Anyone who hasn’t sensed a mood change in this country since the 2008 financial meltdown is either ignorant or in denial. Millions of Americans fall into one of these categories, but many people realize something has changed – and not for the better. The sense of pure financial panic that existed during September and October of 2008 had not been seen since the dark days of 1929. Our leaders used the initial terror and fear to ram through TARP and stimulus packages that rewarded the perpetrators of the financial collapse rather than helping the middle class who lost 8 million jobs, destroyed by Wall Street criminality. The stock market plunged by 57% from its 2007 high by March 2009. What has happened since September 2008 has set the stage for the next downward leg in this Crisis. The rich and powerful have pulled out all the stops and saved themselves at the expense of the many. Despite overwhelming proof of unabashed mortgage fraud, rating agency bribery, document forgery on a grand scale and insider trading based on non-public information, the brazen audacity of Wall Street oligarchs is reminiscent of the late stages of the Roman Empire.
Following the durable goods miss at the end of March, there were some who were expecting another Schrodinger print in today's Factory Orders report, which was expected to post a 1.5% increase (even as the Durable Goods miss was revised from 2.2% to 2.4%, still short of the +3.0% expectation). Alas, no such luck, and instead the weakness from March is spilling over into April as February new factory orders rose 1.3%, missing expectations, but an improvement from January's print which was revised lower to -1.1%. Shipments however declined 0.4% in February, following two consecutive monthly increases. "Transportation equipment, also down following two consecutive monthly increases, had the largest decrease, $1.3 billion or 2.5 percent to $49.2 billion." Finally, and in what will be no surprise to anyone, Inventory stockpiling continues, and is now up twenty-eight of the last twenty-nine months. "This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.6 percent January increase." Finally, the inventories-to-shipments ratio was 1.33, unchanged from January. We will likely see some modest downward GDP revisions based on this data.
Presented with little comment except to note that Members of Congress and Lobbyists rank lowest for honesty and ethics with Nurses topping the list and Bankers just below Journalists as the resentment of where the QE funds flow rises ever so slowly at first...
So when will retail investors start buying stocks? One of the final legs propping up this rally is the belief that retail investors will finally pile into stocks. There is hope that all this “money on the sidelines” will find its way into the stock market. The S&P at 1,350 was supposed to do the trick. Certainly 1,400 on the S&P was going to be enough to chase retail investors into stocks. Basically the argument that retail will capitulate and finally invest in stocks is based on the assumption that higher prices increase demand – aka, a Giffen Good. Retail investors can see that the U.S. debt has continued to grow and that in spite of lip service to deficit reduction, we are creating a bigger deficit. They are nervous about what will happen when finally the spending gets pulled in. They are also very nervous (as are many professional investors) that they will be the last purchase of stocks before the central banks stop pumping fresh money into the system in their never ending attempt to inflate asset prices. Expecting “the masses” to buy just because something is already up 20% seems a little silly, if not downright arrogant. If there is one sector where the upward price movement is sucking in more money it is amongst corporations themselves and if any group has shown an ability to buy high and sell low, it is corporations themselves. It is just wrong to expect individuals to be as frivolous with their money as corporations are.
It is no secret that when it comes to attention spans and 'deep thought', Americans would rather be at the movies. After all, for a country which prides itself on its distractability and sales of ADHD medications, the only thing that matters is the line up of entertainment. Perhaps one reason why last summer's debt ceiling fiasco ended up being such a popular thriller with the masses is that the movie lineup at the time was less than inspiring, leading to a 1.4% decline in summer theater attendance. Which begs the question: what is in store for this year? Because as we have noted, we already know that the US debt ceiling will likely be breached sometime in September, leading into the presidential election, and as a result Americans will demand distraction, or else there is an all too real possibility the same market crash as happened in August of 2011, may recur. So what are the distractions in store for the herd? Courtesy of BofA and the Hollywood Stock Exchange, here is the complete summer lineup, coupled with the HSX movie stock price (an indicator of expected revenues). Will it be enough to offset reality setting in with a thud? You decide.
As Europe's exuberance from the LTROs fades (with Italian banks now negative YTD, Sovereigns wider than LTRO2 levels, and financials desparately divided by the LTRO Stigma) Jefferies David Zervos uncovers the sad reality that faces peripheral creditors and Northern Europeans - as we noted a month ago here. The 'success' of the LTRO monetization scheme (as opposed to EFSF/ESM transfer dabacles) is what enabled the Greek restructuring, and as Zervos notes, the losses that the big boys (Spain and Italy) need to take will not be taken via a haircut but a monetization as the number 1 rule is we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly Northern politicians. If the loss realization is not managed correctly (and losses there will be), then the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.
The income and savings of Northern workers must be ploughed (directly or indirectly) into the rest-of-Europe or the entire structure becomes insolvent and the breaking of that social contract (that they will be looked after when they are old) will inevitably lead to revolt and nasty nationalist political forces being unleashed. The hope to avoid this is the 'wealth illusion' as the workers of the north can never be allowed to realize they have only 50% of their worth in reality. Ireland will be next on the loss-realization-monetization path but as we move from relatively small and containable sovereigns to the big-boys, the idea that Spain and Italy will roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of exit is a material threat to the northern jobs and hence northern politicians. The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.
The only European "thinktank" that has been more correct about predicting developments in the continent than any of its peers ("Greece will never default" - nuf said), has released a new briefing, this time looking at the latest European hotbed of trouble (which is not new at all, just the realization that the LTRO benefit has faded has finally set in), Spain, and specifically if its bank will be forced to seek a Eurozone bailout. OpenEurope is diplomatic about it but the conclusion is that all signs point to yes. Furthermore, as recent general strikes across the country, coupled with occasional rioting, showed, Rajoy's agenda of enacting austerity which will be critical to receive German assistance simply to make Spain the latest German debt slave, may have some problems being enacted. Yet the biggest catalyst for the housing-heavy exposed Spanish banks is that, as Open Europe finds, of the €400 billion in loans made to residential sector, €80 billion is toxic. And only €50 billion in reserves are available. Hence the simple math: at least a €30 billion shortfall will need to come from Europe. And this assume no further declines in home price, which however are set for a record price drop this year. So... LTRO 3 anyone as the focus once again shifts to "deja vu Greece?"
Dr. Constantin Gurdgiev, a non Executive member of the GoldCore Investment Committee, has again analysed the data of US Mint coin sales in Q1 2012 and has looked at the data in their important historical context going back to 1987. He finds that the data regarding gold coin sales in Q1 2012 confirms that there is “no hysteria and no bubble here”. Dr Gurdgiev finds that while volume of sales in Q1 2012 fell from the quite high levels seen Q1 2009, 2010 and 2011, demand was much stronger than “in the pre-crisis average for 2000-2007.” Also of note is the fact that despite the worst financial and economic crisis the modern world has ever seen being experienced since 2008 demand has remained below the record levels seen in the aftermath of the Asian debt crisis and unfounded Y2K concerns. Interestingly, Dr Gurdgiev finds that the historic data (since 1987) shows that the "gold price has virtually nothing to do with demand for US Mint coins - in terms of volume of gold sold via coins." He finds that the demand for gold coins has little to do with the price in general and that “something other than price movements drives demand for coins”.
When one cuts out all the noise, the only true purpose of aggressive (or not) central bank asset expansion, is to be a "buyer" of last resort of sovereign debt funding. Think of it as the source of credit money demand (and hence supply) when every other sector is deleveraging, and when a given Treasury authority needs to pump trillions in debt into the market but when nobody can afford to lever up and buy said incremental debt. Call it monetization, call it funding the deficit, call it whatever: that's what it is. And when people think of monetization, they think, first and foremost of the Chairman, who recently was caught praising the fiat system at a university named for a person who said the following prophetic line: "Paper money has had the effect... it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." Irony aside, when one cuts to the chase, and ignores even further noise about monetization being direct, indirect, sterilized, shadow, etc, there are just two metrics that are relevant: change in sovereign debt and change in Central Bank Assets. In this regard, of the US' $5.5 trillion in sovereign debt increase, the Fed matched Geithner for $2.0 trillion of the total, or 37%. An admirable number and certainly better than the BoE's 29%. Yet who gets the absolute top prize? Why none other than the ECB, which with $2 trillion in expansion (of which about 60% took place under Goldman apparatchik Mario Draghi in just the past 6 months) represents a whopping 63% of total Eurozone sovereign debt expansion of $3.1 trillion!
European cash equities are trading in the red heading towards the US session, with particular underperformance in the periphery as financials continue to remain the biggest laggard. The EU session so far has consisted of downbeat commentary in regards to both Ireland and Portugal. An EU/ECB report noted that, Portuguese debt is now predicted to peak at 115% of GDP in 2013 and that contraction in 2012 is likely more pronounced than thought. Elsewhere, the Irish Fiscal panel said Ireland may need extra budget cuts to reach its 2012 target and 2012 growth has weakened. In terms of economic releases the UK observed a stronger than expected reading on its Construction PMI hitting a 21-month high, which saw some brief strength in GBP.
- China's Central Banker to Fed: Act Responsibly (WSJ)
- Spain's debt to jump to 78 percent of GDP: De Guindos (Reuters)
- Rajoy Needs All the Luck He Can Get (WSJ)
- Spain Faces Risks in Budget Refit (WSJ)
- Top JP Morgan banker resigns to fight abuse fine (Reuters)
- Reinhart-Rogoff See No Quick U.S. Recovery Even as Data Improve (Bloomberg)
- Program to help spur spending in domestic sector (China Daily)
- Barnier hits out at lobbying ‘rearguard’ (FT)
- U.S. CEOs' take-home pay climbs on stock awards (Reuters)
The "down in European hours, and surge as soon as Europe is closed" trade is once again so well telegraphed even Mrs. Watanabe is now in it. Sure enough US futures are red as European shares slide for the second consecutive day, with 16 out of 19 sectors down, led by banks, travel and leisure. Spanish and Portuguese bond yields are up. Not much data overnight, except for Chinese Non-manufacturing PMI which rose modestly from massively revised numbers: February adjusted to 57.3 from 48.4; January to 55.7 from 52.9 - and that, BLS, is how you do it. European PPI rose 3.6% Y/Y on estimates of a 3.5% rise, while the employment situation, or rather lack thereof, in Spain gets worse with an 8th consecutive increase in jobless claims, rising by 38,769 to 4.75 million. Bloomberg reports that Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Francois Hollande, France’s Socialist presidential candidate, widened his lead over President Nicolas Sarkozy in voting intentions for the second round of the 2012 election, a BVA poll showed. Italian bank stocks are notably down and today seems set to be the third consecutive day in which we see trading halts in Intesa and Banca Popolare. Few more weeks of this and the financial short-selling ban is coming back with a vengeance. Yet all of this is irrelevant: the bad news will simply mean the global central banks will pump more money, putting even more cracks in the monetary dam wall, and the only question is how long before US stocks decide to front-run the European close, and whether European stocks will rise in sympathy, just because they get to close one more day.