The actual state of employment in the U.S. is likely far weaker than the economic statistics currently suggest. If this is indeed the case, it creates a potential for policy mistakes that could have negative consequences to both the economy and the financial markets.
Janet Yellen is always one step behind. If people start to ask you "Are you fat?", then you ARE fat!
There has been much discussion as of late about the end of the current quantitative easing program and the beginning of the Federal Reserve "normalizing" interest rates. The primary assumption is that as interest rates normalize, the financial markets will continue to rise as economic growth strengthens. While this certainly seems like a logical assumption, is it really the case?
Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.
It is fortunate that Paul Krugman writes a column for New York Times readers who want the party line sans all the economist jargon and regression equations. So here is the plain English gospel straight from the Keynesian oracle: The US economy is actually a giant bathtub which is constantly springing leaks. Accordingly, the route to prosperity everywhere and always is for agencies of the state - especially its central banking branch - to pump “demand” back into the bathtub until its full to the brim. Simple.
Global banking regulators are considering new measures that would make it harder for banks to understate the riskiness of their assets. The BIS decision, as WSJ reports, to end the long-standing treatment of all government bonds as automatically risk-free, is clearly being priced into European banking stocks (as we noted here). Since the financial crisis European banks have backed up the truck on their domestic sovereign bond issuance (most especially Italy and Spain) - draining every fund to buy over EUR1.8 trillion of these 'risk-free' assets. However, that party is potentially ending as The Basel Committee panel is looking at barring banks from assigning very low risk levels to certain types of assets, a tactic some lenders have used to reduce their capital requirements; which could force banks to raise billions of dollars in extra capital.
For all the theoretical explanations about China's profound commodity rehypothecation problems, the one thing that was missing was an empirical case study framing just how substantial the problem is. After all, it is one thing to say banks expect "X millions in losses", but totally different to see the rehypothecation dominoes falling in practice. Today, courtesy of Bloomberg we got just such an example.
Meet Decheng Mining.
As the probe into alleged fraud at Qingdao continues to escalate (with liquidity needs growing more and more evident as Chinese money-market rates surge), Bloomberg reports that China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, in "the first official confirmation of what many people have suspected for a long time - that gold is widely used in Chinese commodity financing deals." As much as 1,000 tons of gold may have been used in lending and leasing deals in China and Goldman reports that up to $80 billion false-loans may involve gold. As one analyst noted, this was unlikely to have a significant impact on the underlying demand for gold in China and as we have pointed out before, any unwind of the Gold CFDs would lead to buying back of 'paper' gold hedges and implicitly a rise in prices.
- Must be an early winter: Housing Falters as Forecasters See U.S. Sales Dropping (BBG)
- China Property Failures Seen as $33 Billion in Trusts Due (BBG)
- Polish Prime Minister Says Recording Scandal May Trigger Early Election (WSJ)
- Iraqi forces ready push after Obama offers advisers (Reuters)
- Priorities: U.S. cuts aid to Uganda, cancels military exercise over anti-gay law (Reuters)
- Kurds' Takeover of Iraqi City of Kirkuk Strengthens Their Hand (WSJ)
- U.S. says government lab workers possibly exposed to anthrax (Reuters)
- Netflix Up 21% With Tesla: The best U.S. stocks this month are ones that just a few months ago were the biggest losers (BBG)
- Architects of Iraq Invasion Return to Blame Obama (BBG)
- Nato claims Moscow funding anti-fracking groups (FT)
- Lawmakers Skeptical GM Bosses Were Unaware of Defect (WSJ)
- Corinthian Colleges Warns of Possible Shutdown (WSJ)
- Taiwan's Quanta to start mass production of Apple's smartwatch in July (Reuters)
Bad data, don't worry, the central bank's got your back; Good data, don't worry, the central bank promised to stay easier for longer and longer (no matter how good things appear from the data). That's the meme that has driven the short-end of the world's largest bond markets to record lows. And then, just as the world's bond traders think they have the central banks understood, the Bank of England drops a tape-bomb...
Der Spiegel deemed it was the “end of capitalism”, while Die Welt described Mr Draghi as Europe’s Bismarck and as a near autocrat beyond control. Throughout history, currency debasement has been the easy option for emperors, kings, queens and governments. It is the easy option of central banks and of Goldman's Draghi today.
This past week has been all about "anticipation." The markets made little headway during the first half of the week as traders waited in an almost breathless anticipation of the announcement from the European Central Bank. When the news was finally received, investors were initially disappointed but David Tepper stepped into the fray with his ever bullish optimism. The more we read, the clearer it becomes that the world's Central Banks have become caught in a "liquidity trap" which is entirely based on circular logic... Central banks must create asset bubbles in the hopes of stimulating economic activity. When the bubble eventually pops the economic activity evaporates which requires the creation of another asset bubble.
Steve Liesman unleashed a torrent of abuse when he claimed recently that "This Country Was Built On Consumer Debt" Of course, Steve's comments really are of little surprise. With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to diverted from productive investment into debt service. Furthermore, with the Federal Reserve and the Administration actively engaged in creating an artificial housing recovery, and wealth effect from increasing asset prices, it is likely that another bubble is being created. This has never ended well. The concern is that without a reversion of debt to more sustainable levels the attainment of stronger, and more importantly, self-sustaining economic growth could be far more elusive than currently imagined.
It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.
Since so many people are still slightly confused about how all the pieces come together in this move lower in yields, we feel the need to add some follow-up commentary.