New Normal

Just in case the stakes in the final episode of the 2012 season of the "Fiscal Cliff" soap opera, and a 30 second advertising block was not selling for a record amount, here comes the Pentagon with a warning that it may fire almost 1 million civillians their services will be required but unpaid if there is no Cliff deal. From the WSJ: "Mandatory federal spending cuts designed to be prohibitively drastic will become a reality on Wednesday if negotiators remain unable to reach an agreement to avert the reductions. Illustrating the gravity of the cuts, the Pentagon plans to notify 800,000 civilian employees that they could be forced to take several weeks of unpaid leave in 2013 if a deal isn't struck, and other agencies are likely to follow suit. The cuts, which members of both parties have referred to as a "meat ax," are the product of a hastily designed 2011 law that required $110 billion in annual spending reductions over nine years to reduce the deficit. Their severity, representing close to 10% of annually appropriated spending, was intended to force Democrats and Republicans to come together on a broader package of deficit-reduction measures, which would replace the cuts. That effort failed, raising the prospect of the cuts' taking place."

Just when you thought the seemingly endless rabbit hole of Wall Street-Washington corruption, cronyism, co-option, crime and kickbacks may have finally come to an end, here comes the House Ethic Committee to pronounce that no ethics breaches were found among House members in its investigation involving the scandal surrounding Countrywide "VIP loans" and the "Friends of Angelo." And in just doing so, the House effectively cleared itself of any wrongdoing and that's it, case closed - move along... Move along.

Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...

As DB's Jim Reid summarizes, "it is fair to say that newsflow over the next 72 hours will be fairly thin before we head into a tense final few business days of the year." It is also fair to say, that the usual tricks of the new normal trade, such as the EUR and risk ramp as Europe walks in around 3 am, precisely what happened once again overnight to lift futures "off the lows", will continue working until it doesn't. In the meantime, the market is still convinced that some compromise will appear miraculously in the 2 trading sessions remaining until the end of the year, and a recession will be avoided even as talks now appear set to continue as far down as late March when the debt ceiling expiration, not cliff, will become the primary driving power for a resolution. That said, expect to start hearing rumors of a US downgrade by a major rating agency as soon as today: because the agenda is known all too well.

In today's 'fast money'-inspired, everyone's-a-winner, there's-a-bull-market-somewhere world of investing, the old school remains stoic in their buy-and-hold mantra that the Fed has your back and over the long-term retirement is assured and 'holding-hands as you walk along golden beaches with your loved one' is a mere few percent of your salary tithed away every month away... Well, sorry to steal the jam from their donut, but across a massive 568 IPOs in the last few years, Bloomberg's Chart of the Day shows that, in fact, buying and dumping within one-day is massively more profitable than buying-and-holding in the new 'capitalism'. As the mainstream media can't help but notice every uptick in China's share prices as a sign that all-is-well in the world, the local fund managers live by a different meme: "It’s weird that in China the longer you hold new shares, the bigger losses you’ll take."

The chart below is self-explanatory, and somewhat jaw-dropping...

The 20th century gave us Marcel Duchamp and "Fountain"... The 21st century gives us Steve Jobs and Hobo with iPhone.

Not the sudden apocalypse that the headline number promised, but of a depression that started in 2005

Here are two short clips to serve as a harbinger of what may and most likely will happen in the US as labor unions are stripped of even more power in the coming months and years, showcasing their reluctance to go gentle into that good night. This is how close the US is from violence at any one moment. Luckily, nobody was seriously hurt this time.

It is oddly ironic that on the day the US bailout of AIG is complete, and with a "profit" at that, the spin goes, even if the spin ignores that the "profit" was only purchased at the expense of trillions in sovereign debt issuance and near immediate monetization by the Fed, which has onboarded a mindbogling amount of duration risk (from under $500MM in DV01 in 2008 to over $2.5 billion currently, but nobody will discuss this issue as few if any grasp just how much risk exposure the Fed has shifted away from entities such as AIG), that we learn just how far the abuse of virtually free taxpayer funds goes. Only instead of some US government apparatchiks blowing through billions in some concrete government building in downtown D.C., we go to the birthplace of Mozart, in Salzburg, Austria to learn that a "civil servant gambled hundreds of millions of euros of taxpayers' money on high-risk derivatives."

There was a time when working on Wall Street, either on the sell or buy side,  was the dream of every able-bodied worker who could do simple addition in their head and wasn't afraid to cut the occasional corner in exchange for a bottle of Bollinger and a sizable year end bonus. That, however, was so 2006 and with the long overdue conversion of the banking sector into a utility the stratospheric compensation payments from the peak of the credit bubble are long gone. So what is the New Normal dream job? Become a California state worker, preferably one who deals with neurotic and/or crazy people (i.e., a psychiatrist), and rake it in. The following chart from Bloomberg shows just how generous the otherwise insolvent state of California is when it comes to paying its public servants, and the 100%+ increase in California employee state pay since 2005. Needless to say, this is a rate of increase in compensation that 99% of workers in the private sector would die for.

So just what is below "stall-speed" growth in the New Normal? And with 48 out of 49 economists now predicting what we said would happen back in September, namely that the Fed will go all in with QEternity⁺¹ and take its balance sheet to $4 trillion (and then $5 trillion in 2014) yet firmly holding their 2013 year end GDP forecast at 2.0%, lower than Q3 2011's 2.7%, does it mean that even $1 trillion in additional flow and stock from the Fed can barely keep the economy above the Old Normal stall speed definition? What exactly would happen if the Fed were to not monetize hundreds of billions in debt? We shiver to even think.

Regular readers are aware that one of our favorite data series when it comes to demonstrating the quality aspect of the American "recovery" (the quantity is sufficiently taken care of with part-time workers filling in positions without benefits and job security in the New Normal) is that showing the annual average hourly earnings growth in nominal terms, which in November posted the tiniest bounce from its all time low print of 1.2%, rising to 1.3%. The problem as noted above, is that this is nominal wage growth. It therefore excludes the impact of inflation which according to the CPI, rose by 2.2% in October, or, in other words, wage growth was negative in real terms. But it wasn't negative only in October and November. When one takes the Y/Y change in average hourly earnings and subtracts the Y/Y change in CPI one gets a very troubling picture: wages have risen below the rate of inflation for 22 consecutive months, with real wages printing their last positive number back in January 2011 and negative ever since!

There are two approaches to being a sell-side, talking-head, strategist when it comes to China. If China is rising, then hey, global growth is recovering and China's transition is going well - so buy US equities levered to China. If, however, China is falling (or out of favor) then US equity markets are the cleanest dirty shirt and decoupling is the new normal. Thus, no matter what, being long US equities is your staple investment advice - heck it's worked for a few decades, why not? Well the truth is that, empirically, the correlation between US Machinery or Tech Hardware stocks and the Chinese market has risen for six years straight. In other words, there is no decoupling (ever); as goes China, so goes US equities - and that sensitivity has never been higher.

Two months ago, there were various prominent pundits who were furiously mocked and ridiculed by those whose job in the media it is to mock and ridicule, for suggesting what most know: that economic data is widely nuanced, massaged, adjusted, goalseeked and outright manipulated by various political interests. That someone would feign outrage by this allegation is laughable at best (and sorry, the "too many people were involved to keep it a secret" excuse is now absolute rubbish following the confirmation of Liborgate, yet another conspiracy theory until it became a conspiracy fact), yet all the "serious" outlets of insight did just that. Now that the election is over, for one reason or another "unnuanced" normalcy is about to strike back with a vengeance, as soon as tomorrow with the official release of November jobs data. And if the just released Gallup unemployment data is any indication, the amount of outright goalseeking by the fine folks at the BLS was nothing short of startling. Because after recording an adjusted unemployment rate of 7.4% in October, the November unemployment rate, based on a random sample of 29,308 adults, soared by a whopping 0.9% in one month to 8.3%, the most since the Great financial crisis itself! And furthermore, at 8.3% the unemployment rate is now the highest since May. Is it time yet for all those sellsiders to admit they were wrong weeks after producing beautiful pitchbooks of how 2013 will be "different this time" and the economy will soar? Or should we wait a few weeks first?