Not only should we trade the spread between "correlated markets" but we can use the information from changes in the spread to help us trade the individual outright markets.
Things are going from worst to worsterer in Japan. Somewhat ironically (given our recent post), this update to the state of play awaiting Mr. Abe is not good. With the Senkaku debacle flaring still in the background, we wonder just how much 'face' the Japanese are willing to lose as their exports fall 6.5% (for the fifth month in a row) dominated by an 11.6% drop 'to' China (which accounted for around 20% of Japanese exports until recently) making it extremely likely the nation is headed for yet another recession. The trade balance missed large to the downside yet again, extending a multi-year trend (and drastically reducing the 'net' exports capital buffer), and so (as USDJPY remains 'strong' despite REER being well below its 1995 peak) we are to believe yet another JPY1tn Koo-nesian fiscal stimulus will do the trick.
Who owes what to whom?
The week's most anticipated speech (given Obama's absence from DC) is here. Bernanke's Economic Club of New York extravaganza - where he has previously hinted at new or further policy - is upon us. Sure enough, it's a smorgasbord of we'll do whatever-it-takes (but won't bailout Congress) easing-to-infinity, housing's recovering but we want moar, simply re-iterating his comments from last week...
- *BERNANKE SAYS FISCAL CLIFF WOULD POSE `SUBSTANTIAL THREAT'
- *BERNANKE SAYS CONGRESS, WHITE HOUSE NEED TO AVERT FISCAL CLIFF
- *BERNANKE SAYS FED TO ENSURE RECOVERY IS SECURE BEFORE RATE RISE
- *BERNANKE SAYS HOUSING RECOVERY `LIKELY TO REMAIN MODERATE'
- *BERNANKE SAYS CRISIS REDUCED ECONOMY'S POTENTIAL GROWTH RATE
However, as we have noted previously, once you've gone QE-Eternity, you never go back... and we would this is the 3rd time in a row that someone from the Fed has spoken and stocks have sold off.
Unwilling to sacrifice their sovereignty at the altar of the ECB's contingent OMT (and unable to wrench 'help' from their previously colonized friends in Latin America; it seems Rajoy and friends are more than willing to sacrifice their actual land... and citizenship in order to maintain their 'independence'. Reuters reports that Spain is considering offering rich investors from countries such as Russia and China the right to settle in return for them buying up property in the stagnant housing sector. For buying property worth as little as $200,000, wealthy foreigners could be offered a residency permit, the country's commerce secretary said on Monday. This is the same nation with near 11% loan delinquencies, greater-than-50% youth unemployment, and a bad-bank loaded with heavily discounted real-estate assets that are still too expensive to encourage investors, and an ever-present devaluation risk hanging over its paralyzed economy. We wonder how the other nations of the EU will feel about Spain 'diluting' the citizen-asset pool with this new non-tax-paying, non-labor-utilizing 'wealth'. How long before Greece sells plots on Santorini (w/passport)?
Over the past year there have been many articles published about the decoupling of the U.S. economy from the the Eurozone. The belief was based on the simple fact that the Eurozone was facing a debt crisis, combined with austerity measures, which the U.S. would avoid. While there have been brief moments where the U.S. looked like it could stand on its own in the past - the drag from a global slowdown proved too strong to withstand. This time, as expected, appears to be no different.
Corporate profits have been boosted unusually in recent years by fiscal support to the economy, the very heart of the risk posed by 'the cliff.' Despite all the political rhetoric, jawboning and pre-election bluster, corporations may or may not be people, but what they have turned out to be is the government's best friend as without corporations firing millions, the government would be unable to enslave everyone via a habituation to the government's "transfer payment" generosity. Since government has no 'choice' but to do its rightful duty and bail out those poor citizens crushed by the "evil" corporations, it allows the US Treasury to spend, spend, spend under the guise of another false conflict. The corporations (knowingly or unknowingly) are doing the government's bidding (and receiving the quid pro quo) even as the tentacles of uber-government reach everywhere and more than half the US population would exist in a state of learned helplessness if its weren't for Uncle Sam's weekly check, modest as it may be. To summarize: crony Capitalism for richest, socialism for the poorest; and the middle class goes the way of the Twinkie Dodo.
On the block of Hazelwood Road in Memphis, Tennessee, where Rebecca Black used to live, 17 out of 30 parcels have either been completely reclaimed by nature or have houses that sit empty. Five of the 15 parcels on her side of the street were abandoned after the recession ended, public records show. Many of the deserted properties are still legally owned by the mortgage borrowers. Nine of the properties are behind on taxes owed to the city or county governments, or both, public records show.
Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty."
The phrase "Constructive Discussions" will have us all pulling our hair out within a few weeks. Markets will be rock and rolled by anything anyone says about the Fiscal Cliff. The received European news-flow, (ie the stuff the Euro Elites want to you read and believe), says. progress on Greek Compromise and close to a solution on Tuesday with Schaeuble confident of "closing the funding gap". All of which means Greece is essentially solved - well for a while longer. As long as no one asks any difficult questions about debt sustainability and unlikely targets, haircuts for the ECB, or how the economy is doing, the Greece will be just fine and dandy. Unfortunately some folk haven't been reading the script - Lagarde has woken up to the fact she heads an "international" organisation and says a solution must be based on reality, solid and sustainable. Asmussen says a new programme will be needed, and the EU Energy Commissioner (?) says debt restructuring for the "official sector" will happen and therefore real losses are unavoidable. er.. who let him opine?
With Thanksgiving this Thursday, trading desks will be empty on Wednesday afternoon and remain so until next Monday. So even though it is a holiday shortened week, here are the main things to expect in the next 5 days: Bank of Japan meeting, the European Council meeting and the Eurogroup meeting. Key data releases include European and Chinese Flash PMIs.
- Israel Ready to Invade Gaza If Cease-Fire Efforts Fail (Bloomberg)
- Petraeus: A Phony Hero for a Phony War (NYT)
- IMF'S Lagarde says Greek deal should be "rooted in reality" (Reuters) "rooted" or "roofied"? And where was it until now?
- ECB's Asmussen says Greece to need aid beyond 2014 (AP)
- EU makes budget plans without (FT)
- Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
- Shanghai Composite Dips Below, Regains 2,000 Level (Bloomberg)
- Bond investor takes big punt on Ireland (FT)
- Noda defends BoJ’s independence (FT) Indewhatnow?
- Inaba Says BOJ Could Ease More If Government Reins in Debt (Bloomberg) Actually it's the other way around
- Miles Says Bank of England Can Do More If U.K. Slump Persists (Bloomberg) So much for the end of QE
- US tax breaks worth $150bn face axe (FT)
After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. ‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. We think they should go for option one but we fear they will go for option two. In this environment, how can people protect themselves and their property? Our three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver. We are, in our assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. Whenever paper money dies, eternal money – gold and silver – stage a comeback. Remember, paper money is always a political tool, gold is market money and apolitical.