The week's most concise summary of key bullish and bearish events.
In a prior post I compared the 2007 SPX topping pattern to the current May 2011 high. The assumption being the US economy is on the verge of an economic recession now as it was in December 07 when the recession officially began. The similarities were unquestionable (chart below). The unknown is are we building point E. Those believing recession is at hand will say yes, those saying it is a soft patch will say no. Well what do the credit markets say and what explains this 40 basis point move in the 10 year. The end of QE1 actually showed yields falling so history would be on the side of the bond market catching a bid versus the relentless selling going on this week. Well the comparisons with the 10 year treasury in the second half of 2007 and the current period are again striking similar. Equally striking is that we have precedence for such a parabolic move in the 10 year yield.
The way we see it is quite simple. With every investor and every company in the world seeking exposure to China and betting on continued and unabated Chinese growth, what happens if they are wrong? Is it at least worth having some insurance in the portfolio to hedge against the risk of being wrong? If nothing else, we recognize that we are sometimes (often) wrong! GMO’s James Montier recently shared the following thoughts with investors...
Making a complete mockery of regional Fed indices, the June Chicago PMI just printed at a ridiculous 61.1 on expectations of 54.4, up from 56.6, in the process posting its 21st month of growth. Everything is now being done to prevent the all critical now ISM from printing below 50 and to extract as much juice as possible from the last QE2 POMO (the subsequent POMOs are part of the continuing QE Lite). From the report: "PRODUCTION and NEW ORDERS accelerated to mark nearly two years of expansion while their three-month averages declined; ORDER BACKLOGS diverged from improvements in PRODUCTION and NEW ORDERS; Breadth of inflation reported in PRICES PAID eased for a third month." Among the indexes that surged were Production (up from 56 .0 to 66.9), New Orders (from 53.5 to 61.2) and Capital Equipment (120.8 to 135.0). While prices paid declined modestly from 78.6 to 70.5, the biggest drop was in Inventories which plunged to 46.9 from 61.6: this is not good for the I in GDP, although everyone has now written off Q2 GDP so this is irrelevant.As usual the respondents provide the best color, and nobody captures it best than this guy: "The recession, the "recovery," and the disappearance of industrial arts in our schools seem to have diminished a formerly strong labor pool" and this: "Hopefully something will break or the 4th quarter is going to look sad."
Obama Redirects From A Broke US Government By Playing The Class Warfare Card, Focuses On "Millionaires And Billionaires"Submitted by Tyler Durden on 06/29/2011 17:17 -0500
In what appears to be an increasingly tenuous attempt to redirect focus from terminal federal government failure through the imposition of yet another round of class antagonism, Barack Obama, as part of his earlier address to the nation, stressed that more revenue "must be part of any deficit-reduction deal" and criticized Republicans for protecting tax breaks for "millionaires and billionaires" in the process even invoking users of corporate jets (despite that fact that he himself boasted using the $56,000/hour taxpayer funded Air Force one to travel the 110 mile distance between Washington DC and Williamsburg, VA). As the WSJ puts it: Obama "staked out his position in budget negotiations, which have reached a critical phase and increasingly appear to hinge on which side wins the public-relations battle." Well-aware of the dead end trap that Bernanke finds himself in namely that monetary policy alone is now (or ever) powerless to fix the economy (although it sure would do miracle for the Russell 2000... and hyperinflation), and that a fiscal stimulus is currently unpassable, Obama dragged out the strawman, suggesting "that some initiatives designed to stimulate the economy in the short term should be included in a final deal, singling out a yearlong extension of the payroll-tax break for employees, which expires in January." The bottom line is that as the $4 trillion budget cutting goal is completely unattainable (something the Republicans have claimed is a priority in allowing a debt ceiling hike, yet which is nothing but a PR bluff), Obama has instead once again resorted to what he does best: foment class antagonisms within America, by singling out the rich versus the poor. Ironically, as a WSJ commentator puts it so eloquently, "Obama clearly wants all Americans brought down to a shared level of misery --- except, of course, our federal overlords who will continue to demand their own personal jets, international family travel at taxpayer expense, lifetime health benefits while being excused from the ravages of ObamaCare, and of course their recurring exemptions from all other laws that they impose on us lowly serf taxpayers. Obama wants class warfare? Well he got it: Americans vs their elitist, corrupt, irresponsible, thieving government." One can hope that the final outcome of said warfare here will be more effective than any and everywhere else, where said "governments" continue to dangle the carrot of (insolvent) entitlement program elimination should the population dare to change the status quo.
I'm not going to even begin to try and make sense out of today's market. Watching fires burn and teargas fired in Greece, 100 pip moves in the EUR/USD in minutes and computer algos tripping over each other was surreal beyond words. This market right now is a lottery. Calling equities forward looking or a pricing mechanism is beyond ridiculous. It is during noisy times like these that investors must step back and keep things in perspective. Trading on days like today requires little skill and a lot of luck. When I step back I see a deteriorating economy and an equity market trying to understand what to do. Do they "price in" a soft patch or a full blow recession. Market participants are told it is in fact a soft patch. The slightest hint of positive data reinforces those views.
Since I arrived to Spain a few days ago from London, I’ve been sniffing around to get a sense of how Spain’s crisis is unfolding. We see the news clips and YouTube videos of protests, of governments collapsing, of soaring unemployment, but I wanted to see for myself how feels on the ground, and how things have changed over the last year. The most startling change that I’ve noticed, without doubt, is the inflation. Literally everything I’ve looked at– food prices at the local market, restaurant tabs, local electronics, highway tolls, raw material construction costs, mobile phone tariffs, taxi fare, etc. are much more expensive, to the tune of 10% to 25%. So much for the theory that an economic slowdown would decrease prices. John Maynard Keynes, who is consistently held up as the father of modern macroeconomics, suggested in his General Theory that keeping interest rates low and government spending high in order to sustain a boom (or get an economy moving again) would likely NOT result in inflation. Spain is one of many examples that proves this theory to be utter nonsense. Everyone on the ground knows that inflation is high; local newspapers are even running stories about how to best deal with inflation and preserve your savings.
Then things fell apart. The government was peeling off its stimulus programs, gas and food prices had skyrocketed, and suddenly on May 17 tax collections fell versus the same period last year.
We have heard it all before. Self regulation, too big to fail, must be saved, bail out, tax payer paying the bill etc. Hoenig, not overly positive on the too big to fail institution, gives his view on the subject.
China is struggling with inflation, speculation, an increasingly polarized society and even some social unrest. Shilling continues his 5 part China article today on how the country is strolling along the path leading to Hard Landing.
Recession and/or brink of collapse?
We have not recovered from the Great Recession and thus our current economic stagnation is less a new event than a continuation of the original collapse. The basis for the so-called “recovery” was a rise in GDP, that measure of what we have spent in the economy. It’s a fairly useless bit of data.
Despite UK inflation being 4.5% in May, more than twice the Bank of England's target, the BOE’s Posen’s ultra dovish comments are leading to speculation that zero percent interest rates and ultra loose monetary policy will continue for the foreseeable future. This poses risks to those on fixed incomes in the UK, savers, the poor and the elderly, and to countries that export to the UK such as Ireland. Posen said that the Bank of International Settlements (BIS) call for central banks to raise interest rates was “nonsense”. Posen also said there is little risk of a repeat of 1970s-style stagflation. His comments are odd given the fact that the UK is already experiencing high inflation and declining economic growth and looks on the verge of a contraction in economic growth and another recession and possibly a depression. Posen’s lack of appreciation of the real risk of inflation and stagflation both of which the UK is already experiencing leave him open to the accusation that he is talking “nonsense”. These real risks and the BOE’s ultra loose monetary policy will likely result in sterling continuing to weaken in the coming months.
Welcome To The Recession: Manufacturing Surveys Imply US Economy Has Entered The Second Month Of A (Re)RecessionSubmitted by Tyler Durden on 06/27/2011 18:36 -0500
There may be those among the less than brainwashed lemmingerati out there who have noticed what, as we have pointed out for the past month when reporting on the various manufacturing and regional Fed indices, has been an epic collapse in the appropriate data series. As John Lohman so kindly demonstrates, the two month implosion has been beyond epic, and while certainly the biggest drop in the past decade, may also be the all time worst ever. To the point of this post: the last time we had an economic contraction of this magnitude was back in February of 2008, which was two months into the most acute recession in post-depression history. We are confident that once the groupthink wraps its head around the fact that the auto production based renaissance is not coming, and the economy officially tumbles into the commode of Ben Bernanke's fiat dungeon, the NBER will determine (with an appropriate 12-18 month delay), that the current recession started in April of 2011.