Gross Domestic Product
The ECB's new bond purchases are not being sterilized like last year. In fact, just the opposite.
Citi On The SNB Non-Intervention: Pegs Can't Fly, And Why FX Spot Market Intervention Is Not A PanaceaSubmitted by Tyler Durden on 08/17/2011 07:27 -0500
Citi's Steven Englander was proven 100% in his skepticism to the SNB's intervention. Here are his follow up thoughts:
- We think that the SNB is still largely reluctant to intervene on the FX spot market. Investors expecting such measures in the near term could be
disappointed in our view.
- The latest measures imply that the SNB will have to increase the size of its balance sheet by at least about CHF 40bn or 8% of the Swiss GDP
- FX spot market intervention is not a panacea and that the best that the SNB could hope for would be to prevent further CHF appreciation.
- While we could have seen the lows in EURCHF and USDCHF for now, we doubt that an uptrend in the crosses could be sustained.
Consumers used to have discretionary income which they would use or not use depending on their mood. Beginning in 2008, consumers had less money but the price of commodities shot up and that has kept consumer spending high – but that doesn’t mean they are happy about it.
All In A SecTres Day's Work: Total US Debt Hits All Time Record $14,615,567,348,203.71, $28 Billion Higher OvernightSubmitted by Tyler Durden on 08/16/2011 15:49 -0500
Good thing the whole debt ceiling fiasco taught Tim Geithner a thing or two about being frugal, or else today's $28 billion increase in total debt to a new all time high of $14,615,567,348,203.71 may have been far, far worse. At least congress still has $127 billion in dry powder before it has to authorize the extension of the interim debt ceiling cap of $14.694 trillion. At this rate, total debt and US GDP will achieved parity in 4 months, and if the US actually contracts (negative GDP in Q2 and Q3) and enters recession, that will be one divergence spread we will never want to be on the compression side of.
One Of Worst Monthly Sell Offs In High Yield Market's 25 Year History Implies "100% Probability Of Mild Recession"Submitted by Tyler Durden on 08/16/2011 14:20 -0500
More flashing red recessionary indicators are coming courtesy of the largely ignored High Yield market, which following a 5.3% decline is, as Bank of America (itself ironically contributing substantially to the blow out) says, is shaping up to be "among the worst months in the HY market's 25 year history, in a bad company of post-Lehman, post-WorldCom, post-9/11, and post-Russia sell-offs. The difference of course is that we did not have the largest bankruptcy in history taking place (LEH or WCOM shared that title at a time), no terror attack, and no outright sovereign default (Russia in Aug ’98). What we did have however, is a global risk-off trade, sparked by concerns that this fragile environment could slip into a double-dip recession as consumer and business confidence fails to sustain repeated beating from sovereign and financial systemic risk issues." What we also did have is the near end of the modern ponzi economic model, whose viability was once again extended courtesy of a variety of sticky objects thrown at the wall with hopes one sticks. For now the obliteration has been halted, although one thing is undeniable - central planner intervention buys increasingly less and less time. We are confident that August is just the beggining of pain for not only HY, but all other asset classes. And some more ammo for those who like comparing 2011 to 2008: "Parallels are being drawn between today’s environment and that of 2008, given the degree of equity destruction that has taken place across the financial space. Financial CDS – the epitome of ’08 systemic risk – are trading at an average of 190bp in the US, within reach of Oct ’08 levels, and 240bp in Europe, well north of their ’08 wides." What do spreads imply? Nothing short of recession: "The HY index, in the meantime, has widened to 739bp as of close on Thursday, its widest level since Nov 2009. With the spread normally peaking at 1,000bps in full recessionary periods2 (1991 and 2001-02) and bottoming at 250bp in times of strong economic growth, the current level is pricing in an 80% probability of a fullblown contraction in GDP, and a 100% chance of a mild recession."
QE3 ON: Goldman Lowers Global Government Bond Forecasts Following 2012 US GDP Cut To 2.1%, Repeats "QE3 Is Part Of Baseline Estimates"Submitted by Tyler Durden on 08/16/2011 09:34 -0500
For those wondering why gold just surged by about $20 dollars, and why Gartman's cab driver once again proves to be far more astute than his passenger, we bring to your attention a report just released by Goldman's Francesco Garzarelli which is appropriately titled "The Price of Slower Growth" - appropriately, because in it Goldman slashes the firm's outlook on global policy rates across the board, slashes to cut its 10 Year bond yield outlook from 3.75% to 2.75% in 2011 and from 4.25% to 3.50%, slashes 2012 US GDP from 3.0% to 2.10%, and once again makes it all too clear that QE3 is coming, and not only coming but is already priced in (to the tune of about $300-400 billion): "In previous work, we have estimated that every US$1trn in purchases, if maintained, decreases 10-yr Treasury yields by 25bp-50bp. If our subjective assessment that market participants now assign a greater-than-even chance of ‘QE3’ is correct, and considering that the expected ‘unsterilized’ size of these purchases is in the region of US$600-800bn, this would equate to as much as 20bp being already ‘in the price’. Clearly, these magnitudes are unobservable, and thus subject to great uncertainty. Nevertheless, our calculations would suggest that the bond market is already discounting a mild recession and the chance of a Fed reaction to it." Translation (and this is nothing new to ZH readers): Bill Dudley has his marching orders from Jan Hatzius: GS now sees deflation as the broader risk, and anything and everything must be done to make sure Wall Street has another record bonus season round, pardon, deflation must be halted.
A French-owned rating agency (the same country that currently has a short-selling ban) just did all it can not to tip the boat. What can one say but "truly a gutsy call." Unlike S&P which looks at such obsolete things as fundamentals and realistic projections, Fitch instead relies on something far more intangible: "its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base." In other words, it's rated AAA... because it is rated AAA. Somehow we doubt Fitch will take the initiative to be the first to downgrade France... That said even Fitch had some pseudo-harsh words: "Despite its exceptional creditworthiness, the fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to 'AAA' peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst 'AAA' sovereigns. However, federal government indebtedness is lower than in other major 'AAA'-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK ('AAA') and France ('AAA')." So, record debt for a AAA-rated country, check, but... AAA-rated. So all is good.
Throughout the PIIGS crisis, it has been a given that the German juggernaut economy would provide the strength for the rest of Europe to rely on. Last week's weak French GDP number highlighted concerns about the ability of France to retain its AAA rating. Today's weak German GDP numbers will make it even harder for Merkel to convince German's that they need to spend even more money fixing problems abroad. Certainly some opposition members are likely to use the weakness as a sign that she has had her eye of the ball and the domestic economy is suffering at the expense of all her bailout jaunts. I think this potential weakness in the core of Europe is a new addition to the growing list of problems facing the global economy. Empire manufacturing, a relatively minor data point, was awful yesterday. Stocks were able to ignore that yesterday, just as they ignored the extremely weak consumer confidence number on Friday. It feels like a lot of hedges were cut yesterday and the bullishness that was inspired by the strength of stocks has been replaced with doubt again. So far people aren't rushing to put on hedges, but the tone has become decidedly negative.
US Resumes Importing Inflation, Exporting Deflation, As Annual Import Prices Increase Highest Since August 2008Submitted by Tyler Durden on 08/16/2011 07:45 -0500
So much for the end of inflation importing. After dropping by the most in 2011, or 0.6% in June, import prices once again increased firmly, rising by 0.3% in July, on expectations of a -0.1% decline. So much for that commodity drop "cooling" with fuel imports increasing 0.4%, and non-fuel imports up 0.2%. The take home: "Import prices rose 14.0 percent for the year ended in July, the largest 12-month advance since the index increased 18.1 percent for the year ended in August 2008." The picture is far uglier on the export side, where prices posted the first drop since July 2010. "The downturn was led by a decline in the price index for agricultural commodities, which was partially offset by an advance in nonagricultural prices. Export prices rose 9.8 percent over the past 12 months, down from the 10.1 percent change for the year ended in June, which was the largest year-over-year increase in export prices since a 10.2 percent advance between July 2007 and July 2008." In other words: the US is now importing inflation and exporting deflation. What does that mean if you are a chairman of the Fed reserve? Why, that you want to return the favor of course, and as soon as possible at that, as this implies ongoing GDP contraction due to terms of trade.
We are not sure just how many times the same piece of news can be recycled and spun off as new, but here goes. After we reported back in July that "Merkel faces a German revolt over the Greek bailout", a sentiment broadly indicative of what will happen today should the 12:30 pm EDT MerkOzy summit actually not disappoint markets (and it well), here is Ambrose Evans-Pritchard with the latest speculation on the mutiny that awaits Frau Merkel should she proceed with putting doomed common currency over the interests of her people. From the Telegraph: "The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP). Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future." And to think a few short days ago we were ridiculing Die Welt's media propaganda approach to make it seem that the Eurobonds were a done deal...
- High pressure on Sarkozy-Merkel talks (Reuters)
- Noda to "watch" "one-sided moves" in the USDJPY to parity soon enough - Yen to Reach Record Amid ‘Downfall’ of West, Sakakibara Says (Bloomberg)
- Eurobond Debate Rises in Germany, France (WSJ)
- China official paper calls for widening of yuan trading band (Reuters)
- China Economy Slowing ‘Significantly,’ Conference Board Says (Bloomberg)
- BOE's Miles: No Need for More QE (WSJ)
- Christine Lagarde: Don’t let fiscal brakes stall global recovery (FT)
- Zoellick: Governments should deal with global debt woes (Reuters)
- On Midwest Bus Tour, Obama Jabs at GOP (WSJ)
- U.S. debt still safest place for China reserves: top banker (Reuters)
Economic growth is faltering in all major economies with data this morning showing Eurozone and German GDP growth slowing. Eurozone GDP rose 0.2% from the first quarter, when it increased 0.8% while German GDP growth fell by more than expected in the second quarter, dropping to a derisory 0.1%. Double dip recessions involving inflation and therefore stagflation seem increasingly likely.The conditions today are far more bullish than in the 1970’s as in the 1970’s the U.S. was the largest creditor nation in the world whereas today the U.S. is the largest debtor nation the world has ever seen. Gold went parabolic in the 1970’s after a period of stagflation. Today, we appear to be on the verge of a period of stagflation. The 1970’s saw significant geopolitical risk with oil crisis, the overthrow of the Shah of Iran and the Russians invading Afghanistan. Today there is significant geopolitical risk in the world, arguably more, and there remains the real risk of a conflagration in the Middle East between Israel and its allies and Iran and its allies. Today we have a global debt crisis, massive systemic risk in the financial system threatening the solvency of many banks and sovereign governments. This was not the case in the 1970’s. This makes a parabolic move in gold very likely in the coming days, weeks and months. Increasingly, the question is not if we go parabolic rather it is when do we go parabolic – in the weeks and months or in the coming years.
Just when Europe managed to get away from the headline rotation for one whole day, it is back with a thud, reminding everyone that at the heart of it all is not a liquidity crisis but a solvency one, after both German and EU GDP surprisingly missed consensus. And what a surprise it was: while everyone was talking about stagflation in the US, the UK, even China, few if anyone dared to mention that word in the same sentence with Germany. That may change after Q2 GDP expanded by just 0.1% in Q2, on expectations of 0.5% growth and down from a downward revised 1.3% (from 1.5%) previously, (2.8% growth Y/Y vs exp of 3.2%). According to the stats office the weak result was primarily due to weaker net trade and consumption. Well if export-focused and mostly wealthy Germany can't generate enough growth through these two core sources of economic output, then nobody can. The immediate result of this datapoint was Commerzbank, and soon other, analysts lowering their GDP forecasts for 2011 to 3% from 3.4%. Germany is still expected to grow faster than the rest of the Eurozone but not by much any longer as this latest decoupling thesis starts to implode. And speaking of Eurozone GDP, it too surprised to the downside, printing at 0.2% on expectations of 0.3$ Q/Q, down from 0.8% previously (or up 1.7% Y/Y on expectations of 1/8%). The accelerating contraction of the European (and German) economy proves that just like in 2008, the ECB's series of rate hikes was the most misguided decision possible by the world's most clueless central bank, and anyone hoping for more rate hikes can kiss such dreams and aspirations goodbye.The net result: yesterday's entire no volume stock market levitation is about to be undone. Too bad the ECB can't buy some extra GDP for its insolvent (and solvent... for now) member countries.
I am confident in predicting we are about to have another Global Financial Crisis—I’m calling it The Sequel: Same movie, same players, same story. Only this time around—like all good sequels—the financial crisis we are about to experience is going to be bigger, longer, and uncut by bailouts. By the way, that is the key difference between 2008 and 2011: We’re not going to have a Hollywood Ending this time around. The governments of Europe and the United States, as well as their respective central banks, do not have any weapons to fight off this 2011 financial crisis, as they did in 2008, for the simple reason that they used them all up—they’re out of bullets, both monetarily and politically. So when The Sequel hits the big screen, there won’t be a Big Daddy Government deus ex machina to come save the day in the third act twist. When The Sequel hits, we’re on our own.