Cash For Clunkers
In his latest letter Van Hoisington cuts through the bullshit and asks the number one question (rhetorically): why are bank excess reserves (aka the ugly, liability side of Quantitative Easing) still so high. He answers: "Either the banks: 1) are not in a position to put additional capital at risk because their balance sheets are shaky; 2) are continuing to experience large write-downs on commercial and residential mortgages, as well as on a wide variety of other loans; or 3) customers may not have the balance sheet capacity or the need to take on additional debt. They could also see no expansionary prospects, or fear an uncertain regulatory future. In other words, no viable outlets exist for banks to loan funds." Which leads him to conclude quite simply that while risk assets may hit all time highs courtesy of free liquidity, the economy, also known as the middle class, will be stuck exactly where it was before QE2... and QE1. Van also looks at that other critical variable: velocity of money - "Velocity is primarily determined by the following: 1) financial innovation; 2) leverage, provided that the debt is for worthwhile projects and the borrowing is not of the Ponzi finance variety; and 3) numerous volatile short-term considerations." As an uptick in velocity is critical for any wholesale reflation (as opposed to merely hyperinflation) plan to work, this is one metric Van is unhappy with. Lastly, Hoisington also looks at the fiscal headwinds facing the country (which more so than anything terrify the Goldman economics team), and presents his vision on the bond-bubble argument.
The U.S. Federal Reserve, which is in charge of the world’s reserve currency has gone completely and totally insane. Every time the stock market is down 2 points some maniac academic with a printing press delivers a speech about how much money they are going to print, basically daring anyone to short or sell the market. No one is smart enough to know how much QE is priced into the market, is it $500B? $1 trillion? $3 trillion? No one knows, but what we all do know is that the Fed through its non-stop yapping has now set up the ultimate moral hazard in financial markets. It doesn’t matter if all of the economic data miraculously comes in extraordinarily bullish over the next three weeks. The markets have put the Fed into the biggest box they have ever been in. They must do QE2 at this point and they probably have to do it big. The problem is, with the equity market up at the levels it is I don’t think ANY amount of QE2 will cause a rally. In fact, this might be the biggest “sell the news” event in the history of the stock market. If you are smart you will take appropriate actions while you can and sell to someone with less of a clue (believe me there are plenty out there). - Mike Krieger
I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts. This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects. In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade. Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.
Some entertaining observations from BofA's Ethan Harris, who describes in detail why there are 500 billion reasons why gridlock would cripple the economy, and asks whether Obama is (or should be) more like Clinton or Bush in dealing with the approaching deadlines that will result in the first openly negative GDP print as soon as Q3 (good luck justifying thoat 10% EPS growth when the economy is about to decline). And just to confirm how bad it is, Jan Hatzius chimes in to explain why the economy will face a nearly 2% point headwind from inventory liquidation and negative fiscal catch up (think Cash For Clunkers gone viral) nearly every quarter in the coming year.
What are the drivers of the recent heat-up in M&A activity in the past few weeks? A healthy prospect of the Global Economy? Cash burning holes in CEOs’ pockets? Valuation for the acquisition targets is compelling?
The President's economic team doesn't seem to know how to fix the economy. Here are some immediate things he can do to turn it around, quickly. But he has to ignore his advisers.
Another fascinating interview by Jim Rickards, in the first part of which the LTCM GC explains why he has told his clients to get out of stocks (yes, it does have to do with market manipulation and the Fed - the two most popular topics on Zero Hedge over the past year): "Markets have ceased to function as they are intended - traditionally a place to exchange values, but more importantly to perform price discovery (people rely on markets to tell them what to do or to at least give them some guidance). What's happened is that all the markets have become so badly distorted that their price discovery function and therefore the information content around it no longer has any value. The market has become self-referential, an algo playing itself out, almost the way you would run a self-recursive equation on a computer and you get very unpredictable results from very simple equations. It has degenerated into a joke." Perhaps more relevant for those seeking some advice on where to put their money if not into stocks, is his observation that now that the Fed is in dire need to getting people to start spending, the only option left is to instill the fear of a dollar devaluation, but not against other fiat (as that would in turn lead other central banks to follow suit), but depreciation against hard currencies such as gold. "If you are the Fed and you buy up gold to $2,000 an ounce what have you done? You've depreciated the dollar by not quite 50%. Well that's pretty powerful stuff if you are trying to get people to spend money and dump dollars. So they are not out of bullets, they have what I call the golden bullet..." As Kohn today said, it is all about expectations... Well, why not make people expect that the dollar they have today will be worth half as much tomorrow versus gold?
- Asian stocks rise to two-week high on US manufacturing data; Canon gains.
- Australia Q2 GDP grows 1.2% - fastest pace in three years.
- Bernanke, Bair to present views of crisis to inquiry panel.
- Brazil holds rate at 10.75%, meeting expectations.
- Economy seen avoiding recession relapse as US data can't get much worse: Survey.
- Indian sugar production may jump 38% next year on higher planting, rains.
- Manufacturing in US grows at faster pace as factories extend recovery.
- Trichet may say ECB to keep emergency lending measures in place into 2011.
GM sold a total of 185,176 cars in August, a decline of 24.9% from the 246,479 from August of last year (although, there were 26 selling days last year, compared to 25 this year, ergo the adjusted 21.9% decline). Also, dealer inventory jumps in sign nobody wants to buy a government car yet. We sure wonder where CNBC gets their "better than expected" numbers: if, unless, it is the totally fudged and massaged number that GM would like the public to believe is indicative of anything more than just fleet purchases of 4 "core" brands.
Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally. - Eric Sprott
In Advance Of The GDP Report, Goldman's Hatzius Sees 3% GDP Drag From State, Local And Federal In Coming YearSubmitted by Tyler Durden on 07/29/2010 18:07 -0400
Tomorrow's GDP report will be a major market catalyst as it will either confirm that an inflationary double dip has now arrived and the Fed will have no option but to print, or it will come "just better than expectations", once again sending the market into a lithium-deprived paroxysm of intraday jerkiness. Yet in the medium run, tomorrow's number is very much irrelevant, especially if Jan Hatzius' latest analysis on the impact of various trends at the local, state and federal level turns out to be correct. Goldman's analysis is based on the following assumptions: (1) Congress will not extend emergency unemployment benefits beyond the current expiration date in November 2010, (2) state governments will need to make do without any additional federal fiscal aid beyond what was included in ARRA, and (3) Congress extends the lower- and middle-income tax cuts of 2001-2003 as well as the Making Work Pay tax cut of 2009 but not the higher-income cuts of 2001-2003. The latter is of particular significance because as Bloomberg reports, Obama is about to take populism into high gear, as Geithner will next week bring the proposed tax cuts for the rich directly to the masses (and the corrupt simians in the Senate). Obviously the financial implications of that one move alone will be disastrous and even if tomorrow's GDP number prove better than expected, the market may ultimately trade off on the devastating impact from the expiration of the most important subset of tax cuts. Which is why, going back to Hatzius, the Goldman economist states: "The overall impact of fiscal policy (combining all levels of government) is likely to go from an average of +1.3 percentage points between early 2009 and early 2010 to -1.7 percentage points in 2011, a swing of about -3 percentage points. We estimate that the boost to the level of GDP starts to decline in mid-2010, first gently and then more forcefully, setting up a significant negative impact on GDP growth in late 2010 and 2011." The only thing Hatzius forgot to add is brace yourselves for impact. Yet somehow Goldman's own David Kostin projects that 2011 S&P EPS will grow by double digits... even as the firm's own economic team anticipates an economic crunch. This is precisely the conflicted double speak that we have grown to love and expect from the Wall Street sellside.
Is market volatility forewarning doom? Read on...
It's hard to ignore the data that is coming out. There is a definite slowing trend in the economy. It supports my forecasts of a slowdown coming in the second half of this year. Expect the data to be its normal uneven trend, but it is clear that the economy is slowing. Here I show you what I'm seeing.
This is the fourth and final part of my major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics. For those of you who have stuck with me for this series, thanks!
This is Part 3 of a major four part series dealing with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.