Worse, when adjusting for inflation, real disposable income rose just 1.1% compared to last March, and just barely above the 0% breakeven. On the other side, real spending was up 2.2% Y/Y just barely above the 2% recessionary threshold. And even that number is misleading as spending on Total Goods (including durable, already known as being quite abysmal, and non-durable), dropped by $32.8 billion in nominal dollars. What was the offset? Why a massive surge in consumption expenditures on services, which rose by $53.8 billion, which absent the spending aberation for September 11, 2001, which was reversed in the following month, was the biggest monthly increase on record! What drove this record services spending spree is anyone's guess. 

In 2007 a small number of French hedge funds imploded over sudden losses stemming from highly leveraged bets made on the unstoppable subprime mortgage market. At the time, a few saw the writing on the wall; but many simply wrote it off as just another over-levered hedge fund and the subprime mortgage market was 'fine'. Fast forward six years and as we have discussed numerous times (most recently here and here) there is a bubble, potentially far bigger than subprime, in student loan debt. As one of the last remaining outlets for state-sanction credit creation, this is a big deal; but, of course, the popping of the bubble (or even a slight leak) is eschewed since there is so much 'reach for yield' and the Fed's got your back. That is until this week. As WSJ reports, Sallie Mae (SLM), the nation's largest non-government student lender just cancelled a $225 million debt offering as investors  decided they simply were not getting paid enough for risk - amid rising student loan defaults. Simply put, there's a limit to what investors will tolerate.

Wait for it... Fauxterity Austerity's fault!

• Gold Bears Defy Rally as Goldman Closes Short Wager (BBG)
• Still stuck on central-bank life support (Reuters)
• Ebbing Inflation Means More Easy Money (BBG)
• So much for socialist wealth redistribution then? François Hollande to woo French business with tax cut (FT)
• Billionaires Flee Havens as Trillions Pursued Offshore (BBG)
• Companies Feel Pinch on Sales in Europe (WSJ)
• Brussels plan will ‘kill off’ money funds (FT)
• Danes as Most-Indebted in World Resist Credit (BBG)
• Syria says prime minister survives Damascus bomb attack (Reuters)
• Syria: Al-Qaeda's battle for control of Assad's chemical weapons plant (Telegraph)
• Nokia Betting on $20 Handset as It Loses Ground on IPhone (BBG)
• Rapid rise of chat apps slims texting cash cow for mobile groups (FT)
• Calgary bitcoin exchange fighting bank backlash in Canada (Calgary Herald)

The week ahead will be driven by the heavy end-of-month data schedule. In addition to the usual key releases like ISM and payrolls and ECB meeting, this week we also get an FOMC meeting - though it will hardly see much more than a nod to the weaker activity data of late. For the ECB meeting a full refi but not a deposit rate cut are priced now.  Outside the FOMC and the ECB meeting there will be focus on the RBI meeting in India, with a 25bp cut priced in response to lower inflation numbers recently.

With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.

In the 3-d plot, we see that the current trajectory (near the bottom of the graph) is quite a bit below the trajectory during the crisis of 2008. It may be that the 2008 financial crisis was one of financial institution solvency, whereas our current crisis is starting to look like one of financial system failure. If this is the explanation for the differing trajectories then my projection is that we are going to see something we haven't seen before.  The gold-silver ratio has the potential to rise to heights never before seen. The reason is that major crises encourage hoarding and flight; and it is much easier to flee with a million dollars in gold than a million dollars in silver.

The man who is the chief advisor to the US Treasury on its debt funding and issuance strategy was just promoted to the rank of second most important person at the biggest commercial bank in the US by assets (of which it was $2.5 trillion), and second biggest commercial bank in the world. And soon, Jamie willing, Matt is set for his final promotion, whereby he will run two very different enterprises: JPMorgan Chase and, by indirect implication, United States, Inc.

And that, ladies and gentlemen, is how you take over the world.

Never forget, the “achilles heel” of anyone who’s driving aim in life is to CONTROL the lives of other people is his or her aching need to be taken “seriously”. No tyrant on any level can handle derision, it deflates them utterly by reducing their stature to its proper level in a way which they cannot escape. Imagine if they held an election and everybody laughed - and then went on about their IMPORTANT business. In essence, the people who matter in the world are fully confident that they have earned the status of adult human beings and get exasperated with those who insist on treating them as children. There are times when this tiresome tendency can grate very sharply. But most of the time, it really is screamingly funny and really should be treated as such. As Soviet dissenter Vladimir Bukovsky pointed out in his wonderful autobiography - To Build A Castle - one of the most potent weapons wielded by all those who stood up against the tyranny which surrounded them was the political joke. It won a great victory in the end.

A few hours ago, Greek lawmakers approved a reform law to unlock about €8.8 billion of rescue loans from the European Union and the International Monetary Fund. The law, which was a condition for further aid installments, passed easily with the solid backing of the three parties comprising Greece's ruling coalition, by 168 to 123 votes. Next, euro zone officials will meet on Monday to approve overdue payment of 2.8 billion euros ($3.65 billion) in rescue loans, finance minister Yannis Stournaras said. Euro zone finmins will then meet on May 13 to release a further 6 billion euro installment, he added. The use of proceeds? To have enough cash to pay salaries and pensions, and of course to pay Mario Draghi for a bond that matures on May 20. The fact that Europe has gotten the green sign to hand over some pocket change to Greece, so Greece can pay for the maturity on Greek bonds by the ECB was the good news (for someone, unclear exactly who). The bad news, for Greece, starts now. As BBC reports, some 15,000 state workers will lose their jobs by the end of next year. Naturally, in light of the recent epic backlash against austerity (or fauxterity as penned previously) whose corpse has already promptly been trampled in Spain, and now in Italy, Greece would like to get back on the gravy train as well. Yet they are being denied, and the result is indignation at what the people rightfully see as B-class European citizen treatment.

While suicides out of desperation had long been a tragic, if recurring, staple in depressionary Europe, so far popular anger had been directed at within, with few if any murderous outbursts targeted at other people, and certainly not at politicians (or financiers). This obviously has been a critical aspect of the current economic collapse in Europe - one needs but recall that it was a political assassination that sparked World War I in Sarajevo, and indirectly, via the Weimar collapse of Germany, set the stage for World War II, leading to the death of tens of millions around the globe. Today we came close. As the AP reports, during today's swearing in ceremony of Italy's new pseudo-technocrat yet anti-austerity government which has the blessings of Berlusconi, an "unemployed Italian gunman shot and seriously wounded two policemen Sunday in a square outside the premier's office in Rome, but he "wanted to shoot politicians," Rome prosecutor Pierfilippo Laviani said.

We have commented numerous times on the inexorable rise in Spanish non-performing loans (NPLs). Since the Spanish economy started to weaken at the end of 2006, NPLs have been rising sharply; but the subsequent collapse of the Spanish property market exacerbated the matter further, causing a spike in NPLs in 2007 and 2008. Since then, the Euro area crisis and subsequent sharp rise in unemployment have led NPLs at Spanish banks to make new record highs. However, they are not alone. Italian banks did not suffer a property market collapse and so the rise in NPLs started later than in Spain and was not as severe. However, as JPMorgan notes, the sharp rise in unemployment we have seen since mid 2011 has led to an acceleration in NPLs at Italian banks. What should be most worrying for incoming PM Letta, is that from the respective troughs for each country (the trough for Spain was a lot earlier than for Italy, about two years in actual fact), Italy is looking eerily similar. The rise in NPLs at Spanish banks over the past two years has had a lot to do with the recession and rise in unemployment. To the extent that Italian unemployment has only started to rise sharply a year and a half ago, the future path for NPLs at Italian banks looks set to follow that of Spain. So why aren't bond spreads blowing wider? Answer below...

Curious what the Cypriot people think just over a month after the most dramatic European banking sector collapse in years, and subsequent first bank sector bail-in and depositor impairment ever? Courtesy of Bloomberg, which summarizes a poll conducted via Symmetron and posted in Kathimerini Cyprus we now have an idea of what the still stunned Cypriot population thinks.

Having lost your older son in an stand off with the police, the younger one gravely wounded and recently moved to maximum security prison, while alleging both have been set up by the FBI in the recent Boston Marathon bombing, what do you do? Abandon all plans to see them, apparently, despite announcing just a few days ago that burying your dead and "finding out the truth" is the main priority. At least that is that case if you are Anzor Tsarnaev, father of the Boston Marathon bombing suspects. From Reuters: "The father of the Boston Marathon bombing suspects has abandoned plans to travel to the United States to bury one son and help in the defense of the other, he told Reuters on Sunday in an interview in southern Russia."