We have discussed the CRIC cycle a number of times - especially with regards Europe - but it seems the never-ending story of Crisis-Response-Improvement-Complacency has struck once again as Morgan Stanley notes when complacency becomes pervasive, it usually gives way to a renewed crisis. Complacent financial markets appear to be looking through the fact that the global economy remains stuck in a 'twilight zone' between expansion and recession. Dismissing weak PMIs in China and EU, markets have feasted in QEternity and OMT and this has, as expected, affected European policy-makers (e.g. ongoing disagreements over the details of the much-anticipated negative-feedback-loop-breaking banking union; and Spain/Italy's 'belief' they can avoid an ESM 'austerity' program). This feels eerily like the March/April period when post-LTRO improvements induced euphoria in traders and governments/ECB to relax prematurely and as Brevan Howard explains below - every major developed economy is facing significant downside risks - no matter how enthusiastic markets appear to be.
"Electric vehicles cost thousands of dollars more to purchase than conventional vehicles of comparable size and performance."
When it comes to diving trends in the Fed's take over of the Treasury market, there are those who haven't got the faintest clue about what is going on, such as Paul Krugman, who naively looks (as Bernanke expects all economists to) at the simple total notional of securities held by the Fed and concludes that the Fed is not doing anything to adjust fixed income risk-preference, and then there are those who grasp that when it comes to defining risk exposure in the bond market, and therefore in equities, all that matters is duration, expressed in terms of ten-year equivalents. Sadly, this is a data set that not every CTRL-V major or Nobel prize winner (in order of insight) can grab from the St. Louis Fed - it is however available to those who know where to look. And as the chart below shows, even as the Fed's balance sheet has remained flat in notional terms, its Ten Year equivalent exposure has soared, rising by 50% during Operation Twist alone, from $900 billion to $1.313 trillion. What this means in practical terms, as Stone McCarthy summarizes, is that the Fed now owns 27.05% of the entire inventory in outstanding ten-year equivalents. This leaves less than 75% of the market in private hands.
In simple terms this tells us that inflation is hitting “lift off” in the US at the very same time that we are entering a recession that could be on par with that of 2008. And with corn and soybean prices at or near record highs, we could be on the verge of a stagflationary disaster combined with a food crisis at the very same time.
Saving the banks by dumping trillions into housing is classic marginal return. Since the mechanism is broken--housing as the "wealth effect" generator and the source of billions in profits for banks--every $1 trillion in subsidies, give-aways, guarantees and mortgage purchases by the Fed yield fewer benefits to the real economy. Once again the question arises: rather than loan $16 trillion to banks at 0%, why doesn't the Fed just buy all residential mortgages for $10 trillion and charge 0.25% interest on the lot? That would cut out the banks, and that is the point here: the Fed's policies are not aimed at "helping housing," they're aimed at protecting the banks' income streams, assets and political power. Since the banks own $10 trillion in mortgages, housing is a key concern of the Fed's "save and enrich the banks" campaign.
Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!
The last couple of months have been characterised by some weak but 'relatively positive' surprises in macro economic data compared to dismal expectations; but that rising momentum has begun to fade very recently. Sagging domestic growth and weak external demand have created noticeable slowdowns in the industrial production and manufacturing sector. This, as Bloomberg Brief notes, has been the area of the economy that has been the primary driver of growth throughout the recovery and represents the greatest risk to the current economic outlook for sub-trend growth at or below 2 percent. As Joseph Brusuelas points out, these disappointing charts indicate, fiscal gridlock aside, the deterioration in the industrial sector is a 'dagger pointed straight at the heart of a weak cyclical expansion'.
What Do Economic Indicators Show? What Do Economists Say?
The last straw: invoking Japan to rationalize Fed policies and government deficits
According to data released by ACEA (European Automobile Manufacturers’ Association) new passenger car registrations fell 8.9% in August after a decline of 7.8% in July. In 2011, Germany produced 5.8 million passenger cars, of which 77% (4.5m) were exported, making cars and parts the most valuable export good (EUR 185bn). A heavily export-dependent German automotive industry looks vulnerable to setbacks in important markets.
The performance of CRB's sub-industrials relative to Oil has been a consistently useful indication of economic sentiment. Given the recent performance, Oil prices suggest a significant drop in US Manufacturing PMI - sub-40! This leaves President Obama with a dilemma: one the one hand he needs to pressure Oil down (SPR jawboning?) in order to maintain some semblance of economic growth and recovery (and perhaps jobs) but given the highly correlated (and QEternity-driven liquidity spillover) asset markets, a lower oil price fundamentally suggests lower global growth and technically drags risk-assets lower - which in turn moves stocks lower. Once again an encumbent tries to find the Goldilocks-level of Oil - too hot and growth slumps, too cold and markets slump, just right and get re-elected.
GLD & TLT: Exploring the Dark Side of Exchange Traded Funds (ETFs) With Lauren Lyster at Capital AccountSubmitted by EB on 09/20/2012 12:14 -0400
What might happen to your favorite ETF in a crisis? As the the half life for the next Fed-induced bubble happily converges with the six month mark on Mr. Bernanke's QE3, these things never matter...until they do
The Philly Fed's current September Business Indicators index, long ignored when bearish and cheered when bullish, came slightly above expectations of -4.5, printing higher from last week's -7.1 to -1.9. This was the fifth consecutive negative print. And while there were no major highlights in the index, whose New Orders rose from -5.5 to 1.0 at the expense of Shipments and Inventories, both of which imploded to worse then -20, the real story is the Six Months expectations index, which exploded from 12.5 to 41.2: this was the biggest spike may not ever, but certainly in the past 22 years! Is there any wonder why everyone is transfixed with hope that Q4 will be the deus ex that saves the US economy. And so we are back to being a hopium driven economy - when reality sucks, there may not be much change, but there is always hope that finally, the central planners will get it right, and the future will be so bright you've gotta wear Made in China shades. One word of caution: if the so very much anticipated and 100% priced in Q4 recovery does not materialize, and with the fiscal cliff and debt ceiling issues still unresolved, get the hell out of Dodge, as the spread between hope and reality comes crashing.
Equity markets drifted from an unch open to the overnight post-BoJ highs - albeit in an 8 point range and low volumes once again, before giving it all back in the last few minutes - as it dumped to VWAP (again!!). In other 'real' markets, Treasuries rallied - led by the long-bond playing catch up, the USD sold off on the day - aside from a post-BoJ recovery higher which was dissolved into the US day session open, Gold/Silver/Copper inched higher as the USD weakened but Oil continued its post-QE ritual sacrifice - now down 5.5% from pre-FOMC (back under $92) as the Saudi's promise more supply and the IEA build was heavy. Credit markets underperformed - but we suspect this was pre-roll moves and is not too signal-prone. Some standouts in the unreal world of our efficient equity markets, JCP's remarkable rip-and-dip, AAPL's rapid devolution from record highs to VWAP and an unch close at the last minute on huge volume, and QCOR's multiple-halt day ending down 48%. VIX (fell modestly) and the S&P 500 are back in sync and tracked each other all day. After the day-session close (small green), S&P futures drifted further down and ended practically unchanged - on a heavy volume push.
Retail has long been a source of both low-skill entry-level jobs and well-paid careers. Yes, people love to browse and stroll down the mall or shopping district, and this social/novelty function will continue. But can retailers make money off of people browsing? If retail contracts, what does this do to skyhigh commercial property valuations? The same can be asked of cubicle-farm office parks. As telecommuting and contract labor expand, the need for energy-wasting office parks and long commutes will also decline. Technology cannot be stopped, and neither can the drive to cut costs by cutting what can be cut, labor. We can legislate certain aspects of how technology is used, and fiddle with tax incentives and trade restrictions, but we cannot make people drive somewhere to go shopping or stop the 3-D printing/fabrication revolution. What all this calls into question is the entire financialization (debt-based)-consumerist model of "growth" and employment. Decades ago, young men were employed to pump gasoline at gas stations; these jobs all went away as self-service fueling became the norm. At least one state (Oregon, I believe) mandates that all gasoline is pumped by an employee of the station. This rule has created hundreds of jobs that are not necessary in terms of market-demand but that are certainly welcome.
As the FT reports today “In early scenes from Goethe’s tragedy, Mephistopheles persuades the heavily indebted Holy Roman Emperor to print paper money – notionally backed by gold that had not yet been mined – to solve an economic crisis, with initially happy results until more and more money is printed and rampant inflation ensues.” The classic play highlighted, Weidmann argued, “the core problem of today’s paper money-based monetary policy” and the “potentially dangerous correlation of paper money creation, state financing and inflation”. In yesterday’s speech in Frankfurt, Goethe’s birthplace, he said: “The state in Faust Part Two is able at first to rid itself of its debts while consumer demand grows strongly and fuels a strong recovery. But this later develops into inflation and the monetary system is destroyed by rapid currency depreciation.” The name Mephistopheles as used by Goethe comes from the Hebrew word for destroyer or liar. Mephistopheles is a fallen archangel, one of the 7 great princes of Hell and in Goethe’s ‘Faust.’ Mephistopheles is acting for his overlord Satan and seals the pact with Faust. Weidmann is suggesting that the ECB’s current monetary policies are a Faustian pact or a pact with the Devil and that they secure short term gain but will end in the disaster of rampant inflation.