"History is replete with examples of societies whose downfalls were related to or caused by the destruction of money. The end of this phase of global financial history will likely erupt suddenly. It will take almost everyone by surprise, and then it may grind a great deal of capital and societal cohesion into dust and pain. We wish more global leaders understood the value of sound economic policy, the necessity of sound money, and the difference between governmental actions that enable growth and economic stability and those that risk abject ruin. Unfortunately, it appears that few leaders do."
- Paul Singer, Elliott Management
Royal Bank of Scotland Says We're In Deep DooDoo ... Worst Economy Since Before Queen Victoria Was Crowned
At this point it has gotten painfully tedious, and the one phrase to describe trading is - Same Pattern Different Day. With equity futures closing decidedly weak on earnings reality after US market close, the slowly, steady overnight ramp seen every single day for the past month has returned as always, this time on yet another largely expected German confidence indicator beat (following the just as irrationally exuberant ZEW some time ago, and yesterday's far better than expected PMI), this time the IFO Business Climate, which printed at 104.2, on expectations of 103 and up from 102.4. This was driven by both the current assessment rising from 107.1 to 108 and the Expectations rising from 97.9 to 100.5. Naturally, all confidence indicators will be skewed in a way to prevent the market from doubting for a second that Germany may actually succumb to the same recession that has gripped all other European countries (which Germany is an inch away from after its negative Q4 GDP). In other words: there is hope. As for reality, UK Q4 GDP came in at -0.3% on expectations of a far lower drop to -0.1%, and down from the olympics-boosted 0.9% in Q3. The UK certainly can't wait for Mark Carney to come and show them how cable devaluation is really done, cause this time it will be different, if only it wasn't different for everyone else.
Three main forces are at work today: 1) The continued decline in the yen--driven by more evidence of deflation and more jawboning. 2) Poor UK data and weak underlying technicals extend sterling's losses. 3) Stronger German ZEW survey and the repayment fo 137.2 bln euros from 278 banks.
“Those are my principles,” Marx said. “And if you don't like them... well, I have others.”
There are very few free lunches in the world, there will be some costs or unintended consequences of this newfound commitment towards a weaker Yen.
The subject of inflation has remained an emotionally charged topic of debate over the last several years. As rising prices for individuals, and businesses, has negatively impacted their prosperity; reported inflation has remained at very low levels. With the Fed pumping trillions of dollars into financial system the fear of much higher inflation, as the dollar is debased, has caused gold prices to soar in recent years. The sole purpose in measuring inflation is to help businesses, individuals and government adjust their financial planning for the impact of inflation. Inflation erodes future purchasing power, and decreases economic prosperity, if not accurately accounted for. The accuracy of measuring inflation, and accounting for it properly, is essential to long term economic prosperity. Shortly after Clinton entered the White House the Bureau of Labor Statistics (BLS) altered the calculation of inflation by changing the weighting of goods in the CPI fixed basket. But the manipulation of the data did not stop there.
As in any other Ponzi scheme, when the weakest link breaks, the chain breaks. The risk of such a break-up, applied to economics, is known as systemic risk or “correlation going to 1”. As the weakest link (i.e. the Euro zone) was coupled to the chain of the Fed, global systemic risk (or correlation) dropped. Apparently, those managing a correlation trade in IG9 (i.e. investment grade credit index series 9) for a well-known global bank did not understand this. But it would be misguided to conclude that the concept has now been understood, because there are too many analysts and fund managers who still interpret this coupling as a success at eliminating or decreasing tail risk. No such thing could be farther from the truth. What they call tail risk, namely the break-up of the Euro zone is not a “tail” risk. It is the logical consequence of the institutional structure of the European Monetary Union, which lacks fiscal union and a common balance sheet.... And to think that because corporations and banks in the Euro zone now have access to cheap US dollar funding, the recession will not bring defaults, will be a very costly mistake. Those potential defaults are not a tail risk either: If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults. The fact that they shall be addressed with even more US dollars coming from the Fed in no way justifies complacency.
We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Inflation is a political phenomenon because monetary aggregates are not determined by market forces but are planned by central banks in agreement with governments. Inflation is a tax affecting all real incomes. Inflation is a precondition of extreme deflation: depression. Should in fact the overall debt collapse, there would be an extreme deflation or depression because the money aggregate would contract dramatically. In fact the money equivalent to the defaulted debt would literally vanish. It is for this reason that central banks monetize new debt at a lower interest rates, raising its value. All the financial bubbles and the mass of derivatives are just the consequence of debt monetization. How will this all end? In history, debt monetization has always produced hyperinflation. In Western countries, despite the exponential debt a runaway inflation has not yet occurred. Monetary policy has only inflated the financial sector, starving the private one, which is showing a bias towards a deflationary depression. Unfortunately governments and banks will go for more inflation. As history teaches, besides money the freedom of citizens can also be the victim.
There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."
The overnight session has so far been marked with one after another economic debacle out of Asia. First Japan announced that its Q3 GDP fell an annualized 3.5% in Q3, more than the 3.4% expected, the worst decline since last year's earthquake. The drivers were sliding exports and a collapse in consumer spending. The announcement brought on a barrage of platitudes by various Japanese officials who are shocked, shocked, that 32 years of Keynesian miracles have resulted in this horrifying outcome. Of course, everyone knows 33 years is the charm for Keynesian miracles. So much for the boosts from Japan's QE 8 aad QE 9: bring on QE 10. The pundits appear surprised now that Japan is back in a solid recession, which to us is quite surprising as well - does this mean that Japan ever exited the depression? Then China came out with an announcement that its credit growth plunged in October with Chinese banks extended CNY 505bn new yuan loans in October, down from CNY 623bn in September and less than the CNY 590 expected. The trifecta of bad news was rounded off by India, whose Industrial Production joined the rest of the world in global recession, when it dropped 0.4% in September on expectations of a 2.8% rise, even as Consumer prices rose 9.75% Y/Y - the global stagflation wave has arrived... For all those wondering why futures have managed to eek out a modest overnight ramp.
The upcoming week comes less loaded with policy events. The only major one is the Eurogroup meeting on Monday, however EU officials have already confirmed that no decision on the next Greek aid tranche will be made before the Troika’s next report on Greece’s adherence to the bailout conditions. Greece has scheduled an auction for Tuesday in order to roll over €3.1 bn in T-bills expiring by the end of the week. Additionally, in the US, the President has invited leadership of both parties for a first round of talks on the fiscal cliff. The data calendars also look lighter, with the publication of the FOMC minutes on Wednesday, and US Philly Fed on Thursday.
It is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates. Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.
It can be done!
With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform. It will be painful. We all know it will be painful.
If trying to explain why S&P futures are up another 9 points to 1417, and are now 25 ticks from the Monday night lows, there are so many catalysts: perhaps it was the European September unemployment rate rising to a new record of 11.6%, (Italy unemployment is now 10.8% up from 10.6% but it still has a way to go until it hits Spain's 25%) even as Consumer prices kept inflation at a steady 2.5% rate, or that French producer prices rose more than expected even as spending missed expectations, or that Spanish housing permits collapsed by 37.2% in August from July, or that Greek retail sales plunged by 7.2% Y/Y and the Greek 2013 economic outlook was cut in the latest budget with the budget deficit now seen at 5.2% from 4.2% before and that Greece now sees 189.1% debt/GDP in 2013 up from 175.6% in 2012, or that Japan just cut its economic outlook last night after its manufacturing PMI came at 46.9, the lowest since 2009 excluding Fukushima, or that UK consumer confidence printed -30, vs -28 last and the lowest since April, or that Taiwan slashed its 2012 GDP forecast from 1.66% to 1.05%, or that nothing has been resolved on the Greek labor reforms or the now two month overdue Troika bailout, or that insolvent Spain has still not requested a bailout, or that virtually every company that has reported revenues in the last two "dark days" missed expectations, or that US Mortgage applications tumbled 6% for its fourth straight weekly decline (government refi index down 5.5%, mortgage apps down 4.8%), or of course that Hurricane Sandy will cut both Q4 GDP and corporate profits (not to mention sales). Truly, there are so many reasons why the S&P has now soared since Apple announced the termination of its two key executives on Monday afternoon, one doesn't know where to start (and don't you dare say "window dressing"). Perhaps Kevin Henry would, but sadly his Bloomberg status is now "gray"...