We have been very active in our discussions of the impact of the pending rise in food prices around the world (from central bank largesse to weather-related chaos). As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years. Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly in the October prints at the latest. While the effects, for now, are expected to be less extreme than the 2010-2011 episode, the timing as the US enters its fiscal-cliff-prone malaise, could mean a further round of easing will reignite this critical inflationary concern.
UPDATE:*JPMORGAN CFO EXPECTED TO STEP DOWN: WSJ
Jamie "The Europeans have the will, but no way; The US has the way, but no will." Dimon had a very open and wide-ranging discussion with the Council on Foreign Relations today. The conversation ranged from the unfairness of the Bear Stearns' deal (poor chap - all that very limited downside from $2/BSC share, at least initially) to the immediate threat of the pending Fiscal Cliff - and his $100mm-debt-ceiling-preparedness war-room bunker, and America's longer-term fiscal profligacy (vigilantes moving against the US bond market is virtually assured - question is when and how). He also discussed the London Whale 'error' and went on to discuss the Greeks and the Eurozone's political and economic debacle in general. Some significant anti-administration rhetoric (ironic really), summed up with the veiled threat "Hey folks, if you think Washington and American Business can go to war with each other and it ends good - terrible error!"
Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that - to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.
Starting shortly will be the initial press-conference of the Tokyo IMF meetings. We hope Ms. Lagarde has her pre-requisite reading done, is tanned appropriately, and has the teleprompter turned to autocue... live webcast below - will she take questions from any Irish reporters?
The US economy grew at a 1.65% pace in the first half of the year and, according to Bloomberg Brief's chief economist Jo Brusuelas, is now tracking at a 1.5% pace of growth. The IMF's dour outlook for the world's economy has been shoulder-shrugged by many but in this compendium of everything you need to know about the US economic outlook but were afraid to ask, Brusuelas provides the facts and nothing but the facts. From slack in the labor markets, to a slowdown in investment and soft household spending, even the Fed's unprecedented QEternity is unlikely to grab us back from the edge of a malaise-like sub-2% consensus forecast for Q4.
It seems our recent re-introduction of the world to Robert Triffin has struck a note among a number of market participants. The gold-convertible U.S. dollar became the global reserve currency under the Bretton Woods monetary system, which lasted from 1944-1971. This arrangement ended because foreign central banks accumulated unsustainably large reserves of U.S. Treasuries, threatening price stability and the purchasing power of the dollar. Today, central banks are once again stockpiling massive Treasury reserves in an attempt to manage their currency values and gain advantages in export markets. We have, effectively, returned to Bretton Woods. The trouble is, as Guggenheim's Scott Minerd notes, that the arrangement is as unsustainable today as it was during the middle of the last century. None of this should come as a surprise given the unorthodox growth of central bank balance sheets around the world. The collapse of Bretton Woods in 1971 caused a decade of economic malaise and negative real returns for financial assets. Can anyone afford to wait to find out whether this time will be different?
A critical - and under-asked - question for investors and 'believers' in Europe is "in what way the new 'fiscal compact' is actually different from the Maastricht treaty when it comes to enforcing compliance". It turns out, there really isn't any difference, and it is for the very same reasons that stood in the way of countries respecting the Maastrich treaty's limits. If there are 'no constraints on public spending', then why negotiate another 'fiscal pact' at all? As Philip Bagus has shown, the euro area is a good example for the 'tragedy of the commons'. Evidently that is not going to change until the monetary union simply falls apart.
Just two weeks after Egan-Jones started the party, S&P has downgraded Spain to BBB- (with a negative outlook). As we discussed here when Egan Jones pushed all-in with Spain to CC, of course, Moody's (Baa3 Neg) will likely follow shortly with Fitch (BBB Neg) deciding to avoid the office-raid and keep its French parents happy. The main reasons - and concern going forward, via Bloomberg:
- *S&P MAY CUT SPAIN IF POLITICAL, EUROZONE SUPPORT WANED
- *S&P MAY CUT SPAIN IF NET GOVT DEBT RISES ABOVE 100%/GDP '12-'14
- Doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization are, in our view, a destabilizing factor for the country's credit outlook.
- In our view, the shortage of credit is an even greater problem than its cost.
Is the Federal Reserve really doing such a bad job… or does it actually do exactly what it's supposed to do, but the average American is in the dark about what that is? In this explosive video, Casey Summit speaker G. Edward Griffin, author of The Creature from Jekyll Island, talks about the Fed's real role in the US economy and why – contrary to common belief – it is not this banking cartel's mission to act in the best interest of the American public.
UPDATE: Behold the massive bid in VIX futures at the close (after being held down all day as stocks slumped)
The S&P 500 futures (ES) dropped from the opening whistle, bounced a little, then fell all the way down to pre-FOMC levels and then wriggled sideways auctioning in a narrow range for the rest of the day after Europe closed. The Dow and S&P are now red for the month with their biggest 3-Day drop in almost three months as the 50DMA comes back into view. Oil prices surged early on but as the selling came in stocks so oil fell back under $92 dragging the Energy sector lower (as CVX's chicken-and-egg with oil and its outlook continues). All S&P sectors were red on the day but financials outperformed (-0.06%) along with Utilities. Stocks ended just off their lows (as CNBC is so happy to tell us) but Treasury yields closed at their lows - tumbling over 7bps from the 10Y auction. The USD (and gold and silver) were dead today amid all the chaos - with a slight gain in silver and the USD limped lower from a better start. Gold remains -1% on the week. The Russell and Nasdaq are now the worst performers post-QE (-4.4%) while Dow Transports are -4% (and Dow/S&P down around 2%). VIX trod water with a small compression into the close - ending around 16.3%. IG credit outperformed as HY tracked stocks lower.
This October, as the presidential election nears, we witness the strange intersection of the worlds of the gambler and the policy wonk. Daily, our best political observers reference the current prices of the presidential betting market. Unfortunately, we think their lack of knowledge of gambling mechanics leads them astray. This brief introduction to betting mechanics brings us to the first uncomfortable tension between gamblers and policy wonks: policy wonks love to quote Intrade, and gamblers think it’s by far the least important and least informative presidential betting market.
Just like a bad case of crabs, no matter how much you try to wash it away, it just keeps coming back to bite you. The U.S. Energy Department objected to Solyndra LLC’s bankruptcy plan, saying it fails to protect the government’s interest in collateral; via Bloomberg:
- *DEPARTMENT OF ENERGY OBJECTS TO SOLYNDRA'S BANKRUPTCY PLAN
- *SOLYNDRA HAS SPENT VIRTUALLY ALL SALE PROCEEDS, U.S. SAYS
- *SOLYNDRA PLAN FAILS TO PROTECT COLLATERAL INTEREST, DOE SAYS
We are going out on a limb here but the over/under for a Solyndra 'recovery vs Greece 'recovery' is going the wrong way for the US government we suspect.
The Fed's Zero Interest Rate Policy has side-effects. Savers are punished but determining the financial impact poses some difficulties. The conservative and cumulative effect is a loss of just over 9 trillion in savings during the entire period. This represents the current account loss of nearly 2.8 trillion as of Oct 12. Savers could be garnering nearly three times the current amount in interest income if interest rates represented the long run historical mean. But at least the banking system is saved.
It takes all of three seconds on the ground in Spain to realize that this country is hurting. Big time. It’s amazing what the combination of debt, deceit, and a bona fide banking collapse can do to a nation. Consequently, depositors are moving money out of the country en masse, often to the tiny principality of Andorra next door - a highly capitalized, low tax banking jurisdiction. This leaves the already thinly-capitalized Spanish banks in an even weaker position. As we have painstakingly pointed out a number of times, the way the banking system works in most of the world is a complete fraud since most banks only hold a tiny percentage of their customers’ deposits in cash. The moment there are more than a handful of depositors wanting their money back, the bank has a big problem. This is happening nationwide in Spain. As such, the IMF is now recommending that Spain (and other nations in the eurozone periphery) take action “at the national level” to stem this flight of funds and prevent people from moving money abroad. Capital controls by any other name should smell so foul.
Stocks popped on some bloomberg flashing red headlines from the Fed's Beige Book but quickly faded as bonds did not move. The reality - summed up in the worldcloud - is 'mixed' - for sales, for prices, for demand, for jobs:
- *FED DISTRICT BANKS SAID `CREDIT STANDARDS WERE LITTLE CHANGED'
- *FED DISTRICT BANKS SAID MANUFACTURING WAS `SOMEWHAT IMPROVED'
- *FED DISTRICTS SAID `OVERALL LOAN DEMAND INCREASED SLIGHTLY'
- *MOST FED BANKS SAID `WAGE PRESSURES REMAINED MODEST'
- *FED BANKS SAID `EMPLOYMENT CONDITIONS WERE LITTLE CHANGED'
- *FED DISTRICTS SAID CONSUMER SPENDING WAS `FLAT TO UP SLIGHTLY'