When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover. However, the concept was flawed from the start.
"We're on the road to economic stagnation" is how the Dallas fed describes the status quo as Too-Big-To-Fail (TBTF) is forcing the US economy to suffer from the perpetuation of perverse incentives. We want to get back on the path to prosperity and they note that there are some things monetary policy can't fix (well we know that already) but in this case they demand an end to the TBTF paradigm now. In an excellent presentation of the costs and benefits of ending TBTF (defined rather tongue-in-cheekily: The unwillingness of a government entity to abruptly close an insolvent company and force its creditors to sustain sizable losses due to the company’s size, complexity, interconnectedness and general significance within the financial system), the ignorance of the process of creative destruction is critical as they note that a sick (or failed) bank cannot lend: "Undercapitalized banks gum up the working of the interdependent moving parts of the monetary policy engine". Dismissing the Dodd-Frank Act as a distraction that doesn't buttress market discipline, they summarize their guiding principles as: End banking oligopoly power; punish failure quickly; and change the do-or-die (M.A.D.) decision-making paradigm; ending with the threat promise suggestion that Restructuring isn't so radical, firms do it all the time.
Forget 'irrational exuberance', forget 'deregulation of derivatives', Big Al is back and this time he seems to have forgotten any- and every-thing we has ever said. It was only a year ago that Greenspan told CNBC "I am ill-aware of anything that really worked. Not only QE2 but QE1" and yet today the mumbling-'maestro' pronounces, via Bloomberg:
- *GREENSPAN SAYS EQUITY STIMULUS IS HELPING TO DRIVE ECONOMY
- *GREENSPAN SAYS EQUITY STIMULUS IS UNDERESTIMATED
- *GREENSPAN SAYS EQUITY IS COLLATERAL OF FINANCIAL SYSTEM
So it sounds like Alan has joined Ben in the parade of 'the-market-is-the-economy' thinkers as now the critical action of all the greatest minds in our economic policy-makers are convinced that debasement manufacturing a rising equity market (by whatever means necessary) is key (and nothing else!).
Collateral matters when it comes to assessing the value of the debt. If a bank lists the mortgages in its "assets" column at full value even though the underlying collateral (the houses) has lost much of their value, then the bank is grossly over-estimating the value and security of the mortgage. The bank's "assets" are based on phantom collateral. Take away $1 in collateral and you impair $4, $10, $20 or even $30 of debt. Recall that the vast majority of real estate equity and financial wealth is owned by the top 20%, with the majority of that concentrated in the top 5%. That means the bottom 80% own little collateral to leverage into debt. How about leveraging income into more debt? Since the top 10% receive almost 50% of the income, and most of the bottom 90%'s income goes to non-discretionary spending and taxes, then only the top 10% have discretionary income that can be leveraged into more debt.
Since nobody else is trading anything today, we wanted to show readers, courtesy of Nanex, just how it is that the only market participants in the past year, that would be robots of course, traded the ISM number. Pay particular attention how the size book in the E-Mini contract virtually disappeared two minutes ahead of the number as everyone shut down and was merely awaiting the headline at which point everyone who trade in the same direction.
UPDATE: ES liquidity disappeared into the print but the reaction has been 'surprising' for an entirely unsustainable 4.5 Sigma beat, pushing ES +1%, TSYs +4-5bps, Gold/Silver -0.5%, and Oil +0.5% with no European restraint today so far.
Forget the Schrodinger "baffle them with bullshit" economy - it is now officially the Idiotmaker economy. Following the massive Chicago PMI drop yesterday, there were those who expected reality to revert and today's mfg ISM to plunge. No such luck, in fact the Manufacturing Data just came out and destroyed every single convergence thesis, printing at 54.8 on expectations of 53.0, and up from the March print of 53.4. This was the best ISM beat in 7 months, following the worst PMI print in 2.5 years yesterday, also the biggest MOM jump since June 2011, and the biggest 2 month rise since April 2010. Go figure. The only one who predicted the correct outcome? Why Zero Hedge, courtesy of none other than Joe LaVorgna.
While Krugman does not by any means endorse the level of centralism that Diocletian introduced, his defence of bailouts, his insistence on the planning of interest rates and inflation, and (most frighteningly) his insistence that war can be an economic stimulus (in reality, war is a capital destroyer) all put him firmly in Diocletian’s economic planning camp. So how did Diocletian’s economic program work out? Well, I think it is fair to say even without modern data that — just as Krugman desires — Diocletian’s measures boosted aggregate demand through public works and — just as Krugman desires — it introduced inflation. And certainly Rome lived for almost 150 years after Diocletian. However the long term effects of Diocletian’s economic program were dire. Have the 2008 bailouts done the same thing, cementing a new feudal aristocracy of bankers, financiers and too-big-to-fail zombies, alongside a serf class that exists to fund the excesses of the financial and corporate elite? Only time will tell.
Last week, when we discussed the recent ominous gas deal cancellation between Egypt and Israel we warned that the May Egyptian presidential election is the one that nobody is concerned about, yet should be far more prominent on everyone's radar, especially in the aftermath of not only the recent deterioration of Egypt-Israel relations, but also the withdrawal of the Arabian ambassador from Cairo. Art Cashin is one person who has been following this underreported hotbed of geopolitical tensions and has just issued his third warning of what he calls another "nose to nose" in the middle east. Issue is this particular nose has all the leverage courtesy of a little canal that has a huge impact on the most important asset price in the world.
In spite of the holiday in Europe, the region is still one of the biggest issues in the market. We are not sure how the debate has turned into austerity versus growth? Growth, or at least sustainable debt levels is the goal. Austerity and Spending are ways of achieving that sustainable debt level. Growth is one way of achieving a sustainable debt level. A bigger economy would more easily support the existing debt. The key here is not creating more debt than the growth can cover. Reducing debt and reducing expenses is another way of achieving a sustainable debt level. It is depressing and a bit scary that governments have promised far more than they can deliver. So new spending that creates more growth than it costs should be pursued. It won’t be easy to find that many obvious projects, but at least politicians have an easy time spending more money. But there is the pink elephant in the room, or in this case, the black market. Spain has an official unemployment rate of 24%. They project it to be 22% in 2015. This is structural. I cannot imagine the U.S. surviving with that level of unemployment. The unemployed would have taken to the streets long before it hit that level to demand change. In fact, I find it difficult to imagine any country surviving on that level of unemployment, unless it is structurally encouraged. Are the benefits too good? Is it too easy to avoid working? If a country like Spain is paying huge amounts of money to the unemployed, and that is causing a spike in debt to unsustainable levels, then something needs to be done.
Two weeks ago, when reporting on Chesapeake's most recent legal problem in the aftermath of the Reuters report on McClendon's private well deal, we explicitly said: "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses. What this means, simply, is that anyone who believes traditional fundamental analysis will and should work in the CHK case is likely to get burned, especially if China is involved which will have its own tactics vis-a-vis the future of McClendon and/or CHK. And all, of course, courtesy of the Chairman of course." Sure enough, we just got confirmation of what happens when a company that everyone has left for dead gets a bit of good news, in the form that CHK has ended the wells deal and is looking for a new chairman: the stock explodes, as it has this morning when it is now nearly 10% higher in the pre market. That, and the fact that everyone and their grandmother is short, also doesn't help.
In a serious incarnation of what CNBC's feeble attempt to present "disruptive" market individuals, which ironically but not surprisingly are merely those who support the status quo, Wired Magazine is webcasting live it business conference titled "Disruptive by Design", which while also another form of mutual ego-stroking circle jerking, at least bring together individuals who truly are at the forefront of disruptive design. Among the speakers are Marc Andreesen (keynote speaker), Dick Costolo, James Dyson, Curtis Hougland, Shantanu Narayen, Daniel Pink, and many others (full speaker list). Those who are bored by today's lack of any other real events can follow what Wired calls "a dynamic audience of today’s thought leaders for groundbreaking discussions on disruptive business practices, ideas, and innovations." Watch it live here.
While headlines crow of company performance this earnings season and as usual consistent patterns are extrapolated and exaggerated into a forceful flow of propaganda for why everyone should buy stocks, the truth is much less spectacular and in fact downright disappointing if one looks to the future (as opposed to the rear-view mirror). More than two-thirds of the S&P 500's market cap has reported and until last week, there was a very high 83% of companies beating expectations with positive earnings surprises. However, last week's swathe of mediocrity dragged that average down to a much more in-line 77% (which quite frankly still reflects somewhat poorly on all those well-paid analysts out there) but more to the point is absolutely nothing exceptional in terms of why-you-should-buy-stocks-now. Aggregate earnings have exceeded estimates by 7% (impressive indeed) while revenues have beaten by 1% (less so) but what is critical to comprehend if you are investing for future returns as opposed to what you hoped you could have made last quarter, is the fact that forward guidance is almost entirely unchanged for 2012. This reflects companies' perceptions of 'low visibility in global growth across economies' with a consistent theme of European and Emerging Market growth slowdowns being offset by better-than-expected US growth - and we think we have burst that US decoupling bubble enough times now to comprehend its meaning for disappointing earnings for the rest of 2012 as relative demand was dragged forward into Q1. All-in-all, mediocrity rules the surprises and forward expectations continue to disappoint the maddening crowd.
The recent LTRO by the ECB provided lquidity; but at a cost. It is apparent that the banks in Europe pushed up the prices for European sovereigns in the short term but also increased their own risks by doing so. Recent data suggests that almost 10% of foreign buyers exited many of the weaker sovereign credits in Europe while their domiciled banks picked up the slack but, in doing so, increased their own risk and as yields have gapped back out in Italy, Spain et al the banks are facing significant losses on their balance sheets. It is quite possible now that with this weekend’s elections in Europe that Germany will find itself backed into a corner and nationalism could become a self-centered affair in Berlin with surprising consequences that could result from finding itself backed up against the wall. As much of Europe now finds itself in recession I note the continuing possibility of social unrest that could burst at any time as the unemployment numbers for much of the youth in Europe are abysmal and idleness can ignite in the most controlled of societies.
As the runoff round of the French presidential election approaches, the only hope for Sarkozy who was trailing Hollande by a 9-10 point margin was that right winger Marine Le Pen would endorse his candidacy. If at all, she was expected to do so this morning. She did not. Instead, she told her followers to cast a blank vote, in essence cementing the fate of Sarkozy, and setting France and Germany on a big showdown over the fate of the fiscal union, and Europe's austerity. Of course, this is for the cameras. What happens behind is quite different, and usually coincides with the wishes of he, or in this case she, who pays the bills. Yet it was her assessment of the "choice" presented to the French people that was very much dead on: "Who out of Nicolas Sarkozy or Francois Hollande will be most subservient when carrying out austerity politics? Who will obey to the letter the orders of the troika: the IMF, ECB, European Commission?" It is he who shall be elected.