There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy.
Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...
Succinctly summarizing the positive and negative news, data, and market events of the week...
Sam Zell: "This is a very treacherous market," thanks to the giant tsunami of liquidity, "the problems of 2007 haven't been dealt with," and given the poor macro data and earnings, "we are suffering through another irrational exuberance," leaving the entire CNBC audience speechless when he concludes, "the stock market feels like the housing market of 2006."
In a shocking state of affairs, it would appear the stock market's wealth effect is not rubbing off on the real economy. The National Federation of Independent Businesses (NFIB) shows 0% of their members planning to hire. One can only presume we need moar QE, moar deficits, and moar wealth effect.
We started off the overnight session with various pseudo-pundits doing the count-up to a 100 in the USDJPY. It was only logical then that moments before the 4 year old threshold was breached, the Yen resumed strengthening following comments from various Japanese politicians who made it appear that the recent weakening in the currency may suffice for now. This culminated moments ago when Koichi Hamada, a former Yale professor and adviser to Japanese Prime Minister Shinzo Abe, told Reuters that level of 100 yen to dollar is suitable level from the perspective of competitiveness. The result has been a nearly 100 pip move lower in the USDJPY which puts into question the sustainability of the recent equity rally now that the primary carry funding pair has resumed its downward trajectory. Another result is that the rally in the Nikkei225 was finally halted, closing trading unchanged, and bringing cumulative gains since the morning before the BoJ’s announcement last Thursday to 8.9%. Over that the same time period, the TOPIX Real Estate Index is up an incredible 24%, no doubt reflecting the prospect of renewed buying of REIT stocks from the BoJ’s asset purchasing program.
The general mantra from mainstream analysts and economists since the first of the year is that the "economy is set to finally turn the corner." The premise of the assumption is that the Fed's continued monetary actions, and now specific targeted goals of suppressed inflation and targeted employment, is going to push the economy into "escape velocity." Today, we leave the analysis up to you. The following series of charts displays several important economic variables ranging from incomes and production to economic growth. The question for you to answer: "Is the economy about to boom OR has it peaked for the current economic cycle?" As you look at each chart below compare what you are visualizing versus what you are being told.
It is clear now that we must have been wrong about the economy. No more proof is needed than the fact the Dow has gone up 1,500 points. Everyone knows the stock market reflects the true health of the nation – multi-millionaire Jim Cramer and his millionaire CNBC talking head cohorts tell us so. Ignore the fact that the bottom 80% only own 5% of the financial assets in this country and are not benefitted by the stock market in any way. It is time to open your eyes and arise from your stupor. Observe what is happening around you. Look closely. Does the storyline match what you see in your ever day reality? It is them versus us. Whether you call them the invisible government, ruling class, financial overlords, oligarchs, the powers that be, ruling elite, or owners; there are powerful wealthy men who call the shots in this global criminal enterprise. No amount of propaganda can cover up the physical, economic, social, and psychological descent afflicting our world. There’s a bad moon rising and trouble is on the way.
The latest release of the National Federation of Independent Business Small Business Survey was a bit of dichotomy of interpretation. Is the inventory increase really a sign of optimism or is it an unwanted buildup as sales have slowed as shown by the latest wholsesale inventory report? Are capital outlays really a sign of optimism or is it simply just required maintenance and upkeep? The interpretation of the data is key to understanding the direction of the overall economy. Economic confidence still remains at levels lower than in 2011 or in 2008 during the depths of the financial crisis. Concerns for businesses remain weighted toward the consumer and the government. Weak sales, government regulations and taxes are the top 3 biggest headwinds curtailing small business currently. With the upcoming debates over the debt ceiling and the budget it is unlikely that these concerns are going to improve much anytime soon.
Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.
The ongoing message from the mainstream media, analysts and most economists is that the economy has turned the corner and we are set for substantially stronger growth in the coming year. While that sounds great on the surface the economic data has yet to hint at such a robust recovery. What is worrisome is that CNBC has started using the term "Goldilocks economy" again which is what we were hearing as we approached the peak of the market in early 2008. As David Rosenberg pointed out in his morning missive: "Maybe, it's just this: so long as there is a positive sign in front of any economic metric, no matter how microscopic, all is good. After all, you can't be 'sort of in recession' - it's like being pregnant... either you are or you are not." The bottom line is that ex-artificial stimulus, and other fiscal supports, there is little in the way of an economic recovery currently going on. In order for the economy to reach "escape velocity" it will be on the back of sharply rising employment and wages which are needed to prime consumer spending. This is not happening as the the gap between wages and rising cost of living continues to drive the consumer to shore up that shortfall with more debt.
With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing:
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.
This follows a statement by the US Treasury's Lael Branaird yesterday in which she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Lastly, the SNB's Jordan also confirmed that the Swiss National Bank will continue to do everything to crush its own currency, and will the 1.20 EURCHF floor, stating that Japan is merely doing the right thing to stimulate growth (i.e., doing what "we" are doing). In other words, let the FX wars continue and may the biggest balance sheet win, all the while everyone pretends nothing is happening.
The market has been rallying over the last few weeks as the bulls have definitely taken charge in the New Year. Most of the recent analysis has pointed to signs of an improving economy and stronger employment as the driving force behind the advance. My view has clearly been that it has been the impact of the Fed's liquidity injections pushing asset prices higher. There is one caveat here. Last winter was the warmest winter on record in 65 years which skewed much of the seasonal data by allowing work to continue when normally workers would have been shut in due to inclement weather. We are seeing the exact same anomalies occur this year as the winter is currently the warmest in the last 55 years combined, and when combined with lower energy prices, is giving a temporary boost to incomes. As we witnessed in 2012 - when the seasonal adjustments come back into alignment in the spring the drop off in reported economic activity will be fairly severe.
The release of the National Federation Of Independent Business (NFIB) Small Business Survey for December was much like the report we discussed in November. In short - there were very few positives to be found. The current survey was completed prior to the last minute "fiscal cliff" deal that raised taxes on small business owners and employers. It is unlikely that higher tax rates will spur businesses to expand employment, make capital expenditures or increase production. Furthermore, with the resolution to the upcoming debt ceiling likely resulting in few, if any, real spending cuts the worries about future economic strength will likely persist.
With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.