Another fairly uninspiring day.
In absence of hard data, subject to rumours and sentiment, as well as sudden “squeezes” or “sell-offs”, albeit in very tight ranges.
Mood maybe less rainy then yesterday, but, call me a bear, it doesn’t feel very convincing out there.
The NY Fed is not the only place where Hopium grows anew. Moments ago the conference board reported its September confidence print, which soared by nearly 10 points to 70.3, from 60.6 in August, and expectations of a 63.1 print: this was the highest print since February when hopes that the European LTRO may work (it didn't), and the largest beat in seven months. Ironically, the February beat was driven by 6 month forward hope as well, hope which have been dashed by today's current conditions number as the spread between hope and reality once again collapses. Naturally, the driver for today's miraculous pre-election beat: 6 month outlook soared from 71.1 to 83.7. In other words, if the present did not quite work out as had been hoped, one can just defer hope one more time - surely this time the future will certainly be different. Finally, and as was to be expected, the "confidence" when broken down by income buckets: those with $50k and more in income feel better, those with $35k and less in income feel better. Who is worse off? Why the middle class of course, or those with incomes between $35-$50k.
Some time ago, before China's hard landing was virtually assured (see Iron Ore prices), there was a period when its data was a veritable cornucopia of Schrodingerian ambivalence, with various economic indicators representing either growth or contraction at the same time. It appears that the modified wave-particle duality has just shifted to the US, whose housing segment is the latest patient of wave function collapse as the July Case Shiller index printed both a beat and a miss at the same time. The Top 20 composite index beat in the NSA Year over Year price change, which was +1.2%, on expectations of +1.05%, and up from a revised 0.59. However, it missed in the sequential Top 20 Composite price change, which printed at 0.44%, below expectations and half off the June price increase of 0.91%. In fact, as the chart below shows, the July increase was now the slowest sequential increase in the past 5 months, and at this rate, the August, or September data at the latest, will show a sequential decline in prices, as the euphoria from the Rent-to-REO fades, and as the massively pent up foreclosure inventory is finally forced to come to market and drag prices far below where the currently artificially propped up market "clears" (read Foreclosure Stuffing).
Risk-averse sentiment was prevalent throughout the session, after both Spain and Italy sold bonds/T-bills, which attracted weak bidding and hence saw lower than exp. b/c. In addition to that, yields on 3m and 6m Spanish T-bills were higher, with some pointing to the fact that the Treasury has been forced to step up its T-bill issuance to meet its zero net funding target (higher supply). As a result, peripheral bond yield spreads are wider by around 9bps, with Italian bonds underperforming given the supply later on in the week. This underperformance was also evident in the equity space, where the domestic stock exchange is seen lower by over 1%, compared to DAX which is only lower by 0.4%. In the FX space, firmer USD weighed on both EUR/USD and GBP/USD, both trading in close proximity to intraday option expiry levels.
After briefly attempting to stage a rise in the early overnight session, the EUR has since resumed its lower glidepath (something which Germany's export-focused economy and the only realy economic driver in Europe desperately needs: after all Europe is the only entity in the world whose central bank is working to promote a stronger currency) to the 1.2900 support, as once again Europe comes back into focus, exposing all its warts, scars and boils in perfect 1080HD resolution. Among the key events were a Spanish €4.00 billion bill sale as well as an Italian €3.94 billion 2 year bond sale, which despite selling at the maximum of the intended range, showed far less investor demand than on recent occasions, a development which Rabobank said is to be expected as the "Draghi effect" wanes, and once again Europe is left to its own devices. "The longer Spain delays on requesting bailout, the more the improvement in sentiment following Draghi’s pledge to save euro is likely to unwind" Richard McGuire, fixed income strategist at Rabobank, writes in client note. "Unraveling of “Draghi effect” may accelerate, with possible Moody’s downgrade this week and lack of progress at Oct. 8 Eurogroup summit." Other events out of Europe include the ongoing attempts in Spain to package lots of trash under the rug (see: Spanish Bad Bank Risks Investor Conflict With Stressed Lenders), the realization that the Swiss National Bank instead of continuing to exchange EUR for AUD, bought €80 billion of core debt according to S&P, the print of Italy's September consumer confidence which held near 15-Year lows, a French industrial sentiment which held near Two-Year lows, and so on. Greece too continues to make noises but it seems that the little country is being ignored by everyone. Catalonia's separatist tensions however are getting louder after the Barcelona province did not get the unconditional bailout it demanded (as we wrote yesterday).
Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P. and one of the most successful hedge fund managers of all time told Maria Bartiromo last week that he owns gold and that he sees no “sensible reason not to own gold”. The interview was part of the Council on Foreign Relations (CFR) Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of wealthy and influential CFR members. The respected hedge fund manager suggested that a depression and not a recession was likely and warned of social unrest and the risk of radical politics as was seen with Hitler and the Nazis in the Depression of the 1930’s. Dalio spoke about how “gold is a currency” and when asked by Bartiromo “do you own gold?”, he smiled and said “Oh yeah, I do.” The admission elicited a laugh from the CFR audience. Dalio’s interview is important as it again indicates how slowly but surely gold is moving from a fringe asset of a few hard money advocates and risk averse individuals to a mainstream asset. Wealthier people and some of the wealthiest and most influential people in the world are slowly realising the importance of gold as financial insurance in an investment portfolio and as money. This will result in sizeable flows into the gold market in the coming months which should push prices above the inflation adjusted high of 1980 - $2,500/oz. The interview section where Dalio is asked about gold by an audience member begins in the 43rd minute and can be seen here.
The last time we saw a bevy of regurgitated European rumors shortly refuted was last Friday. Today we get a redux, following a hard push by none other than Spiegel (precisely as we predicted a month ago: "And now, time for Spiegel to cite "unnamed sources" that the EFSF is going to use 3-4x leverage") to imagine a world in which the ESM can be leveraged 4x to €2 trillion. This is merely a replay of last fall when Europe's deus ex for 2 months was clutching at a cobbled up superficial plan of 3-4x EFSF leverage, which ultimately proved futile. Why? Because, just like in 2011, one would need China in on this strategy as there is simply not enough endogenous leverage in either the US or Europe which would make this plan feasible. And China, we are sad to say, has a whole lot of its own problems to worry about right about now, than bailing out the shattered dream of a failed monetary unions still held by a few lifelong European bureaucrats, which this thing is all about. As expected, moments ago Germany refuted everything. Via Reuters: "Germany's finance ministry said on Monday that talk of the euro zone's permanent bailout fund being leveraged to 2 trillion euros via private sector involvement was not realistic, adding that any discussion of precise figures was "purely abstract." This also explains why we devoted precisely zero space to this latest leverage incarnation rumor yesterday: we were merely waiting for the refutation.
We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains below - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.
Mark Twain once wrote that "History doesn't repeat itself, but it does rhyme." While this is a statement that is often thrown around by the media, economists and analysts - few of them actually heed the warning. It has been even worse for investors. Over the past 800 years of history we have watched one bubble after the next develop, and bust, devastating lives, savings and, in some cases, entire countries. Whether it has been a bubble created in emerging market debt, rail roads or tulip bulbs - the end result has always been the inevitable collapse as excesses are drained from the system.
So after 2 hell of positive weeks with fairy dust sprinkled by the CBU (Central Banks United), things seem a little out of breath here.
Post-Central Bank intervention depression, so to speak, as the question on everyone’s mind is “What’s next?
Add to that soured geopolitics that stirred spirits in Asia, MENA and to some extend in regional Spain.
It’s not like anvils are flying low, nor shoes dropping.
No major news, but jittery here.
There was a time when it took at least some digging to cut through the manipulated headline data. Not so much any more. The latest UMichicagn consumer confidence data point is out, and it being an election year and all, and there needing to be some immediate validation of the massive stock surge in the aftermath of our own Gideon Gono going full retard, posted the biggest positive surprise to expectations in well... ever, printing at 79.2, on expectations of 74.0, up from 74.3. This was the highest print since May, which occurted not on the conditions component, but the expectations, which soared from 65.1 to 73.4. And here is the punchline: why did consumers get more confident? Because in the period from the last month they priced in more... drumroll... deflation! 1 and 5 year inflation expectations declined from 3.6% and 3.0%, to 3.5% and 2.8%. And that's how we know they don't even bother to mask the lies any more.
Spanish Debt, Bank Borrowings Soar To Highest In Decades As Home Prices Fall By Most Ever While GDP ShrinksSubmitted by Tyler Durden on 09/14/2012 07:57 -0400
If only the Fed or ECB could print another Spain with the same facility that they engage in currency destruction, (and make no mistake: yesterday's "open-ended" Fed easing, is today's ECB "open-ended" intervention, is tomorrow's BOJ, is Sunday's PBOC, etc.), now might be the time. Because things in Spain, no matter what one is told, are getting progressively worse. The reason: on one hand the continuing surge in regions and total debt, both of which jumped in Q2, on the other hand Spanish bank borrowings from the ECB soared to €389 billion in August, a new record, and up from €376 billion, just as TARGET2 liabilities rose to a new record of €429 billion as well, explaining where that surge in German TARGET2 claims went, on the third hand housing prices collapsed by 14.4% in Q2, the most ever, and tying all the hands together was that the Spanish economy contracted. But please ignore the details. Focus on the important things, such as the surge in the Ibex, the S&P, consumer confidence, gold, crude, etc, however long these continue. Because unless there is such a thing as a free lunch, with every incremental injection, all Bernanke proves is that the underlying reality is far worse than what is telegraphed to the people.
Gallup's US economic confidence index surged 11 points last week (more than the 10 points when Bin Laden was killed) and has reached levels comparable to the pre-crisis highs from January 2008. As Gallup notes, it appears that the spark for the dramatic rise in Americans' economic confidence last week was the Democratic National Convention. A review of Gallup's nightly tracking results shows that the index was consistently near or below -25 each night in late August and early September, but then sharply improved on Sept. 4, the first night of the convention, to -18. Confidence then held at or near -18 through Sunday, despite the dismal August unemployment report Friday morning showing continued weak jobs growth. More specifically, the convention appears to have given Democrats and, to a lesser degree, independents, fresh optimism about the economy. We can only assume that the cognitive dissonance of the hope-holding believers-in-change will not carry through to real economic growth or all those other 'hopers' - the 'this-time-QE-is-different' crowd - will be sadly disappointed.
California Lt. Governor: This Aggression Against Our Expropriation Of Private Property Will Not Stand, ManSubmitted by Tyler Durden on 09/10/2012 13:21 -0400
It is not news that California, despite what the money laundering practices aided and abetted by the NAR at the ultra-luxury segment of housing may indicate, is and has been for the past 5 years neck deep in a massive housing glut (with millions of houses held off the books in shadow inventory), which together with a complete economic collapse of this once vibrant economy, which happened to be the world's 7th largest, led various cities to resort to the socialist practice of expropriation, or, as it is known in the US, eminent domain, whereby a citizen's rights in property - in this case their home - are forcefully expropriated with due monetary compensation, naturally set by the expropriator. It is also no secret, that Wall Street, which has the most to lose by handing over property titles on mortgaged houses in exchange for money that is well below the nominal value of the mortgage, is not happy about this draconian quasi-communist measure, and has apparently told California to cease and desist. It is, apparently news that California has had enough of these bourgeois capitalist pawns, and has decided to, appropriately enough, channel El Duderino, and to tell Wall Street that this aggression against forced socialist expropriation, by broke deadbeats, will not stand... man.