What a difference a month makes. About 4 weeks ago the European crisis was "over" - French President Sarkozy exclaimed that: “Today, the problem is solved!” Christine Lagarde, former French finance minister, and current IMF head following the framing of DSK, added that “Economic spring is in the air!”... Fast forward to today when following the inevitable end of the transitory favorable effects of the LTRO (remember: flow not stock, a/k/a the shark can not stop moving forward), the collapse of the Spanish stock market, the now daily halting of Italian financial stocks, the inevitable announcement that shorting of financials in Europe is again forbidden, and finally the record spike in Spanish CDS, Europe is broken all over again. Which brings us again the Sarkozy and Lagarde. The Frenchman who is about to lose the presidential race to socialist competitor Hollande (an event which will have major ramifications for Europe as UBS' George Magnus patiently explained two months ago), no longer sees anything as solved, and instead is openly begging for the ECB to inject more, more, more money into the system to pretend that "problems are solved" for a few more months. Incidentally, so is Lagarde, for whom in an odd change of seasons, economic spring is about to be followed by a depressionary winter. The problem is both will end up empty handed, as the well may just have run dry.
Tim Geithner Glitch In The Matrix Special: Will America Become Greece In Two Years - "No Risk Of That"Submitted by Tyler Durden on 04/15/2012 16:45 -0500
Geithner April 2011: Q: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?” - Tim Geithner: “No risk of that.”
Geithner April 2012: Q: “If we don't deal with these debt problems we are going to be Greece in two years” - Tim Geithner: “No risk of that.”
From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011... and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don't have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.
We cannot collect enough taxes to catch up with spending
A Monetary Cliff or a Fiscal Cliff: these are the two poisons that Barton Biggs sees rushing straight toward America, with little hope of an uneventful collision. While we have not been shy of our opinions on Barton Biggs' flip-flopping positions, his note on the US "as a nation of totally self-centered special interest groups that terrorize our politicians" struck a chord and deserves praise in its clarity. Noting that Europe seems stuck again, he points to the US market being data and Europe-dependent for the next month and believes the correction is little less than half way over (in terms of size not time). In Biggs opinion "although the Monetary Cliff is more long-term dangerous, the proximity of the Fiscal Cliff, if not dealt with, will trigger the dreaded double-dip recession we are all terrified of and bring on another financial crisis."
The second bond auction of the week prices uneventfully, with the Treasury selling $21 billion of 10 Years at a yield of 2.043%, better than the 2.045% When Issued, and better than last month's 2.08%. Yet keep in mind that inbetween the March auction and today, the 10 year hit nearly 2.40%, so don't let the apparently stability give the impression that there is no volatility under the surface. Unlike the yield, the Bid To Cover dropped from last month's 3.24 to 3.08, which while week for recent auctions was just below the TTM average of 3.12. What is of note is that Dealers had to once again take down more than half the auction, or 50.5%, with the last time there was more than a 50% takedown being back in November 2011. Of the balance 11% went to Direct, and the remainder or 38.5% to Indirects. Overall, a quiet auction and now we just have tomorrow's $13 billion 30 Years to look forward to as total US debt approaches the $15.7 trillion milestone next on its way to the $16.3 trillion debt ceiling breach in 6 months. In the meantime enjoy fixed coupon bonds: for in one month, the FRN cometh.
Here is a number for you: 70% That is roughly how many economic reports have missed their mark in the last month. Why is this important? Believe it or not - It has a lot to do with the weather. We have written many times recently about the weather related effects skewing the seasonal adjustment figures in everything from the leading indicators and retail sales to employment numbers. Now those weather related boosts are beginning to run in reverse as weather patterns return to normal and realign with the seasonal adjustments. This resurgence of economic weakness is only just beginning to appear in the fabric of the various manufacturing reports. The Chicago Fed National Activity Index (a broad measure of 85 different data points) has declined from its recent peak in December of .54 to .33 in January and -.09 in February. The ISM Composite index (an average of manufacturing and non-manufacturing data), Richmond, Dallas and Kansas Fed Manufacturing indexes all posted declines in March.
One can write lengthy essays, op-eds, and client letters explaining both why the labor force participation rate is plunging due to innocuous reasons such as everyone over 40 retiring yesterday full of jouissance and excitement to begin the sunset phase of their lives using copious life savings earning 0.0001% in interest, or, inversely, why this is one great big propaganda ploy by the BLS to make Obama look good a few short months ahead of the pre-election debt ceiling breach, pardon, his re-election date. We prefer cutting to the chase. Here is today's chart of the day from BofA, which begs one simple question: when will the two time series recouple, because recouple they will, and how will America react to the realization it was lied to for 2% worth of unemployment "improvement"? The chart says it all.
A few weeks ago when discussing the imminent debt ceiling breach, and the progression of US debt/GDP into the 100%+ ballpark, we reminded readers that in February S&P said it could downgrade the US again in as soon as 6 months if there was no budget plan. Not only is there no budget plan, but the US is about to have its debt ceiling fiasco repeat all over as soon in as September. Which means another downgrade from S&P is imminent, and continuing the theme of deja vu 2011, the late summer is shaping up for a major market sell off. Minutes ago, Egan Jones just reminded us of all of this, after the only rating agency that matters, just downgraded the US from AA+ to AA, with a negative outlook.
Who will buy our debt in the coming months and years? Europe is saturated with debt and doesn’t have the means to purchase our debt. Japan is a train wreck waiting to happen. China’s customers aren’t buying their crap, so their economic miracle is about to go in reverse. The Federal Reserve cannot buy $1 trillion of Treasury bonds per year forever without creating more speculative bubbles and raging inflation in the things people need to live. The Minsky Moment will be the point when the U.S. Treasury begins having funding problems due to the spiraling debt incurred in financing perpetual government deficits. At this point no buyer will be found to bid at 2% to 3% yields for U.S. Treasuries; consequently, a major sell-off will ensue leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity. In layman terms that means – the shit will hit the fan. The Federal Reserve and Treasury will be caught in their own web of lies. The only way to attract buyers will be to dramatically increase interest rates. Doing this in a country up to its eyeballs in debt will be suicide. We will abruptly know how it feels to be Greek....The entire financial world is hopelessly entangled by the $700 trillion of derivatives that ensure mass destruction if one of the dominoes falls. This is the reason an otherwise inconsequential country like Greece had to be “saved”.
Today's otherwise key news event - the ECB rate announcement (which just printed at unchanged as expected) and press conference, will be trivial. As such, everyone is set to ignore the latest update from Mario Draghi, who courtesy of a $1.3 trillion liquidity injection since December has now largely wasted all his liquidity dry powder, at least until Spanish and Italian bonds are trading back at 7%, some time in the next few months. The result is that people like Citi's Steven Englander are saying to ignore the ECB, and to focus solely on the ADP (which has a horrendous predictive track record of the actual NFP print) report, to be released at 8:15 am, as it may be the only tradable hint ahead of the NFP report which as noted before is coming out on Friday, which is an equity holiday, although futures and bonds will be trading at the time of the release. More importantly, since the Fed now responds to economic data points in real time, a big miss to the consensus print of 206K will likely set the market surging as it will mean the Fed doves are back in control. Paradoxically, a meat or big beat, will be very market negative, as it will justify the withdrawal of liquidity support for at least 3-4 months, when the election fight will be in full swing, and Obama would be quite happy for another boost to the S&P in advance of November, and the repeat of the debt ceiling fiasco.
...For those confused why the market is reacting like a stung bee to today's announcement that contrary to Jan Hatzius' expectations, Twist may not be extended (at least not before we get a 20% market correction), here is where all, repeat all, market "growth" has come from in the past three months. Hint: $2 trillion in central bank easy money. Because the ECB is now shooting blanks, the Fed will find it difficult to ease so close to the debt ceiling farce, and the BOJ is irrelevant. And if the spigot is shut off, watch out below.
It is no secret that when it comes to attention spans and 'deep thought', Americans would rather be at the movies. After all, for a country which prides itself on its distractability and sales of ADHD medications, the only thing that matters is the line up of entertainment. Perhaps one reason why last summer's debt ceiling fiasco ended up being such a popular thriller with the masses is that the movie lineup at the time was less than inspiring, leading to a 1.4% decline in summer theater attendance. Which begs the question: what is in store for this year? Because as we have noted, we already know that the US debt ceiling will likely be breached sometime in September, leading into the presidential election, and as a result Americans will demand distraction, or else there is an all too real possibility the same market crash as happened in August of 2011, may recur. So what are the distractions in store for the herd? Courtesy of BofA and the Hollywood Stock Exchange, here is the complete summer lineup, coupled with the HSX movie stock price (an indicator of expected revenues). Will it be enough to offset reality setting in with a thud? You decide.
As it now stands, the US economy faces a “fiscal cliff” in early 2013 – meaningful Government spending cuts AND tax increases at the household level. Nothing like a double whammy, now is there? Unquestionably this is one of the reasons why the Fed has pledged to leave short-term interest rates low for some time. So what happens if nothing is changed and both tax increases and spending cuts are allowed to materialize? Although it’s an approximation, the deadly combo could shave 1.5% plus from US GDP next year. Estimates from the Congressional Budget Office are for a more meaningful contractionary impact. And that’s before the ultimate global economic fallout influence of Europe and China slowing. But there is a larger and very important issue beyond this, although the “cliff” is something investors will not ignore and could be very meaningful to forward economic and financial market outcomes, especially given the relative complacent market mood of the moment.
It is funny to hear the talking heads preface virtually every bullish statement with "the US economic data is getting better." It's funny because it's wrong. We have been tracking economic data based on our universe of indicators and as of today we have seen a miss rate of about 80%. And now, Deutsche Bank has joined us in keeping track of economic beats and misses, with their own universe of 31 economic indicators. The results are shown below and the verdict is in: the US economy has officially turned the corner... lower, now that the seasonally adjusted boost from a record warm winter fades and becomes an actual drag (not to mention the fading of the $2 trillion in central bank liquidity).