recovery

The last time the S&P 500 rallied in such a serene manner as the current trend was March 1987 - a few months before monetary imbalances came undone and crashed in October 1987. Further, JPMorgan's Michael Cembalest notes that prior to WWII, the previous rally as calm and uninterrupted as this was in November 1928 - a year before the crash. The JPM CIO points out how the Fed's ZIRP has created a 'Portfolio Rebalancing Channel' (PRC) transmission mechanism from cheap credit to wealth effect through spending and profits (that has worked as planned) but the last leg on this mechanism has not functioned so well. Payroll growth has been underwhelming and the housing market remains stunted - leaving the real economy remaining fragile despite the market's appearance. The Fed remains committed to driving this 'channel' but, as Cembalest points out this could easily be derailed by inflation, a bond market revolt towards funding our 'Ecuadorean' deficits, or the pending fiscal cliff legislated for 2013. "So the PRC keeps chugging along, until the Fed's job is done (and Goldilocks continues), or something breaks." History does not rhyme; ninety years ago, money-printing led to calamity in Germany, and eventually, to disaster in Europe. Today, money-printing is designed to save it.

All you need to read and more.

• Obama budget defeated 414-0 (Washington Times) yes, the Democrats too...
• German Central Banker: ECB Loans Only Buy Time (AP)
• Baku grants Israel use of its air bases (Jerusalem Times)
• Japan May Understate Deflation, Hampering BOJ, Economist Says (Bloomberg)
• BRICS flay West over IMF reform, monetary policy (Reuters)
• Five Portugal Lenders Downgraded by Moody’s (Bloomberg)
• SEC Registration Captures More Hedge Fund Advisers (Bloomberg)
• EU Nears One-Year Boost in Rescue Fund to $1.3 Trillion (Bloomberg)
• Consumers plot emergency oil release as Saudi decries high prices (Reuters)
• Japan Plans to Draft Stopgap Budget for First Time in 14 Years (Bloomberg)

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

Germany's recent 'agreement' to expand Europe's fire department (as Goldman euphemestically describes the EFSF/ESM firewall) seems to confirm the prevailing policy view that bigger 'firewalls' would encourage investors to buy European sovereign debt - since the funding backstop will prevent credit shocks spreading contagiously. However, as Francesco Garzarelli notes today, given the Euro-area's closed nature (more than 85% of EU sovereign debt is held by its residents) and the increased 'interconnectedness' of sovereigns and financials (most debt is now held by the MFIs), the risk of 'financial fires' spreading remains high. Due to size limitations (EFSF/ESM totals would not be suggicient to cover the larger markets of Italy and Spain let alone any others), Seniority constraints (as with Greece, the EFSF/ESM will hugely subordinate existing bondholders should action be required, exacerbating rather than mitigating the crisis), and Governance limitations (the existing infrastructure cannot act pre-emptively and so timing - and admission of crisis - could become a limiting factor), it is unlikely that a more sustained realignment of rate differentials (with their macro underpinnings) can occur (especially at the longer-end of the curve). The re-appearance of the Redemption Fund idea (akin to Euro-bonds but without the paperwork) is likely the next step in countering reality.

You can listen to CNBC, and the president, drone on about the recovery, about the wealth effect, about trickle-down economics, about why adding $150 billion in debt per month is perfectly acceptable, and about a brighter future for America and the world... or you can take a quick look at these two charts and immediately grasp the sad reality of where we stand, and even sadder, where we are headed.

Okay, the coast is clear. Everyone buy PIIGS debt to boost pensioon fund yield -or- Media assisted .gov dis(not "mis")information fails to stand up to arithmetic fact!

Going into the US open, European equity markets are trading slightly lower with some cautious trade observed so far. In individual equity news, France’s Total have shown some choppy trade following reports from their Elgin gas field in the North Sea, shares were seen down as much as 3% but the company have played down the gas leak and have regained slightly in recent trade; however they remain down 1.4%. In terms of data releases, the final reading of Q4 GDP from the UK has recorded a downward revision to -0.3%. Following the disappointing release, GBP/USD spiked lower 20pips and remains in negative territory.  In the energy complex, WTI is seen on a downward trend following last night’s build in oil reserves shown by the API data. Earlier in the session French press reported that France had made contact with the UK and the US regarding the release of emergency oil stocks, following this, WTI spiked lower around USD 0.30 but quickly regained.  Looking ahead in the session, international market focus moves to the US, with durable goods orders and the weekly DOE oil inventory due later today.

'The current rally is running long; equities are due for a 3-5% pull-back' is how Deutsche Bank begins to give some context to the scale of the performance of stocks over the last four months. Whether it be liquidity-fueled optimism, optically-pleasing macro data, crisis-fatigue, or just good old-fashioned back-up-the-truck-we're-all-in buying since the last 10% correction in November, the S&P 500 has rallied 22% - essentially unimpeded for 80 days without a drawdown. In between 5% selloffs, the median rise in the S&P 500 is 10% and the duration is 56 days so this current rally is indeed getting long in the tooth (with a 2.5% retracement the best the bears have managed in 2012). To get a better sense of how equities may perform after such a big rally, Deutsche identifies 8 similar cases to the current one when a 10%+ drawdown was followed by a 15%+ recovery: Jul-50, May-70, Dec-74, Aug-98, Sep-01, Oct-02, Feb-03 and Mar-09. At the same point in the rally (i.e. after 3mo), the market continued to grind higher the next 3 months by 4% on average. So a move of this size and velocity (and smoothness) has only occurred 7 times in the history of the S&P 500 and a quick glance at some of those dates marks some notable periods in US economics (and global geopolitics).

Housing is improving! Housing is improving! Housing is improving!

if I say it enough will someone believe it?

This post has a link to a Bloomberg story about a revival in Seattle where house bidding wars are in progress: Date March 27, 2012. You won't believe it. It reads like a story from the heart of the days of the bubble market.

Gold is targeting $1,700/oz after yesterday’s Bernanke QE hints and today’s urging by the OECD to boost the Eurozone ‘firewall’ by another $1.3 trillion. Gold is consolidating on yesterday’s gains today above the 200 day moving average (simple) at $1,687/oz after yesterday’s biggest daily gain since January. The gains came after Ben Bernanke warned of the risks to the fragile US economic recovery and signalled the Fed would keep interest rates low and further debase the dollar – boosting gold’s inflation hedging appeal. Gold is also likely being supported by the OECD’s warning that the debt crisis is far from over. The OECD said today that the euro zone's public debt crisis is not over despite calmer financial markets this year and warned that Europe's banks remain weak,  fiscal targets are far from assured and debt levels are still rising. The OECD said that the eurozone needs to boost crisis ‘firewalls’ to at least $1.3 trillion. Gold likes the ‘trillion’ word and talk of ‘trillions’ and will be supported by the risk of the creation of trillions of more euros, pounds and dollars in the coming months. Indian jewellers are on strike to protest against a government levy on gold and the strike is entering its 11th day in most parts of India. It has brought gold imports to a near standstill from the world's biggest buyer of bullion in the peak wedding season.  The Indian government for the second time in 2012 doubled the import tax on gold coins and bars to 4% along with an excise duty of 0.3 percent on unbranded jewellery.

The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.

Bernanke’s argument that he can push demand harder to reduce unemployment is based on the notion that unemployment is more cyclical than structural. Unfortunately that seems like a bad bet given the evidence. The greatest bulge in unemployment in this cycle is from not-temporary unemployment instead of from temporary unemployment. And that category’s contribution to the unemployment rate is larger than in this expansion at this point than in any previous expansion at the 32-month mark since at least the 1970s. Ben seems to be rolling the dice on a bad bet. But it’s a bet that gives him a rationale for postponing tightening which is what his Great Depression lesson tells him to do. Right now all we really know is the ‘what’ of his policy ‘not the ‘why.’

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning's tungsten brick road. Yet in the aftermath of last month's stunning surge in the country's trade deficit, this, and much more may soon be finally ending. Because as Caixin's Andy Xie writes "The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then." As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: "Yen devaluation is likely to unfold quickly. A financial bubble doesn't burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government's solvency could lead to a collapse of the JGB market." It gets worse: "Of course, the government will collapse with the JGB market." And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world's rapidly declining 3rd largest economy to take precautions for when this day comes... soon.

For months we have been saying that there is no housing recovery, and what little buying interest there was was driven purely by abnormally warm weather and still record low interest rates. Well, the seasonal aberrations are now over, and normalcy can return, but not before much demand was pulled forward (Cash for Caravans? Money for McMansions? Shekels for Shacks? Dough for Dumps?) to December-February courtesy of "April in January" and mortgage rates soaring to well over 4%, leading to a major tumble in MBA new home and refi mortgage applications (as noted here "So Long Housing - Mortgage Applications Collapse, And Sentiment Update"). So we won't repeat ourselves, intead we will give the podium to CNBC's Diana Olick who now finds empirical evidence of what we have been saying all along. From Olick:  "Housing was charging back. Spring sprung early. Sentiment among home builders doubled in six months. Any talk that the fundamentals might not be supporting the sentiment was met with harsh criticism. And then suddenly it wasn’t. A slew of new housing data last week disappointed the analysts and the stock market, and all of a sudden you started to hear concern that maybe housing wasn’t exactly in a robust recovery. From home builder sentiment to housing starts, to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it (except perhaps if you invest in rentals, as multi-family housing starts made more gains, but that is a contrary indicator to housing recovery)." And from the ground:"And then an email from a Realtor in New Jersey: “Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest."