Gross Domestic Product
Here come the downward revisions to the "strong" initial Q4 GDP print. Moments ago the December trade deficit was released, and it soared from the impressive November deficit print of $34.6 billion to a far less impressive $38.7 billion, far above the $36.0 billion expected, and an indication that, as we warned, the Q4 GDP revisions are imminent (unless of course inventory numbers rise even more to offset the weakness). As the BEA simply explains, "The deficit increased... as exports decreased and imports increased." Indeed.
Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.
Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:
1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.
2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.
Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.
"Markets were over-priced coming into 2014," warns Sam Zell (noting that he does not believe in the Fed's wealth effect perspective on market-growth helping buying and selling decisions in the real economy), but while he sees a benign outlook for residential real estate, among his biggest concerns are "half-assed" Obamacare's "deleterious effect on the USA" and its "need to be radically changed." Supportive of Carl Icahn and his 'capitalist activism', Zell adds rather frankly that he believes Tom Perkins was correct about the "the 1%... for political convenience," and reminds Bloomberg TV's Betty Liu that "the politics of envy, the politics of class warfare are what has separated America from many parts of the rest of the world," until now.
An "Austrian" Bill Gross Warns: "The Days Of Getting Rich Quickly Are Over... Getting Rich Slowly May Be As Well"Submitted by Tyler Durden on 02/05/2014 13:03 -0500
If readers ignore the rest from the latest monthly insight from Bill Gross of PIMCO, they should at least read the following insight which we agree with wholeheartedly: "our PIMCO word of the month is to be “careful.” Bull markets are either caused by or accompanied by credit expansion. With credit growth slowing due in part to lower government deficits, and QE now tapering which will slow velocity, the U.S. and other similarly credit-based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume. Perhaps the whisper word of “deflation” at Davos these past few weeks was a reflection of that.... don’t be a pig in today’s or any day’s future asset markets. The days of getting rich quickly are over, and the days of getting rich slowly may be as well. Most medieval, perhaps." Where have we read this recently? Why in An “Austrian View” Approach To Equity Prices in particular and the bulk of Austrian economics in general. Which means that following the TBAC, i.e. the committee that really runs the US, none other than the manager of the world's largest bond fund has now moved over to the Austrian side. Welcome.
Today's modest bounce in stocks - considerably removed after-hours - does not provide much hope for those looking to buy the dip with the Dow still down over 1000 points year-to-date. In fact, as we discuss below, troubling news just continues to pour in from all over the world... For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable. Consider the following...
A month ago, Nigeria's state-owned National Petroleum oil company (NNPC) said it had accounted for all of the $49.8 billion in revenues that were supposed to paid to the government explaining it had spent over $10 bn on subsidies, repairs, and losses on crude oil inventory - "no money is missing," they exclaimed. However, according to Bloomberg, Nigeria's Central Bank governor Lamido Sanusi (often seen at the footer of those emails everyone gets) proclaimed to the government's senate finance committee that NNPC hasn't accounted for $20 billion in revenue. "There is $20 billion that has not come back to us - the burden of proof is on NNPC." That is 8% of GDP! Perhaps dropping a line to some Western central bankers for a temporary bridge loan (because we are sure the money is there) would be appropriate.
Following the evaluation of liquidity needs (and availability) for the Commonwealth of Puerto Rico, S&P has decided that "it doesn't warrant an investment-grade rating":
- PUERTO RICO GO RATING CUT TO JUNK BY S&P, MAY BE CUT FURTHER
- GOVT. DEVELOPMENT BANK FOR PUERTO RICO CUT TO BB FROM BBB-:S&P
- PUERTO RICO GO RATING LOWERED TO 'BB+': S&P
- PUERTO RICO REMAINS ON WATCH NEGATIVE FROM S&P
Both the G.O.s and the Development Bank have been cut. Note that 70% of muni mutual funds own this - and it is unclear if a junk rating forces (by mandate) funds to cover. Worst of all, S&P warns Puerto Rico could now face a $1 billion collateral call on short-term debt - the same waterfall collateral cascade that took down AIG.
Last week brought two important pieces of news: one deceptive, the other fraudulent. The deceptive news was that the Fed, in its last Ben Bernanke moment, would stay the course. The fraudulent news was that US economy grew at a 3.2% annualized pace in the last quarter of 2013. We're still in the weakest recovery since the end of World War II. But since 1950, the composition of the US economy has changed so substantially that GDP 'growth' no longer means what it used to mean...
We find it truly extraordinary that anyone is surprised the financial system is under duress again.
With the world's focus on emerging markets and anxiously trying to bring the narrative back domestically as a reason to buy US stocks, we thought this simple chart would help clarify just how 'great' the US economy (70% of GDP is consumption we are constantly reminded) is doing...
How many times in the last few days have we been told that Turkey - or Ukraine or Venezuela or Argentina - are too small to matter? How many comparisons of Emerging Market GDP to world GDP to instill confidence that a little crisis there can't possible mean problems here. Putting aside this entirely disingenuous perspective, historical examples such as LTCM, and ignoring the massive leverage in the system, there is a simple reason why Emerging Markets matter. As Reuters reports, European banks have loaned in excess of $3 trillion to emerging markets, more than four times US lenders - especially when average NPLs for historical EM shocks is over 40%.
The potential for transformation can be expressed in one simple phrase: it doesn't have to be this way. The structures that benefit from dominating the current system maintain their dominance by convincing us that "the way it is" is inevitable and impervious to systemic change. That is the primary mythology that generates and maintains their dominance..."Induce people all to want the same thing, hate the same things, feel the same threat, then their behavior is already captive--you have acquired your consumers or your cannon-fodder."
Unlike the other Fed presidents who are all too happy to lie in order to instill some confidence not realizing that by doing so they hurt their own credibility, non-voting member Jeffrey Lacker and president of the Richmond Fed has a different approach - telling the truth. Which is why we read his just released speech this morning with interest since once again, it contains far more truth and honesty than anything else the FOMC releases. Sure enough, it has enough fire and brimstone to put even fringe bloggers to shame.
While Greece may be the most corrupt nation in Europe, there appears another problematic issue for finance minister Yannis Stournaras when he discusses the way forward with his Swiss counterpart this week. As Bloomberg's Niraj Shah reports, Greece's difficulties with tax evasion are the worst in Europe. Accprding to a study from Johannes Kepler University, the size of the Greek shadow economy is a stunning 24% of GDP. One can only wonder what lesson this unintended consequence has for a US (or French) President besotted with extraction - especially as 74% cite "taxes are too high" as a reason for 'informal labor'.