In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression. Hard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!). During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive (here’s a graph) . They waited until the forest was ablaze before breaking out the hoses, and for that they’ve been rightly criticized. Our “proactive” Fed elected to hose down a forest that wasn’t actually on fire, with gasoline, and the results speak for themselves. With the IMF recently lowering its 2012 US GDP growth forecast to 2%, while the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.
Lost in the complete and utter lack of newsflow yesterday (no pun intended) were some comments from Otmar Issing, former chief economist of the ECB. Also a German. Also an advisor for Goldman Sachs. In the absence of Angela Merkel and Schauble, both of whom are still conducting privatization due diligence on Santorini, he decided to present the German view to all the recent bluster and posturing by Europe choosing beggars. What he so conveniently explained is just why "European Union" is the biggest oxymoron imaginable, and why Germany will hardly smile quietly as the rest of the continent uses history as its only leverage to shame Germany into funding the bailout of its broke neighbors. In fact, what Issing confirms, is why any hope that a Federalist union in a continent in which deep seated hatred runs deep, and will promptly overtake any of the happiness associated with the recent 30 years of fake prosperity, is doomed. Art Cashin explains.
Confused what the Fed may or may not do in 3 weeks? Join the club (although the answer at this point is a definite nothing especially with food prices soaring not only in the US but around the world). There are those - banks - who as we have said repeatedly are in desperate need not of promises of further easing, but of cold, hard, free, electronic reserves. Then there is everyone else who doesn't care what the Fed does because it will have no impact on the economy, but at least it may raise 201(k)'s for a little longer, preserving the myth that asset values may still increase, and feed the illusion of wealth. At least until the impact of the latest Fed (non) intervention fizzles. Then there is Art Cashin, who deserves to be heard, if for no other reason, than because he is the true Chairman (of the fermentation committee).
And so the fly in the ointment arrives as beggars are not only choosers but have completely lost their minds. As we explained very, very clearly over the weekend in "In Order To Be Saved, Spain And Italy Must First Be Destroyed", the market, courtesy of its primary function of discounting being completely and utter distorted and destroyed thanks to central planning, "priced in" the fact that Spain will be bailed out in the only possible way: by making a Spanish bailout next to impossible, sending its bonds so much higher that Rajoy could not possibly see any need in demanding a bailout (something which as Art Cashin explained further today will very much infuriate Obama). Well, as often happens, we may have been ahead of the market by a few days. And reality as well: because as of minutes ago Spain's PM confirmed precisely what we warned against - that by frontrunning Spain's destruction, and hence rescue, it has doomed Spain to a fate far worse. From France24: Spain will not seek eurozone financial aid beyond an agreed rescue for its banks if more conditions than those already agreed for recapitalising lenders are attached, an EU source said Tuesday." The problem is that if and when the inevitable bailout demand comes, not only will there be more conditions, but Spain will effectively cede sovereignty to the Troika explicitly, and to Germany implicitly (for the full breakdown see here). Which again begs the question: which came first - the market frontruning the bailout or the government refusing to request a bailout on the market frontrunning the bailout and so ad inf.
"Who knew that the 24th electoral district in Chicago actually sits in Northwest Madrid?" That is how Art Cashin concludes his tangent into the president's pre-election tactics, which now apparently involve begging heads of sovereigns to accept bailouts from other sovereigns (coughgermanycough) just to boost one's reelection chances. Why? Because the one thing that could send the S&P ripping higher, however briefly, is what we have been discussing for the past week: namely the market finally getting the paradoxical catalyst that the market has already priced in - Spain admitting it is broke. And why would Obama be focused on a rising S&P, fiscal cliff after the election notwithstanding? The chart below should explain it.
In the aftermath of Knight's crushing algo-driven error and subsequent cash loss, which may well prove terminal for the business - an artifact of a broken market we have been warning and writing about since 2009 - we present some informative insights into the various eras of Wall Street trading errors courtesy of that grizzled trading veteran, the Chairman of the Fermentation Committee, Art Cashin.
Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"
A few weeks ago America had to go through the supreme political theater that was the SCOTUS' unprecedented and uber-political decision on Obamacare, which in attempting to overcome allegations of partisanship, only succeeded in reinforcing these even deeper. Now, with everyone expecting Bernanke to launch QE every time there is a 1% downtick in the Russell, our honorable Chairsatan is in the same position: he needs to do something but can not afford to appear political with the presidential election just over 3 months away. In other words, from the soap opera about the Supreme Court of the US, we now move to the one about the Supreme Federal Reserve of the US. And the trouble for those whose investment strategy is hope and prayer is that the Fed is becoming aware of this reflexive phenomenon, and just for that reason may delay QE until September, by which point the US, and global economy, will be in freefall.
The avuncular Art Cashin is sounding a lot less sangune than many of his market-watching peers. UBS' main man notes that traders are particularly struck by the continued weakness in the transports group (with FedEx and UPS down 8 of the last 11 sessions - and the Dow Transports down the equivalent of 300 points for the Industrials on Friday alone). "The sharp contraction in the Transport area and recent sharp drops in several trucking statistics add to growing fears that the economy may have stalled over the last four weeks," is how he puts it, but it is his cocktail-napkin charting that concerns the most. Historically, even in years that don't have multiple "end of the world as we know it" headlines in the news, the equity markets decline in the week after July option expiration. Twice in the last five years the S&P lost more than 4% in the week after July expiration. So, does that mean we should tether the elephants? No, but we should be alert and nimble on a week with a somewhat spotty history - with 1332/1335 as his key line in the sand for more downside in cash S&P.
UBS' Art Cashin had originally intended to explore the scholarly give and take of both the opinion and of the dissent. Both have marvelous allusions to things like the Federalist papers and “original intent”. As he notes "a full reading is like a visit to the mind gym, a mental workout of the first order." However, the more he read the dissent, the more he saw the minority’s very evident concern that the Constitution was being weakened. On a very timely day, Art encourages one and all to read both the Opinion and Dissent as the venerable patriot adds: "It's important to all of us".
As always, the most pragmatic read thru of what are now day to day rescue efforts out of Europe, which in its own words has effectively given up on seeking a long-term remedy, comes from UBS' Art Cashin who as usual cuts right to the bone of the deluge of essentially hollow endless chatter out of Europe whose sole purpose is to once again baffle all the algos with binary bullshit.
While Europe is dominating headlines this week, UBS' Art Cashin suggests "mark your calendar and cross your fingers" as he notes the disproportionate prevalence of events that occur in September. Focusing on The Economist's Greg Ip's recent post on a possible seasonal pattern in banking crises, via this recent Reinhart & Rogoff extension paper by Laeven and Valencia, he notes: "The frequency with which the world goes to hell in September seems hardly random." Unfortunately the authors provide no explanation for this beyond observing, "An interesting pattern emerges: banking crises tend to start in the second half of the year, with large September and December effects." Ip and Cashin offer some thoughts on why this is so historically, and more importantly why this time is no different, as the avuncular Art concludes with: "try to enjoy your summer".
The always pragmatic Art Cashin summarizes today's 12:30pm FOMC announcement. In summary: "look for the Fed to dangle a big carrot - some semi-specific course of action that would be put in place if the labor markets continue to worsen. Net/net, he needs to keep the door wide open and maybe outline certain milestone “triggers” that will allow the Fed to act later in an election year without being accused of being overtly political." Said otherwise, the happy ending will likely be deferred one more time. The market may not be very happy.
Whether its performance-missing anxiety or premature exuberance, UBS Art Cashin notes (as we did on Friday) the disconnect between Bonds' less sanguine appearance and equity's which "seemed determined to take a victory lap even before the polls opened – forget about closed." As Cashin notes, equities were also helped by the quarterly expiration as well as the S&P reweighting which seemed to keep a bid under stocks throughout the day. As the week will be focused on attempts to form a Greek government (in a relatively light macro data week), the avuncular Art summarizes perfectly the situation as "Greek elections may just delay and not decide" as markets appear to be sensing the stalemate and yielding initial gains.
Earlier in the week, UBS' Art Cashin noted that some traders were re-reading Bernanke’s speech of November 21, 2002 on countering inflation. Prior re-readings had given clues on things like QE1 and even Operation Twist. The primary theme of the speech was - what can the Fed do to fight deflation (and stimulate the economy) if the Fed Funds rate fell to zero (aah, those simple golden years). Cashin points out that most of the operations, however, tend to be means to make money available or easy. With nearly $2 trillion in excess free reserves that doesn’t seem to be the problem. Inducing spending is the problem. Of all the suggestions, the wider inflation tolerance may be the only one that may do that.