Over the past several months, many pundits were scratching their heads at the peculiar patterns in summer hiring and layoff trends, which threw all NFP, claims, and JOLTs forecasts in a loop making a mockery of even the best forecasters. The reality is that there was a very specific reason for this abnormal seasonal pattern: numerous car plants worked throughout the summer, avoiding traditional temporary shutdowns and furloughs, in an attempt to provide an optical boost to the Union-endorsed administration. And as always happens (see Cash for Clunkers), every attempt to pull demand or supply from the future to the present results in an eventual collapse in either of these two. Sure enough, with June and July reaping the benefits of advance demand, August is set be an absolutely abysmal month for US auto assemblies and for Industrial Production. Because as Stone McCarthy calculates, based on projections provided by Wards Autos, the U.S. motor vehicle assembly rate for August is projected to decline by 8% to a 10.1 million annualized rate after rising by 4.4% in July. This would be the biggest monthly percentage decline in the assembly rate in about a year and a half, since April 2011's 9.5% drop.
A new and important bullish indicator for the gold market is that gold calls are at highs not seen since the October 2008 low as option traders go long gold in the belief that it will go higher. It suggests that option traders believe that U.S. Federal Reserve Chairman Ben Bernanke will hint at or announce additional money printing and monetary easing at the Jackson Hole, Wyoming, symposium. Alternatively, it suggests that they are bullish on gold due to the risks posed to the dollar and the risk of inflation taking off. The ratio of outstanding calls to buy the SPDR Gold Trust versus puts to sell jumped to 2.69 to 1 on August 24th and reached 2.76 earlier this month, the highest level since October 2008, according to data compiled by Bloomberg. Ownership of calls is up 26% since the July 20th options expiry. Ten of the most owned actively owned ETF option contracts are bullish. Option traders are regarded as savvier and tend to be more sophisticated then the more speculative futures traders.
Several recent releases of data bring the problem into focus; a sharp focus. In Germany, once thought to be almost invincible and somehow outside the recession that is raging in Europe, the crisis is just beginning - but it is clearly indicated by the newest data which shows that Germany has begun the descent down the rabbit hole with the rest of its brethren. Germany is now trapped; having lost control of the situation - first by the way the game has been played; and second by the limitations of her capital. We suspect you will soon find a politician in Germany who is opposed to the policies of Ms. Merkel and who will rise to power based upon "Germany for the Germans". All of this is also defined by a very warped time-line. The problems are now, the recession is now, the economic difficulties are now and the solutions that have been proposed are one to three years out. Germany is in the box and we are afraid that it is now Frau Pandora and not Frau Merkel who owns the key.
The largest consumer products companies and retailers are already adjusting to it.
With an almost perfect six-year lag, the S&P 500 appears to be following the same path as it did into the Subprime crisis from the Feb 2003 lows - almost too accurately. The analog is stunning 'optically' and even more concerning from a behavioral perspective. By this time in 2006, we had seen the US Home Construction Index drop 40%, Subprime lenders going bankrupt left and right, Magnetar Capital had started to create CDOs with the express intent of failing, and Nouriel Roubini had just given his IMF presentation on the forthcoming US housing bust and major recession. Despite all of this, which in hindsight was extremely worrisome, the S&P 500 managed to gain 200 more 'the Fed has our back'-points before cognitive dissonance finally gave in to the reality that the 'music had stopped' - first out wins, and large crowds and small doors don't mix. With the current market rising on ever-decreasing volumes (in futures and stocks - so it's not about the high-price equities), divergence between the new highs in equity indices and falling 'net new highs' in NYSE stocks, and near-peak post-crisis level of complacency in options prices, it seems risk and reward are at best skewed neutral, and at worst flashing red warning signals.
Doug Casey is of the opinion that the Hubbert peak-oil theory is correct. In the 1950s, M. King Hubbert projected that US oil production would start declining in the 1970s, and he was accurate. Then he projected that in the mid-2000s, the world's production of light, sweet crude would start declining. He was quite correct about that, too. There will always be plenty of oil at some given price, but to produce oil – even conventional, shallow, light sweet crude – now costs close to $40/bbl in many places. Drilling in politically unstable jurisdictions with sparse infrastructure is neither cheap nor fun. We're talking about production costs of at least $80/bbl in many cases. In an industrial world with seven billion people, the only energy source that makes sense is nuclear power. Sure, you can use wind and solar from time to time and in certain places. But those technologies are extremely expensive, and they absolutely can't solve the world's energy problems.
The punchline from today's Fed household debt and credit report is comparing student debt to one other favorite product of the housing bubble generation: HELOCs. We note home equity lines of equity because as of June 30, 2012, long after HELOCs were widely available to Americans locked in a rabid pursuit to extract as much equity as they could out of their homes, is when the 90+ day delinquent rate on this product hit an all time high of 4.92%, and is finally rising at a breakneck speed. What is fascinating is when one re-indexes the delinquency rate on HELOCs and student loans. While we admit that the "discharge" option on real estate-backed debt does have a material impact, the reality is that once the prevailing mode of thinking is one of just not paying one's student loans, it will be not the student loan chart which is already parabolic, but that which tracks delinquent student loans that will take its place in the exponential hall of fame.
The Chinese Stock Markets are returning to the lows of 2009 and the Europe is mired in a recession. The American Stock Markets are not far off their highs and we do not think this will continue. Mark Grant is quite negative, for all kinds of reasons, about our equity markets now and would be taking profits and returning to the more assured bets of getting yield from bonds and not from dividends. A dividend may be reduced or cancelled by the wave of some Boards’ hand one afternoon while senior debt cannot be cancelled without the company or the municipality going into bankruptcy so that the top of the capital structure is far safer than relying upon dividends for income. In the next sixty days we are faced with Greece, Portugal, Spain, Italy and ECB issues that are quite serious both economically and politically. You may think what you like but there is a lot of risk on the table; of that you may be assured. When someone says, “Buddy can you spare a dime” we would like to be the one being asked and not the one doing the asking. It is here where we stand and wait.
The Status Quo depends on the professional/managerial class to maintain order and keep the machine running. Since this class has more options in life than less educated lower-income workers, their belief in the fairness and stability of the Status Quo is essential: should their belief in the Status Quo weaken, so would their commitment to positions that require long work days and abundant stress....At every juncture where a decision to opt out (quit) or continue serving the Status Quo arises, the believer is co-opted by their desire to "stay in the game" for the promised slice of wealth and security. The risk-return calculus is heavily skewed to complicity, because the options for wealth and security outside the machine are meager and loaded with risk. It is my contention that the wealth and security promised by the machine in exchange for subservience are phantom, and the risk of the promises not being kept is much higher than generally assumed. ironically, those who opt out and accept the risk and lower compensation are actually more secure and much wealthier (in terms of well-being and autonomy) than those who submit to voluntary capture.
The first shot in the fingerboning wars (a key step up from mere jawboning) has barely been fired following Draghi's earlier OpEd in Zeit (posted here in its entirety), when the Bundesbank already had its response ready for print in the form of yet another interview with its head, Jens Weidmann, who says nothing new or unexpected, but merely emphasizes that no matter how loud the chatter, how empty the promises, or how hollow the bluffing, Germany's response continues to be, especially after today's higher than expected inflation across the country, 9, 9 and once again, 9. Perhaps the most notable part of the interview is Weidmann's comparison between the ECB and the Fed, and why one is allowed to monetize bonds, while the other shouldn't be: "The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe....When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks." Of course, when the wealth of the status quo is at risk, such trivialities as democracies are promptly brushed by the sideline...
Miseseans choose to reach their conclusions not from data, but instead from praxeology; pure deduction and logic. This is quite unlike the early Austrians like Menger who mainly used a mixture of deductionism and data. Like all sciences, economics should be driven by data. For if we are not driven by data than we are just daydreaming. As Menger — the Father of Austrianism, who favoured a mixture of deductive and empirical methods — noted:
The merits of a theory always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements.
Praxeology is leading Austrian economics down a dead end. Austrianism would do well to return to its root — Menger, not Mises.
The causal relationship between scarcity, demand, and price is intuitive. Whatever is scarce and in demand will rise in price; whatever is abundant and in low demand will decline in price to its cost basis. The corollary is somewhat less intuitive, but still solidly sensible: the cure for high prices is high prices, meaning that as the price of a commodity or service reaches a threshold of affordability/pain, suppliers and consumers will seek out alternatives or modify their behaviors to lower consumption. Much of the supposedly inelastic demand for goods is based on the presumptive value of ownership. For many workers, there simply won’t be enough income to indulge in the ownership model. The cost in cash and opportunity are too high. This leads to a profound conclusion: What will be scarce is income, not commodities.
Droughts tend to produce vast yield variations. This week's ProFramer crop tour reaffirmed this tendency and as UBS notes, conditions declined with the expectations of low yields compounded by the harsher reality of poor quality - likely to be a major issue for corn feeders. Interestingly, Soybeans looked good from the road but up close (pod formation and beans/pod) were well below normal; and UBS adds to forget the CME for the moment - the cash market is now the attention grabber as they expect it to lead this rally in Ags higher - especially the July 2013s, raising an interesting question of if (or when) the US will restrict exports? Especially with no let-up in the drought conditions.
"We accept the world as it is presented to us. If True American really wished to discover the truth, I would be unable to prevent him from doing so. But he is much happier in my artificial world than he would be in the real world. Since there are so many painful consequences to seeking the truth, he quite rightly prefers to live in my artificial world."
We noted yesterday that the mice of the European equities markets have tended to run when the credit cats are away; and sure enough, London comes back from a long-weekend and risk appetite disappears. European stocks gave back most of their gains from yesterday (and more in some cases) as Sovereign, corporate, and financial credit opened far less exuberantly and drifted wider for most of the day (with some slight US-open-driven strength into the close). Financials modestly outperformed as Sovereigns did not - with Spain now 48bps wider than last week's best levels, Italy 39bps wider, and seemingly forgotten (yet a total disaster) Portugal +52bps. Swiss 2Y rates have tumbled back lower in the last few days to -35bps. The standout was the OMX (Stockholm) which fell 2.3%, its biggest fall in 4 months, as Swedish banks stumbled.