Earlier we reviewed the overnight plunge in China stocks, especially those related to the real-estate market in the aftermath of the latest move by the State Council to be far more hawkish than expected, in its effort to curb property inflation. The economic and market weakness that resulted has followed through to overnight US and European futures, even as peripheral bonds are trading roughly unchanged, surprising many who thought this weekend's Beppe Grillo statement on the future of Italian debt and presence in the Eurozone would be market moving: it wasn't as Grillo said nothing that he had not already made quite clear. In other, more recent economic news, UK construction PMI imploded to recession levels, plunging to 46.8 from 49.0, far below expectations and the lowest print since October 2009, setting the stage for much more Goldman-led reflation by the BOE. Also negative was the drop in the Eurozone Sentix Investor Confidence index which tumbled to -10.6 from -3.9 on expectations of -4.3, sending the EURUSD deep into 1.29 territory. It appears the Sentix excludes the soaring German confidence, which two weeks ago was the sole driver of all upside, not once but twice in one week. Today we get the first day of the sequester being digested by the market - this togetger with an empty macro calendar in the US means rumors and headlines will determine how far GETCO's algo push the stop hunts during the first and last 30 minutes of trading.
If anyone was hoping that in the peak holiday month of December the US consumer would finally open up the purse strings and "charge" everything, we have bad news: in the last month of 2012 revolving consumer credit dipped by some $3.6 billion, a reversion of the modest increases seen in November and October, and the biggest decline in credit card debt since July of 2012. Yet overall consumer credit rose by some $14.6 billion and beat expectations of a $14 billion increase. Why? Because as we have been warning for quite a while, everyone is now piling into student debt (and NINJA Uncle Sam subprime car loans). Sure enough, non-revolving credit soared by $18.2 billion in December - a monthly record for this time series since its revision several months back - and shows that when it comes to levering up, few are using their credit cards, as increasingly more opt to rotate proceeds from their "student loans" into everyday purchases.
It has been another quiet overnight session, with macro data decidedly mixed and "adjusted", because while the key German December Industrial Production number came in sequentially at 0.3% on expectations of a 0.2% rise, it fell more than expected on an unadjusted Y/Y basis, dropping 1.1%, on expectations of just a 0.5% drop. On the other hand, Spain's industrial output not unexpectedly stagnated for a 16th consecutive month, plunging by 6.9% in December in line with expectations, and sliding by a whopping 8.5% Y/Y. In bond auction news, Spain sold some €4.61 billion in 2015, 2018 and 2029 bonds, all pricing with yields substantially higher than recent January auctions, which in turn sent the Spanish 10 Year to 2 month highs of 5.52% after the auction, however it has since regained most of the losses.
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry. Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans. When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion. Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.
Work in the mortgage market? Never read about Kamala Harris or the CA "Home Owner Bill of Rights?" Read on....
Gold bullion for delivery in December climbed as high as 1.2% to 5,000 yen per gram on the TOCOM. In ounce terms, the yen fell to 155,180/oz against gold, its highest level since 1980. According to the data on Bloomberg, the all-time record high for gold priced in yen was 204,850 yen on January 21, 1980. Thus, yen gold remains 33% below the record intraday nominal high from 1980. Given the Japanese determination to devalue the yen to escape deflation, the record nominal high will almost certainly be reached in the coming months. Platinum also climbed 2.7% to 5,130 yen per gram for the same month, the highest level for the most-active contract since May of 2010.
There has been a tightening of European financial conditions. Two more pieces of evidence were reported today. This issue may very well overshadow other issues at Draghi's press conference next week. German 2-year rates are moving above the US-- a 30 bp swing since early Dec. Meanwhile, US rates are rising relative to Japan. The dollar-bloc (and sterling) continue to under-perform. We also look at the US economic calendar for the day that features the ADP employment estimate, the first look at Q4 GDP and the conclusion of the FOMC meeting.
Germany and Japan have a long tradition of cooperating, at least when it comes to various iterations of world war, generically in the conventional sense (and where they tend to end up on the less than winning side). Which is why it may come as a surprise to some that earlier today German politician Michael Meister launched what is now the third shot across Japan's bow in what is rapidly escalating as the most dramatic case of global currency warfare between the world's net exporters (at least legacy net exporters: thanks to Japan's recent political snafus, it has now become a net importer as it is rapidly losing the Chinese market which accounts for some 20% of its exports) which started as long ago as 2010 when it was quite clear that currency warfare is what the insolvent world can expect, before it devolves into outright protectionism, and finally regular war as Kyle Bass explained recently. To wit: “What can Japan’s competitors do?” Meister said today in a telephone interview. “Either we’re all smart and do nothing, or we follow suit and create a spiral that hurts us all.”
A few years ago back when I used to watch an occasional bit of television, I would always have an internal debate with myself: which was more funny– Comedy Central, or CNBC? It was always a toss-up. One channel has talking puppets. The other has Steven Colbert. Both are satires of our bizarre reality. These days it seems financial media has surged ahead in this contest, rolling out one expert guest after another to beat a steady drum that economic recovery has settled on terra firma. Now, I’m an optimistic guy... and there are plenty of good news stories around the world. But just looking at the numbers, it’s clear that there is a major disconnect between sentiment and reality. On one hand, western governments and mainstream media sources tell people that their economies are recovering and moving forward. Sentiment is high, confidence is growing. Unfortunately the data show a completely different story...
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.
November Consumer Credit Soars, Driven By Student And Car Loans: 95% Of All 2012 Consumer Debt Funded By Uncle SamSubmitted by Tyler Durden on 01/08/2013 16:17 -0400
SSDM: just like in October, and September, and August, and so on, November consumer credit saw a decent pick up of $16 billion, well above the expectation of $12.75 billion, above the $14.1 billion in October, and the third highest monthly print of 2012. And if this was driven even remotely by actual short-term consumption demand, it would likely be a good sign, as it would imply consumers have more faith in being able to repay their credit cards. Sadly, of the entire $16 billion jump, only $817 million, or 5%, was based on a jump in revolving credit. The real "growth" came as usual courtesy of Uncle Sam handouts, solely in the form of auto and student loans, which accounted for a whopping $15.2 billion of the increase in consumer debt, the second largest jump in the year, second only to the $18 billion in January. And as everyone knows, student loans are already on fast track to forgiveness (full forgiveness in 10 years if one works for the government), as will be the case for those NINJAs who buy GM cars using government loans. For all of 2012, a whopping $130 billion of the $137 billion total has been in the form of government handouts. In other words, nearly 1% of 2012 GDP has been funded by Uncle Sam in the form of (dischargeable) loans which everyone else will be responsible for, until nobody at all is responsible.
Equity markets recovered from a lower open following press reports overnight by eKathimerini that the country’s main banks are considering requesting additional funds for their recapitalization and edged higher throughout the session after sources at Hellenic Financial Stability Fund said that there no indications that Greek banks need more recap funds. In addition to that, Xinhua reported that chance of China RRR cut is increasing for January, citing industry insiders for RRR cut forecast. This follows on from the reports in ChinaDaily last week, which suggested that a small interest rate cut at the right time could substantially decrease financing costs and improve expectations for profitability, citing researchers from the China Development Bank, the State Information Center and the Shanghai Securities News who have worked together to forecast key economic indicators and policies in 2013. The risk sentiment was also supported by well subscribed debt auctions from the Netherlands, Austria, Greece and Belgium. As a result, peripheral bond yield spreads are tighter by around 5bps in 10s. Going forward, market participants will get to digest the latest NFIB, IBD/TIPP and Consumer Credit reports. The Fed is due to conduct Treasury op targeting Oct'18-Dec'19 (USD 3.00-3.75bln) and the US Treasury is also set to auction USD 32bln in 3y notes.
The biggest highlight of the day is the launch of Q4 earnings season with Alcoa after the close. The question is by how much will the ES/SPY correlation have dragged individual stock prices higher from far lower cash flow implied valuations - we will get a glimpse this week, as well as get a sense of how Q1 is shaping up, this week but mostly next week as earnings reports start coming in earnest. There was the usual non-event newsflow out of Europe, which has no impact on risk levels, now driven solely by every twitch of Mario Draghi's face, and best summarized by this from SocGen: "In the wake of September's 3 point VAT increase in Spain, which saw a significant bringing forward of consumption to beat the tax hike, euro area activity in Q4 has been genuinely awful."
Earlier today, Bill Frezza of the Competitive Enterprise Institute and CNBC's Steve Liesman got into a heated exchange over a recent Frezza article, based on some of the key points we made in a prior post "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed" in which, as the title implies, we showed how it was that the Fed was indirectly intervening in the stock market by way of banks using excess deposits to chase risky returns and generally push the market higher. We urge readers to spend the few minutes of this clip to familiarize themselves with Frezza's point which is essentially what Zero Hedge suggested, and Liesman's objection that "this is something the banks don't do and can't do." Liesman's naive view, as is to be expected for anyone who does not understand money creation under a fractional reserve system, was simple: the Fed does not create reserves to boost bank profits, and thus shareholder returns, and certainly is not using the fungible cash, which at the end of the day is what reserves amount to once dispersed among the US banks, to gun risk assets higher.
Alas, Steve is very much wrong.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.