Archive - Sep 2014 - Story

For the past five years there has been a very clear and significant cycle to US macro data.. A year ago, we explained this cycle appears to be created by government agencies need to spend, spend, spend their budgets out ahead of fiscal year-end (Sept). This year has been no different... As in past years, this spike in activity is extrapolated by the smartest people in the room, leaving the reality to miss expectations for the rest of the year. A glance at the chart below might suggest, we just jumped the shark once more in US macro data for 2014...

Just hours after the beheading of a 2nd American journalist, The White House has issued a statement:

*U.S. TO SEND ABOUT 350 MILITARY PERSONNEL TO IRAQ: WHITE HOUSE
*WHITE HOUSE SAYS ADDITIONAL FORCES WON'T SERVE IN A COMBAT ROLE

With American non-combat, humanitarian, advisers now being dispersed to the four corners of the world for non-combat, humanitarian, advisory roles; one wonders how long it will be before someone asks President Obama just what these peace-keeping non-combat personnel will be doing in their role "to protect diplomatic facilities and personnel in Baghdad."

Washington’s strategy in Iraq is in shambles, but not just because America’s spanker-in-chief is really a wimp at heart. The problem is far more generic. To wit, the geographic territory of Iraq is not a nation; it is an arbitrary series of lines on a map drawn 100 years ago by dandies in the foreign offices of two fading empires (the British and the French) - which lines encircled numerous tribes, ethnicities and religious confessions which had no interest in sharing a common statehood.

First it was socialist utopia Venezuela and now Keynesian-economics favorite playground Japan is concerned about a troubling problem - fear of a toilet-paper shortage. As WSJ reports, the Ministry of Economy, Trade and Industry is encouraging families to stockpile at least one month’s worth of toilet paper in the event of a major disaster, as they "fear there would be a serious shortage of toilet paper nationally." Ironic really, given Shinzo Abe's past 'problems'.

Is it possible, that in globally interconnected economy, the U.S. can stand alone? It certainly seems that the answer to that question is currently "yes" as financial markets hit "new all-time" highs and economic data has rebounded in the second quarter following a sharp Q1 decline. However, as is always the case, the issue of sustainability is most critical.

Last Thursday the Ukrainian government, echoed by NATO spokesmen, declared that the the Russian military is now operating within Ukraine's borders. They said the same thing before, most recently on August 13, and then on August 17, each time with either no evidence or fake evidence. But let's give them the benefit of the doubt. You be the judge. We put together this helpful list of top ten telltale signs that will allow you to determine whether indeed Russia invaded Ukraine last Thursday, or whether Thursday's announcement is yet another confabulation...

Moments ago, in an example of "very serious phrasing", none other than the bank that does god's work on earth (especially when it means providing off balance sheet financing for the bank of the Holy Spirit), just reported that the reason why China will hit its growth target is because of, drumroll, its fudged GDP. Only Goldman is far more serious when it says all of this, with the result being just too hilarious for words: to wit: "In the coming months, China’s National Bureau of Statistics is to make adjustments to the methodology used to calculate GDP. These adjustments are likely to boost real GDP growth by 0.1-0.2pp, thereby making it easier for the government to reach its goal of “around 7.5%” GDP growth in 2014."

Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place. We seem to be close to the endgame.

Today was a significant day for many markets. For the 7th time in the last 8 months, US Treasuries opened the month with weakness (30Y up 8.5bps, 2Y +3bps from Friday). Significant JPY and GBP weakness pushed the USD Index to fresh 14-month highs (+0.25% on the week). USD strength smacked gold (-$20 to $1265), silver, and crude oil significantly lower (WTI under $93 and Brent testing towards $100, both down over $3). US equities decoupled (lower) from VIX and JPY-carry around the European close after hitting new all-time highs in the early session (over 2,006 for S&P Futs). Volume was better (but then it was a down day). Despite oil weakness, Trannies took off leading the day (with Dow and S&P closing lower from Friday). Credit traded with stocks for most of the day but ignored the late-day VWAP ramp in the S&P, closing at its wides. The ubiquitous late-day buying panic saved S&P 2,000... because it can.

Here are some of the choice excerpts from the man who is baffled by a new effort to punish him, proud of past triumphs and incensed by criticism: “You’ll have to ask those people, ‘What do you have against Mozilo, what did he do?’” he said in a 30-minute call with Bloomberg News before Labor Day, one of his few interviews since the firm’s downfall. “Countrywide didn’t change. I didn’t change. The world changed.”  Mozilo doesn’t understand why he and his firm, blamed by lawmakers and authorities for lax underwriting and predatory lending, have been seen as villains. “No, no, no, we didn’t do anything wrong,” he said, adding that a real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.” Yes, the Moz talks about himself in the third person.

Do you believe in miracles? Morgan Stanley's Adam Parker does, having given up on his sane bearish case long ago, he now predicts S&P to 3,000 because "if we get EPS growth of 6% per year from 2015-2020, that would drive S&P500 earnings to near $170; a 17x multiple would translate into a peak level for the S&P500 near 3000 under this scenario." So, just some simple math, eh? But he does add, "of course, no one can predict unforeseen shocks to the economy," but they will never happen, right?

Now that the financial oligarchs have had their way with the U.S. property market, to the point that average citizens can’t even afford to own a home (Zillow recently showed that 1 in 3 homes are unaffordable), it appears they have turned their sights overseas. What better market for bailed-out bankers to feast on than Spain, with its 50%+ youth unemployment rate and a continued depressed real estate market.

While it is unclear if August's exuberant buy-it-all strategy will hold for September, the following chart from BofA should raise a few eyebrows. In August, practically all the gains for bonds (yield compression) occurred in the overnight session (from 8pmET to 6amET)...

When it comes to keeping track of China's economy, one can listen, and ignore, the official goalseeked and made-up-on-the-fly data released by the government, or one can simply observe the price dynamics of the all-important Chinese commodities sector (because with fixed investment accounting for well over 50% of GDP, the marginal price of the commodities that are used in capital investment tell us all we need to know about the true state of the Chinese economy). It is here where we find that contrary to the recent performance of the Shanghai Composite, which has been trading exclusively on the coattails of the most recent unofficial QE by the PBOC, commodity prices in China are actually crashing across the board, which in turn suggest that the real GDP is most likely anywhere between 20% and 60%, if not more, below the "official" 7.5% GDP print.

As we discussed yesterday, Vladimir Putin's apparent 'threat' to EU's Barroso that "If I want to, I can take Kiev in two weeks," prompted both anger and response as NATO reacted by stating a new "spearhead" force of 3-5,000 troops would be flown in to combat any (further) Russian aggression. However, Russia is not happy that the EC President leaked the conversation with Putin's aide Ushakov stating that recounting the private conversation was "inappropriate," "undiplomatic," and "unworthy of a serious political player." More troublingly, the cold-war-tension-like escalation from NATO has prompted Russia to revise its military doctrine to account for “changing military dangers and military threats.”