I’m a beer lover, but that beer-induced smile on my face is about to dry up.
This week's US data onslaught begins today, with the ADP private payroll report first on deck (Exp. 230K, down from 281K), followed by the number of the day, Q2 GDP, which after Q1's abysmal -2.9%, is expected to increase 3%. Anything less and in the first half the US economy will have contracted, something the purists could claim is equivalent to a recession. The whisper numbers are to the downside since consumption and trade never caught up and the only variable is inventory as well as Obamacare, whose impact was $40 billion "contribution" in Q1 was entirely eliminated and instead led to a deduction, something we expect will be reversed into Q2. Following the backward looking GDP (which will be ignored by the sellside penguins if it is bad and praised if good) at 2:00 pm Yellen Capital LLC comes out with a correction on her call to short social networking stocks, as well as admit once again that the "data-driven" Fed really has no idea what it is doing and how it will tighten, but that tightening is imminent and another $10 billion taper to QE will take place ahead of a full phase out in October. Joking aside, the Fed is expected not to do much if anything, which may be just the right time for Yellen to inject an aggressively hawkish note considering her inflation "noise" refuses to go away.
While the epidemic of law enforcement theft is problematic throughout the country (see these egregious examples from Tennessee and Michigan), it appears Texas has a particularly keen love affair with the practice. Not only did last year’s story take place in Texas, today’s highlighted episode also takes place in the Lone Star State. This time in a town of 150 people called Estelline, which earns more than 89% of its gross revenues from traffic fines and forfeitures. In other words, from theft.
Working for the government was always pitched as somehow being better guaranteed than risky private corporations. However, the problem with government pensions has been they promised whatever sounded nice, with zero accountability. The presumption that tax revenue was an endless pit is one of those fallacies that nobody ever investigates. The ramifications of what happens in Detroit will ripple through the entire debt structure nationally for if this will be the new game plan to follow, why should people buy any government debt whatsoever if not even bankruptcy laws apply? As we said – he who makes the laws never goes to jail for breaking them.
Flint may be Michigan’s second city to plunge into bankruptcy unless retirees accept cuts in health benefits that threaten to unravel a balanced budget. As Crain's Detroit reports, Emergency Manager Darnell Earley (Flint’s third emergency leader since it was placed under state control in 2011) warned "If we have no ability to mitigate the cost of retiree health care, that’s going to make it very difficult for the city to remain financially stable over the next few years." As Eric Scorsone notes, "Flint's at the forefront, but a lot of cities are on the same train, and that train is headed for the cliff."
- Ukraine Says Malaysian Airliner Shot Down Near Russian Border (BBG)
- Downing of airliner seen as pivotal moment in Ukraine crisis (Reuters)
- Malaysian Air Flight Took Route Avoided by Qantas, Asiana (BBG)
- Russian-Made Missile Hit Malaysia Jet, U.S. Officials Say (BBG)
- Netanyahu Orders Military to Ready Wider Gaza Incursion (BBG)
- Silvio Berlusconi Underage Sex Conviction Overturned (WSJ)
- But... but... "economic patriotism" - AbbVie to Buy Shire for $54.8 Billion as Drug Deals Surge (BBG)
- SEC targets 10 firms in high frequency trading probe - SEC document (Reuters)
- Art bubble pop: Sotheby's to Lay Off 'Modest' Number of Employees (WSJ)
- Moar Abenomics: Hermes Sales Trail Estimates as Japanese Revenue Declines (BBG)
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
The Phoenix housing market has a special place in the heart of housing bubble watchers: together with Las Vegas and various California MSAs, this is the place where the last housing bubble was born and subsequently died a gruesome death which nearly brought down the entire financial system. Which is why the monthly WP Carey report on the Greater Phoenix Housing Market is of peculiar interest for those who want to catch a leading glimpse into the overall state of the bubble US housing market. As hoped, this month's letter does not disappoint. What we find is that while equilibrium prices have been largely flat month over month, and are up 6% on an average square foot basis from a year ago, something very bad is happening with a key component of the pricing calculation: demand has fallen off a cliff.
Long before 1984 gave us the adjective “Orwellian” to describe the political corruption of language and thought, Thucydides observed how factional struggles for power make words their first victims, "Words had to change their ordinary meaning and to take that which was now given them." Orwell later explained the reason for such degradation of language, "Political speech and writing are largely the defense of the indefensible." The bottom-line is that tyrannical power and its abuses comprise the "indefensible" that must be verbally disguised; which seems to have never been more appropriate than now in the stream of 'disguised' words we are fed every day...
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
A state economy is nothing without the businesses that call it home. But, as WaPo notes, those businesses are not created equally - bigger businesses naturally have outsized influence, generating more revenue, paying more taxes and employing more people. As Bloomberg notes below, some are less surprising - GM runs Michigan, ExxonMobil runs Texas, and Berkshire Hathaway runs Nebraska but for Washington (home of Microsoft), it is CostCo that runs the state. So what's the biggest business in your state?
The news that hundreds of thousands of people will lose water supplies is not a stunning headline anymore - poor old Ukraine... or Iraq. However, this time, the 'it couldn't happen here' crowd might be stunned to hear that The Motor City is playing serious hardball with residents who have fallen behind on paying their water bills. Detroit’s Water and Sewerage Department has begun turning off the taps of 150,000 residents who are at least two months behind on payments. As one advocate notes, "sick people have been left without running water and working toilets. People recovering from surgery cannot wash and change bandages. Children cannot bathe, and parents cannot cook." Of course, given that these are generally voting members of the US public, we would be stunned if the Federal government did not create a new fund to 'help' them out of this 'unfairness'.
Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.
This week brings PMIs (US and Euro area ‘flash’) and inflation (US PCE, CPI in Germany, Spain, and Japan). Among other releases, next week in DMs includes [on Monday] PMIs in US (June P), Euro Area Composite (expect 52.8, a touch below previous) and Japan; [on Tuesday] US home prices (FHFA and S&P/Case Shiller) and Consumer Confidence (expect 83.5, same as consensus), Germany IFO; [on Wednesday] US Durable Goods Orders (expect -0.50%, at touch below consensus) and real GDP 1Q anniversary. 3rd (expect -2.0%) and Personal Consumption 1Q (expect 2.0%), and confidence indicators in Germany, France and Italy; [on Thursday] US PCE price index (expect 0.20%), Personal Income and Spending, and GS Analyst Index; and [on Friday] Reuters/U. Michigan Confidence (expect slight improvement to 82, same as consensus), GDP 1Q in France and UK (expect 0.8% and 0.9% yoy, respectively), and CPI in Germany, Italy, Spain and Japan.
Perhaps the miserable failure of the bear case on global equities over the past 5 years has more to do with marketing the message than anything actually wrong with the arguments for higher volatility and lower asset prices. As a reminder, ConvergEx's Nick Colas notes the classic "4 P’s" of marketing are: Product, Price, Promotion, and Place (Distribution), pointing out that when it comes to getting the bear case out, it is clear which component is missing: Price. Stock markets that churn higher - as they do right now - simply make it too expensive to sit out the rally. The “Product” and “Promotion” are both fine – you can read negative commentary in many reputable places and speak with very intelligent bears. That takes care of “Place” as well; it’s not hard to find cautionary investment opinions. The take-away from this approach is simple: calling the top may not be as hard as you think. The first 10% pullback may be enough to complete the 4 Ps. Until then, however, it’s just too hard a story to sell.