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.
Suddenly the delicate balancing of variables is once again an art and not a science, ahead of a week packed with binary outcomes in which the market is already priced in for absolute perfection. Per DB: We have another blockbuster week ahead of us so let's jump straight into previewing it. One of the main highlights is the German Constitutional Court's ruling on the ESM and fiscal compact on Wednesday. On the same day we will also see the Dutch go to the polls for the Lower House elections. Thursday then sees a big FOMC meeting where the probabilities of QE3 will have increased after the weak payrolls last Friday. The G20 Finance Ministers and Central Bank Governors will meet on Thursday in Mexico before the ECOFIN/Eurogroup meeting in Cyprus rounds out the week on Friday. These are also several other meetings/events taking place outside of these main ones. In Greece, PM Samaras is set to meet with representatives of the troika today, before flying to Frankfurt for a meeting with Draghi on Tuesday. The EC will also present proposals on a single banking supervision mechanism for the Euro area on Tuesday. If these weren't enough to look forward to, Apple is expected to release details of its new iPhone on Wednesday. In summary, it will be a good week to test the theory that algos buy stocks on any flashing red headlines, no longer even pretending to care about the content. Think of the cash savings on the algo "reading" software: in a fumes-driven market in which even the HFTs no longer can make money frontrunning and subpennyiong order flow, they need it.
The Summer of hope is over. Analysts return to their desks amid a grand-tour of conferences, industry gatherings, and company meetings, and - as has happened on average for the last twelve years - expectations are notched down from first-half-of-the-year 'hope' that this-time-is-different. Barclays' Barry Knapp notes that while macro risks seem more balanced than last spring, equity investors face a considerably higher risk in that of elevated earnings estimates. Since 2000, the worst month for analyst estimate revision momentum (net revisions) is also October, followed by September and December (tied). It stands to reason (though it’s tough to statistically ‘prove’) that equity investors and analysts return from vacation, attend conferences, and cut their earnings estimates. This, in turn, contributes to increased volatility and negative returns. While many will be focused on broader concerns – the ECB meeting, German Constitutional Court, presidential polls and macro data – equity investors are likely to hear a consistent message from the ~180 conferences: the global and domestic economic outlook is not robust enough to justify 11% y/y earnings growth in 4Q12 or 12% in 2013.
- Romney Promises to 'Restore' U.S. (WSJ)
- Dirty Harry Makes Surprise Appearance (WSJ)
- It has always been about the gold: Time for eurozone to reach for the gold reserves? (FT)
- EU Plan Said to Give ECB Sole Power to Grant Bank Licenses (Bloomberg)
- More attempts to marginalize Germanty: Brussels pushes for wide ECB powers (FT)
- Justice may be blind but it has geographic limits: Apple Loses Patent Lawsuit Against Samsung in Japan (BBG)
- ECB Said to Use Greek Myth for Security on New Euro Banknotes (Bloomberg)
- Alberta deficit set to triple on slumping oil prices (Globe and Mail)
- Reid's ties to China-Nevada solar plan draw ire (Reuters)
- Bernanke may hint at QE without boxing Fed in (Reuters)
- Berezovsky loses against Abramovich (FT)
- Spain Considers Bankia Re-Capitalization Without EU Money (Bloomberg)
As noted yesterday, the confounding divergence between the stock markets of the Chinese growth "dynamo" which is at three year lows, and that imploding basket case of a banana republics known as Europe, whose stock markets trade like a penny stock and have been soaring laelt, may never have been wider, but when it comes to how people feel, unlike in the US, they refuse to be fooled by some arbitrary manipulated level of the DAX, CAC, IBEX or MIB. In fact, Europe's "chip on its shoulder" grow to the largest it has been in three years as confidence plunged. Specifically, consumer confidence in the euro area slumped to the lowest in three years at minus 24.6, according to the final estimate for August. The 3.1 deterioration in August represents the sharpest decline in a year. The index has been lower in only two periods over the past three decades. Not unexpectedly the least unconfident is Germany, while Greeks are urgently trying to find new reasons to keep pushing the rock uphill day after day.
The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper... "Perceived inflation will go through the roof. We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative). Oh yeah, and massive inflation. I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade. This is, of course, until we hit the next bubble sometime around 2018 and start over again. The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last. These extremes are fueled by the easing that is meant to cure us. The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover."
The technical picture for Euro gold looks near perfect now. Gold has been trending higher since May. The long term charts show a series of higher lows and higher highs and even in the correction of recent months there have been a series of higher lows and gold gradually consolidated between €1,200 and €1,400/oz. Gold is now comfortably above the 50, 100 and 200 day moving averages. In the last four years, there have been 3 periods of correction and consolidation which have lasted 12 to 13 months (see boxes in first chart) and we appear to be coming to the end of another such period. Break outs from such consolidations often lead to sharp moves higher and thus new record highs above €1,359/oz and possibly over €1,600/oz should be seen before the end of 2012. The fundamental back drop of the unresolved Eurozone debt crisis , deep divisions in the ECB and a high degree of uncertainty regarding the euros long term future strongly suggest that the euro will continue to fall against gold in the coming months. Further confirmation of robust demand for gold is seen in figures showing that exchange-traded products backed by the gold expanded to a record. Smart money from Paulson to Soros to PIMCO continues to diversify into gold. Gold ETFs holdings have now surpassed Italy to become the world’s third-largest gold holdings when compared with national gold reserves.
- Hurricane Isaac Whips Storm Surge on Path to New Orleans (Bloomberg)
- Republicans Vow to Transform Obama’s U.S. With Low Tax, Freedom (Bloomberg)
- Little-known Ryan to take center-stage at Republican convention (Reuters)
- An $800 billion stimulus tempest in a teapot: China State Researcher: Local Govt Investment Plans Largely Symbolic (WSJ)
- China Says Payment Delays, Defaults May Worsen (Dow Jones)
- G-7 Countries Call for Increased Oil Output to Meet Demand (Bloomberg)
- Creeping Socialism: Clegg calls for emergency tax on rich (FT)
- United Airlines computer problem delays 200 flights (Chicago Sun Times)
- Paulson, Investors Avoid Fireworks Despite Brutal Run (Bloomberg)
- Occupy Sets Wall Street Tie-Up as Protesters Face Burnout (Bloomberg)
- The nostalgic grass is always greener: Serbia Joblessness Swells as Milosevic-Era Leaders Return (Bloomberg)