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Updated Macro Observations From Strategic Alpha

Tyler Durden's picture




 

Submitted by Maurice Pomery of Strategic Alpha

If Trichet is using the same signals as last time (and we have to imagine he is), then the hike is at the next meeting: Kiss goodbye to Spanish and Portuguese housing:

We simply have to assume that Trichet, who has deliberately used the exact same language or code words, is signalling a move as early as the next meeting or else why use the same phrase. He must have considered that the markets would come to such a conclusion. I am therefore suggesting that we price and expect this event to happen sooner than was expected and will assume that the markets will continue to force the divergence with US rates wider. Of course we will have to see if this move, when it comes, is a policy mistake and if so it will not have been the first in my view. The point is if he is right then is King wrong? Pressure from the financial press will certainly be evident.

This obsession with the slightest rise in inflation is not without its dangers and he sounded more like the head of the Bundesbank rather than the ECB to me but he has obviously got the support of the other members which I am a little surprised by. You can kiss goodbye to the Spanish housing market (what is left of it) as most mortgages are on floating rates and Portugal and the other peripherals will feel this deeply. A rise in April will be significant but bond markets are already pricing in more hikes and this looks like the end of this cycle, even though he downplayed this (the markets don’t believe this is a one off and inflation doesn’t work like that), so just how many hikes they price in for this year will be interesting to watch but pressure will surely be brought on the peripherals again and spreads need monitoring closely from today. If this is a one-off then it just does not make sense considering the fragility of the peripherals and so my view that this is a little panicky remains and may impact on growth. This inflation is not domestically grown and certainly not evident in many areas outside of Germany.

Central banks around the world have been or will be hiking as inflation continues (Korea next) from oil and food spikes but Trichet has moved before much of an effect has been seen in EU data. I can see why the commodity basket currencies we seeing rate hikes and the ballooning Chinese economy needed some tightening and still does but this move seems a shock still. There is no sign that Bernanke is anywhere near moving but pressure is mounting on the BoE so we have the USD as a massive vehicle for funding carry trades and this looks likely to become a stronger argument over time and the Dollar looks extremely exposed to further falls in my view. I believe we need to prepare ourselves for a steep and possibly fast move lower in the DXY!

Can this stance of Trichet’s have been cosmetic and do the risks warrant the forthcoming actions? He says it is not the start of a hiking cycle so does he feel that inflation, derived externally, will disappear with a 25bp hike? Was this a move to shift EONIA rates? What if the EUR goes to 1.50, are they happy with that as it is certainly not out of the question? What will that do to the peripherals as higher rates and a strong currency will surely spell disaster. Maybe this move is to placate and comfort the German people so that they can believe their interests at the central bank are being handled responsibly and so should vote for support of EU decisions. I hope not. They made a big mistake by hiking in 2008 on the back of an oil spike and seem likely again and the German economic machine may well get a spanner in the works as Chinese leading indicators suggest to me that the slowing is picking up pace and demand may fall off a cliff. That will leave Europe exposed again as last time. I do hope King and the MPC hold firm or we will be fighting a deep recession very soon. If Trichet is proved wrong on this again then the credibility of the ECB will surely be questioned. I think it will. Actively killing growth in this environment is tantamount to suicide.

It seems the market is preparing for a strong NFP number: That will not fix much as the Dollar is still headed lower on a macro basis:

Analysts are suggesting that today’s headline number is due for a surprise to the upside after weather affected data last month but it remains a lottery to me. Revisions and underlying rates may tell us a bit more but I have a serious hatred of US payrolls data as it is nothing short of a lie and does not reflect the actual swelling numbers of long-term unemployed. In fact I will go as far to say it is a disgrace. (Rant over). However keep an eye on the hours worked today as I feel this is one of the most important releases and a significant increase (0.4-0.5) will encourage many analysts to believe a turn has arrived.

Claims have now managed to get their average below 400k for the first time in a while and this seems to be encouraging those looking for a big number today. However in real terms it has to be suggested that even by pumping up the economy with massive stimulus, the employment rate has hardly been touched and this is one of the two mandates of the Fed. Equity markets took off after the claims data but they never go down seemingly for long these days. The BLS is a farce and to highlight this; official figures showed that unemployment fell sharply for a second straight month in January, the report from Bureau of Labor Statistics was unclear about how many jobs were actually created. One surveying method found 589,000 new jobs; another survey showed 36,000 new jobs. What? Pathetic, no wonder it is a lottery and to me the headline data has little real value. If we look at a professional surveying company then we get a very different picture! Gallup suggests that:  "Unemployment, as measured without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January! We are not getting the true picture in official data. It is flawed.

In my view most of the hiring is of a part-time nature as not many businesses trust the economy and nor do I as the participation rate falls and the amount of citizens discarded onto food stamps increases. I think they key to the health of the US economy is the consumer and I place a lot of importance on their expectations and behaviour now. Unit labour costs and CPI remain very low and Bernanke will not budge for some time yet on rates even if unemployment drops slightly, as he knows it may not last if the consumer starts deleveraging as I think he might. The rising cost of food and oil could spark a demand slide and quickly see the consumer back away from spending, throwing the US back towards recession. Central bankers elsewhere are killing growth with rate rises, which in developing nations like China is fine but in the developed world, the timing could not be worse and the pain inflicted on the consumer is key in the US, EU and UK alike.

This data will not influence Bernanke as it is not about data now, it is about funding the deficit and thus more spending from Obama will need more bond purchases by Bernanke as they have to take up the slack as foreign buyers continue to diversify and few seem to see this. The Feds balance sheet is ringing alarm bells to me and M2 is exploding higher. How is it that the Fed is allowed to be the biggest holder of US debt? Who authorises this extremely dangerous situation and how does he get out of it? Printing more Dollars I guess. Good Lord the Dollar is in deep, long-term trouble in my book as history confirms that printing money ends in disaster. ALWAYS.  ZIRP will continue to see money evade paper assets and look for stores of value and commodities will continue to rise until Bernanke changes his stance but I am afraid he is trapped in a “Catch 22” situation now. US real wages are falling fast and the US needs the consumer spending now to get the recovery going. That is not going to happen.

In my view the inflation impact on the EM world will come soon and the first collapse is looming large and will impact the global growth story. This is a 2011 event; no doubt. The problem is that the costs of many commodities are in USD’s. I fail to see how the Fed’s actions can stop the Dollar falling and to me it is a policy tool they are comfortable with at the Treasury and if it forces some de-pegging due to insurmountable pain or potential civil unrest in Asia or elsewhere then so be it! US monetary policy is being exported to pegged Asian economies and something will snap soon. What happens if US yields start rising again? Can Bernanke honestly stop or exit Q/E? I am not sure he can now as if he does not soak up the excess from the Treasury the US will have to restructure or default. This is now not about data but funding and investors need to realise the difference, especially on days like today as they will throw up opportunity. Just when and how can the US cut their deficit? Never in its current form!

 

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Fri, 03/04/2011 - 08:46 | 1017975 Turd Ferguson
Turd Ferguson's picture

"This NFP will not influence Bernanke as it is not about data now, it is about funding the deficit"

100% spot on.


Fri, 03/04/2011 - 09:06 | 1018010 FilthyLucre
FilthyLucre's picture

For once Bernake was telling the truth when he said there isn't enough gold to return to a gold standard. He knows how many Benny bucks exist and how many more he is going to print. Whats one hundred thousand bazillion gagillion bucks (rounded up to the nearest infinity) divided by all the US's gold (rounded down to whats actually at Ft Knox). Infinity/0 doesn't work so well.

Fri, 03/04/2011 - 09:47 | 1018129 f16hoser
f16hoser's picture

Any number devided by infinity = zero. We're doomed......

Think congress will tax the free lunch lines????????

Fri, 03/04/2011 - 09:47 | 1018135 Sophist Economicus
Sophist Economicus's picture

You know, when I hear B say that about gold I couldn't believe it!  

Geez, one ounce of gold is sufficient at a high enough price to fiat!   The scary thing is that from his expressions, it looked like he really believes that gold at $1400 is accurate and that the math doesn't compute.   I walked away thinking, "this guy isn't evil, he's just arrogant!   He really believes this is true."   Unfortunately for most, the impact of his actions are the same

Fri, 03/04/2011 - 14:26 | 1019264 cranky-old-geezer
cranky-old-geezer's picture

For once Bernake was telling the truth when he said there isn't enough gold to return to a gold standard.

No, he's LYING again.

There's PLENTY of gold to return to a gold standard.

He knows the problem is the exchange rate. 

Anyone wana guess?  $87,000 per ounce?  $123,000 per ounce? 

He'd have to pull TRILLIONS of FRNs out of the system to get the exchange rate down anywhere near today's spot price.

THAT'S why he doesn't want the Fed audited.  He's scared shitless people would find about the HUNDREDS of TRILLIONS of dollars he's created and given to cronies secretly.

Fri, 03/04/2011 - 09:09 | 1018013 Larry Darrell
Larry Darrell's picture

+ 1

And this is the reason everyone in every stock or commodity will continue to BTFD.

 

With real interest rates negative until this thing finally blows apart, there is no other option if you want to preserve any purchasing power.

Fri, 03/04/2011 - 08:51 | 1017983 johnQpublic
johnQpublic's picture

with the fed being the largest holder of our debt, why dont they just cancel or forgive that debt?

they can print more debt later after all...

Fri, 03/04/2011 - 09:21 | 1017986 falak pema
falak pema's picture

As somebody pointed out the Spain/Portugal real estate bubble is now toast. Forget it. The EU will do its share. The Mafias of the world and the EU banks who helped launder refunneling this money in will have to take a mega hair cut. The issue of the euro currency is no longer economic but now political in the intergalactic currency war now raging thanks to QE-2. The middle east and chinese/japanese oligarchies heavily support the Euro for political reasons to oblige the USD to be shelved as reserve currency. It is in their long term interests. WIll they succeed is the issue of this currency war shooting match. The BCE is playing it on both sides. Supporting the FED Ponzi and alleviating the EM demands for outsourcing surpluses into nationally denominated but ECB supported euro bonds, even if they are overdiluted by PIGS sovereign debt.

There are two linch pins to this ticking monetary grenade :

a) Merkel/German panicking to pull the plug on the ECB's Ponzi. But if she does she kill's Germany's MAIN export market : Europe. Current deadline for this reappraisal is 2013. But in reality it will occur much earlier as the events are now in ME fed crisis mode.

b) The USD starts collapsing under strain of QE running out of steam and the prime dealers/hedge funds moving massively out of stocks into bonds/PM commodities. In this case the FED throws in the towel and the asset correction and the Great Depression occurs. US GDP falls by 30% like in EU. It could tank the world economic system. The Chinese and the US would like this to happen five years down the road, for different reasons. But the current ME spiral and its unknown but very toxic fall-out looks like it will make it unravel faster then later.

 

Life jackets everyone!

Fri, 03/04/2011 - 08:57 | 1017990 John Law Lives
John Law Lives's picture

Washington DC has no collective will to cut spending.  The Ben Bernank is a good little puppet who accommodates Washington DC.  Print money and spend it and rack up more debt and create inflation.  What a vicious cycle.

Fri, 03/04/2011 - 09:02 | 1017997 westboundnup
westboundnup's picture

When the market surged mid-week, I saw a CNBC commentator on the floor of the exchange stating neither he nor any of his colleagues had any idea why it was occuring given that the price of oil remained high, no significant positive economic indicators, etc.  What was jarring to me is that it was clear that he was lying by just looking at him.  Clearly he knew what was driving the market, but feigned ignorance.  While some may find it a pretty basic assumption that financial commentators engage in spin, it is disconcerting to see it occur live and with such little effort at masking.

Fri, 03/04/2011 - 09:03 | 1018005 Sophist Economicus
Sophist Economicus's picture

It is amazing to me how Trichet can play these FX guys like a fiddle.   He is screwed.  Jawboning is his only weapon.   The energy wasted on this crap because of the world's defective monetary system is incredible

Fri, 03/04/2011 - 09:13 | 1018017 Robslob
Robslob's picture

what is to be derived from the observation is the point...

these guys are seeing their living disappear before their eyes...no one will ever again invest in what they sell for the balance of their lifetimes...that was the look you saw...finally realizing what you do brings no value AND having it exposed...Priceless

Fri, 03/04/2011 - 09:14 | 1018020 Monday1929
Monday1929's picture

Unless he is a sociopath, How does bernanke sleep at night?

Fri, 03/04/2011 - 13:00 | 1019097 dizzyfingers
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You answered your own question - he IS a sociopath. They're everywhere.

 

 

Fri, 03/04/2011 - 09:16 | 1018025 overmedicatedun...
overmedicatedundersexed's picture

the economy is improving UE is dropping about time for Harry to jump in with exploding home decorations sales and new business contacts who are hitting decade high sales.. Harry, Harry?

Fri, 03/04/2011 - 09:16 | 1018026 Johnny Lawrence
Johnny Lawrence's picture

Who are these people?

 

“The labor market has passed an important threshold and is starting to create a good number of jobs,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s partly a snow-related rebound, but I think there’s some real substance there. We’re looking for jobs to run 200,000 plus in coming months as the recovery reaches the self- sustainable stage.”

Fri, 03/04/2011 - 09:28 | 1018047 falak pema
falak pema's picture

Men from mars, sons of ET, mission controlled aliens subcontracted by FED to support the myth of asset market's levitation. There is so much liquidity around and so few real places to invest it. It's velocity into temporary labour creation is awesome. But will it last?...ask Hamlet...is he in his usual mood...has he seen the Ghost yet?

Fri, 03/04/2011 - 09:39 | 1018079 Josh Randall
Josh Randall's picture

On the Euro and bailouts - What will Merkel do now that she and her party are getting their lunch handed to them by the German Voters? If Ireland kicks the bankers and their phony debt in the crotch, then the Euro will be on an express elevator to hell going down fast.

Merkel yelling "Euro Akbar" while she runs throwing money down a rat hole wont leave her a legacy of anything other than of a complete failure.

 

Should make for some interesting couple of weeks in Euro Disney Land

Mon, 03/07/2011 - 20:41 | 1028073 lsjcma
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