Liquidity Bubble

Tuesday's Case Shiller update index showed something very troubling: as a whole, the US housing market in its broadest sense, has barely budged in the past four years (chart). And yet, what is unmistakable, and what has given many the impression that there is a "recovery" (despite clear recent signals to the contrary) are media attempts to spark a buying frenzy in several of the key markets that were responsible for the prior housing bubble, such as Florida, California, Nevada and Arizona. And how do we know they are succeeding, if only until the Bernanke liquidity bubble pops again? Courtesy of articles such as this: "25 markets where flipping homes is most profitable." Nuff said.

The topic of the student loan bubble (and even its popping) has been digested to death on Zero Hedge. One topic that has been avoided however, is that of the student equity bubble, for the simple reason that until now the concept did not exist. That may change soon: as the Economist reports, some California students have a modest proposal to the symbiotic University-Banker net worth extraction mechanism - shove your debt. Instead, they will pay for their unaffordable education (except when funded with copious amounts of unserviceable and non-dischargable debt) with equity.

Earlier today, when forecasting the Chicago PMI, we warned to "expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages." Sure enough, the economic data is now straight out of China, with the Chicago PMI not only trouncing expectations, printing at 64, on consensus of 61 (the highest since last April when the peak of the liquidity bubble popped and the stock market rolled over), but, wait for it, the Employment index came at 64.2, up from 54.7, which was the highest employment print since April 1984! At this point it is no longer worth commenting on economic data, as between this, the NAR, the consumer confidence, it was all become farce of a blur. we now expect February unemployment to print negative as the labor participation rate slides to 50%, and seasonal adjustments and birth/date fixtures account for 5 million "additions" to jobs. One thing that is sure. There will be no more easing for a looooooooong time. Kiss any hope of more trillions in central bank liquidity goodbye.

It is hard to believe that the first dot com bubble, so vivid to most semi-veteran traders, occurred over a decade ago. What is even harder to believe is that courtesy of the record liquidity bubble created by the Central Planning mafia, 2011 has already seen not only the second dot com bubble, but as the table below demonstrates, its bursting. Of all the dot com 2.0 IPO to hit the market in the past 3 months, the average return is now down 20%, but that has not prevented an underwriting syndicate comprised of the TBTFs to make billions in underwriting fees. Luckily, the fervor that previously had gripped some of the more volatile precious metals, and since spilled over into new public issues, has popped. Incremental cash will now be nearly impossible to get. To all companies that managed to take advantage of momo traders who have a memory of 15 minutes or less, congratulations. To everyone else: get in line for QE3. Wink, wink Groupon.

Even as gas continues to creep ever higher, removing substantial marginal purchasing capacity from the US consumer, a topic beaten to death previously, the oil exporting cartel remembers that in a world strapped for energy, oil prices can and will be quite sticky. Which is why now that OPEC has had its refreshed taste for $120 brent after a three year hiatus, it will most certainly not let the price of crude drop into double digit territory absent another massive deflationary shock a la the fall of 2008. To wit, OPEC has just announced that $120 oil is an acceptable level and will "not hinder global growth." Funny - if one pulls OPEC press releases from the summer of 2008, the cartel used verbatim words to describe $150 oil, and its impact on the world economy. Then again, as Dallas Fed's Fisher pointed out earlier today, commodities are now exposed to the same excess liquidity bubble that took crude to its all time highs. We expect nothing less this time around, especially now that for some inexplicable reason, the world believes that the Fukushima situation is contained and thus the "demand destruction" part of the equation can fall out.

Much has been said about how the PPI and the CPI are stuck in deflation mode (despite what everyone is seeing when buying groceries or filling up empty gas tanks). Much less has been discussed about how Bernanke's blunt policy tool of unlimited liquidity is leading to an inflation-driven bubble in Asia (and all Emerging Markets). Luckily, Macro Man Simon Black provides a first person perspective of how this bubble is developing, and how it will soon pop. In some ways this is empirical evidence of what Knight Research said previously: namely that the days of an EM push-pull mechanism are coming to an end. Here is why Knight's conclusion is spot on, paraphrased half way around the world: "when central banks start ratcheting up interest rates (like the Fed did in 2004 and what China is doing now...), buyers and developers no longer have access to cheap credit. Demand drops, and prices fall. When this finally happens, I think the subsequent fallout will serve as another strong argument to abandon the dollar and reset the financial system, especially in the developing world. All they need is a reasonable alternative. China is already allowing its currency to be used for cross-border settlement and limited reserve status, and as this function grows for the renminbi, you can bet that Asian nations will stop importing American monetary inflation and start exporting those dollars back home." A must read note for all those who base their investment decisions based on theoretical musings and thought experiment speculation.

Fiat Currencies are circling the drain boys and girls. How else can you explain Stocks, Bonds, and Gold going up while the dollar craps the bed? You cannot fight the fed. Just position yourself for the pop in the liquidity bubble. Perhaps a minor bout of Hyper-Inflation would cure this. Anyway, we are rolling some Gold profits into Grains now.

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin…).

With the US increasingly locked up in its own liquidity bubble, even as its traditional trading partner China moves to a trade deficit stance for the first time in years, the key question of how that other critical trading counterparty, Europe, will survive the tensions in its periphery have been persistently unaddressed. As rumors of a Greek credit restructuring become ever louder, the next question becomes not whether it is "constitutional" to bail out Greece, but whether a EMU member can impair the balance sheets of its investors in a pre-packaged bankruptcy, the bulk of whom just happen to be other Union members. And all of this is occurring even as concerns about the viability of the euro as a currency have become a mainstream topic. Below is the latest essayistic observation on the future of the euro and the eurozone from SocGen's Dylan Grice, who as usual shows more foresight on all matters sovereign than most. His conclusion: the euro could very well soon become the short-lived barbarous relic of the 21st century.

Say goodbye to China's "export economy" paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers. From China's official daily newspaper: "The country will probably see a "record
trade deficit" in March thanks to surging imports" and "will "fight
back" if Washington labels China a currency manipulator." Perhaps this finally explains where all the excess liquidity has gone: with China now not exporting to the US consumer, it has instead refocused on its own "middle" class. This means that Chinese administrators are much more focused on maintaining a stable economy, and will be much more concerned about economic overheating, which goes in line with the recent indications of material liquidity tightening out of Beijing. Market News reports that the actual deficit will come in at $8 billion for March, the first deficit since April 2004, when the gap was $2.26 billion. Maybe Albert Edwards will just have the last laugh with his iconoclastic prediction of a CNY devaluation.

Famous short seller Jim Chanos characterized China as "Dubai times 1,000, or worse.” While talking his books, Chanos could stand to lose big on his China shorts by basing his view on flawed analogies with the US real estate market.

The levered assets of the banks in many Euro-sovereign nations easily outstrip those nations' GDP's. So when the nations' banks get in trouble from bad banking practices (and a very large swath have), the nations themselves are helpless in attempting to truly save the banks (and instead only institute a bait and switch wherein private default risk/insolvency potential is swapped for public manifestations of the same).

Summary and my thoughts on a trio of Dr. Marc Faber's latest interview where he discussed his 2010 outlook on China bubble, sovereign default risk, stocks and commodities.

Must read: UBS Macro Sales (note, this is likely not the UBS house view) calls for a peak in Emerging Markets. "To me this is our Bhutan Dry Docks moment. The economic argument supporting EM investment is valid -as I pointed out earlier, you can't create a bubble without something that initially supports investment flows - but its gone too far. When I read market commentary that suggest that
the Shanghai composite share index (see below) is now better value because price earnings ratios have come down from 100 to 50 its like déjà vu all over again. I wrote stuff like that back in 94 - just before the peak - just before the crash - just before the US rate cycle turned. I'm calling a top in emerging markets. Q1 2010 will still see massive money flow into the asset class as portfolio decisions are driven by last year's stellar performance and developed market pessimism, but starting in Q2 as Paul's setting change comes closer, it is time to call a top to the twin liquidity bubble of this cycle - traded commodities and emerging markets."

While Bernanke is preparing to hit the TV circuit (after hiring Obama's exhausted teleprompter team) to cash in on his Time Warner accolade, even as he is set to do nothing at all about the liquidity bubble forming in every aspect of the economy, the much more logical and efficient country of Norway is doing the right thing, and in making sure its economy does not overheat, has raised interest rates by 0.25% to 1.75%. The target rate: 1.25%-2.25%. In other news: Goldman Sachs is not moving to Oslo.