With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.
Things change fast in the technology world.
Apart from the slight uptick from the bottom in the housing market, the rest of the economy is just not robust enough to produce earning`s growth.
The politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. But will it work? Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.
Facing reality is positive. That's the upside to the fiscal cliff. The last decade's fantasy that we could borrow our way to prosperity while lowering taxes on upper-income earners (because it's so cheap to borrow trillions at near-zero interest rates) is finally running into reality-based resistance.
Reminding the world of just the kind of truthiness that got him sacked originally by that other Italian, the Ex-Goldmanite Mario Draghi, back in November 2011, and which the world has to look forward to when Silvio Berlusconi returns to power some time in 2013, even if not as PM (a position he currently has a snowball's chance in hell of regaining based on current political polls), Reuters informs us that the Italian, who certainly has not read the Goldman book on status quo perpetuation, just said the unimaginable: the truth. To wit: "If Germany doesn't accept that the ECB must be a real central bank, if interest rates don't come down, we will be forced to leave the euro and return to our own currency in order to be competitive." Berlusconi said in comments reported by Italian news agencies Ansa and Agi. The 76-year-old media tycoon has made similar remarks in the past about the possibility of Italy, or even Germany, leaving the euro, but has often at least partially rectified them later." Not this time. Now with Germany and the Buba folding like a broken chair, Silvio is coming back and knows he can demand anything and everything, and Germany has no choice but to accept, Merkel reelection in a few months be damned.
In what is the day's most overhyped piece of non-news, we go to Italy to learn what many already knew on Thursday, namely that with the loss of support of Berlusconi's PDL party, Mario Monti's technocratic government, which correctly "feels" it lost its parliamentary support, is coming to an end and after a two hour meeting between the former Goldman advisor and Italian president Napolitano, Monti announced he "intends to resign after checking to see if parliament can pass next year's budget law, President Giorgio Napolitano's office said on Saturday... If the budget law can be passed "quickly", Monti said he would immediately confirm his resignation. Monti's announcement came after a two-hour meeting with Napolitano, who has the power to dissolve parliament." The reason this is non-news is that Monti government's tenure is ending in a few months anyway, and general elections are coming in Q1 regardless. In other words, it may take weeks or months for the budget law to pass, or not, at which point it will be time for new elections anyway.
Bloomberg's Joshua Zumbrun has released a much overdue, MSM apocryphal, somewhat realistic outlook on the endspiel of Bernanke's central planning: i.e., the unwind of the Fed's balance sheet that from just under $3 trillion will reach $5 trillion by the end of 2014. We say "somewhat" because the conclusion in the article is that there is some hope still for an orderly wind down of the Fed's assets without a complete market collapse. The reality is that there is no such hope.
Yesterday we presented Goldman's first 3 Top Trades for 2013 as they come out, while also noting Goldman's recent disfatuation (sic) with gold. Today, we present Goldman's 4th Top Trade for 2013, which is, drumroll, to go long Spanish Government Bonds, specifically, the 5 year, which should be bought at a current yield of 4.30%. with a target of 3.50% and a stop loss of 5.50%. This reco comes out after the SPGB complex has already enjoyed unprecedented gains - but not driven by economic improvement, far from it - but merely on the vaporware threat of ECB OMT intervention. Of course, once the "threat of intervention" moves to "fact of intervention", everything will promptly unwind as it always does (QE was far more potent as a stock boost when it was merely a daily threat: the market's peak not incidentally occurred the day after Bernanke dropped his entire load: one simply can't move beyond infinity). And with Spain's massive bond buying cliff in Q1 2013, the days its bailout could be postponed are coming to an end.
Citi's Robert Buckland explains: If policymakers really do want to encourage stronger economic growth (and especially higher employment) then we would suggest that they take a closer look at the equity market's part in driving corporate behaviour. Despite high profitability, strong balance sheets and ultra-low interest rates, any stock market observer can see daily evidence of why the listed sector is unlikely to kick-start a meaningful acceleration in the global economy. A recent Reuters headline says it all: "P&G Plans to Cut More Jobs, Repurchasing More Shares". If anything, low interest rates are increasingly part of the problem rather than the solution. Perversely, they may be turning the world's largest companies into capital distributors rather than investors.
Warren Buffett’s General Re-New England Asset Management has warned that until central bank monetary policies around the world change “there will be a tendency to higher gold prices.” General Re-New England Asset Management, a unit of Warren Buffett’s Berkshire Hathaway Inc., said gold may advance as businesses temper spending and central- bank stimulus measures fall short. Gold’s climb last year to more than $1,900 an ounce was fuelled by the expectation that government spending cuts in Europe would reduce demand for goods and services, GR-NEAM Chief Investment Officer John Gilbert wrote in a newsletter posted on the unit’s website today, as reported by Bloomberg. “There is growing evidence that the rising price of gold is a statement about the discouraging prospects for returns on productive investments,” Gilbert said. “We hope that this analysis is wrong. We fear that it is not.”
After recently selling the most expensive per-square-foot residential property in the world recently, the liquidity slooshing around the world has been modestly stymied by Hong Kong's curbs on home-buying in the world's most expensive market. But there is always a greater fool to sell to, right? So, that Fed-sponsored liquidity has found a new yield-grabbing spot - parking spaces! Average HK parking space prices have started to surge (up 6.7% in Q3) to its second highest on record and as Bloomberg Businessweek notes, a parking space in the exclusive Repulse Bay are sold for $387,000 (yes, that's a place to park your car; and no, it doesn't come with a happy ending) - double the average US home price! "There's just too much liquidity in the market," said Simon Lo, Hong Kong-based executive director of research and advisory at property broker Colliers International. "The government has set up a firewall for residential properties, but all this money still needs to find a place." Once again we are reminded of the Fed mantra - repeat in monotone: 'there is no inflation and money-printing has no adverse effect'.
In a recent article at the NYT entitled 'Incredible Credibility', Paul Krugman once again takes aim at those who believe it may not be a good idea to let the government's debt rise without limit. In order to understand the backdrop to this, Krugman is a Keynesian who thinks that recessions should be fought by increasing the government deficit spending and printing gobs of money. Moreover, he is a past master at presenting whatever evidence appears to support his case, while ignoring or disparaging evidence that seems to contradict his beliefs. Krugman compounds his error by asserting that there is an 'absence of default risk' in the rest of the developed world (on the basis of low interest rates and completely missing point of a 'default' by devaluation). We are generally of the opinion that it is in any case impossible to decide or prove points of economic theory with the help of economic history – the method Krugman seems to regularly employ, but then again it is a well-known flaw of Keynesian thinking in general that it tends to put the cart before the horse (e.g. the idea that one can consume oneself to economic wealth).
Somewhere in the deep bowels of Brussels bureaucratic labyrinth, a murder of European ministers (as they most closely approximate the Corvus Corvidae Genus/Species) currently sitting down and trying to come with a solution that "fixed" Greece. It will do no such thing: in fact, all that the Eurogroup is doing today, in addition to trying to do with it already did twice before without success, is to find a socially palatable way to disclose a policy that will see Greek debt haircut by a very modest amount (modest enough to be considered prohibited under Article 123, but who is counting any more), either through an outright haircut of official sector debt (something Germany has repeatedly said "9" to), or through a debt buyback of existing private debt (something which will have no impact now that the debt has soared following a long-running political leak which has allowed bondholders to trade accordingly). Aside for applying lipstick on a dead pig, what Europe is doing is focusing on the numerator in the all critical debt/GDP ratio. Sadly, this is just half of what Europe should be focusing on. The other half? Why GDP of course. Because it is here that things get truly hilarious.
In summary: Greek 2022 debt/GDP will be 115% if and only if Greece not only cuts its debt by EUR50 billion, but manages to grow its GDP by EUR60 billion.
Catalonia's exit polls confirm over two-thirds of votes will go to pro-independence parties that will likely push for a referendum to break away from Spain, which the central government will challenge as unconstitutional. The more-populous-than-Denmark region is home to car factories and banks that generate one-fifth of Spain's economic wealth (larger than Portugal's). The incumbent, Artur Mas, has converted to a more radical separatist bias since huge street demonstrations in September showed the will of the people. As Reuters notes, growing Catalan separatism is a huge challenge for Prime Minister Mariano Rajoy, who is trying to bring down painfully high borrowing costs by persuading investors of Spain's fiscal and political stability. Critically, the exit polls suggest the dominance of separatist parties will mean a referendum for secession within two years - leaving us asking the simple question: who will buy any Spanish debt, even fully backstopped by the ECB, if there is a real risk that in under two years, 20% of Spanish GDP will simply pick up and leave.