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".
We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble. Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon. The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. Capital markets are at the heart of capitalism and they are not working.
We have been warning of the pending fiscal cliff in the US and the somewhat inevitable debt ceiling debacle, election uncertainty, and the question of Fed independence in an election year as potential catalysts for risk flares in the US and abroad. For now, US equities are happy to ignore these events, still drawn in their Pavlovian-educated manner to US equities for their nominal enrichment. The trouble is - there are clear warning signs from some particularly noteworthy markets that all is not well (that appear more capable of comprehending fundamentals). Forget for a moment the overnight plunge and recovery in futures as this will bring only anchoring bias; a step back to 30,000 feet and we note that the spread on USA Sovereign CDS has risen by over 30% in the last month (now back at 40bps or 3-month wides) flashing a worrying warning signal for US equities if the past is any guide. Remember that US CDS are denominated in EUR and do not simply reflect the 'default' risk of the fiat-issuing USA but the devaluation or restructuring risks - and it appears market participants are getting nervous once again of the profligacy of the US government and the ineptitude of the central banks with their one-trick-pony experimentation. At the same time, central banks' broad repression has crushed volatility in every asset class - except, as Morgan Stanley notes - credit which is inferring considerably higher chance of a risk flare in the short-term. So while this week will bring cheers of growthiness and cooperation and decoupling, the all-seeing eye of credit markets remain far less sanguine.
With earnings season now virtually over, it is time to ask why, despite a majority of the companies beating expectations, is the S&P inline with where it was when earnings season started. There are two main reasons why the market has not been impressed: the percentage of "beaters" is nothing spectacular on a historical basis as was shown previously, especially in the aftermath of aggressive cuts to Q1 top and bottom line forecasts heading into earnings reports; more importantly, even with Q1 earning coming out as they did, the bulk of the legwork still remains in the "hockeystick" boost to the bottom line that is completely Q4 2012 loaded, as bottom up consensus revisions to the rest of 2012 are negative despite Q1 beats. As Goldman summarizes: "1Q 2012 will establish a new earnings peak of $98 on a trailing-four-quarter basis. With 88% of S&P 500 market cap reported, 1Q EPS is tracking at $24.10, 1% above consensus estimates at the start of reporting season and reflecting 7% year/year growth." So far, so good. And yet, "Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%."
Excessive spending has created record levels of debt and deficits, and the worst is yet to come, threatening opportunity and prosperity for younger generations. In these 10 charts, via The Heritage Foundation, we highlight the third (and arguably most frightening) in our four-part series on the Federal Budget - Debt & Deficits.
Something funny happened when last August CNBC hired access journalist extraordinaire Andrew Sorkin to spiff up its 6-9 am block also known as Squawk Box: nothing. At least, nothing from a secular viewership basis, because while the block saw a brief pick up in viewership driven by the concurrent (first of many) US debt ceiling crisis and rating downgrade, it has been a downhill slide ever since. In fact, as the chart below shows, the Nielsen rating for the show's core 25-54 demo just slid to multi-year lows. And as NY Daily News, the seemingly ceaseless slide has forced CNBC to start panicking: "CNBC insiders tell us executives at the cable business channel are “freaking out” because viewership levels are down essentially across-the-board, particularly with its marquee shows, “Squawk Box” and “Closing Bell." “Their biggest attractions have become their biggest losers,” says one TV industry insider familiar with the cable channel’s numbers. According to Nielsen ratings obtained by Gatecrasher, from April 2011 to April 2012, “Squawk Box” is down 16 percent in total viewers and 29 percent in the important 25-54 demographic bracket that advertisers buy." Yet is it really fair to blame the slide of the morning block's show on just one man?
There is nothing quite like a $70 billion debt auction settlement at the last day of a month to bring total US debt to a record $15.692 trillion, which happens to be just $600 billion shy of the $16.394 trillion debt ceiling. (and no, contrary to simple economic textbook lesson, this does not mean that the private sector just got another $70 billion in debt capacity courtesy of taxpayers, as explained here). And now that we know what Q1 GDP was at the end of Q1, or namely $15.462 trillion, it is simply math to divine that today alone total US/debt to GDP rose by 50 bps to a mindboggling 101.5%.
Treasury Forecasts $447 Billion In Funding Needs Thru End Of September - $300 Billion Shy Of TrendlineSubmitted by Tyler Durden on 04/30/2012 16:50 -0400
Earlier today, the Treasury forecast that in the third and fourth fiscal quarter of 2012 (April-September), the US would need a total of $447 billion in new debt (split $182 billion in Q3 and $265 billion in Q4), bringing the total debt balance to just over $16 trillion by the end of September. While this is a commendable forecast, and one which certainly has provided to alleviate rumors that the US debt ceiling of $16.4 trillion would be breached by the mid/end of September, the chart below shows that it may be just a tad optimistic.