Not much going. Markets treading water in sync. Going RN, simply on lower levels. The calm before the Storm?
Minor data week, which will leave market action subject to jitters and rumours, technicals and charts. Tricky auctions of the week will be the one for EUR 8bn Italian bills on Thu and Italian 3 YRS to close the week on a Friday 13th (amount still open; were EUR 3bn 3s and 1.5bn 7 and 8 –year bonds last month). One will bear in mind that the holiday season, which slowly but surely starts to kick in, will further diminish what’s left of liquidity, exacerbating any given move.
A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.
So where does this leave us, knowing that despite all the exuberant highs and depressed lows, we had ended the previous week pretty much in unchanged matter?
Well, after a 10-day period that had not one but 2 bail-outs announced, a EU summit that initially seemed to good to be true, results-wise, and then ended up just being that, and a triplet of Central Bank cuts cum QE supportive measures, things don’t look much better…
- The next Enron: JPMorgan at centre of power market probe (FT)
- Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others (NYT)
- Ex-JPMorgan Trader Feldstein Biggest Winner Betting Against Bank (Bloomberg)
- Finland Firm On Collateral As Spain Aid Terms Discussed (Bloomberg)
- Heatwave threatens US grain harvest (FT)
- Wall Street Is Still Giving to President (WSJ)
- Greenberg Suit Against U.S. Over AIG To Proceed In Court (Bloomberg)
- Crisis forces "dismal science" to get real (Reuters)
- Hope continues to be as a strategy: Asia Stocks Rise On Expectation Of Monetary Policy Easing (Bloomberg)
Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.
Whether it was the deterioration in Consumer Credit, downgrade rumors for US financials, Greek bank restructuring/run chatter, or a final realization that near-term QE is off at these levels of equity prices (as signaled by Bernanke and Gold this morning), the equity short-squeeze stumbled hard in the last hour of the day to end unch. Utilities managed to outperform handily as all the high beta sectors dumped into the close as Tech and Financials closed red for the day. Treasury yields and the USD were signalling considerably more equity weakness than we got though the dive caught stocks up but Gold remained the biggest loser of the day (-2% on the week against the 0.7% loss in the USD). Silver remains positive for the week - though matched gold's weakness on the day as Copper and Oil whipsawed up and down on rumor and then lack of follow-through. Equities pulled back closer to the underperforming investment grade (and less so high yield) credit market at the close. Treasury yields ended marginally lower (with the long-bond underperforming) and 7s and 10s -2bps)leaving 5Y flat still up 9bps on the week (and outperforming). Risk markets in general slid as Bernanke's speech was delivered and the Q&A proceeded but stocks went almost totally dead with financials and the S&P 500 e-mini clinging to VWAP as volumes died - until that last hour plunge. MS and BofA took the brunt of the selling pressure (ending down 3-4%) - though they are still well of the lows from a few days ago. VIX cracked back above 22% as we dropped in the end but closed down 0.5vols at 21.7% (and the term structure of vol has steepened up to 5mth highs) but implied correlation rose back over the somewhat critical 70 threshold and equities remain notably rich to broad risk assets in general still and today's huge jump in average trade size is somewhat concerning.
That the just released consumer credit update for April missed expectations of a $11 billion increase is not much of a surprise. As noted earlier, the US consumer has once again resumed deleveraging: April merely saw this trend continue with revolving credit declining by $3.4 billion, offset by the now traditional increase in student and subprime government motors car loans, which increased by $10 billion. In other words, following a modest increase in revolving consumer credit in March, we have another downtick, and a YTD revolving credit number which is now negative. Obviously the government-funded student loan bubble still has a ways to go. No: all of this was expected. What was very surprising is that as noted in the earlier breakdown of the Z1, the entire consumer credit series was revised, with the cumulative impact resulting in a major divergence from the original data series. Why did the Fed feel compelled to revise consumer credit lower? Simple: as debt goes down, net worth goes up, assuming assets stay flat. Which in the Fed's bizarro world they did! Sure enough, if one compares the pre-revision Household Net Worth data (which can still be found at the St. Louis Fed but probably not for long) with that just released Z.1, one notices something quite, for lack of a better word, magical. Ignoring the March 31 datapoint which does not exist for the pre-revision data set, at December 31, household net worth magically grew from $58.5 trillion in the original data set to $60.0 trillion in the revised one!
With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect
That US consumer credit soared by $21.4 billion in March on expectations of $9.8 billion rise, or the fastest monthly expansion since March 2001 would have been commendable and memorable if one did not dig through the actual components. Which sadly are atrocious: of the entire surge, a modest $5.1 billion was from real credit, or revolving, credit-card type debt. This brought the total revolving debt to $804 billion or to a level first crossed in January 2005. The balance, or $16.2 billion, was non-revolving debt, or the type of debt used to fund GM car purchases by subprime borrowers and push the student loan bubble well into its $1+ trillion record territory. The total non-revolving debt is now $1.739 trillion: an all time record. As for the source of such debt? why the US government of course, in what is the supreme ponzi scheme, whereby the US government allows US consumers to purchase Government Motors products and to keep the Higher Learning status quo in power. In other words, the US government has become the final enabler of the consumer spending bubble with proceeds used to keep the US auto unions happy (as channel stuffing is already at record high levels), and of course, to fund such ancillary student purchases as iPads. As for whether any of this debt will ever be paid off? Don't be silly.
European cash equities opened sharply lower this morning following electoral uncertainties arising from various corners of Europe, notably Greece and France. Volumes also remain light as the market closure across the UK reduces the number of participants today. The mainstream political parties from Greece, PASOK and the New Democracy, failed to establish a majority this weekend as voters firmly expressed their discontent with the political establishment, evident in the rise of fringe parties. As such, the leaders of New Democracy and PASOK will now attempt to establish a coalition party with the splinter group Independent Greeks (a party notable for its anti-EU/IMF stance), due to begin as soon as today. The uncertainty in Greece’s future has taken its toll across the markets today, with EUR/USD beginning the session sub-1.3000 and all European equities trading markedly lower throughout most of the morning session. Elsewhere on the political front, Francois Hollande has won the French Presidency and is to be inaugurated on May 15th, as such; participants now look out for any comments regarding the relationship between the new French leader and German Chancellor Merkel. The Spanish government are set to make an announcement on Friday concerning the continuing troubles over the Spanish banking sector, with a government source commenting that the plans will include the creation of a 10- and 15-year ‘bad bank’. Recent trade has seen a recovery across forex and stocks as EUR/USD grinds higher and stock futures move closer to unchanged. Strong German factory orders data has helped the moves off the lowest levels, as demand from outside the Eurozone helps lift the figure above expectations of +0.5% to +2.2% for March.
All major European bourses are trading lower with the exception of the DAX, which holds just above the open by a modest margin. Adidas ranks among the top performers in the German index, following the report of a strong set of sales figures, contributing to the positive trade. Spanish concerns continue to build up as Standard & Poor’s took ratings action on 16 of the country’s banks, downgrading the notable names of Banco Santander and BBVA. Although the move was not a surprise as this is the usual procedure following a sovereign downgrade, both Santander and BBVA, along with the IBEX are in negative territory. The Bund is seen higher amid a generally risk-off theme to markets this morning. Volumes have been relatively light, however a slight pick-up has been observed in recent trade, grinding the security upwards in the last hour or so. EUR/USD continues to experience weakness and now trades close to a touted option expiry of 1.3200, as traders seek the safety of the USD across a number of currency crosses.
Last night, Goldman entered into unchartered territory with its first observations of the student loan bubble in a piece titled "Are Student Loans Driving Consumer Credit Growth?" Most of the observations are nothing new, although author Alec Phillips does bring up one amusing implication of what the soaring student debt may mean in macro terms. Specifically, to Goldman the rise in debt is merely "A more important source of countercyclical credit. Since federal student lending standards are looser than most other forms of credit, they now rely mainly on Treasury borrowing for financing, and demand for them appears stronger when the labor market weakens, it seems likely that education-related debt will grow fastest at times when the economy slows and other lenders are pulling back." In other words, the rate of change in student debt is inversely proportional to the improvement in the US economy, or directly proportional to its deterioration. So since the student debt chart is, for lack of a better word, parabolic, what does that mean for the broader economy?
Last night it was uber-dove Janet Yellen, today it is uberer-dove, former Goldmanite (what is it about Goldman central bankers and easing: Dudley unleashing QE2 in 2010, Draghi unleashing QE LTRO in Europe?) Bill Dudley joining the fray and saying QE is pretty much on the table. Of course, the only one that matters is Benny, and he will complete the doves on parade tomorrow, when he shows that all the hawkish rhetoric recently has been for naught. Cutting straight to the chase from just released Dudley comments:"we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established. But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery. On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012." Translate: NEW QE is but a CTRL-P keystroke away now that all the inflation the Fed usually ignores continues to be ignored.
In an attempt to not steal too much thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his view of the S&P 500 hitting 800, as operating earnings compress to $80 per share, is founded in more than just a perma-bear's perspective of the real state of the US economy. As he points out "The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction." The combination of a hard landing in China, a recession in Europe, and a stronger USD will weigh on earnings and inevitably the US consumer (who's recent spending spree has considerably outpaced income growth) with the end result a moderate recession in the US. The story is "there is nothing else except consumers that can really hype the U.S. economy" and that is supported by employment but last week's employment report throws cold water in that. "Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up." While the argument that the US is the best of a bad lot was summarily dismissed as Shilling prefers the 'best horse in the glue factory' analogy and does not believe investors will flock to US equities - instead preferring US Treasuries noting that "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."