While economists may waste lots of hot air debating this, that and the other about the future growth trajectory of the US economy, in the aftermath of Goldman's cut of US GDP to just a 1.1% annualized rate of growth. And with the fiscal cliff, debt ceiling, Europe, China, and a plethora of other unknowns up ahead, this number will certainly decline further. Now here lies the rub: as the chart below shows total US marketable debt has doubled in the past 4 years, or an annualized growth rate of just above 21%. And as Zero Hedge has shown before, total US Debt/GDP is on the verge of crossing 102%, the highest since WWII. Simply said, the divergence between the two data series will only accelerate as every incremental dollar of debt generates ever less bank for the GDP buck. And that, from a "sustainability" perspective, is what the problem is in a nutshell.
Last week the S&P erased 6 days of consecutive losses in 30 minutes of trading on the back of news that JPMorgan lost at least 25% of its average annual Net Income in one epic trade, and stands to make far fewer profits in the future, even as the regulators are about to fire a whole lot of traders for mismarking hundreds of billions in CDS. This was somehow considered "good news." This being the "new normal" market, where nothing makes sense, and where EUR repatriation as a result of wholesale asset sales by European banks drives stocks higher, we were not too surprised. Sadly, even in the new normal, things eventually have to get back to normal. And that normal will come as corporate earnings are disclosed over not so much over the next 3 weeks, when 77% of the companies in the S&P report Q2 results, but in the 3rd quarter. Why the third quarter? Simple: as Goldman's David Kostin explains, "consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q." Sorry, but this is not going to happen...
While conflicts within and with the Middle East region are still among the top global risks, the paradigm has definitively shifted to China and Europe.
- Merkel Backs Debt Sharing in Germany Amid Closer EU Push (Bloomberg)
- With a ruling as early as today, here are four health care questions the Supreme Court is asking (CBS)
- George Soros - Germany’s Reticence to Agree Threatens European Stability (FT)
- China Stocks Drop to Five-Month Low (Bloomberg)
- The New Republic of Porn (Bloomberg)
- That's a costly detached retina: Greek Lenders Postpone Mission to Athens (FT)
- Spain Asks for Aid as EU Fights Debt Crisis (FT)
- Wolfgang Münchau - Why Mario Monti Needs to Speak Truth to Power (FT)
- U.S. Banks Aren’t Nearly Ready for Coming European Crisis (Bloomberg)
- MPC Member Wants £50bn Easing (FT)
- India Boosts Foreign Debt Ceiling by $5 Billion to Defend Rupee (Bloomberg)
Let’s consider Germany. According to Axel Weber, the former head of Germany’s Central Bank, Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.
Critical of the market's reaction to the 'no new QE' news, Biderman and Bianco wholeheartedly believe yesterday's plunge was entirely due to the fact that the 'Bernanke Put' - that we have become so conditioned to expect - did not appear at the levels many expected. Despite a federal deficit of $100 billion per month, it seems the Fed is now in agreement with Biancerman that US growth is limping along at best but notably Jim Bianco believes the fiscal cliff will end up more of a bump in the road as he sees politicians being forced to agree to extend or roll-back (maybe at the very last minute) offsetting the abyss. However, with the debt ceiling looking like it will be hit before the election, it will be interesting to see what political parlance is used if-and-or-when Geithner borrows from the trust funds to keep the government going this time (or not). Positive on Gold longer-term, Bianco sees it like other markets: "Gold is a junky that has not got its money fix" and the only reason to believe Gold is a sell is if you think CBs are done - they are not! Finally the two discuss the fact that 'nobody wants to be bearish anymore' when looking at sentiment surveys - setting up a 'trap-door' for the market.
With all the buzz about the 'Fiscal Cliff' – that toxic combination of tax increases and spending cuts due to take hold in a few months – the subject of ongoing Federal budget deficits has fallen by the wayside. ConvergEx's Nic Colas believes that’s a temporary phenomenon, for Congress will have to hammer out agreements to raise the debt ceiling right alongside its negotiations over the 'Cliff' items. His back-of-the-envelope attempt to quantify how much a multi-year debt limit increase would run to take this burdensome legislative issue off the Congressional docket for 5, 10 or even 20 years is worrisome at best with a $3.4 trillion for the 5-year runway, but this assumes a high level of incremental taxation. The number could be as high as $4.5 trillion. As for the longer time horizon debt runways, think in terms of an incremental $6.5 -9.5 billion for a 10 and 20 year horizon. And without significant changes to taxes and/or spending, more. Much more. We cannot help but think about Paul Krugman as we ponder these numbers. His recent book, End this Depression Now, proposes that “A quick, strong recovery is just one step away, if our leaders can find the intellectual clarity and political will to end this depression now.” This “One step” is deficit spending that is orders of magnitude greater than anything spent already. We have no idea if he really believes any of this, since it is politically impossible, but he does have a Nobel (though so did the guys at LTCM).
Gluskin Sheff's David Rosenberg may be cautious on the outlook for risk assets and cyclical securities over the near- and intermediate-term, but, he notes, change is always at the margin, and it usually starts in the political sphere. Austerity is not some dirty nine-letter word as the socialists in Europe would have you believe. It is all about living within your means and living up to your commitments. There is some good news in the United States with respect to this topic, but the uncertainty over the extent of next year's tax bite is likely to cause households and businesses to pull spending back and raise cash, at the margin, which means the economy won't turn around in time for Mr. Obama. As was the case with Ronald Reagan, just having a clear and coherent fiscal plan will part the clouds of uncertainty and encourage capital to be put at risk rather than sit as idle unproductive cash on corporate balance sheets. In a somewhat stunning sentence from the no-longer-a-permabear, he notes that "The future is brighter than you think", but just in case you are backing up the truck, he adds "this does not mean we will not have another recession, by the way — as we suffer through a deflationary debt deleveraging. I'm noticing a certain degree of despair these days, just as I am getting enthusiastic about the future. Much depends on what happens on November 6th and between now and then we still have the European mess, China hard landing risks and the U.S. debt ceiling issue to confront. Be that as it may, those with some dry powder on hand will be in a solid position to take advantage of whatever forced "panic" selling takes place."
Société Générale head of foreign exchange research Kit Juckes on the US dollar dynamic, QE 3, 4, and 5, "even lower rates for even longer than you thought," and the Bank of Japan slowly learning to match policies with the Fed.
Bob Farrell's rule #9 is: "When all experts and forecasts agree — something else is going to happen." This statement encapsulates the basic tenant of being a contrarian investor. As Sam Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?" Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is the darkest. However, being a seller in exuberant markets or a buyer in major rout is very tough, if not impossible, for almost every investor as the emotions of "greed" and "fear" overtake logical buy and sell decision making.
Instead of his usual rant, Charles Biderman of TrimTabs discusses the reality of the macro environment with Madeline Schnapp - though do not worry as the sense of sarcasm and disbelief at the government's actions and hopes is palpable. Noting that our economy is at best growing 'sluggishly' based off her real-time macro data, Biderman's right hand goes on to explain to him that inflation is running hotter than the government would like us to believe. More importantly, she hits the nail on the head with regard to what Biderman notes is the wasted stimulus money, saying that the economy needs to clear the malinvestments, not sustain them through stimulus transmission mechanisms, in order for growth to once again re-appear. Historically QE2 did manage to create some inventory restocking and pick up in wages/salaries in Q1 2011 but Operation Twist appears to have little to no impact on the real economy (outside of government statistical modelers) - which as we have said before indicates the diminishing returns to government intervention. What is clear is that, as we have noted, that post the 1971 modified gold standard, over a long-period of time it has taken an 'unsustainably' increasing amount of government debt to create economic growth - with the post-2008 insanity that we need $2.50 to create $1 of economic growth. The two end with a discussion of the debt ceiling and deficit potential for a black swan event.
“Public debt is an enemy for the country”
The dollar was a median step towards a newer and more corrupt ideal. Its time is nearly over. This is open, it is admitted, and it is being activated as you read this. The speed at which this disaster occurs is really dependent on the speed at which our government along with our central bank decides to expedite doubt. Doubt in a currency is a furious omen, costing not just investors, but an entire society. America is at the very edge of such a moment. The naysayers can scratch and bark all they like, but the financial life of a country serves no person’s emphatic hope. It burns like a fire. Left unwatched and unchecked, it grows uncontrollable and wild, until finally, there is nothing left to fuel its hunger, and it finally chokes in a haze of confusion and dread…
India is known for its historically high per capita demand for gold, particularly before festivals and the wedding season, which peaks in the months of October to December. With more than ¼ of the entire global world market for the metal, the country has long been leading world demand, though fellow BRIC member China is catching up. But recent developments in India have gold bugs stirring – protests, boycotts, and a proposal for a tax on the sale on gold jewelry has severely dampened demand ahead of one of the most lucrative festivals in the country. And with global gold prices down more than 10% since their February high of $1,787.75, there seems to be good reason to worry. While acceleration in gold prices and Indian GDP seem to link up as do Indian demand and global GDP growth, increases in demand have little correlation to gold price growth. Similarly, rampant inflation has almost no role in stifling demand for the metal. If these correlations - and the seasonal performance patterns - hold true in 2012, gold investors might be able to sleep a little easier. While none of this guarantees that gold will experience some kind of meteoric rise to $2k, especially given all the other factors that contribute to prices, Nic Colas, of ConvergEx, thinks it’s safe to say that the supposed softening demand in India shouldn’t be too concerning. The US has bought 42% less gold than it did in 2006. So when it comes to declining gold prices, don’t jump to blame India. After all, it isn’t even wedding season yet...
While, by definition, we can't 'know' or predict what the event is that becomes a Black Swan, it is nevertheless useful to consider which large risks are relatively underpriced by the market currently and perhaps more so - what to keep an eye on to consider the odds of such an event. Biancerman (or should it be Bideranco) take on Europe (the pace of the disaster is accelerating and the hope for a Draghi-save is overdone), US Inflation (focus on 3% as a 'problem' and owners-equivalent-rent), The Debt Ceiling (will Geithner get 'extraordinary' again or will it become the political hot potato that proves the deficit will never be cut) , and The Fiscal Cliff (the entire gain in income from the 2009 lows will be removed if this occurs - that doesn't seem like a positive) in this thought-provoking clip. Reflecting on these realities, Biderman so eloquently notes "means the smelly stuff is likely to hit the fan" and Bianco reminds us that, just as in 2008, "hope [in equities] can be a very powerful drug".