Recession

Whether it is strong-USD-based forward revenue reductions for US corporations, rear-view mirror-based fuel-cost implicit tax-cuts, or unsustainable savings rate reductions, the recent US data has created a plethora of 'this time is different' decoupling theorists. We discussed David Rosenberg's perspective on this unsustainability last week and now his old employer (Bank of America) is notably out with a rather negative note on the chances of this 'local' European problem becoming a global issue and impacting US growth through both trade and financial linkages. In their view, we will see a steady deceleration in growth this year while the consensus sees a pick up and by the spring these negative revisions (from sell-side economists) will weigh heavily on stock markets and support bonds. They sum it up succinctly: 'Enjoy the recent price action while it lasts.'

UBS, which has been issuing ever gloomier forecasts over the past few months, with the sole intent of getting someone to bail out the European financial system, which despite the current stay of execution is increasingly more brittle (because solvency crises only get worse with time, never better), has just come out with its magnum opus. In a report released overnight, the firm's Global Rates Team has just jumped the shark, with a prediction that things in Europe are literally about to implode: "we anticipate that the crisis will deteriorate further than the stressed levels of late November. We do not believe that Greek PSI will take place in a “voluntary” fashion but instead expect coercive restructuring of Greek debt either before or soon after the March redemption, triggering CDS contracts. Greece is not likely to decide to leave the euro area in 2012, though the risks of that happening have certainly increased." And as we well know from previous UBS reports, a departure of a country from the Eurozone would lead to a mass splurge in purchases of guns, spam and gold. So is this merely a last ditch call for a bailout from someone, anyone: either Fed or ECB will do? Most likely. Because if while the general market continues to ignore Europe, and European banks are out there literally screaming the end is nigh, then the truth is surely somewhere inbetween. Especially, if as Reuters reports, Greece is just the beginning. "One of Portugal's most prominent business leaders has moved his family holding company to Holland partly because of uncertainty over whether the country will remain in the euro, Alexandre Soares dos Santos said in a newspaper interview on Saturday. Soares dos Santos, who is chairman of the board of Jeronimo Martins, caused a stir in Portugal this week when it emerged that his family holding company that controls the country's second largest retailer had moved to Holland...."I also don't know if Portugal will stay in the euro. And if it leaves, it will be to the escudo," Soares dos Santos told Expresso, referring to the escudo currency used by Portugal before it adopted the euro. "I have a right to defend my property."" So while everyone continues to expect the best, those who really matter are planning for the worst.

I go schizoid.

Brief and concise summary of the week's key bullish and bearish events.

If the pundits are counting on the US to be the engine that drives Global growth - it's going to be a very slow year indeed!  

We have previously eschewed the constant refrain of any and every talking head who pounds the table on adding to equity risk on the basis of 'low' interest rates - why wouldn't you earn the higher dividend? or how much lower can rates go? However, aside from the drawdown-risk and empirical failure of the stocks-bonds arguments, there are three very pressing reasons currently for reconsidering the status quo of bonds against equities. Volatility in equity markets has been considerably higher than bonds and even at elevated earnings yields, it is no surprise that risk-savvy investors prefer a 'safer' lower-vol yield. Furthermore, when compared to a long-run modeling of business cycle shifts in stocks and high yield credit markets, stocks remain notably expensive to the credit cycle. Simply put, corporate bonds are at best offering better value than stocks if your macro position is bullish (and are forced to put money to work) and at worst suggest being beta-hedged is the best idea (or market-neutral) or in Treasuries.

Commodities such as copper have led the market for years; recently they've rolled over while the stock market surges higher. Once again, either historic correlations have been decisively severed or there is a gargantuan divergence that's about to be resolved. Sentiment readings are firmly in extreme bullish territory, but hey, maybe the market will reward the majority with a rally that feeds on rising complacency. And maybe the truism "volume is the weapon of the bull" is also voided, as low volume rallies may well lead to lower-volume rallies. The market has been acting as if all these signs are bullish. Maybe, maybe not. Meanwhile, the witches are cackling quietly over their bubbling brew, and it certainly sounds like some evil is being conjured up.

If there was one analogy for the failing artificial Eurozone system we had not heard so far, was one comparing it to Hogwarts (thank you Harry Potter). Now, courtesy of Tullet Prebon that is no longer the case: "Albus Mario Dumbledore and Harry Constancio Potter are due to assemble next Thursday for the next episode of the sovereign Voldemort saga. It is foretold that during the press conference the headmaster will unveil his wand and deliver an almighty spell, ‘Expelliarmus Debtus’, whereupon the dreaded Troika Dementors will be vaporised disappearing into the austerity vortex, leaving the Muggles to live happily ever after."

Three short videos of American women responding to the Great Recession in a manner we all can learn from, self reliance.

According to Bloomberg's First Word Cross Asset Dashboard, sentiment rose modestly in European session and into U.S. open, with EU and U.S. equity indexes as well as Bunds and Treasury yields modestly higher, Bloomberg analyst TJ Marta writes in following note:

• Payrolls est. 155k; market possibly expecting upside surprise after yesterday’s ADP 325k vs est. 178k
• After most Asia equity indexes fell moderately, EU equity indexes, U.S. futures modestly higher; S&P futures +0.7%
• Treasury yields modestly higher ~1bps; Bund yields modestly to significantly higher, led by 2-yr +3.6bps
• FX, commodities, EU sovereign yield to Bund spreads mixed in mostly modest ranges
• In Europe, Hungarian bonds jumped by the most in 6 weeks following hope that talks between the Premier, Central Bank Chief and Ministers would resolve the IMF rescue impasse. The meeting was concluded with Orban saying that Hungary wants IMF aid and is ready to support central bank - in other words Hungary just caved to the banking status quo. CDS declined modestly from all time records.
• Germany November factory orders collapsed by 4.8%, on expectations of a 1.8% drop - biggest drop since September 2008 - the recession has now firmly moved into the core.
• ECB deposit facility usage rose to a new record of €455.3 billion.
• Liquidity conditions are measured by Swap Spreads improved modestly, and are now at early November levels: the 3M EURUSD basis swap rose 6.8 bps to -102.25, highest since November 7; the 3M Euribor/OIS dropped to 0.93, lowest since November 25

Troika inspectors will leave angry again. But this time, the Prime Minister put the nuclear option on the table....

These are not mega trends, but they will prove to be important.

Those attempting to pressure Iran by increasing "tensions" and thus the price of oil have it precisely backwards. The one sure way to fatally destabilize the Iranian theocracy is to adjust the demand and supply of oil so the price plummets (as it did in December 2008) to $25/barrel, and stays there for at least six months. It has been estimated that the Iranian theocracy cannot fund its bloated bureaucracies, military and its welfare state if oil falls below around $40-$45/barrel. Drop oil to $25/barrel and keep it there, and the Iranian regime will implode, along with the Chavez regime in Venezuela. Saber-rattling actually aids the Iranian regime by artificially injecting a "disruptive war" premium into the price of oil: they can make the same profits from fewer barrels of oil. The way to put them out of business is drop the price of oil and restrict their sales by whatever means are available. They will be selling fewer barrels and getting less than production costs for those barrels. With no income, the regime will face the wrath of a people who have become dependent on the State for their sustenance and subsidized fuel. How do you drop oil to $25/barrel? Easy: stop saber-rattling in the mideast and engineer a massive global recession with a side order of low-level trade war. Though you wouldn't know it from the high price of oil, the world is awash in oil; storage facilities are full, and production has actually increased a bit in North America.

When it comes to the markets one can easily ignore the fact that the world is one big ponzi and things, as we know them, are coming to an end as long as the can can be kicked down the street at least one more time. In other words, without a hard deadline, there is nothing that can force change upon a system already in motion, no matter how self-destructive. Unfortunately, the clock in Europe is ticking as a deadline approaches, and somewhat poetically, the place where it all started is where it may end. In March Greece faces a redemption cliff: if by then the €130 billion promised to it by the Troika as per the July 21 second bailout, is not delivered, it is game over - first for Greece which will default, then for the ECB, which will be forced to write down holdings of Greek bonds, in effect wiping out its equity and credibility, and lastly, for the Euro, which will see a core member leaving (in)voluntarily.

While the market continues to simply fret over when and where to start buying up risk in advance of inevitable printing by the US and European central banks, those of a slightly more contemplative constitution continue to wonder just what it is that has allowed the US to detach from the rest of the world for as long as it has - because decoupling, contrary to all hopes to the contrary, does not exist. And yet the lag has now endured for many more months than most thought possible. And making things even more complicated, the market which doesn't follow either the US nor European economy has decoupled from everything, breaking any traditional linkages when analyzing data, not to mention cause and effect. How does reconcile this ungodly mess? To help with the answer we turn to David Rosenberg who always seems to have the question on such topics. His answer - declining gas prices (kiss that goodbye with WTI at $103), and collapsing savings. What happens next: "in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment." Indeed, one little noted tidbit in the monthly NFP data is that those who "find" jobs offset far better paying jobs in other sectors - as a simple example the carnage on Wall Street this year will be the worst since 2008. So quantity over quality, but when dealing with the government who cares. Finally, will the market continue to decouple from the HEADLINE driven economy, which in turn will decouple from everyone else? Not unless it can dodge many more bullets: "As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data." Read on.