As so often happens, one of the biggest surprises of the recent period of broad economic weakness, has been the American consumer, who always somehow manages to come through (or so the official econometric authorities make us believe) and cross a chasm of economic stagnation with shopping bags full of stuff. But while the "consumer" (or his department of truth proxy) has sourced the US economic dynamo in the past several months as Europe imploded, and thus served as a supporting brace for the latest incarnation of the US decoupling thesis (where not just Europe, but also the economies of Japan and China have been deteriorating rapidly), the reality is that unless European problems are promptly fixed (which they won't be) the last ditch global economic support pillar, the US consumer, is about to roll over, because as Bank of America explains, "heading into the holiday shopping season; most [consumer statistics] measures are no better than they were last year. In fact, many are worse." And in what may be news to JP Morgan, "With home prices continuing to decline, a wealth driven consumption binge looks unlikely." In other words, while for now the bottom had managed not to fall off the global economy as the tapped out US consumer spent their last dollar to avoid a worldwide re-depression, if European problems are not rapidly resolved, and by that we mean well before the Thanksgiving sales begin, not even "record" corporate profits (which incidentally are rolling over and are purely at the expense of consumption capacity), will do much to prevent the market from finally catching up to reality.
With the OWS movement leaving many Americans confused as to whether they should support or stay away, one thing is for certain, Americans are aware of a certain truth that is happening in our country. We have a certain combination of events that is leaving many people struggling and asking very good questions. The truth is this; We have structurally high unemployment, salaries are stagnant, debt burdens are rising, costs for education, health and energy are on the rise and we are increasingly overwhelmed with clear and present danger coming from every corner of the earth. To make matters worse the ruling elite of this country and the very wealthy are continuing to benefit while the remainder of the population struggles. This is the appeal of the OWS movement despite the fact that the members making up the movement are advocating entirely unappealing solutions in the form of wealth distribution, punishing success and other hard left ideologies...In a country where American Idol and the Jersey Shore are better known than who currently runs the Federal Reserve it is hardly a wonder that cries for Socialism just sound appealing. To further exacerbate the overall ignorance of the populace our education system and emphasis on history and economics appear to be tilted in the direction that highlight correlation and anecdotal evidence rather that fundamentals. I understand it does not behoove me to openly ostracize a large segment of the population, but until we address core understanding of our economy and core principles of what makes our society tick then the partisan rifts will continue. So let us tackle this "explanation" of inequality which is now being circulated on the internet and shared on Facebook with proud posters feeling rather enlightened about their "discovery".
The math of the European bailout (using the EFSF or otherwise) is so easy even a cave-EUReaucrat can do it: It doesn't work. But leave it to Europe's financial ministers to figure this out in the literally last minute. As Bloomberg reports, "A 10-hour meeting in Brussels failed to yield a blueprint for banks’ role in a revamped Greek rescue as European finance ministers haggled over what they called a “credible firewall” against fallout from deeper writedowns." And now it's 5 start dinner time: "The ministers’ meeting broke up at about 7 p.m. after reaching agreement that European banks may need about 100 billion euros ($139 billion) in capital after marking their sovereign-debt holdings to market values, according to a person familiar with the discussions. This amount is needed to reach a core tier 1 capital level of 9 percent based on a European Banking Authority test, said the person, who declined to be identified because discussions are private." No, it's not, it's a joke. The number, once again for those who dare to approach "stuff" mathematically is anywhere between €400 billion and €1 trillion. But we give the EUReaucrats another 2 months before they comprehend this simple fact. Which means that tomorrow's summit which was supposed to be the "come to God" meeting which was expected to resolve all of Europe's problems, much to our, and every other non-momo's relentless snickering, will be a complete and total disaster. But fear not: because Europe has another 3 whopping days after that until Summit #2, when everything will be fixed. For realz.
Goldman Sees An "Unusually Uncertain" Future And Another Debt Ceiling Hike Just In Time For The Presidential ElectionSubmitted by Tyler Durden on 10/22/2011 - 15:42
Even if the European Lack of Union does, miraculously, come up with some short-term resolution of a mathematically unsolvable crisis (at its core, the problem is that there is simply far more debt than there are assets, let alone cash flow, period, end of story) suddenly the market's will refocus its attention on the question of our own intractable math: i.e., how will America, suddenly once again the "neo-decoupled" source of global growth (don't look now but the Shanghai Composite is at multi-year lows even post the bank bailout from two weeks ago so the "dynamo" sure won't be Beijing), proceed to lead the world out of its latest slump? The answer is simple - it won't. At least not according to Goldman Sachs, which once again focuses on what everyone so conveniently chooses to ignore - the complete fiasco that is America's fiscal situation. Here is a reminder: "The fiscal policy outlook is unusually uncertain, and this uncertainty will persist even after the “super committee” reaches a decision by its deadline roughly one month from today." The European math is not the only one that does not work: "Even if reforms are agreed to next month, further legislation will need to be passed next year to address the expiring 2001/2003 tax cuts and the potential constraint of the statutory debt limit (again). Some lawmakers may also want to intervene to alter the automatic spending cuts that would take effect in early 2013 if the super committee fails to reach its $1.2 trillion deficit reduction target." For those who enjoy solving insolvable problems: you take your 2.0% (tops) Q3 GDP, and cut it by 2.5%, and that's the growth rate in 2012. Why? "In FY2011, several temporary provisions added to the budget deficit. These included the payroll tax cut; emergency unemployment compensation; spending from the American Recovery and Reinvestment Act of 2009 (ARRA), and expensing for corporate investment. Together, these account for almost 2.5 percentage points of GDP in FY2011." With the GOP dead set on making the president seem like an economic disaster, you can kiss these "temporary" boosts goodbye. And, the kicker, as far as the president is concerned, is that as Steve Jobs predicted, he most likely will not have a second run for one simple reason. "Based on our FY2012 deficit forecast along with non-deficit financing needs and accumulation of Treasuries in federal trust funds (which count toward the debt limit) borrowing authority might be exhausted by November or December of 2012, not long after the presidential election." Or, not long before the presidential election if the US continues to spend at the current rate. In which case, Jobs will be once again 100% spot on.
The only thing better than general satire, is capital markets satire, courtesy of William Banzai, who explains precisely what to expect following the imminent start of trading in GRPN shares (remember: get them now before they are "90% off" in a group discount liquidation, and bundled free with that weekly Brazilian wax special).
Back in May 2, 2010, when discussing the first failed Greek bailout (still to be implemented) we made the following observation: "Ignore for a second the sheer lunacy of anyone who thinks that the Greek government can grow GDP and decline the budget deficit in a straight line now that the country will see crippling strikes and rolling riots (not to mention blackouts) on a daily basis. But do note the black line, which shows the projected Debt/GDP ratio for the country as part of the bailout package. In essence Greece will go from having "only" a 133% Debt/GDP ratio to an insane 149% in 2013 before presumably dropping to 144% lower in 2014, still a good 11% higher than currently. Greece just got bailed out so it can get into even more debt! What psychopath of the Keynesian school thinks that this unbelievable trajectory is anything but a complete and utter waste of money? German, and US taxpayers, are merely giving Greece money so it can increase it debtor status with French and a few other European banks. To say that this is a viable solution is something that only those who bow at the altar of Alan Greenspan can do." And so once again, in the endless battle between common sense and Keynesianism, it is former 1 - latter 0, after the Troika yesterday released its revised projections for total Greek debt/GDP, which has just been hiked from 149% to 186% by 2013! Said otherwise, Econ 101 textbook insanity just cost the Greek people roughly half their entire GDP in incremental debt (which they will never be able to repay anyway), however in the process they kept French banks alive and well as a Greek default in May 2010 (the only real option) would have not only destroyed a failed economic monetary union, but blown up the entire French bank system. Fair trade off in that other endless battle, between the 99% and the 1%.
Paul Brodsky does not trust the bond markets. That position may seem strange coming from someone who has spent most of his professional career trading bonds, but it's precisely this insider knowledge that has led him to start directing investors to safer harbors. In fact, he thinks our credit system is so far out of control that it will cause a massive - and largely unavoidable at this point - devaluation of the US dollar (and most other fiat currencies, as well). Ultimately, Brodsky recommends investors concerned with protecting the purchasing power of their wealth today get exposure to hard assets that can't be so easily inflated away.
First, the algos took over the real markets. Now, they control the fake ones too...
American Anger: 58% Say Are "Furious About America's Politics" Compared To 49% In January, 37% Support #OWSSubmitted by Tyler Durden on 10/21/2011 - 18:02
The Arab Spring, which yesterday claimed its first brutal televized murder, confirming that the new regime is unfortunately in no way more civilized or humane than the old one, is slowly gaining ever more traction, and those in power who think they are immune from the basest of human emotions like Gadaffi thought, even in so-called civilized countries, may be surprised to discover otherwise. According to a new AP-GfK poll, 37% of respondents back "Occupy Wall Street" and its various offshoot variants. As can be expected, "A majority of those protest supporters are Democrats, but the anger about politics in general is much more widespread, the poll indicates." What is more disturbing is that nearly two thirds of respondents are openly expressing anger with everything that is wrong in America, even if they can't quite place their affiliation with either the Tea-Party of the #OWS movement. "58 percent say they are furious about America's politics. The number of angry people is growing as deep reservoirs of resentment grip the country." The number was 49% in January - in other words it is rising with meteoric speed. And with the topic of Marxism lately quite prevalent if for purely intellectual masturbation purposes, perhaps the practical implications of Marxist "discontent" should also be considered, and the defining question becomes what will be the tipping point beyond which silent protest and peaceful occupation morphs into something far worse.
Any internal memo that is distributed on the last day of the week, and intercepted by American Banker at 5pm on a Friday, must surely be a portent of many good news for the bank which recently added a few trillion in derivative "assets" to match its OpCo deposit pool "liability". We can only hope that as a result of the restructuring, the company's retail banking website will no longer mysteriously crash following announcements of gratuitous debit card fees. Then again, any BofA announcement that has the following sentence in it, "remember, we have the best franchise, capabilities, and customer base in the industry" confirms that the level of mass delusion is unfixable, and that the website will most certainly be the first to go once the bank's $1 trillion in deposits realize they are the first line of defense to just a few extra trillion in derivative contracts.
Just when one thought the oversold status of the all important Euro (by way of the market defining EURUSD) may have peaked and short covering resumed, we once again find that the technical reason (not to be confused with the fundamental one which has to do with EUR repatriation by French banks) why the EUR continues to melt up, and drag all 1.000 correlated assets along with it, is that after a brief retracement in mega bearish exposure in the currency as of last week, bearish sentment once again returned, and after 8,902 net short non-commercial contracts were covered in the weekend ended October 11, the subsequent most recent week saw another 3,925 net shorts added according to the CFTC's COT report, bringing net short exposure back to near 2011 'highs' at -77,720 contracts. This is, to put it mildly, disturbing, because while stock pundits look at NYSE short interest, in this day and age of ultra low volume and liquidity algo trading, the only real transaction occur on the uber-levered margin: i.e., the EURUSD, where one pip delta translates in roughly 2 DJIA points. But it is explicitly disturbing because while the EURUSD has just closed at 1.39, or the highest (resistance) level since early September when the pair broke down, the net short interest now is well over double when the EURUSD first traded at this level.
From my recent conversations with emerging market portfolio managers, it is becoming quite clear that the enthusiasm investors had placed in Brazil as a domestic growth story earlier in the year is running thin. Buy why is the bloom coming off the rose? Some of the things portfolio managers are saying range from an experienced small-cap Latam buyer who said, “Inflation, Mantega going Don Quixote fighting wars that nobody creates other than themselves with high inflation. There is just no visibility,” to a large global fund manager who said, “I am in Brazil this week, it’s slowing down here for sure...” Banco Fator head of equity research Lika Takahashi made some very insightful comments this morning on this topic. In her view, there are couple of factors. First off, valuations in Brazil remain high. Especially considering that it’s likely the global slowdown coupled with high inflation domestically will crimp margins going forward, something she believes is not fully priced in yet.
Today was one of those days when the PT lifestyle was... less than glamorous. It took nearly 24-hours of travel dealing with weather delays, in-flight diversions, and mind-numbing airline incompetency... but I've finally arrived to Mongolia. As I write this, it's a balmy -7 Celsius (19F) outside. Despite the terrible weather, I'm excited to spend the next several days here sniffing around a few private placements and hopefully having some killer barbecue. More on Mongolia next week, let's move on to this week's questions. First, Jennifer asks, "Simon, you've been writing a lot lately about the prospect of social unrest in the developed world, including the US. You suggest that international diversification is a great way to protect against this threat. But if there's social unrest in the US, won't there be total chaos everywhere else?" Not by a long shot. I'll explain--