June 3rd, 2011
Credit markets have been performing well all year. The returns, while not outstanding have been incredibly consistent. There has been an eerie calm to the market. Most people are bullish on corporate credit - even those who don't like the overall yields argue that the spreads are attractive. That may be true, but two leading indicators of potential trouble in the credit market have popped onto my radar screen
I've repeatedly pointed out that Wall Street executives are incentivized to lie, cheat and steal. So - of course - they will continue to lie, cheat and steal. Politicians are EXACTLY the same ...
Will the biggest acquisition in its 36-year history give Microsoft a leg up on Google and Apple?
Food stamps, my pops, and another look at a trillion.
Just in case the broad speculator public did not get the message earlier this week after the CME lowered ES margins, just in time for the market to sell off and send realized vol surging (while of course ignoring plunging vol in gold, silver and all other commodities), the CME has completed the "paint by Rahmian numbers" puzzle, and has made clear which other asset class has the investment "go ahead" by the administration. As of a few minutes ago, the initial and outright margins for 10Y and 30 Y Treasury Bond Futures, 10 Year On The Runs, 7 Year Interest Rate Swaps and LT US Treasury Bond Futures were all lowered by up to 19%. Good thing the move comes 4 weeks before the end of QE 2. Were it to just precede, or, gasp, coincide with June 30, one may get ideas that this is not quote unquote risk management, such as that expressly not exhibited by the CME's refusal to hike ES margins following their cut, but is nothing but another glaringly obvious means of directing speculative capital into preferred asset classes.
Probably the most imprtant secular trend in recent employment data, one that has a far greater impact on the macroeconomic themes than Birth/Death and seasonal adjustment manipulated month to month shifts in the employment pool per either the household or establishment surveys, is the labor share of national income. In a 2004 paper from the St. Louis Fed, the authors make the following statement: "The allocation of national income between workers and the owners of capital is considered one of the more remarkably stable relationships in the U.S. economy. As a general rule of thumb, economists often cite labor’s share of income to be about two-thirds of national income—although the exact figure is sensitive to the specific data used to calculate the ratio. Over time, this ratio has shown no clear tendency to rise or fall." It would be wonderful if this was true, and thus if the US population really had a stable distribution of income between laborers and capital owners. Alas it is dead wrong. In fact, as the latest note from David Rosenberg points out, the "labor share of national income has fallen to its lower level in modern history - down to 57.5% in the first quarter from 57.6% in the fourth quarter of last year, 57.8% a year ago, and 59.8% when the recovery began." And here is where the Marxist-Leninist party of the US should pay particular attention: "some recovery it has been - a recovery in which labor's share of the spoils has declined to unprecedented levels."
"I have said it's worse than Chernobyl and I’ll stand by that. There was an enormous amount of radiation given out in the first two to three weeks of the event. And add the wind and blowing in-land. It could very well have brought the nation of Japan to its knees. I mean, there is so much contamination that luckily wound up in the Pacific Ocean as compared to across the nation of Japan - it could have cut Japan in half. But now the winds have turned, so they are heading to the south toward Tokyo and now my concern and my advice to friends that if there is a severe aftershock and the Unit 4 building collapses, leave. We are well beyond where any science has ever gone at that point and nuclear fuel lying on the ground and getting hot is not a condition that anyone has ever analyzed." So cautions Arnie Gundersen, widely-regarded to be the best nuclear analyst covering Japan's Fukushima disaster. The situation on the ground at the crippled reactors remains precarious and at a minimum it will be years before it can be hoped to be truly contained. In the near term, the reactors remain particularly vulnerable to sizable aftershocks, which still have decent probability of occuring. On top of this is a growing threat of 'hot particle' contamination risk to more populated areas as weather patterns shift with the typhoon season and groundwater seepage.
Pictures are worth a thousand words. These pictures tell the story of QE.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 03/06/11
As we predicted last week, the tide has turned in the futures market, where after 4 weeks of steep declines, the net EUR non-commercial specs have finally posted a pick up. And considering they are delayed by about 700 pips, after the pair has surged since May 23, expect what will likely be the biggest surge in net long EUR exposure next week. In the week ended May 31, there were 21,970 net longs, compared to 19.129 in the week prior, and 99,516 on May 3, when the EURUSD was flirting with the 1.50 mark. We expect a pick up of at least 30-40k contracts in the next week as all latecomer shorts promptly cover. Elsewhere, the short covering spree in the USD continues but not for long: look for the most recent net long exposure of 4,787 to promptly flip and go negative once again as more and more begin anticipating another Monetary Easing episode. And out east, the net JPY exposure went bearish fror the first time sine May 3, with net exposure dropping from 8,006 contracts to -1,648. The technicals at this point indicate a break of recent EURUSD resistance in the 1.50 area is very much possible.
Someone keep an eye on Waddell and Reed at all times. Repeat: all times. Because once they, and the market, and the Troica realize that the passage of Bailout 2 will lead to a revolution, it will get very, very interesting. "Protesters belonging to the left-wing The All-Workers Militant Front (PAME) union unfolded a giant banner from the roof of the finance ministry building on the central Syntagma square, calling for a nationwide strike against the new austerity measures that the government agreed to take in return for the new bailout package. "From dawn today forces of PAME have symbolically occupied the finance ministry, calling on workers to rise, organize their struggle and prevent the government's barbarous and anti-popular measures from passing," the front said, AFP reported."
It has been a few weeks since Goldman's FX strategist Tom Stolper made a public appearance. Which is reasonable: after all the EURUSD dipped as low as 1.39 about ten days ago, a level which threatened to stop out Stolper's 1.55 EURUSD target at a loss. Luckily for the GS FX strategist, this is about the time when the G7 decided it was its imperative to once again impair Europe in exchange for sending US stocks higher (i.e., DXY down, RUT up), alas the decision came at a very bad time for the US economy, which was just entering the worst 10 day period of declining growth since last summer. Either way, now that the EURUSD has retraced a massive 630 pips move in the past 10 days, Stolper has once again shown his head, issuing yet another hit piece on the USD. And what a hit piece it is: "...he upcoming balance of payment data will likely show a notable
deterioration in the BBoP. Finally, US policymakers seem to be making
little or no progress on fiscal consolidation with Moody’s now also
warning about the consequences of hitting the debt ceiling in early
August. We remain short the USD against the EUR, CNY, MYR, PHP, and now also the NOK." Ok, we get how you feel... But what is the prop desk doing?
Last off he will be able to see the sun, and not mere reflections of him swimming in debts, but he will see him in his own proper place, and not indebted in another; and he will contemplate him as he is, a debt free man.
Anything negative can be called “transitory.” Commodity prices are rising, I am nervous. Don’t worry, it’s transitory. Wait a minute, now the economic statistics are rolling over? Transitory! But Bernank, I don’t have a job and just joined the ranks of record food stamp participation (it is now 44 million people). Quiet sheep, let the adults deal with it. Besides, it’s…well you get it. So the brilliance of it all is that no matter how bad things get, some talking head can come out there and tell you it’s temporary. The term “soft patch” is just a another way of saying it. Not only is it a way to give a downtrodden people hope while they are being robbed, but it also allows for additional time for the Central Bankers to put the final nail in your coffin. All Americans have to do to look at our future is pay attention to what is being done to Greece and Ireland. Greece of course is furthest along the path to becoming a slave colony of the European banks and their puppets at the ECB. They are being told to sell off assets in order to protect the bond values of insolvent banks. This is simply a leveraged buyout of Greece by those that control the distribution channel of money. When EVERYONE is broke, the player that comes out on top is the one that can create the money versus the one that cannot.
Watch the teleprompter advise the president on the correct choice of words at his address to workers at a Fiat, pardon Chrysler Group, Toledo supplier park, during which he will have to explain why both fiscal and monetary policy (read Keynesianism) is now a confirmed failure. But far from Austrian economics finally get the respect it so much deserves, this will merely retrench the current idiotic policies - just read any column by Krugman demand doubling down on stimulus post haste: that's what happens with junkies - it never ends, and in fact the "last" does must always be more and more and more...