Central banks see their main role now in supporting asset markets, the economy, the banks, and the government. They are positively petrified of potentially derailing anything through tighter policy. They will structurally “under-tighten”. Higher inflation will be the endgame but when that will come is anyone’s guess. Growth will, by itself, not lead to a meaningful response from central bankers. No country has ever become more prosperous by debasing its currency and ripping off its savers. This will end badly...
If you believe that the U.S. economy is heading in the right direction, you really need to read this article. As we look toward the second half of 2014, there are economic red flags all over the place.
We have covered the topic of the student loan bubble extensively in the past so we won't waste more digital ink on where it comes from or what it means for the troubled US consumer, suffice to report that according to the Fed, in Q1 total Federal student loans rose by another $31 billion to a record $1.11 trillion, and up a whopping $125 billion, or 12% from this time last year.
Another month, another confirmation that when it comes to the US consumer, it is all about student debt (and to a lesser extent, car loans). Moments ago the Fed reported that consumer credit number for March: at $17.5 billion, it not only blew out the expectation of a $15.5 billion increase (although when one adds last month's $3.5 billion downward revision to $13.0 billion the two month total actually missed), but was the highest monthly increase since February 2013. That's the good news. The bad news was once again in the composition: of this $17.5 billion $16.4 billion was non-revolving debt, or about 94% of total. The "good", or revolving, credit card debt? Only $1.1 billion.
- Alibaba files for what may be biggest tech IPO (Reuters)
- Early Tap of 401(k) Replaces Homes as American Piggy Bank (BBG)
- Developers Turn Former Office Buildings Into High-End Apartments (WSJ)
- Thai court orders Yingluck Shinawatra to step down as PM (Guardian)
- German industry orders fell 2.8% in March, the biggest drop in one and a half years (RTE)
- Ukraine Bulls Scatter as Death Toll Mounts (BBG)
- China Property Slump Adds Danger to Local Finances (BBG)
- Stein Says Fed May See Bouts of Volatility as It Approaches Exit (BBG)
Perhaps the most important "news" of the day is that it is non-Tuesday. Yes, there was actual news news, like German factory orders dropping -2.8% on expectations of a 0.3% increase, French industrial production down -0.7% on expectations of a 0.3% increase (both misses driven by a soaring Euro which is now spitting distance away from the 1.40 ECB "redline"), the Nikkei tumbling 2.9% to just above 14000, the Shanghai Composite down 0.9%, SocGen Q1 profit plunging 13% and conveniently blaming it on Russia, speaking of Russia things continue to deteriorate even though Interfax reported that the country has received the first part, some $3.2 billion, of the promised IMF bailout - money which will be used to promptly pay Gazprom... and buy gold, a sudden conflict between China and Vietnam escalating over the placement of an offshore oil rig and so forth, but in the new normal, none of this matters.
In this brave New Normal world, a Chinese contraction is somehow expected to be offset by a rebound in Europe's worst economies, because following China's latest PMI miss, overnight we were told of beats in the Service PMI in Spain (56.5, vs Exp. 54.0, a 7 year high sending the Spanish 10 Year to fresh sub 3% lows), Italy at 51.1, vs Exp. 50.5, also pushing Italian yields to record lows, and France 50.4 (Exp. 50.3). We would speculate that macro events such as these, as fabricated as they may be, are relevant or even market-moving, but they aren't - all that matters is what the JPY and VIX traders at the NY Fed do in a low volume tape, usually in the last 30 minutes of the trading day. And since the trading day today happens to be a Tuesday, and nothing ever goes down on a Tuesday, the outcome is pretty much clear, and not even the absolutely abysmal Barclays earnings report has any chance of denting the latest rigged and manufactured low-volume levitation.
The last time the intellectual titans of the San Fran Fed, which have made a living out of asking probing, kindergarten-level questions and then spending tens of thousands of taxpayer funds to answer them, performed in depth inquiry into a topic was about a month ago when it asked "How Important Are Hedge Funds In A Crisis." To its dismay, it found the answer to be "very." Today, the intellectual titanism continues when the regional Fed, which Janet Yellen called her home for so many years, asks (and answers), "Is It Still Worth Going to College?"
This week, markets are likely to focus on US ISM Nonmanufacturing, services and composite PMIs in the Euro area (expect increases), ECB’s Monetary Policy Decision (expect no change in policy until further ahead), and Congressional testimony by Fed’s Yellen.
The similarities between 2007 and 2014 continue to pile up. And you know what they say - if we do not learn from history we are doomed to repeat it. Just like seven years ago, the stock market has soared to all-time high after all-time high. Just like seven years ago, the authorities are telling us that there is nothing to worry about. Unfortunately, just like seven years ago, a housing bubble is imploding and another great economic crisis is rapidly approaching.
Putting this in context, in the past 12 months, a record 98% of all credit - $162 billion - has gone into non-revolving debt, i.e., student and car loans. How much has been added to credit card balances? An absolutely meaningless $4 billion, or 2% of total. Shown below, the "consumer recovery" is the bar chart on the left.
There is a reasonably quiet start to the week before we head into the highlights of the week including the start of US reporting season tomorrow, FOMC minutes on Wednesday and IMF meetings in Washington on Friday. On the schedule for today central bank officials from the ECB including Mersch, Weidmann and Constancio will be speaking. The Fed’s Bullard speaks today, and no doubt there will be interest in his comments from last week suggesting that the Fed will hike rates in early 2015.
- The counter-HFT-attack begins with first target - dark pools: Dark markets may be more harmful than high-frequency trading (Reuters)
- Malaysia Jet Team Hears Pings Consistent With Black Box (BBG)
- At Toyota as Humans Steal Jobs From Robots (BBG)
- ‘Reverse Auctions’ Draw Scrutiny (NYT)
- Death knell sounds for Brazil’s economic strategy (FT)
- Technology Traders Head for the Exit as Put Trades Surge (BBG)
- NSA Uses Corporate News to Spread Propaganda and Silence Dissent (TruthDig)
- Holcim, Lafarge agree to merger to create cement giant (Reuters)
- Any minute now: Investment Jump Seen From Macy’s to Berkshire After 2013 Fizzle (BBG)
- India kicks off world's biggest election in remote northeast (Reuters)
No Yen carry levitation overnight and, naturally, no Spoo levitation, with the futures struggling following the Nikkei's -1.7% drubbing (pushing it back to nearly -10% on the year) and down well from Friday's closing print. Risk averse sentiment following on from lower close on Wall Street on Friday, NASDAQ 100 (-2.7%) marked the worst session since 2011 dominated the price action in Asia, with JGBs up 32 ticks and the Nikkei 225 index (-1.7%). The Shanghai Composite was closed for a market holiday. Overall, stocks in Europe have recovered off lows but remain in negative territory (Eurostoxx50 -0.64%), with tech sector under performing in a continuation of sector weakness seen in the US and Asia, however Bunds remained under pressure as speculation of QE by ECB continued to undermine demand for core EU bonds. No major tier 1 releases scheduled for rest of the session, with focus likely turning to any policy related comments from ECB’s Weidmann, Constancio and Fed’s Bullard.