In a strange coincidence, President Obama, as reported by Bloomberg, just followed Mario Monti's new normal and 'came clean' about the real state of the economy, following his earlier snafu:
*OBAMA SAYS `ABSOLUTELY CLEAR' ECONOMY NOT FINE, AP SAYS
*AP SAYS OBAMA SEEKS TO CLARIFY PRIVATE SECTOR REMARKS
The President went on to say that he knows the economy "needs to be strengthened" while clinging to his basic belief that there has been some momentum. Is 'truth' the new 'lie'? Or did hope and change just change on less hope?
The S&P 500 gained over 3.5% this week (with a dip-and-rip today on dismal volume). This is the best week of the year amid the lowest volume of the year (ex-holiday weeks). Gold, Stocks, Treasury yields, and the USD all recoupled from last Friday's decoupling and limped higher, ending at the top of the day's range today. Financials and Tech outperformed - up over 1.1% - with the majors best as financials won on the week +4.8%. Treasuries close to close were dull but intraday saw rather notable vol as 30Y yields dropped over 10bps before round-tripping back to its high yields of the day. All-in-all, broad risk assets did leak higher today but nothing like as exuberantly as stocks which was somewhat surprising into a weekend likely full of equity dilution for Spanish banks (and more burden for Spain) - or none at all. The USD rallied into the European close and sold off after for the fifth day in a row. HYG outran stocks on the day and maintained the bid (ES closed at overnight highs) but IG and HY credit lagged on the day - though are al better on the week. Cross asset-class correlations dropped notably into the close, as implied correlation dropped and VIX was very stable given the rally into the close, holding above 21% - even as S&P 500 e-mini futures ended the day more than 2 sigma above VWAP (as we suspect futures roll effects kept some out into the weekend). Lastly, this push higher today in stocks saw a major drop in average trade size - certainly not offering the kind of follow through to yesterday's (or the week's) gains that one would expect on a new bull leg.
Moments ago the following headline flashed across the Bloomberg terminal:
- Sentiment Improves Ahead of Weekend Eurogroup Meeting
All one can do here is laugh - we can discuss how this is simply the latest idiotic case of perpetual deja vu, where a broke continent sits down, orders catering service, only to realizes it is broker than before, but not before scheduling its next meeting, while Jean-Claude Juncker utters some more lies... or we can simply once again present David Einhorn's brilliant summation of the sequence of motions that the USS Troikatanic goes through every single time as it achieves absolutely nothing.
We can only assume that the technocrat-in-chief of Italy, Mario Monti, has read the second chapter of 'how to be a European leader' as he switches from Juncker's "When it's bad, you have to lie" mantra to "Maybe the real truth will scare 'em into it" as he pushes the spending of other people's money and a growth agenda (which of course will solve all the insolvency problems). As Bloomberg reports, the blackmail negotiations threats continue:
*MONTI SAYS THERE IS PERMANENT RISK OF CONTAGION IN EURO ZONE
*MONTI SAYS SPAIN BEING DEALT WITH PROMPTLY, ADEQUATELY
*MONTI SAYS EU NEEDS GROWTH POLICIES QUICKLY TO STOP CONTAGION
*MONTI SAYS MARKETS DEMANDING EUROPEAN GROWTH
Perhaps he just noticed the underperformance of Italian bonds the last day or two and just how this will rapidly spill back into his back-yard.
When you hear two politicians in the US going toe to toe arguing about public finances (i.e. money that isn’t theirs), they’ll often cite numbers published by the Congressional Budget Office (CBO). In political circles, the CBO is considered an honest broker - an objective referee that simply presents the facts without taking a position on the numbers. Today they’ve released an infographic showing America’s debt to GDP ratio over the last 100-years, through World War I, the Great Depression, World War II, the Nixon Gold shock, and the Global Financial Crisis. For what it’s worth, both of the CBO’s scenarios for future debt growth seem absurd underpinned by an even larger assumption– that the status quo is maintained, i.e. the United States remains the world’s most powerful economic force, can print currency at will without consequence, and can inspire foreigners to buy Treasuries. Rather than relying on some bureaucrat, though, history is really the best indicator for what will happen in the future. It may not repeat, but it’ll certainly rhyme. And history shows that the long-term likelihood is financial repression, severe inflation, and/or default.
Rick Davis of The Consumer Metrics Institute plays Clark Kent to Charles Biderman's Superman as the two dig into the latest GDP data. Critically, they break down the components and using inflation levels (CPI-U or The BPP) that make some sense Davis and Biderman are "really worried" that the real economy appears to be in a contractionary state if inflation is adjusted for correctly. Even the anemic BEA's 1.88% growth rate is 'very very poor' for an economy that is supposed to be 3 years into a recovery. The per-capita income (the money available to all households to spend) actually shrank - even using the BEA's inflation data. This juxtaposes shrinking household disposable income with a real economy supposedly growing (though slowly) which was driven almost exclusively by consumer spending - leaving Davis and Biderman questioning 'where this money is coming from?'. The simple answer is the savings rate has plunged, freeing up over $200bn in annual spending (and student loans have added another $100bn, refis $50bn, and strategic defaults $80bn) - all unsustainable one-time increases. Spending is not coming from income. Davis concludes that the BEA is notoriously bad at calling turning points (only getting the Great Recession 'direction' correct after 16 months and magnitude after 40 months) - leaving him of the opinion that we may well be in the first quarter of the next recession.
"The global banking system is functionally insolvent and will fail without exogenous policy action" is how QBAMCO's Paul Brodsky begins his latest treatise noting that asset monetization (and in, particular, gold monetization) would solve many more problems than it would create. The negatives would merely recognize the balance sheet damage already done and beginning to be manifest (first, in the private sector and now, increasingly in the public sector). The global economy is threatened because, in real terms, it continues to misallocate capital and rolling unfunded debts and debating in the political sphere over the merits and risks of unfunded growth or policy-administered national austerity programs is a futile endeavor. The math suggests strongly neither can work. Brodsky is convinced policy-administered asset monetization would stop the global financial system from seizing, restore sorely needed economic balance, and reset commercial incentives so that real growth can once again gain traction.
"Fortress Paper Ltd. announces that its wholly-owned subsidiary, Landqart AG, a leading manufacturer of banknote and security papers, has had a material banknote order reinstated. This order was unexpectedly suspended in the fourth quarter of 2011 which negatively impacted the financial results of Landqart's operations in the first half of 2012."
Reports citing European sources state that Eurozone finance ministry officials, followed by finance ministers themselves, will hold conference calls on Saturday. A formal request for Spanish EFSF/ESM/IMF support, solely for the purposes of bank recapitalization, could be announced after these calls, and appears to be the motivation for them. As JPMorgan notes, while the timing of such a request would come as something of a surprise, the substance does not. A key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain's chances of avoiding a broader support package. Our best guess is that it will not as JPMorgan believe that this is merely a stepping stone to a broader package of support for Spain and that the request for support has at least three negative consequences.
"The next stage in the crisis will be blatant blackmail....
With their refusal to accept money from the bailout fund to recapitalize their banks, the Spanish are not far from causing the entire system to explode. They clearly figure that the Germans will lose their nerve and agree to rehabilitate their banks for them without demanding any guarantee in return that things will take a lasting turn for the better."
With a quiet start and more violent end to the week, Europe was a technical mess across asset classes. Sovereign bond strength through Thursday seemed much more a story of a missing CDS market (Monday and Tuesday) and basis traders into the end of the week than any underlying confidence. As Spain's and Italy's basis (the spread between CDS and bonds) pushed back up and over zero so sure enough Friday saw their bonds underperforming. Further banking system bailout fears weighing on debt concerns and the contagion to Italy were evident as Italy and Spain gavce up most of the week's gains into the close. Notably France and Austria were significantly wider on the week (burden-sharing). The bailout hopes spureed significant outperformance in European financial credit spreads - both relative to their stocks and the broad credit market overall. The long credit, short stock trade played out as the capital structure effects of any banking bailout were figured into dilution or further encumbrance of whatever equity value is deemed left. Swiss 2Y rates plunged under -30bps today and EURUSD weakened notably (almost roundtripping the week's strength) as clearly the seeming positives of the word 'bailout' are beginning to sink into the reality of what more debt, more encumbrance, and more stigma means for banks and sovereigns now more and more closely tied thanks to LTRO.
We're like a sprawling family bickering over the inheritance: we'll keep arguing over who deserves what until the inheritance is gone. That will trigger one final outburst of finger-pointing, resentment and betrayal, and then we'll go do something else to get by. The "solution" is thus collapse. This model has been very effectively explored in The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization by Thomas Homer-Dixon. The basic idea is that when the carrying costs of the society exceed its output, the whole contraption collapses. The political adjunct to this systemic implosion is that the productive people just stop supporting the Status Quo because it's become too burdensome. The calculus of self-interest shifts from supporting the bloated, marginal-return Status Quo to abandoning it.
So the root problem is the system, human nature, blah blah blah. There are no "solutions" that can fix those defaults. The "solution" is collapse, as only collapse will force everyone to go do something more sustainable to get by.
The significant rise in global systemic risk that occurred in 2008 remained until mid 2010 when it began to subside a little as Jackson Hole and QE2 seemed to allay fears somewhat. However, in the last year or so, BofA's market fragility index has soared higher alarmingly signaling higher systemic risks than in the peak pre-Lehman era. This confirms the massively elevated signal for global systemic risk that credit markets are also sending.
Just as predicted earlier, the GDP downgrades begin.
We revised down our Q2 GDP tracking estimate by two tenths to +1.8% (quarter-over-quarter, annualized) from +2.0% previously. The downward revision primarily reflects weaker-than-expected real export growth in April. This was partly offset by stronger than expected wholesale inventories, which increased by 0.6% (month-over-month) in April.
Surely this explains why the market is about to turn green.