Archive - May 31, 2013 - Story

Sadly, that "something" has nothing to do with the real economy, but it has everything to do with the stock market which is all that matters to the Fed. Presenting the Adjusted Reserves held by Fed banks: it is, logically, at a fresh all time high. This is the low-powered money that due to capital allocation preferences continues to go, every day for the past 4 years, not into the broader economy (blame it on the 2s10s, or the disastrous state of the US consumer who has no desire for loans, or what have you) but straight into the S&P500. Since the full blown launch of QE3 excess bank reserves have grown by $500 billion, or roughly a 30% increase in six months. Which is also the reason why the S&P has correlated not with any actual fundamental data, but only this chart for the past 6 or so months.

Ireland has seen its youth unemployment rate drop for 10 of the last 11 months and has dropped to a 'mere' 26.6% - the lowest since July 2010 - in what is truly the only possible silver lining in today's absolutely dreadful data release. All four of the other PIIGS nations now have broken the dismal Maginot Line of 40% youth unemployment with Italy finally joining the club (Italy 40.5%, Portugal 42.5%, Spain 58.2%, and Greece 62.5%). What is even more concerning is that not only are these rates extremely high but they are accelerating with all four of these dark nations seeing their rates rising faster than in recent months (this was the 2nd fastest rise in Greek youth unemployment ever). Overall, Europe's youth unemployment rate continues to march higher (to 24.4%) having not fallen for 24 months, but it is Spain that is the 'winner' with 41 consecutive months without a drop in youth unemployment. With welfare benefits running dry, and Sweden and Switzerland already running hot, we fear this summer may bring the much-feared unrest so many have been concerned about.

In yet another confirmation that the US consumer continues to get slammed, and is respectively slamming the GDP by spending less, today's April personal spending and personal income both missed expectations, printing flat and declining -0.2% from the March numbers, much as expected following the Q1 spending spree, which means that economic growth in Q2 and onward as a function of consumer spending will only "taper" going forward especially with the delayed impacts of the payroll tax negative effect on spending finally starting to trickle down. What's worse, is that since incomes did not improve in April, the savings rate remained flat at a minuscule 2.5%, or just off the lowest its has been since the start of the Second Great Fed-propped Depression.

Weakness in gold and silver is leading to robust demand internationally as store of value buyers accumulate gold and silver on this dip. This is particularly the case in Asia where premiums remain robust and supply demand imbalances remain. The persistent strong demand of this week began on the price falls in April. This demand is clearly seen in the London gold and silver trading data released by the London Bullion Market Association (LBMA) yesterday. London gold trading jumped to a 20 month high in April and silver volumes surged 25% after the price falls led to an increase in physical buying, the LBMA said in a report. Trading in gold averaged 24.1 million ounces a day in the London market, the most for any month since gold reached record nominal highs in August 2011, the LBMA said in a statement yesterday as reported by Bloomberg.  The 24.1 million ounces was a 10% increase on March when 21.8 million ounces a day were traded. Silver volume surged nearly 25% to 165.2 million ounces a day, up from 132.5 million ounces in March. There were 5,395 gold transactions on average per day, the highest on record, while silver transfers at 1,007 a day were the second-highest ever, according to the report.

The European Union is leading the nations of Europe nowhere. They have sat there and languished in their own self-adoration, propped up their egos on self-congratulation and flounced recitals of praise fluffed and huffed by one politician and told to another. They have a central bank promising what cannot be delivered and they have used up all of their capital to buy the debt they have created to support the artifice. Then having mutilated the pension funds of their citizens and having pressured every money manager on the Continent they congratulate themselves on their lower yields. They see a road without end; we can see the end. They congratulate themselves; we yawn as the mumbo jumbo continues.

If the scramble to hit 100% unemployment was a race, then Europe is about to leap the rest of the world.

• Record unemployment, low inflation underline Europe's pain (Reuters)
• The ponzi gets bigger and bigger: Spanish banks up sovereign bond holdings by more than 10% (FT)
• California Lawmakers Turn Down Moratorium on Fracking (BBG)
• China’s Growing Ranks of Elderly Beset by Depression, Study Says (BBG)
• Tokyo Prepares for a Once-in-200-Year Flood to Top Sandy (BBG)
• Morgan Stanley Cutting Correlation Unit Added $50 Billion (BBG)
• IMF warns over yen weakness (FT)
• Rising radioactive spills leave Fukushima fishermen floundering (Reuters)
• India records slowest growth in a decade (FT)

The missing link to Japan's Abenomic recovery is and will be wage inflation: without it, soaring import costs which have more than offset any benefits from a modest rise in exports (and a still negative trade balance), will be for nothing, and if the wealth effect begins slowing or, heaven forbid, reversing, and the USDJPY slides back under 100 dragging the Nikkei down with it and all those hedge funds who scrambled into Japan with hopes of get rich quick dreams exit stage left, all bets are off. The result, ironically, would be an even worse bout of deflation than the country had in the recent past as all Abenomics will have done is pulled demand forward driven by transitory stock market gains, while far stickier import energy costs hammer the consumer's discretionary cash flow. In the meantime, corporations aren't waiting, and in a need to protect their bottom lines are doing to selling prices what they have zero intention of doing to wages and costs: hiking them. So following in the footsteps of many other luxury, and not so luxury, goods makers, Apple was the latest to announce overnight that it is hiking the prices of select iPad and iPod models by 16% and 14% respectively.

Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.