recovery

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

Yes, Greece had a smaller, shakier economy and doesn't have a central bank to print its own currency at will like Japan or the US. But even those countries with a printing press learn that, after a certain point, expanding the money supply only complicates the problem of too much debt by inflating key economic input costs and dangerously weakening the currency. The cold hard fact Greece is facing is that it's now at the point where extraordinary losses need to be taken. The problem is, no one wants to take them. And all the sturm und drang being exhibited by Brussels, the ECB, sovereign debt holders, and other world leaders is nothing more than a frantic game of hot potato. The one thing we can be confident of is that at some point, these losses will be taken. The market will eventually force it. And the second thing we can predict is: we don't know what will happen when they are. There is so much complexity in the counterparty exposure to Greece debt - as well as the much larger derivative exposure tied to this debt - that anything between "not much" and "worldwide financial conflagration" could be possible. And that's just Greece. As other larger countries begin to sink under the weight of their sovereign debts, the risks to the global financial system increasingly escalates. Which is why Ben Davies has a hard time finding a good home for investment capital other than gold.

While mostly a regurgitation of old, very trite, and quite meandering thoughts, there are some tidbits of information in the latest just released 2011 Berkshire Letter to shareholders such as that Buffett has chosen a successor to the 81 year old increasingly more confused head (unclear who), that Buffett is on the prowl for large acquisitions, that he hopes IBM shares languish for the next five years (frankly we can't wait until Buffett opens a stake in Apple so he can control the two stocks that between them account for about half of the moves in the DJIA and the NASDAPPLE - after all "economies of scale" is all about how Nominal Buffett exudes 'success'), that he once again sees a housing bottom (he adds: "Last year, I told you that “a housing recovery will probably begin within a year or so.” I was dead wrong" - this admission is far more than we will ever hear from James Cramer who has been calling a housing bottom since 2009), and "Housing will come back – you can be sure of that" - sure, just not in your lifetime, and probably not in ours either, but most importantly, is the discovery not that BRK's profit declined by 30% (to $3.08 billion from $4.38 billion) on a smaller gain on derivatives, but that since he actually will have to post collateral on new derivatives, "we will not be initiating any major derivatives positions." The reason: "We shun contracts of any type that could require the instant posting of collateral. The possibility of some sudden and huge posting requirement – arising from an out-of-the-blue event such as a worldwide financial panic or massive terrorist attack – is inconsistent with our primary objectives of redundant liquidity and unquestioned financial strength." So his warning that derivatives are WMDs years ago was only appropriate if there was money to be lost, such as is the case for 99.9999% of other investors? Ah, there goes the good old hypocritical, crony Warren we have all grown to known and love. And finally what would be a recent Buffett missive without the obligatory gold bashing section: after all, how will the Ponzi scheme inflate if people have realized it is a ... well, Ponzi, championed by none other than the person everyone once thought was actually an investing genius. Fast forward to Buffett's 2020 Letter (when Greek debt/GDP is precisely 120.5%) his main message will be: "I told you to run away from gold. I was dead wrong."

There have been numerous media stories out over the last couple of weeks about the recovery in housing at long last.   Of course, this is the same housing bottom call that we heard in 2009, 2010 and 2011 - so why not drag it out again for 2012.  Eventually, the call will be right and they will be anointed with oils and proclaimed to be the gurus that called the bottom.  In the financial world you only have to be right once. However, back on earth, where things really matter, housing is a major contributing component to long term economic recovery.  Each dollar sunk into new housing construction has a large multiplier effect back on the overall economy.  No economic recovery in history has started without housing leading the way.  So, yes, housing is really just that important and we should all want it to recover and soon.  The calls for a bottom in housing now, however, may be a bit premature as I will explain.

The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short - we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama's reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the "realizations" that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market's preoccupation all too soon.

Yes, the Federal government can cover up the damage by borrowing 10% of GDP each and every year ($1.5 trillion, and don't forget to add in the off-budget "supplementary appropriations"), and the Federal Reserve can add trillions in quantitative easing stimulus, but even adding $8 trillion of borrowed/printed money to the economy over the past four years has had remarkably little effect on the private-sector economy. That does not bode well for the "recovery."

And I thought securitization ment they where going to keep the loan docs in a safe place in some bank vault some where...

Below is some more hard data where you won't find the much anticipated, 'any minute now', housing recovery. While the first chart shows the annualized new home sales sold data, which came in at meaningless 321K in January on expectations of 315K, and a meaningless drop from an upward revised 324K, all this shows is that 3 years after the "recovery", there is zero improvement in housing. In non-SAARed terms, there were just 22K homes sold in January. Naturally, this is to be expected because as long as the government continues to prevent true price discovery, there will be no real housing market. Which is just what the second chart  shows: Completed houses for sale at the end of period dropped to 57K - this is the lowest point in the 40 years of this data series. Said otherwise nobody has any hopes that there will be a pick up in housing demand. And why should they - after all as the third and final chart shows, shadow inventory is at a record, and about to be unleashed on the market at bargain basement prices courtesy of the Robo-settlement, which in turn will drag down prevailing prices far, far lower everywhere. Welcome to the latest housing non-recovery.

Bunch of irrelevant and reflexive (stock market is up so confidence - in what? manipulated markets? - is higher, so stock market is up so confidence is higher etc) stuff today, as the world central banks prepare to pump another $600-$1000 billion into the consolidated balance sheet and send input costs into the stratosphere. Somehow this is bullish for stocks. Luckily, it will finally break the EURUSD - ES linkage.

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?

While the bulk of tangential themes in Albert Edwards' latest letter to clients "The Ice Age only ends when the market loses hope: there is still too much hope" is in line with what we have been discussing recently: myopic markets focused on momentum not fundamentals ("It's amazing though how the market can get itself all bulled up and becomes convinced that we are the start of a self-sustaining recovery. And funnily enough there's nothing more likely to get investors bullish than a rising market"), short-termism ("One thing you can say for the market is that it has an extremely short memory"), and that so far 2012 is a carbon copy of 2011 ("One thing you can say for the market is that it has an extremely short memory. Let us not forget that the performance of the equity market so far this year is almost exactly the same as we saw at the start of 2011 (in fact the performance has been similar for the last 5 months"), his prevailing topic is one of hope. Or rather the lack thereof, and how it has to be totally and utterly crushed before there is any hope of a true bull market. And just to make sure there is no confusion, unlike that other flip flopper, Edwards makes it all too clear that he is as bearish as ever. Which only makes sense: regardless of what the market does, which merely shows that inflation, read liquidity, is appearing in the most unexpected of places (read Edwards' colleague Grice must read piece on why CPI is the worst indicator of asset price inflation when everyone goes CTRL+P), the reality is that had it not been for another $2 trillion liquidity injection in the past 4-6 months by global central banks, the floor would have fallen out of the market, and thus the global economy. In fact, how the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond a doubt that every risk indicator is fake???

• IMF Official: 'Huge' Greek Program Implementation Risks In Next Few Days (WSJ)
• European Banks Take Greek Hit After Deal (Bloomberg)
• Obama Urged to Resist Calls to Use Oil Reserves Amid Iran Risks (Bloomberg)
• Hungary hits at Brussels funds threat (FT)
• Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage (Bloomberg)
• Germany fights eurozone firewall moves (FT)
• New York Federal Reserve Said to Plan Sale of AIG-Linked Mortgage Bonds (Bloomberg)
• G-20 Asks Europe to Beef Up Funds (WSJ)
• New Push for Reform in China (WSJ)

Back in December I penned an article about the potential for gasoline prices to rise quickly to catch up with surging oil prices.  We said then "If we look at just the nominal price data going back to 1990 we can see that there is indeed a very high correlation between oil prices and gasoline prices.   While divergences from each other do occur on occassion those divergences tend not to last for very long with gasoline usually correcting towards the price of oil."   That is precisely what has happened since the near $3 per gallon of gasoline this summer, which was an effective $60 billion tax break for consumers during the much anticipated retail shopping season, to near $3.50 a gallon today.  That 16% rise in gasoline has now effectively wiped out the entire payroll tax cut being extended into 2012. There has been a lot of media commentary as of late about the recovery in the economy.  The dangerous assumption being made here is that the recent upticks in the economic data have come primarily at the expense of inventory restocking and end of year buying of capital goods by businesses to lock in tax credits.  Extrapolating those bounces in the data well into the future can prove to be disappointing.  Yet this is exactly what the the President's current budget, which has been presented to Congress, has done.  That budget plans for 3% or stronger economic growth over the next 6 years.  This is a pretty lofty goal which considering last years growth was a paltry 1.7%.  However, in order to acheive a 3% plus growth rate the consumer is going to have to should 2.1% of that load through consumption.

Goldman's David Greely is no Tom Stolper. In fact his recommendations have been correct more often than not. Which is why we believe that when the market learns that the Goldman commodities strategist just opened a long September WTI position at $107.55, it will merely provide that extra oomph to send WTI up, up and away. Or maybe not: this could be another one of the "fade Goldman" calls. Alas, with the real impact of the recent $2 trillion balance sheet expansion becomes truly felt we have a distinct feeling Goldman is quite right on this one. Evil, evil speculators.

Warning: Not for the faint of heart.