BOE

Europe took August off. Today, it is America's turn, as the country celebrates Labor day, although judging by recent trends in the new 'Part-time" normal, a phenomenon we have been writing about for years, and which even the NYT has finally latched on to, it would appear the holiday should really be Labor Half-Day. After today the time for doing nothing is over, and with less than one month left in the quarter, and trading volumes running 30% below normal which would guarantee bank earnings in Q3 are absolutely abysmal, the financial system is in dire need of volume, i.e. volatility. Luckily, things are finally heating up as the newsflow (sorry but rumors, insinuations, innuendo, and empty promises will no longer cut it) out of various central banks soars, coupled with key elections first in the Netherlands and then of course, in the US, not to mention the whole debt-ceiling/ fiscal cliff 'thing' to follow before 2012 is over. So for those who still care about events and news, here is the most comprehensive summary of the key catalysts over the next week and month, which are merely an appetizer for even more volatile newsflow in October and into the end of the year.

Today may be the final snorefest before tomorrow Uncle Ben Chairsatan disappoints everyone (sending the market even higher on hopes and prayers he is really saving the super-duper nitrous turbo bazooka for the Sept 13 FOMC meeting) with nothing actionable coming through the J-Hole teleprompter, but that doesn't mean the day has to be boring. Luckily, Goldman has made sure of just that with a report on the surprising higher than expected rise in German unemployment, which coupled with yesterday's higher than expected inflation in Deutschland (they didn't build that inflation, someone else did it for them) is certain to get all ze Germans in a very bailouty moody. However, this being Goldman: the bank that runs the ECB, the Fed, the BOC, and soon, if all goes according to plan, the BOE, the base coverage is enough to make one's head spin. To wit: 'Unemployment edges higher, but employment continues to rise." In other words, add both German employment and unemployment to that other list of items that just goes up come hell or high water, such as stocks, bonds, VIX, crude, gold, blood pressure, coffee consumption, and so forth. Why, one may ask? Simple - "the new central-planned normal." Which of course is the same as the old central-planned normal from circa 1954 Stalingrad.

The market over the summer has been quieter than we had expected - thanks to Draghi's threats placating-words and Bernanke's promises. Equities rallied, Bunds and Treasuries sold off, and government spreads in Europe declined. All these markets look more constructive. However, the event calendar in the near future is very heavy, notably the political one. This article from UBS' global strategy group does three things. First, they provide a list of events until the end of the year. Second, the relative importance of the various events are ranked; and finally, they provide, where needed, a comment on what to expect. We still believe three topics will drive markets: (1) the ongoing European sovereign crisis, where we see some progress (albeit slow) as Draghi has pushed forward his agenda and found some support from politicians; (2) the political issues in the US, although the main change is the more dovish Fed; and (3) world growth, which has been disappointing and is a major risk to monitor. 

We are often asked for glossaries or background posts to help in the comprehension of how-we-got-here?, where-here-is?, and where-we-are-going? We hope that our posts, while diverse in nature, build upon one another and provide an educational platform for all levels of market/economy participant (active traders, passive investors, and working / non-working citizens alike) but as far as a succinct primer on how broken the status quo is and the 'euphoric' economy that very few could see through their Keynesian "debt doesn't matter" blinders, Steve Keen's introductory lecture at UWS is perhaps the most complete soup-to-nuts discussion we have seen recently. From the OECD's total ignorance to Bernanke's 'Great Moderation' miss; from economic 'religion' to science; and from Keynes to Minksy, Keen explains, in language even Chuck Schumer could understand, how more debt doesn't solve too much debt, how stability breeds instability, and why the US won't be finished deleveraging until 2025 (at this rate).

The empirical data is in. And it turns out that as we have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich. Here are four simple questions to the venerable Bank of England (just as applicable to any and every Central Banker); and sadly, we expect to see the announcement of more quantitative easing to the financial sector long before we expect to see answers to any of these questions.

The odds of Fed easing at the September FOMC meeting seem close to 50-50 (with both sides vehemently talking their books - Fed officials and equity managers alike). Recent data has been a bit better: payrolls, claims, retail sales, and industrial production. As UBS' Drew Matus notes, other factors that will play a role include the ISM report, claims reports, and 'fiscal cliff'-related events. However, the primary determinant will be the upcoming August payroll report. The chart below ignores these other factors and offers up the odds of further easing in September based on the base case that Bernanke’s primary concern is the state of the US labor market. July’s 8.3% unemployment rate and payroll gain of 163k put current odds of further easing at 45%.

• So Draghi was bluffing after all: ECB Said To Await German ESM Ruling Before Settling Plan (Bloomberg)
• German finance ministry studying "Grexit" costs (Reuters) - it would be bigger news if it wasn't
• Money Funds Test Geithner, Bernanke Resolve as Schapiro Defeated (Bloomberg)
• Top Merkel MP says Greek deal can't be renegotiated (Reuters)
• China Eyes Ways to Broaden Yuan's Use (WSJ)
• Armstrong ends fight against doping charges, to lose titles (Reuters) - Dopestrong?
• Need more socialism: Public confidence in France's Hollande slips (Reuters)
• Seoul court rules Samsung didn't violate Apple design (Reuters)
• France, Germany Unify Approach to Greek Talks (WSJ)
• Stevens Sees Mining Boom Peaking, RBA Ready to Act (Bloomberg)

• 'Pussy Riot' band members found guilty (Al Jazeera)
• Merkel Says Germany Backs Draghi’s ECB Aid Conditionality (Bloomberg)
• Now, the reverse psychology: Hilsenrath: Fed 'Hawks' Weigh In Against More Action (WSJ)
• London Firings Seen Surging As Finance Firms Add NY Jobs (Bloomberg)
• Facebook Second-Worst IPO Performer After Share Lock-Up (Bloomberg)
• Kocherlakota Says FOMC Goes Too Far With 2014 Rate Pledge (Bloomberg)
• China Said to Order Action by Banks as Developer Loans Sour (Bloomberg)
• Australian Treasury Dismisses AUD Intervention Calls (Dow Jones)
• Brevan Howard Loses Third Founder As Rokos Said To Leave (Bloomberg)
• Japan eyes end to decades long deflation (Reuters)... for 30 years now
• Ex-Morgan Stanley Executive Gets Nine Months in China Case (Bloomberg)

The European morning session has been fairly quiet, with European equities opening lower following over night reports from China that the People's Bank of China might buy back government debt in the secondary market making the much speculated reserve ratio requirement cut it less likely. With several market closures across the Euro-area thanks to the Assumption of Mary holiday, volumes have been particularly light, and with a distinct lack of European data, market focus was on the release of the Bank of England's minutes for the August rate decision. As expected, the MPC voted unanimously to keep the APF unchanged at GBP 375bln and the benchmark rate unchanged at 0.50%, though some MPC members noted there was a good case for further expansion of QE. The better than expected UK jobs report also helped strength GBP.

• Investors Shift Money Out of China (WSJ)
• Rajoy Risks Riling ECB in Bid to Avoid Union Ire (Bloomberg)
• Romney-Ryan See Fed QE as Inflation Risk Amid Subdued Prices (Bloomberg)
• Spanish savers offered haircut then money back (FT)
• Must wipe all traces of illegality and settle for $25,000: Standard Chartered Faces Fed Probes After N.Y. Deal (BBG)
• Greece debt report backs cuts plan (FT)
• Greece seeks two-year austerity extension (FT)
• Brevan Howard Looks To U.S. To Raise Money For Currency Fund (Bloomberg)
• Can he please stop buying gold? Paulson, Soros Add Gold as Price Declines Most Since 2008 (Bloomberg)
• BOE Drops Reference to Rate Cut as It Considers Policy Options (Bloomberg)
• EU Banking Plans Asks ECB to Share Power, Documents Show (Bloomberg)

It is just getting stupid. Europe officially enters recession, Japan GDP declines nominally, China admits to food inflation which locks the PBOC out of easing for months, UK inflation is again rising faster than expected which will soon force the BOE to reevaluate its latest easing episode, Brent is once again rising on supply fears and middle east war fears to a 3 month high, corporate revenues have never been worse in this recession cycle and what happens? Futures spike following a very visible invisible finger pushing ES higher by 0.5% at 9 pm Eastern and setting the scene for trading throughout the night. And since the market has reverted back to full retard mode full of hope of an absolution from the Fed, this time at the August 31 Jackson Hole meeting, which will be very disappointing as Ben will say absolutely nothing yet again, why not take the S&P to new 2012 highs? After all well over 100% of QE3 is now priced in. Finally, expect the ES to surge by 10 points should advance retail sales miss wildly the consensus of a +0.3% print. After all, inverted is the NKI.

• Must be those evil speculators' fault: Oil price inflates as speculators bet on stimulus (Reuters)
• Need moar stimulus: UK Coalition plans housebuilding stimulus (FT)
• Paul Ryan brings fundraising prowess to Romney presidential bid (Reuters)
• Chinese serial killer shot dead after massive manhunt (Reuters)
• Silver Hoard Near Record As Hedge-Fund Bulls Recoil (Bloomberg)
• World powers eye emergency food meeting; action doubted (Reuters)
• Clegg Said to Have Role in Picking King Successor as BOE Chief (Bloomberg)
• Standard Chartered CEO takes charge of Iran probe talks (Reuters)
• Risks must not hide positive China trends (FT)
• BOJ should not rule out any policy options: July minutes (Reuters)
• India Says Growth Sacrifice Needed in Inflation Fight (Bloomberg)

Last week was a scratch in terms of events, if not in terms of multiple expansion, as 2012 forward EPS continued contraction even as the market continued rising and is on the verge of taking out 2012 highs - surely an immediate catalyst for the New QE it is pricing in. This week promises to be just as boring with few events on the global docket as Europe continues to bask in mid-August vacation, and prepare for the September event crunch. Via DB, In Europe, apart from GDP tomorrow we will also get inflation data from the UK, Spain and France as well as the German ZEW survey. Greece will also auction EU3.125bn in 12-week T-bills to help repay a EU3.2bn bond due 20 August held by the ECB. Elsewhere will get Spanish trade balance and euroland inflation data on Thursday, German PPI and the Euroland trade balance on Friday. In the US we will get PPI, retail sales and business inventories tomorrow. On Wednesday we get US CPI, industrial production, NY Fed manufacturing, and the NAHB  housing index. Building permits/Housing starts and Philly Fed survey are the highlights for Thursday before the preliminary UofM consumer sentiment survey on Friday.

In the euro area overnight rate targeting has produced roughly a 130% expansion of the true money supply in the first decade of the euro's existence – about twice the money supply expansion that occurred in the US during the 'roaring twenties' (Murray Rothbard notes in 'America's Great Depression' that the US true money supply expanded by about 65% in the allegedly 'non-inflationary' boom of the 1920's). This expansion of money and credit is the root cause of the financial and economic crisis the euro area is in now. This point cannot be stressed often enough: the crisis has nothing to do with the 'different state of economic development' or the 'different work ethic' of the countries concerned. It is solely a result of the preceding credit expansion. Since long term interest rates are essentially the sum of the expected path of short term interest rates plus a risk and price premium, the central bank's manipulation of short term rates will usually also be reflected in long term rates. In the euro area's periphery, the central bank has lost control over interest rates since the crisis has begun. The market these days usually expresses growing doubts about the solvency of sovereign debtors by flattening their yield curve: short term rates will tend to rise faster than long term ones. This in essence indicates that default (or a bailout application) is expected to happen in the near future. It is possible that this effect has also influenced the ECB's decision to concentrate future bond buying on the short end of the yield curve. However, as is usually the case with such interventions, there are likely to be unintended consequences.