recovery

It seemed appropriate, given Europe is hitting the wall again in its vicious cycle of self-financed self-hypnotizing recovery-less recovery, to present the 'World Collapse Explained In 3 Minutes' that so mockingly relates the real state of absurdity we face in today's financial markets.

From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011... and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don't have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.

...Add all these charts up and we get a snapshot of a housing recovery that seems to have stalled or rolled over. The reasons why are apparent: mortgage debt remains elevated, a vast "shadow inventory" of underwater or foreclosed homes remains off the market and household income has stagnated or declined, as reported in What If Housing Is Done for a Generation?.

Gold bullion remains supported, mostly due to a pickup in physical Indian and Chinese gold demand this week. There are expectations of sustained Indian consumption next week in the lead up to the Akshaya Tritiya festival later this month.  Western physical buying remains unusually anaemic - for now. In recent years, April and May have been positive months for gold in terms of returns (see table above). April has returned 1.4% per annum in the course of the current bull market since 2000.  May has returned 1.75% per annum in the course of the current bull market since 2000. Interestingly, the last month of Q1 and Q2, March and June, have been negative in terms of returns. March in particular has seen the poorest returns for any month in the last 11 years with average falls of 0.6%.  Therefore the very poor performance of gold in March 2012 (-6.4%) may represent another buying opportunity as it did last year (see chart below) and in previous years.

Because pink slime was just the beginning.

"In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!" is how PIMCO's El-Erian introduces the game-theoretic catastrophe that is potentially occurring around us. In a lecture to the St.Louis Fed, the moustachioed maestro of monetary munificence states "let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden" and "it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances." It appears that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances. The question is will investors remain "numb and sedated…. by the money sloshing around the system?" or will "the welfare of millions in the United States, if not billions of people around the world, will have suffered greatly if central banks end up in the unpleasant position of having to clean up after a parade of advanced nations that headed straight into a global recession and a disorderly debt deflation." Of course, it is a rhetorical question.

Following today's disappointing jobs data, we thought it useful to reflect on the sad reality that is occurring under the eyes of AAPL Mr. Market. As BofAML notes this morning, their Economic Data Diffusion index (which tracks macro data surprises) has been trending lower for over a month (indicating a trend of data missing expectations to the downside) and, more importantly has turned absolutely negative (indicating a marginally negative bias to the overall economic data expectations). Following our lead, they note the weather's impact and that this is likely to be the third time in this recovery that the markets and economic consensus has over-reacted to positive news and become too optimistic about growth. Looking ahead, we expect this data downshift to continue. In the near term, both higher gasoline prices and the fading weather effect will likely weigh on growth and, over the course of the second half, we expect the looming fiscal cliff to undercut confidence and growth. Party's ending, a tough economic reality is looming and the punchbowl remains out of sight for now.

Heading into the US open, European stock markets are experiencing a mixed session with particular underperformance noted once again in the peripheral IBEX and FTSE MIB indices. The Portuguese banking sector specifically is taking heavy hits following overnight news from Banco Espirito di Santo that they are to issue a large quantity of new shares, prompting fears that further banks may have to recapitalize. The financials sector is also being weighed upon by a downbeat research note published by a major Japanese bank on the Spanish banking sector. Elsewhere, the Italian BTP auction was released in a fragmented fashion showing softer bid/covers and the highest yield since mid-January in the only on-the-run line sold today. Similarly to yesterday’s auction, the sale was not quite as poor as some as feared. Italy sold to the top of the range and as such, the Italian/German 10-yr yield spread is now tighter by 13BPS, currently at 361BPS. From the UK, the DMO sold 20-year gilts with a lower bid/cover ratio and a large yield tail, prompting gilt futures to fall by around 10 ticks after the release. Later in the session, participants will be looking out for US PPI data and the weekly jobless numbers.

Last night it was uber-dove Janet Yellen, today it is uberer-dove, former Goldmanite (what is it about Goldman central bankers and easing: Dudley unleashing QE2 in 2010, Draghi unleashing QE LTRO in Europe?) Bill Dudley joining the fray and saying QE is pretty much on the table. Of course, the only one that matters is Benny, and he will complete the doves on parade tomorrow, when he shows that all the hawkish rhetoric recently has been for naught. Cutting straight to the chase from just released Dudley comments:"we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established.  But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.  On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012." Translate: NEW QE is but a CTRL-P keystroke away now that all the inflation the Fed usually ignores continues to be ignored.

• Fed's No. 2 Strongly Backs Low-Rate Policy (Hilsenrath)
• World Bank Cuts China 2012 Growth Outlook on Exports  (Bloomberg)
• BlackRock's Street Shortcut: Big Banks Would Be Bypassed With Bond Platform; 'Not Going to Cannibalize' (WSJ)
• George Soros - Europe’s Future is Not Up to The Bundesbank (FT)
• Fed May Have Aggravated Income Inequality, El-Erian Says(Bloomberg)
• Shirakawa Pledges Japan Easing Amid Political Pressure (Bloomberg)
• Spain’s Debt Struggle Opens Door to Sarkozy Campaign Message (Bloomberg)
• Iran Woos Oil Buyers With Easy Credit (FT)
• Syria Pledges to Observe Ceasefire (FT)

Now that every morning the US market is once again in full on European debt issuance stress mode, it makes sense to see just when the real stress will hit the tape, or in other words, how long until the LTRO money fully runs out. Remember that the latest contraption in the European ponzi, the LTRO, took worthless collateral from European banks, and flooded them with fresh money good cash so they could use this cash to buy their own sovereign debt, and specifically to prefund the hundreds of billions in 2012 issuance net of debt maturities. So how does the math work out? Deutsche Bank summarizes the unpleasant picture.

While every soon-to-be-retired boomer and his or her long-only asset-manager stock-broker commission-leecher lies awake at night in the forlorn hope that Ben "I'm-all-in" Bernanke finds another pile of printing presses to make use of in his game of Global No-Limit Texas Central-Banking; the economy, judging by 'selective' macro data and today's Beige Book, is limping along quite happily with no need for QE3 anytime soon (and that spells trouble for a market that is entirely dependent on the spice flow of liquidity and not just the stock of central bank assets). The sad truth is, as we first pointed out back in early February, that the economy is significantly less upwardly mobile than it 'optically' appears (or the market signals it to be) thanks to the extreme weather that has occurred and so while the spin-masters will attempt to make every headline look like we are in self-sustaining recovery mode, the Fed knows full well the reality is far different (hence Bernanke's recent comments) and yet they have not admitted to this animal-spirits-shattering reality (yet). Perhaps this shockingly simple 'chart-that's-worth-a-thousand-words' will force their hand as the correlation between regions showing extreme positivity within today's Beige book and the regions with the extremest weather disconnects is, well, extreme itself. It seems the Fed is caught between a rock of stagnating inaction and a hard-place of independence-removing LSAP.

In an attempt to not steal too much thunder from Gary Shilling's thought-provoking interview with Bloomberg TV, his view of the S&P 500 hitting 800, as operating earnings compress to $80 per share, is founded in more than just a perma-bear's perspective of the real state of the US economy. As he points out "The analysts have been cranking their numbers down. They started off north of 110 then 105. They are now 102. They are moving in my direction." The combination of a hard landing in China, a recession in Europe, and a stronger USD will weigh on earnings and inevitably the US consumer (who's recent spending spree has considerably outpaced income growth) with the end result a moderate recession in the US. The story is "there is nothing else except consumers that can really hype the U.S. economy" and that is supported by employment but last week's employment report throws cold water in that. "Consumers have a lot of reasons to save as opposed to spend. They need to rebuild their assets, save for retirement. A lot of reasons suggest that they should be saving to work down debt as opposed to going the other way, which they have done in recent months. So if consumers retrench, there is not really anything else in the U.S. economy that can hold things up." While the argument that the US is the best of a bad lot was summarily dismissed as Shilling prefers the 'best horse in the glue factory' analogy and does not believe investors will flock to US equities - instead preferring US Treasuries noting that "everyone has said, rates cannot go lower, they will go up, they will go up. They have been saying that for 30 years."

Last week we had the Fed's hawks line up one after another telling us how no more QE would ever happen. We ignored them because they are simply the bad cops to the Fed's good cop doves. Sure enough, here comes Bernanke's right hand man, or in this case woman, hinting that one can forget everything the hawkish stance, and that ZIRP may last not until 2014 but 2015! Which, by the way, is to be expected: since ZIRP can never expire, it will always be rolled to T+3 years, as the short end will never be allowed to rise, until the Fed has enough FRNs in circulation to absorb the surge in rates without crushing the principal, as explained yesterday.

In its latest note, Goldman is not providing any actionable "advice" which is naturally to be faded and would have been thus quite profitable, but merely updates its outlook for the second quarter, which is not pretty. The firm now expects a slowing down in the overall economy to a 2% GDP rate, and an "additional loss of momentum during the next few months", which is to be expected as every bank wants to keep the perception that NEW QE is just around the corner, as economic stagnation can rapidly become a contraction. Most importantly, the firm expects just 150,000 payrolls to be created every month, which net of the 90,000 monthly labor force increase (yes, forget what the BLS tells you - every month courtesy of demographics the American labor force grows by an average of 90k people) means that only 60k jobs will be added to offset the structural job collapse since December 2007. It also means that the pre-election rhetoric will change significantly as the economic strength from the start of the year disappears, and with it any hope of an economic upswing, providing additional ammo for exciting GOP pre-election theater.