As many expected, the Bank of England has followed in Bernanke's footsteps and proceeded with extra QE, 75 billion extra, or about 25 billion more than consensus - this is the first expansion in the British QE since November 5, 2009 when it did the latest £25 billion expansion. Unfortunately, this is just the beginning: much more global QE is coming down the line as the "monetary authority" realizes it only has itself and its printers to rely on in a world rapidly reentering recession.
At its very core, to price something complicated, you lay the most similar liquid asset you can find next to it that has a liquid price. You deconstruct the liquid one by its risk premia, and then you reconstruct the one you are trying to price by applying suitable risk premia to it. The output is fair value. All the talk of “Japanification” is just a variation on this theme at a pretty remarkable order of complexity. Call it modeling, call it storytelling, whatever: one compares an economy going through a multi-year banking crisis with one that is just a few years into a banking crisis. Compare trajectories, similarities, and differences. Then figure out what matters and what doesn’t in a macro-sense. One has either past observation to understand reality, or rely on dumb luck to understand future events.
Millions of middle class citizens in the U.S. sink deeper into despair every day. Day by day hope is being lost that the future for our children will be better than our past. The political, financial, and corporate leaders of our country are intellectually and morally bankrupt. The major Wall Street banks are bankrupt. Social Security is bankrupt. Medicare is bankrupt. The whole damned world is bankrupt. Anyone with an unbiased view of our planet would conclude that we are in unfathomable danger. The list of impending catastrophic issues that will blow up the world for millions in the U.S. and across the globe is virtually endless... When I started to detail the issues facing our country today, I expected to come up with 10 to 20 bullet points of key concerns. As I methodically worked through the categories of challenges facing the American Empire, the total reached 76 bullet points. The facts as presented above paint a picture of impending doom for America. The slogans and vapid “solutions” proposed by political candidates and entrenched Washington politicians do not even scratch the surface of what would need to be done to save this country from economic collapse. Many of these problems took decades to create and are not solvable in a reasonable time frame. With the country still delusion, overleveraged, and underemployed, it seems like the existing economic and social structure will need to be blown up to restore hope in this country.
Yesterday, Goldman proclaimed that their new base case outlook is one of a double dip for Germany and France, and hence all of Europe. Now, it is S&P's turn. In a just released report, S&P says that "The prospect that Europe might dip into recession again is looking more likely. The flow of news and market developments in recent weeks, such as sharply deteriorating business sentiment and a projected slowdown in the U.S., has led us to once again revise downward our projections for economic growth in 2012. This follows a number of downside revisions in our last economic outlook at the end of August. We now forecast GDP growth in the eurozone at 1.1% in 2012, compared with 1.5% in our earlier projection. For the U.K., we expect a GDP growth rate at 1.7% in 2012, slightly below our 1.8% projection in August. We still do not expect a genuine double dip to occur in the eurozone as a whole or in the U.K., but we recognize that the probability of another recession in Western Europe has continued to grow. We now estimate the probability of a new recession in Western Europe next year at about 40%. In our baseline forecast, however, we continue to anticipate sluggish and unevenly distributed growth over the coming five quarters." Next up: rating warning for France, and all EFSF bets are off?
While everyone's attention is focused on just what unconventional policy Benny and the Inkjets will pull out of their collective sleeves to prevent another financial implosion (fear not, something will appear), it is time to redirect once again to the copper plated elephant in the room, China, which last week became the target of a "Hard Landing" vendetta by Bank of America's David Cui (noted here). Well, the China strategist just fired a follow up shot with "Four systematic risks & potential for financial market turmoil." So, for all those who need one more nail in the "China Bubble" coffin here we go, first textually... "we have sensed that the financial markets in China have become increasingly unstable and that the risk of a hard landing is rising. In this report we outline four systematic risks that we believe have the potential to cause financial market turmoil: 1) private lending (a current issue); 2) property price correction (potentially over the next three to twelve months); 3) bank bad debt write-off and eventual recapitalization (potentially over the next two to three years); and 4) “hot money” outflows (event driven and highly unpredictable). Many of these risks are intertwined which is why we refer them as systematic risks, i.e. difficult to mitigate via diversification. As a result, we suggest investors remain defensive in their portfolio construction in the medium to long term (although we recognize that some short term tactical bounces in the market are possible after the recent sharp sell-off)." And, more importantly, visually...
Bernanke will testify before the Joint Economic Committee today to offer his outlook on the state of the economy, governmental financial policy, and federal spending priorities. Last time he testified on the Hill, the Fed Chairman said the U.S. economy was showing signs of a "self-sustaining recovery" but cautioned that another four to five years may pass before unemployment levels fall to historic norms. Presenting the semi-annual Monetary Policy Report provides an opportunity for the Fed to update its view on the economic outlook directly to Congress. Watch out for any notable keywords such as "QE3-XXX", "Keynesian Paradise", "Turboprint", "Hyperinflation" and last but not least "Gold is money."
Fed Chairman Bernanke testimony, second useless Op Twist POMO and August factory orders. And a whole lot of political things happening.
Risk aversion has again dominated the European session in what is becoming a familiar theme. The postponement of the decision on the next Greek aid tranche weighed heavily on sentiment which was compounded by several other factors. Goldman Sachs cut their forecasts for global growth saying they expected the Euro-area to experience a “mild recession” and this was later echoed by S&P who also noted they see a 40% chance that Western Europe would experience a recession. Developments in the financial sector have been in focus with Dexia shares at one point falling 30% after reports that its exposure to troubled Eurozone sovereign debt amounts to more than its entire equity base, with the French finance minister having to say that France and Belgium will guarantee the banks creditors. Furthermore, Deutsche Bank cut their 2011 forecast for their core business area saying that Q3 results for this year will be significantly lower than forecast; the banks shares fell 8% before bouncing with the DAX index lagging its European peers. Elsewhere, there were solid government debt auctions from Austria and Belgium while the Italian government bond yield spread over Bunds tightened due to renewed market talk that the SMP was again buying in the Italian curve. Moving into the North American session the key data will be the Durable Goods and Factory Orders, while comments will be anticipated from both ECB’s Trichet and Fed’s Bernanke. Later into the session there will second round of Operation Twist purchases from the Fed while the Belgian cabinet will hold an emergency meeting to discuss the Dexia situation.
For those who miss the daily reruns of the televangelist driving the audience into a frenzy with chants of "pass this bill", before the donations plate is passed around, fear not: there is much to look forward to in the next few days, headlined by the Chairsatan, who already has his eye on the turboprint button all over again, who will testify on his economic outlook to the Joint Economic Committee later today.
Goldman Raises US Recession Odds To 40%; Sees More Fed Easing, Expects Recession In Germany And FranceSubmitted by Tyler Durden on 10/03/2011 18:37 -0500
We won't comment on the supreme imbecility of being able to predict something as amorphous as a recession in decile increments, but for what it's worth, here it is. Just out from the crack Goldman tag team of Hatzius and Dominic Wilson, who usually don't work together unless they have to make some big statement: "We now see the risk of a renewed US recession as around 40%." (this was 30% before - expect every other Wall Street idiot to follow suit with an identical prediction). Also, those wondering if Goldman is content with getting shut out on its IOER cut demand, we have the answer: no. To wit: "We expect additional easing of monetary policy beyond the ‘operation twist’ announced recently, although this may not come until sometime in the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target - is likely to intensify." Lastly, as relates to the saving grace in Europe, little surprise there - Goldman, whose plant Mario Draghi is about to take over the ECB, expects the very same ECB to open the spigots: "The increase in financial risk is likely to lead the European Central Bank to ease its liquidity policies further this month, and the economic weakness will probably result in a cut in the repo rate by 50bp to 1% by December." As for European economic prospects, well, sacrifices will be made: "we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery." And with a former Goldmanite about to take over the European money issuance authority, we have a bad feeling about what will transpire in Europe after October 31, when Trichet finally exits stage left.
With the weekend full of on-again-off-again comments from various European, Asian, and US politicians and central bankers with regard the chances of various incarnations of the EFSF solving all of our ills (or not), Nomura's Fixed Income Research team has what we feel is one of the most definitive analyses of the various options. We have discussed the self-exciting strange attractor nature of the endgame that will be a leveraged EFSF many times recently. The Nomura team, however, does a great job of breaking down various scenarios, such as Structural Weaknesses of EFSF 2.0, Proposals for an EFSF 3.0 (and their variants), Leverage-based options, and EFSF 2.0 as TARP and how these will result in one of three final outcomes: fiscal union, monetization, or major restructurings risking the end of the euro, as everyone searches for a steady state solution to the 'problem' of the eurozone.
While the most elegant solutions have no official sanction, we think the necessary political resolve is yet to be forthcoming, and the technical issues are challenging if not insurmountable for many of the legal workarounds, resulting in the need for yet another round of parliamentary approvals. Consequently, we see a significant risk that the market, looking for large headlines and enhanced flexibility, will be disappointed at least in the short run.
Inflection points on four key markets that would serve as definitive indicators that the world is in a double-dip recession.
A remarkable discovery reveals equations that economists say could end the business cycle - forever. Ian Macallum, spokesman for the Royal & Ancient Historical Society of London, told Routers that the equations were contained in an unpublished manuscript which was found in the attic of an 18th century flat in Soho. "We were skeptical when initially contacted by the current owners” said Macallum. “There is no record of Keynes ever having resided at that address. But we can confirm that the manuscript is indeed an original work of Lord Keynes." The formulas seem to have been derived from the Navier-Stokes equations which describe the motion of fluid substances. “It’s pure Keynesian genius” said former Fed Governor Fred Mishkin. “There is a strong consensus among economists, at least within the Federal Reserve, that liquidity is the answer to the age-old question ‘what is the meaning of life?’” So, it makes perfect sense that someone as brilliant as Keynes would adapt these equations to a framework for fiscal and monetary policy.”