Mario Draghi Reprises Hank Paulson: Demands Full Monetization Authority Or Else Threatens With End Of EuroSubmitted by Tyler Durden on 09/04/2012 11:21 -0400
Yesterday's "leak" of Draghi's comments that it is not monetization if just the tip only bonds with a maturity of 3 years or less are monetized, aka, legitimate monetization does not cause inflation was so horribly handled that the ECB huffed and puffed in a desperate attempt to appear angry, even though it was absolutely delighted that it had even more ammo in its war against Germany. Today, the leakage continues only this time nobody cares that Draghi's desperation is hitting the headlines left and right. As a result, Draghi literally pulled a carbon copy of Hank Paulson, and while he did not have a three page term sheet in hand, threatened that the Euro would end unless he was allowed to monetize short-term bonds. Here's looking at your Germany. From Bloomberg: "European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival. Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union."
With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.
With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.
At the end of December 2010, Philipp Bagus (he of the must watch/read 'Tragedy of the Euro') provided a clarifying and succinct rebuttal or Bernanke's belief in the extreme monetary policy path he has embarked upon. Bernanke's latest diatribe, or perhaps legacy-defining, self-aggrandizing CYA comment, reminded us that perhaps we need such clarification once again. Critically, Bagus highlights the real exit-strategy dangers and inflationary impacts of Quantitative Easing (a term he finds repulsive in its' smoke-and-mirrors-laden optics) adding that:
Money printing cannot make society richer; it does not produce more real goods. It has a redistributive effect in favor of those who receive the new money first and to the detriment of those who receive it last. The money injection in a specific part of the economy distorts production. Thus, QE does not bring ease to the economy. To the contrary, QE makes the recession longer and harsher.
Or we might name it after the intentions behind it: "Currency Debasement I," "Bank Bailout I," "Government Bailout II," or simply "Consumer Impoverishment."
Corporates are in relatively good financial shape and theory says should respond to high profits and cheap debt by investing more. However, while high 'profits' and low cost of debt are reasons for capex and opex to be rising more quickly than they are, these two critical drives of recovery show no signs of responding to these profit/debt incentives - and so as Citigroup notes "recovering is not booming". Top-down, compared to history, capex is low, following P/E's sentiment - especially in Europe (indicating a lack of confidence in the future). However, at the sector level this reverses: high capex has been given a low PE, while low capex has a high PE. The market is effectively encouraging companies to invest less and return more money. Longer term the consequences for economic growth, inflation and earnings growth are negative - as we trade (once again) short-term equity gain for long-term sustainable economic gain.
Even the hardiest investors have been lamenting that gold prices have been stuck in a rut for a long time. Others with less experience have watched the market waiting for something to happen... And as always, many bailed out of the market entirely, licking their wounds. But some, have been stocking up. Regardless of the date, we're confident that a new high in the gold price will come. The highs will come because many major currencies are unsound, overburdened with debt, and being actively diluted by governments. Indeed, the ultimate high could be frighteningly higher than current levels. As such, we suggest taking advantage of prices that won't be available indefinitely. I think we all need some of nature's cure for man's monetary ills.
In the immortal words of the Jackson 5: "I'll Be There" seems to be the meme du jour - which appears to us to be the same message that Bernanke (and his proxy Hilsenrath) have been on for a few years now. However, in case you hadn't had enough sycophantic central-bank-fellating 'hope', the WSJ's front-man just reiterated for one and all that Ben's our man. In our subtle opinion, it seems however that perhaps Bernanke was a little disingenuous with his talk of 'policy tool effectiveness' - as clearly his efforts have not had the desired economic effect so far (or he would not need to reiterate the ability to do more of the same).
Ben's prepared remarks went off embargo at 10:00 am Eastern. The text (just the body, excluding appendices) had 4,549 words, 254 commas and 173 periods. It took Goldman 40 minutes to read it, write a 579 word response, proofread, get it through compliance, and shoot it to all clients. The title? "Bernanke Makes Case for Effectiveness of Unconventional Easing" of course, even though the real shocker in the speech was that Bernanke for the first time as far as we recall admitted that the sentiment that QE is not working may result in a Catch 22 where every incremental and larger QE episode has diminishing returns (just as we have been warning for years).
It is no secret that having failed repeatedly at the trickle down aspect of QE1, QE2, Op Twist 1, Op Twist 2 (and implicitly LTRO 1 and LTRO 2) as it pertains to the man in the street (if not the man in Wall Street, who was subject to 1-2 years of subpar bonuses which have since regained their upward trendline), the last effort the central planners of the world, and the administration, have is to furiously do everything in their power to reflate housing one more time, following what is already a triple dip in home prices ever since the December 2007 start of the Second Great Depression. Which is why month after month we get seasonally fudged, conflicted and outright manipulated data from various sources how housing has bottomed, for real this time, and things are finally looking up. Remember: with any con game, the key word is confidence, and the US consumers need to regain their confidence. Sadly, as the following very simple chart and accompanying explanation, the answer to the housing question is only one: there will be no housing recovery until much more debt is eliminated. $3.2 trillion to be precise. Everything else is merely fits and spurts of upward action predicated by easy money hitting the market either directly, or via the "REO-to-Rental" stimulus program du jour, which lasts for a few months then promptly evaporates.
Despite high-flying equity indices, there is some underlying concern that all is not rosy in the global economy (and that Fed/ECB/PBoC might not save the day this time). As Morgan Stanley notes, the overcrowded trades are overweight US and within US overweight defensives - implying cyclicals are starting to reflect the current global macro weakness and that there are further downgrades to global growth forecasts to come. Expectations for a repeat of H2 2011's surge in positive surprises are misplaced as several unique factors were at play last year - and are very much lacking this year; moreover global growth indicators are significantly weaker than a year ago. With this background, MS also does not expect imminent QE in the US; the Chinese policy response continues to lag expectations; and there are several hurdles to executing ECB action - all of which leave them expecting further substantial downgrades to 2013 consensus earning forecasts in the US.
In November 2008, President Barack Obama won the popular election for President by 9.5 million votes. A burgeoning financial crisis and weakening economy helped his candidacy at the time, but four years on the sluggish pace of economic recovery is a headwind to his re-election. Consider, for example, that there are currently 12.8 million people unemployed in the U.S., or that an estimated 8 million adults entered the SNAP (Food Stamp) program since November 2008 (total increase in enrollment: 15.6 million). Presidential elections are won in the Electoral College, of course, so in today’s note ConvergEx's Nick Colas parses out this employment/food security economic stress for the key “Battleground” states.
Seven of the 8 swing states this election year are more economically stressed than the national average in terms of unemployment and/or food stamps, while 2 of the 3 states “leaning” toward Obama are worse off than the national average. Romney, behind in the electoral vote count by most analysts’ figures, theoretically stands to gain from a weak national economy, but he’ll have to earn the vote of an estimated 4 million Americans in 14 key battleground states to have a shot at the White House.
We don't need recession
Or means of repression
Just give us some money
Our life could be sunny too...
As the world anticipates Bernanke's speech on Friday - which most do not expect to explicitly say "NEW-QE-is-on-bitches" - we started thinking just what it is that he can suggest that would provide more jawboning potential. His speech is likely to lay out 'lessons learned' and outline the various conventional, unconventional, and unconventional unconventional policy options available (as we noted here). While open-ended QE, cutting the IOER, and 'credit-easing' are often discussed, none would be a surprise; this reminded us of an article from Morgan Stanley two years ago - after QE2 - that raised the possibility of Price-Level Targeting (PT), which is quite different from Inflation-Targeting. While its cumulative effect could be anti-debtflationary, it is however tough to communicate, reduces the Fed's inflation-credibility, and could be seen as inconsistent with the Fed's dual mandate. Our hope is that by understanding this possibility, the mistaken shock-and-awe is dampened.
The discussion over the GOP's gold standard proposals continues in spite of the fact that everybody surely knows the idea is not even taken seriously by its proponents – as we noted yesterday, there is every reason to believe it is mainly designed to angle for the votes of disaffected Ron Paul and Tea Party supporters, many of whom happen to believe in sound money. As we also pointed out, there has been a remarkable outpouring of opinion denouncing the gold standard. Unfortunately many people are misinformed about both economic history and economic theory and simply regurgitate the propaganda they have been exposed to all of their lives. Consider this our attempt to present countervailing evidence. The 'Atlantic' felt it also had to weigh in on the debate, and has published an article that shows, like a few other examples we have examined over recent days, how brainwashed the public is with regards to the issue and what utterly spurious arguments are often employed in the current wave of anti-gold propaganda. The piece is entitled “Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts”, and it proves not only what we assert above, it also shows clearly why empirical evidence cannot be used for deriving tenets of economic theory.