Gross Domestic Product

At this point I can’t help wondering if China and GM should form a strategic alliance to attain truly “miraculous” growth. China could build dealerships, let GM fill them with cars, then blow them up only to build a NEW dealer to which GM could deliver a new load of cars, thus insuring record sales for GM and record GDP for China.

During his presentation to the Senate yesterday (to be followed promptly by another presentation before Congress shortly), Bernanke discussed the impact of the $61 billion spending cut on GDP. In doing so he referenced a report published by Goldman strategists Jan Hatzius and Alec Phillips. He did so incorrectly. And the first thing Hatzius did this morning is to correct the Chairman: "Some have wondered—e.g. in the Q&A portion of Fed Chairman Bernanke’s monetary policy testimony on Tuesday—how such seemingly small cuts could have such a noticeable impact.  But it is important to remember that we are talking about a hit to the quarter-on-quarter annualized growth rate of spending here, not about a hit to the level of GDP.  For illustration, it is useful to go through a simplified version of the calculation underlying our estimates for the House-passed spending cut." Hatzius clarifies further: "We estimate that the $25bn cut in our budget projections reduces growth in Q2 by around 1 percentage point (annualized); this effect is already incorporated in our forecast that real GDP will grow 4% (annualized).  In addition, we estimated that the $61bn cut passed by the House would reduce growth in Q2 and Q3 by 1½-2 percentage point (annualized) in Q2 and Q3.  (In other words, relative to the assumptions currently embedded in our forecast, the House-passed package would imply an additional ½-1 percentage point drag on growth in Q2 and an additional 1½-2 percentage point drag in Q3.)  Spending would then be maintained at that lower level thereafter, and the effect on GDP growth would dissipate quickly in Q4 and would be essentially neutral by 2012 Q1." So perhaps the Chairman will keep this in mind as this report is surely reference once again today.

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.

Markets mixed this morning with the U.S. up and Europe in negative territory as oil prices rose dramatically and Middle Eastern turmoil raged on. Bernanke spoke yesterday in the semi-annual Humphrey Hawkins speech to Congress, continuing to push Congress to tighten fiscally and to not raise the short term debt limit. While expressing concern for inflation risks, he remained confident that the outlook remains stable for the country. Monetary policy is likely not to tighten until unemployment is subverted and inflation stabilizes toward 2%. Bernanke’s presentation to Congress continues today. Data yesterday showed that manufacturing grew at its fastest pace since 2004, as the ISM Manufacturing Index rose to 61.4 in February v 60.8 prior, putting the U.S. in the head of the pack in the recent manufacturing upswing and causing a sell-off in treasuries. While we do not necessarily believe that a rapidly rising ISM will drive GDP growth above 3%, we do believe that Friday’s payrolls numbers will not echo the prior months disappointment and should print close to the consensus forecasts. Today’s ADP, however, is anyone's guess since the tracking error flipped late last year. The Fed’s release of its Beige Book to this afternoon will provide a more narrative outlook on the current economy.

This is the first in an occasional series examining the end of the American Empire and the global shock waves it will produce. Contrary to popular belief I suspect the unraveling will take place over many years, decades even, with sudden plunges and slow partial recoveries aka dead cat bounces. I call this series of examinations “End Game”.

Over the past several decades, the American economy has been slowly but surely merged into the emerging one world economic system.

Guggenheim's Scott Minerd has released a somewhat controversial piece looking at several steps forward in case the MENA crisis escalates to the point where dominoes start toppling each other. His conclusion: "After all these dominoes fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exasperated by shrinking exports, leading to a decline in the value of the euro. Against this landscape, the U.S. economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis." Needless to say we disagree with this rather simplistic assessment, or rather, with a very large caveat: in nominal terms, Minerd may well be right, but the resultant surge in oil to well over $200 (should his thesis pan out) will cripple the US economy, force the Treasury to turn on the afterburner on debt issuance, and ultimately result in the biggest bout of monetization ever, resulting in the death of the US dollar (and thus, the resurgence of the gold standard). That said, it is a good piece, if one takes the conclusion with a big piece of salt. In our opinion, the only clear winners from the domino collapse will be oil as we have claimed since early January... and the PM complex of course.

Counterfeit money exploits trust by presenting a facsimile of authenticity. A high-quality counterfeit bill (for example, the $100 bills exported by North Korea) are facsimiles of authentic paper notes which then gain the trust of users. A counterfeit gold bar is a piece of lead coated with a layer of authentic gold. The mechanism is the same: a veneer of integrity tricks the buyer into trusting the validity of the entire bar. The U.S. has a deeply counterfeit economy.

Silver has risen another 1.4% today to a high of $34.44/oz and above the 31-year interday high of $34.33/oz reached last Tuesday (February 22nd). Silver is higher in all currencies this morning, especially the Japanese yen. The news that Saudi Arabia may be sending tanks to crush anti-government protests in Bahrain saw buying of silver, gold and oil. The backwardation and news regarding delays and difficulty of securing silver bullion in volume including the Royal Canadian Mint having difficulty sourcing physical bullion from bullion banks suggest that silver could soon break out and move sharply higher. The moves in silver have been greeted with the usual silence by mainstream financial media with little or no coverage or fanfare about the record highs. Indeed, only those who peruse the specialist press and make it their business to inform themselves about silver, would even be aware of the record highs.

• China says media must 'cooperate' after clampdown (AFP)
• Shirakawa Says Current Yen Level 'Not Working As An Additional Risk Factor' (WSJ)
• China Sees Drop in New Bank Loans (WSJ)
• EU Raises 2011 Growth Forecast, Sees Inflation Accelerating (Bloomberg)
• Europe Wary of Rethink Over Irish Bail-Out (FT)
• Charlie Sheen v Muammar Gaddafi: whose line is it anyway? (Guardian)
• BOE's King Says Raising Rate to Make a Gesture Is Self-Defeating (Bloomberg)
• Cameron Says UK Could Arm Rebels (FT)
• Bill Gross Gets `A' for Effort on Trader Greed (Bloomberg)

Markets in positive territory this morning. NY Fed President William Dudley said yesterday that unless inflation expectations are significantly surpassed, short-term interest rates will remain low, while also adding that no change in current monetary policy is likely. In contrast, St. Louis Fed President James Bullard said yesterday in an interview that the Fed will finish QE2 without full dispensation. The statements reflect the heating debate over the future of the current stimulus program. Economic events today include ISM, which by all preliminary indicators should print ahead of the 61.0E. Such a high print might well set the stage for a front end selloff, which we would use as an entry point as we do not believe the historical relationship between ISM and overall GDP growth will hold owing to the fact that ISM will be more bolstered by large sized exporters that are neither the trough of the economy, nor the path it will take back. Additionally today features Fed Chairman Bernanke’s Humphrey Hawkins testimony. Today’s Senate Banking Committee portion is usually calmer than tomorrow’s House Financial Services Committee schedule, but we expect the usual grandstanding from legislators and for Bernanke to be cautiously optimistic regarding the economy, but defensive about monetary policy. The market has in the past interpreted commentary regarding potential exit strategies as being indicative that those strategies are about to be employed, therefore we think Bernanke will avoid that discussion as best he can. If he does not, however, we believe that as with the ISM above, the front end should be bought up on a selloff.

As oil (read Brent) looks set to take out interim highs following news of a rapid escalation in Bahrain and Saudi Arabia, it will be interesting if Ben Bernanke, in his first of two semi-annual Humphrey Hawkins reports before Congress and the Senate, will actually discuss what is relevant: namely the inflationary surge in every single commodity, and plunge in the dollars, and the Fed's continuing preposterous policy of only caring about the Russell 2000 instead of actually doing anything to improve the economy. Reuters' advance look of today's presentation before the Senate Banking Committee at 10:00 am which will be webcast on Zero Hedge is quite amusing: "Federal Reserve Chairman Ben Bernanke will likely remain skeptical about the strength of the economic recovery in testimony on Tuesday, despite recent data pointing to improvement, signaling the central bank is unlikely to cut short its $600 billion stimulus plan." Why skeptical? Has he not been listening to the endless stream of permabulls on TeeVee every day, not to mention the teleprompter, all of whom have invested their entire reserve of credibility in lying to the public that we are in a V-shaped recovery and what not. Or is the economic recovery only and always merely a function of the Fed's ongoing injection of $100+ billion directly into the banking system (and the Russell 2000)? Because oddly the "pundits" always continue to ignore that one minor point.

Should the U.S. ban oil imports [except Canada] for energy security and independence? At least that's the policy proposed by a study group at Yale.

In a January 2009 ABC interview with George Stephanopoulos, then President-elect Barack Obama said fixing the economy required shared sacrifice, "Everybody’s going to have to give. Everybody’s going to have to have some skin in the game." For the past two years, American workers submitted to the President’s appeal—taking steep pay cuts despite hectic productivity growth. By contrast, corporate executives have extracted record profits by sabotaging the recovery on every front—eliminating employees, repressing wages, withholding investment, and shirking federal taxes. Washington’s embrace of labor market flexibility ensured companies encountered little resistance when they launched their brutal recovery plans. Leading into the recession, the US had the weakest worker protections against individual and collective dismissals in the world, according to a 2008 OECD study. Blackrock’s Robert Doll explains, “When the markets faltered in 2008 and revenue growth stalled, U.S. companies moved decisively to cut costs—unlike their European and Japanese counterparts.” The U.S. now has the highest unemployment rate among the ten major developed countries.

Who believes this stuff?