Europe may be fixed for the next week or two (until someone once again figures out that by manipulating the market, the ECB is merely making it easier for peripheral governments to do nothing to fix their unprecedented intra-Eurozone imbalances, as has been the case all along with the only strategy Europe has deployed to date namely kicking the can), but that doesn't mean all event and newsflow ends. Here is what to expect out of the insolvent continent as it attempts to put a very volatile (and violent) 2012 to bed with just one more month. Of particular note: €123 billion in Euro coupon payments in the month of December, which serves as a timely reminder that in 2013 European banks better be ready to buy up the record gross and net issuance of their sovereigns with gusto, or else Europe may promptly become "unfixed" all over again.
Many people, and erroneously, think that all of the purchasing by the Fed will go to both markets in equal amounts but this is not the case. More money for the stock markets would have to come from asset reallocations by money management firms, insurance companies, pension funds and the like and this is not going to happen anytime soon given the 2008/2009 experience. Consequently the greatest flows generated by the Fed’s recent and forward actions will affect the bond markets much more than the equity markets. Between the MBS purchases and the next upcoming stimulus push, the Fed would account for 90% of all new debt issuance and leading to a demand imbalance between $400 billion to almost $2 Trillion depending upon the actual Fed announcements. The Fed currently holds about 18% of the U.S. GDP on its books and it could bulge to 23-28% a few years out. This all works, by the way, only because all of the world’s central banks are working in concert so that there is no imbalance and money cannot be invested off-world. Yields will not make sense empirically because of the actions of the Fed but it will make no difference, because their intentions and goals are vastly different from investors.
Quiet session so far, with a notable move higher in the last block of trading in China pushing the SHCOMP for its first gain in 6 days, and off post-2008 lows. What precipitated the buying is irrelevant, although we got a good glimpse into the state of the Chinese economy thanks to Australia prior where the RBA cut rates by 25 bps to a historic low 3.00% (a move that sent the AUD higher), a level last seen during the financial crisis, and confirming that not all is well for the Chinese derivative economy despite loud promises from the Chinese politburo that growth is back. Bypassing the bullish propaganda were Renault Nissan's Chinese car sales for November which fell by 29.8% Y/Y. Some "recovery" there too. In Europe, the status quo continues, with chatter out of Germany's Merkel who begins her 2013 election campaign today, that Germany wants a strong Eurozone (it doesn't), and a strong Euro (it doesn't), but that nobody can predict when the Eurozone crisis will end (not even Hollande or Monti who did just that yesterday?). Otherwise sentiment there is still driven by the formal Spanish re-request of aid (and imminent receipt of €39.5bn in bank recap funds) from the EU by mid-December. As a reminder Spain did this originally in June but the algos were so confused yesterday they thought this was an official sovereign bail out request sending risk soaring only to tumble later (only in the New Normal is admission of sovereign insolvency a "good thing"). Nonetheless, despite the massive overvaluation of European markets (more on that later), the EURUSD continues to the upward momentum (in the process further curbing German exports and assuring the German recession), and was last seen trading up to 1.3075, about 30 pips higher.
Those curious why Goldman Sachs felt compelled to undertake a quiet an unexpected by most (if not us) peaceful coup of the Bank of England, it is because the oldest central bank still has among its ranks people such as Andy Haldane, who in a world populated by deranged textbook economists who don't understand that it is the central bank policies' fault the world will be forever mired in substandard growth and soaring unemployment, is a lone voice of reason (recall BOE's Andy Haldane Channels Zero Hedge, Reveals The Liquidity Mirage And The Collateral Crunch). And since the BOE has no choice but to join all its peers in a global race to the bottom (largely futile in a world in which currencies exist in a closed loop, and in which if everyone devalues, nobody devalues as even Bill Gross figured out yesterday), it is prudent to listen to Haldane's warnings while he is still in the employ of Her Majesty the Queen. Such as his latest one, in which he says that the scale of the loss of income and output as a result of the crisis started by the banks was as damaging as a "world war."
We find ourselves more amazed than ever at the ability of those in power to lie, misinform and obfuscate the truth, while millions of Americans willfully choose to be ignorant of the truth and yearn to be misled. It’s a match made in heaven. Acknowledging the truth of our society’s descent from a country of hard working, self-reliant, charitable, civic minded citizens into the abyss of entitled, dependent, greedy, materialistic consumers is unacceptable to the slave owners and the slaves. We can’t handle the truth because that would require critical thought, hard choices, sacrifice, and dealing with the reality of an unsustainable economic and societal model. It’s much easier to believe the big lies that allow us to sleep at night. The concept of lying to the masses and using propaganda techniques to manipulate and form public opinion really took hold in the 1920s and have been perfected by the powerful ruling elite that control the reins of finance, government and mass media. How many Americans are awake enough to handle the truth? Abraham Lincoln once said that he believed in the people and that if you told them the truth and gave them the cold hard facts they would meet any crisis. That may have been true in 1860, but not today.
Back in June, the Danish Central Bank set a New Normal precedent by being the first bank to impose NIRP, after it lowered its deposit rates to a negative 0.20% for everyone, in other words anyone wishing to keep cash with the bank would have to pay 20 bps for the privilege. NIRP just moved south to Switzerland, only this time not with a central bank decree: after all the SNB is already engaged in capital controls via the 1.20 EURCHF peg. After all it would seem unsportmanlike if the central bank would admit it needs more currency warfare to halt the influx of CHF into its system, as it would also imply that not only is the Eurozone not fixed, but the exodus of EUR-denominated accounts is relentless, and only the BIS is the marginal buyer of the currency. Instead, Swiss megabank, Credit Suisse, whose assets are orders of magnitude greater than Swiss GDP, in what will be a precedent copied by all other Swiss banks, just imposed negative credit rates on cash clearing balances after December 10 as per the message sent to clients below. In other words, "your CHF-denominated cash is no longer welcome at Credit Suisse, please convert it into that joke of a currency EUR post haste, K thx bye."
In a world that already makes little sense to most, Credit Suisse just pushed the envelope a little further. The bank has just announced that going forward it will be charging for firms to hold a CHF cash balance - i.e. the bank, given the already-negative Swiss government bond yields, has moved to its own NIRP for its clients. The need to do this suggests an overwhelming desire for short-term safety that flies in the face of the seeming level of complacency that exists in the European bond (and stock markets). As we have warned before, it seems that the currency wars that appear to have escalated have now started the 'capital control' wars as CS (and implicitly the SNB) adds this negative interest rate 'charge' to its already pegged currency in the vain hope that of managing the unmanageable flow of safe-haven-seeking cash.
- *CREDIT SUISSE INFORMS BANK CLIENTS OF NEGATIVE RATES ON CHF FROM DEC. 10
- *CREDIT SUISSE INFORMS CLIENTS IN SWIFT NOTICE, CONFIRMED BY BNK
The US dollar's recent losses are being extended at the start of the new week. The announcement of the details of the Greek bond buy-back scheme has triggered a sharp rally in peripheral bond yields, while the euro area Nov manufacturing PMI is reported at 8-month highs, even if still below the 50 boom./bust level at 46.2. The euro has completely recouped the knee-jerk losses scored in thin activity just before the weekend when Moody's announced a cut in the ratings for the EFSF, which follows its recent downgrade of France.
One of the best bond traders on Wall Street said this recently: “Get ready for The Great Bond Shortage in North America. If it has a cusip and it is rated, it is going higher/tighter.” The compression in bond spreads since the Fed started all of their “made-up/newly printed money for free” antics is the root of all of this and we do not expect a change anytime soon. There are various estimations for the 2013 net new issue supply in all sectors of Fixed Income but I peg it around $400 billion. Around $800 billion will be paid to bond holders during the year in coupon payments and, if reinvested, will cause a supply deficit of about $400 billion for the year. Exacerbating all of this is the Fed, who will buy around $500 billion in MBS this year and perhaps the same amount in Treasuries which could take $1 trillion out of the market all by itself. Consequently we face a lack of bonds denominated somewhere between $900 billion and $1.4 trillion, depending upon the Fed, which will increase the rolling train of compression, lower interest rates further in all likelihood and cause great angst for investors who will find very little of value left in the Fixed Income markets. Safety; yes but yield; no. Inflation and Deflation, it should be noted, only work in operative systems; but it is not Inflation or Deflation that are going to matter in the short run, though it will later; it will be the lack of bonds of any sort to purchase and a stock market that may be dangerously out of sync with the fundamentals opening the possibility of a crash. If so much money is printed and so little regard is placed upon fundamental economic principles then the Real Estate crash of several years ago will look like child’s play by comparison. “Systemic Breakdown” would be the functioning words.
Two critical developments give us clues that the days of Central Bank intervention holding the system together are coming to an end.
The conflict between labor and capital is a long and illustrious one, and one in which ideology and politics have played a far greater role than simple economics and math. And while labor enjoyed a brief period of growth in the the past 100 years first due to the anti-trust and anti-monopoly, and pro-union laws and regulations taking place in the early 20th century US, and subsequently due to the era of "Great Moderation"-driven "trickling down" abnormal growth in the developed world, it is precisely the unwind of this latest period of prosperity, loosely known as "The New Normal", and in which economic growth will persist at well sub-optimal (<2%) rates for the foreseeable future, that is pushing the precarious balance between labor and capital costs - in their purest economic sense, and stripped of all ethics and ideology - to a point in which labor will likely find itself at a persistent disadvantage, leading to the same social upheaval that ushered in pure Marxist ideology in the late 19th century. Only this time there will be a peculiar twist, because while in relative terms labor costs as a percentage of all operating expenses are declining around the world, when accounting for benefits, and entitlement funding, labor costs are rising in absolute terms if at uneven rates and are now at record highs. Which sets the stage for what may probably be the biggest push-pull tension of the 21st century for the simple worker: declining relative wages, which however are increasing in absolute terms when factoring in the self-funded components paid into an insolvent welfare system. But the rub comes when one considers the biggest disequilibrium creator of all: central bank predicated cost of capital "planning", whereby Fed policies may be the most insidious and stealth destroyer of all of labor's hard won gains over the past century.
Whether you believe he is a one-hit-wonder or an investing wunder-kind, the following 44 minute clip from the activist investor (who is early, not wrong, on JCP, right?) provides investors with some indepth insights into what it takes to finance and grow a successful business and 'how to make sound investments that will lead to a cash-comfy retirement.' Of course, there are those who can and "do" grow a business, and those who "invest"... often times with less than stellar (ahem PSIV) results.
Following some well-timed 'suggestions' in Natural Gas and Apple this year, the new bond guru has some rather more concerning views about the future of America. Reflecting on a dismal outlook progressing due to the fact that "Retirees take resources from a society, and workers produce resources", Gundlach has cut his exposure to US equities (apart from gold-miners and NatGas producers) noting their expensive valuation and low potential for growth. In a forthcoming Bloomberg Markets interview, the DoubleLine CEO warns we are about to enter the ominous third phase of the current debacle (Phase 1: a 27-year buildup of corporate, personal and sovereign debt. That lasted until 2008, when Phase 2 started, unfettered lending finally toppled banks and pushed the global economy into a recession, spurring governments and central banks to spend trillions of dollars to stimulate growth) as deeply indebted countries and companies, which Gundlach doesn’t name, will default sometime after 2013. "I don’t believe you’re going to get some sort of an early warning," Gundlach warns "You should be moving now."
There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."
In America we face our fiscal cliff or perhaps our bungee jump and while no resolution is in sight the one thing that we can hang our hats on is that we will face higher taxes. These may be the ones currently proposed or they may be totally new ones as defined by some sort of compromise. Given this 99% possibility it may be wise and in my opinion it is wise to take some profits now before the end of the year. We would start with bonds that are trading within a hairsbreadth of Treasuries or even through them and redeploy further out the curve in bonds that have some reasonable chance of continued compression. We think the compression will continue as the policy of the Fed and the ECB does not change for some period of time and the flows of money keep forcing the compression. We suggest taking some profits now because of two common sense principles.