Rosenberg's Musings On The Global Bailout And Other Things
Rosie's latest (via Gluskin Sheff) indicates an increasing skepticism with the Eurozone, and with a world generally still enamored with the bailout mentality:
The intense risk aversion of the past week is fading somewhat with global equities rallying. Asian equity markets are up for the second day in a row (+0.3%) and European bourses love the bailout chatter.
Bonds are on an even keel despite today’s $25 billion 10-year Treasury note offering but this comes after yesterday’s sharp backup in Treasury yields (even with a decent 3-year note auction). The German bund market is selling off discernibly right now even if U.S. and Japanese yields are tad lower. The U.S. dollar’s sharp climb seems to have been curbed and as such the commodity complex has a small bid to it at the current time (see more below).
Here we are, 2½ years into the global credit crunch and investors are still salivating over bailout prospects — the chatter is that the troubled European countries, Greece in particular, is on the precipice of receiving such a package, primarily, it seems, in the form of German loan guarantees. So, what we see today is Greek bond yields plunging and German bund yields on the rise. Great deal for the German taxpayer, don’t you think? Maybe it should be the Deutschland that plans an exit strategy (Martin Wolf’s column in today’s FT, and its dire conclusion, is worth reading — “a currency union whose core country not only exports deflation but also stands aside as members collapse is in deep trouble”). Investors seem to be believe that such a lifeline is being made available because the cost of insuring Greek bonds against default (CDS spreads) have collapsed 36bps, to 343bps (and down 15bps for Portugal, to 189bps since one bailout will most certainly beget another — this is a classic example of PIGS (Portugal, Ireland, Greece, and Spain) lining up at the trough).
Even so, the draconian budget cuts looming in many European countries is certainly going to pose a drag on growth forecasts in the continent and globally as well; all the more so with China and India swinging from policy stimulus to restraint and the Fed planning its own exit plan. Watch Bernanke today — and look at Chart 1 below — the Fed is concerned about being politicized and yet at the same time it is holding $1 trillion of ‘motherhood’ home loans in its balance sheet!
Maybe the economists are also going to have to take a knife to the global GDP forecast in the aftermath of some pretty sad industrial output numbers out of France (-0.1% MoM in December) and Italy (-0.7% MoM). Moreover, the Bank of England sliced its projection for U.K. growth (even though its manufacturing data came in above expected) and also stated that the risk is that inflation will UNDERSHOOT its targets (a hint that aggressive monetary policy stimulus measures will remain intact for some time). On the trivia front, China officially surpassed Germany as the number one exporter in the world in 2009 — $1.2 trillion to $1.1 trillion.
Combine this with increasing risk away from the PIIGS and a topic near and dear to Zero Hedge's hearts, namely the massive roll in Treasuries, and you have a sure recipe for near-term disaster.
While the focus has been on Greece in particular, and the PIGS in general, let’s not forget that fiscal strains are evident everywhere from the U.K., to Japan, to the U.S.A. (and several states). The U.S. has a record $2½ trillion of new borrowing requirements this year (nearly 20% of GDP that has to be financed or rolled over). Fully 75% of U.S. federal debt ($4.7 trillion) comes due in the next five years and that number is still rising — the average term to maturity is nearly four years.
The stresses in the private sector, especially the U.S. mortgage market, are still in place. Another wave of foreclosed units will be hitting the market unleashing a fresh wave of deflation in residential real estate. In fact, what is particularly ominous is that 1 in 15 of folks out there who are delinquent on their mortgages are actually current on their credit cards! Remember all those option-adjustable rate mortgages issued between 2004 and 2007 ($230 billion worth)? Well, they come due starting now and through 2012 and it will be interesting to see who bails these folks out as their interest rate gets reset into the stratosphere.
GDP downward revisions already starting to percolate. Good thing the market has priced in a 5.7% number. What happens after the first official downward revision? The Second?
The U.S. wholesale trade report was soft with inventories posting a 0.8% December drop, which followed a 1.6% increase in November. Together with the 0.1% drop in December factory inventories, we could well see that 5.7% initial GDP headline print trimmed to 5.5% — but there is much more information still to come. As we have said, that 5.7% estimate for Q4 is ripe for revision just as the 3.5% initial take in Q3 was taken down 2.2%.
The outlook? Deflation:
With regard to the U.S. housing market, there remains a glaring supply-demand imbalance that can only mean more deflation ahead. There are 231,000 vacant newly-built housing units for sale. On top of that, we have 3.29 million existing owner-occupied housing units listed for sale. Then we have 3.5 million empty housing units for sale that have been taken off the market for unspecified reasons (this is the fabled shadow inventory via the foreclosure process). Right there we have over seven million of supply overhanging the residential real estate market, and there are 112 million homeownership units, so this classifies as a 6.3% total vacancy rate. At the same time, we have a competing rental vacancy rate of nearly 11% and the homeownership sector is also battling it out against an apartment market where median asking rents have come down an average of 3.5% over the past year and the decline is accelerating. Inflation indeed.
For the chartists out there, Rosie points out that copper has become a viable coincident indicator. Based on this trend, prepare for much more market downside.
Not only do we have a new economic indicator to chew on but we have a new market barometer to gauge as well. The ever-reliable ‘The Short View’ column in the FT (page 15) runs with a new metric to look at — the copper/gold ratio. The copper price reflects global economic activity and gold reflects financial stability. Indeed, we checked it out and the ratio does have a 95% correlation with movements in the stock market.