Double Dip

Frontrunning: April 21

  • AIG said to insure Goldman's board against investor suits (Bloomberg)
  • UK unemployment hits 16 year high - they need to subcontract the BLS (FT)
  • Earnings update: Boeing says health costs cut outlook (Bloomberg), AT&T hit by charge (Reuters), Wells misses revenue estimate (Bloomberg), Morgan Stanley posts profit on CDS and bond trading (Bloomberg)
  • V-shaped explosion: an eventual inflationary collapse into a "double dip " Greater Recession (Asia Times)
  • Richard Rahn: could the US become Argentina (Washington Times)
  • Paulson reassures on Goldman role (Reuters, WSJ)
  • Goldman says SEC case hinges on actions of one employee (Bloomberg)
  • Greece says to agree joint text with IMF, EU by May 15, claims "restructuring talks are nonsense" (Reuters)

Albert Edwards: "We Are Now Only One Cyclical Downturn Away From Outright Deflation"

Albert Edwards is out with an interesting twist on inflation/deflation. In his latest letter he notes "I have stated openly that I expect the UK 1970s experience of almost 30% inflation to be repeated in my lifetime. I also expect this to be reached in countries that got nowhere near this 30% rate in the 1970s (e.g. the US and Europe, which both peaked around 15% ? somewhat surprisingly Japan also hit almost 30% in the 1970s)." Yet he counters: "But despite my belief that we will see a paradigm change over the next decade or so, I continue to retain our heavy overweight for government bonds. Recent inflation and monetary data continues to make me feel we are now only one cyclical failure from falling into outright deflation." So for the time being, Edwards is long bonds. The question is when will the secular inflation thesis become dominant and when will "rapid nominal GDP growth [appear] dragging bond yields higher." Yet at the core of any debate is the ongoing paradox of market schizophrenia: bonds continue pressing lower arguing for accelerating deflation even as stock surge higher in anticipation of inflation and the reduction of debt through surging prices and excess liquidity. Are bonds and stocks right in principle, yet disagree in terms of timing? And if so, why do stock (which tend to have a much shorter investment horizon ) price in inflation first, and bonds second? Is Albert right, or is the market simply reacting to unprecedented Fed intervention without any guidance on how to make proper asset allocation decisions? If, as we expect, Greece collapses soon, that may be the tipping point that accelerates the resolution of that fundamental quandary.

Art Cashin Reveals An Aborted Goldman Attempt To Sell Greek Debt, Morgan Stanley On Tap To Underwrite Greek US-Denominated Debt

In this morning’s Option Investor, Jim Brown makes an interesting comment on Greece’s attempt to move some of its bonds in the U.S. market. Here’s what he wrote:

If you don't want to bid for U.S. debt you could walk on the wild side and bid on up to $10 billion in Greek debt being sold in the U.S. sometime over the next 2-3 weeks. Morgan Stanley is the likely candidate to sell the debt after a Goldman Sachs effort fell apart from lack of bidders. Greek finance minister George Papaconstantinou will lead a U.S. road show sometime after April 20th in an effort to drum up interest. Greece is trying to sell itself as an emerging market, Balkan country and thus investors will get a higher yield from emerging market debt. I guess that is a good ploy if they can sell it but I think U.S. investors may be a little more intelligent than that. Secondly, if Goldman could not sell the debt I doubt Morgan Stanley can either. Greek 10-year debt yields rose over 7% intraday today.

We had not heard of the earlier Goldman attempt. This could get interesting.

Reggie Middleton's picture

These are the news items from the Easter weekend that those who're asleep at the wheel probably missed. Yes, of course they're important and deserving of your attention, that's why they were buried into the Easter weekend!
No need to fret, I condensed them and supplied supplementary analysis to show my love:-)

How Long Will The Bond-Equity Divergence Continue? Not Much Longer According To Morgan Stanley

So far the stock market has has been having its cake, and eating it with relish too. With stocks having rallied almost 80% from the lows, the one market participant that still seems to not have gotten the memo of a surging economy is the bond market. To the credit of Merrill's Harley Bassman, 10 Year spreads have been trading in a tight range between 3.2% and 3.8% for almost a year (no doubt in big part precipitated by the Fed's control of a vast portion of the bond and MBS market). Should equities take another major leg higher, whether due to NFP or other reasons (most likely momentum inertia), it is very likely that the 10 Year, which many believe has been patiently waiting for deflation to finally be realized, will finally snap its tight trading range and go higher. Much higher. Morgan Stanley sees the 10 Year going wider by 60 bps in the next 90 days.

Half-Hearted "Happy Print" Into the Long Weekend

Well they tried, but it didn't amount to much. Too many guys took off for the long weekend, so there were not enough speculators around to paint the tape to new highs for the long weekend.

Chicago PMI Weaker Than Expected, Advance Release Spooks Market, Inventories Surge Boost Index

For those wondering what caused the market to take a beating at 9:42 AM Eastern, it was the 3 minute advance release of the Chicago PMI to subscribers (a topic we have discussed previously). The index came out for the general mort consumption at 9:45 AM, when the bulk of the loss had already taken place. As for the actual data, add the PMI to the latest set of double dip inflection indicative data. After declining sequential increases of 5.8%, 4.8%, and 1.8%, the March PMI recorded a substantial downward move of -6.1%, from 62.6 to 58.8. And as you can see on the chart below, if it had not been for the Inventories subcomponent, which surged by 24% from 42.4 to 52.4, the index would have likely posted a double digit drop. As for the credibility of an inventory build up so late in the stimulus cycle, we will leave that to the integrity of the actual data.

Disappointing ADP Comes In At -23K, Consensus Was For +40K

And just to make the miss a little more palatable, February was revised from -20K to -24K just to not show a double dip inflection point. Also, keep in mind the increasingly largest employer, the US Government, is not accounted for. Next up: Friday NFP and a +200,000 consensus, of which February snow counter-adjustments and census is about pretty much all of that.

Whither CNY Revaluation

Earlier we presented one side of the possible consequences of branding China a currency manipulator. In the realm of pundits nowhere is the China debate more pronounced than between Nobel (or is it Oscar) winner Paul Krugman and Morgan Stanley Asia Chairman Stephen Roach, in which the latter has proposed some amusing applied sporting goods suggestions vis-a-vis the former. Last night, the Morgan Stanley strategist made his case even clearer in an Op-Ed in the FT, titled "Blaming China will not solve America's problems." As we are fairly confident that the last thing America needs at this point is to antagonize its primary lender (sorry Ron Insana, the whole "if you owe a bank one trillion, you own the bank" is the most stupid thing one can say in this particular relationship), we would tend to agree that scapegoating at the national level, while easy to do (just ask Bill Lockyer and G-Pap), only shows the market that one is hopeless to actually fix the underlying problems and instead seeks to distract from the matter at hand. Roach's argument, by the way, is spot on: America is deflecting from the savings problem (which incidentally, after yesterday's PCE once again outpacing Consumer Incomes, slipped to 3.1% or the lowest levels since 2008). At this rate we will soon be back to negative savings, and the anger at China will be greater than ever. Why look to ourselves to fix a problem that so easily can be scapegoated onto others. And if it means purchasing a few more MaxiPads, pardon iPads, so much the better (out of curiosity, we wonder just where the components for the iPad are made, and just where it is assembled...).

Inverting Cause And Effect: Do Asset Prices (And Stock Market Bubbles) DetermineThe Economy And Monetary Policy?

Earlier Alan Greenspan shared some Fed insight, explaining the diagonal rise of the stock market, which can be summarized as follows - "stock prices determine the economy, not the other way round." In one simple sentence, Greenspan demonstrates that the Fed is not only chock full of people who can't read economic textbooks good (sic) but is populated by a subset of people suffering from cause-and-effect inversion disorder (it is also chock(er) full of new and improved stock traders and algos populating Liberty 33, doing all they can to make sure that in 13 up days, there is just one down). Yet in a market which has broken all laws of rationality, is the Fed's flawed self-fulfilling prophecy gaming the only thing that the amazing American's recovery is based on? To be sure, the main reason why economic skeptics such as Rosenberg, Edwards, Janjuah, and (ever decreasing) others retain their pessimism is that while the marker has now priced in one of the most ebullient, V-shaped economic recoveries in the history of the world, the underlying economy has stagnated and even downshifted into a double dip along numerous metrics, even despite ongoing fiscal stimulus and monetary pumpatude. So what is going on? Simple - the Fed, and by implication the administration, believe that once confidence and the market reach a given level, Joe Consumer will forget that the mortgage bill has not been paid in 12 months, the credit card in 3, that all neighbors lost their jobs a year ago and still can't find a new ones, and instead will merely look at the Dow (not the S&P - for some reason government/Fed workers still don't realize that nobody follows the DJIA, but whatever) and the UMich consumer confidence, for a barometer of economic health. The fallacy of this proposition is of course beyond preposterous, but these and such are the thoughts of the Federal Reserve.

Appropriately, Goldman's Sven Jari Stehn has just published an analysis looking at whether there is a two-way relationship between asset prices and the economy (merely the latest in a long line of such queries), and most relevantly: monetary policy.

asiablues's picture

The yuan-induced heated debates prompted two prominent economists--Paul Krugman and Jeffrey Frankel--to come up with two versions of swan songs for China. Ironically, the two, however diverging, could still lead to the same "next black swan" scenario warned by Albert Edwards at SocGen last November.

The JPYEUR Carry Trade Better Known As The Stock Market Is Back

If you were wondering what is driving all the action in the stock market again, and, as long discussed on Zero Hedge, over the past 6 months, wonder no more. Presenting today's intraday JPY-EUR pair, better known as the carry, and best known as the S&P 500. With no fundamentals driving the market to speak of, or at least all fundamentals rolling over into double dip territory, the only safe correlation is once again the carry trade.

madhedgefundtrader's picture

The velocity of money is collapsing. The end of a 50 year super cycle in lending. The government might as well be pushing on a wet noodle. The gold bugs have got it all wrong. The chances of the Fed being able to head off an inflationary burst are close to nil. But the bond vigilantes may have to wait a couple of years. Tax hikes of 3% of GDP next year will strangle the recovery in the crib. A wide ranging, in depth interview with John Mauldin on Hedge Fund Radio.