- Ceasefire over, Ukraine forces attack rebel positions (Reuters)
- No Good Iraq Options for Obama as Russia, Iran Jump In (BBG)
- Japan’s Cabinet Agrees to Allow Military to Help Defend Allies (BBG)
- Obama says to reform immigration on his own, bypassing Congress (Reuters)
- South Stream Pipeline Project in Bulgaria Is Delayed (NYT)
- Foreign Banks Still in the Dark About Missing Metals in China (WSJ)
- Quelle indignity: several bankers at French bank BNP Paribas will face demotions and cuts to their pay and bonuses (FT)
- Symantec Warns of Hacker Threat Against Energy Companies (BBG)
- Shrinking Office Spaces Slow Recovery (WSJ)
- Rand Paul Slams ‘Fat Cats’ With Hedge Fund in Top Donors (BBG)
BTFATH! That was the motto overnight, when despite a plethora of mixed final manufacturing data across the globe (weaker Japan, Europe; stronger China, UK) the USDJPY carry-trade has been a one-way street up and to the right, and saw its first overnight buying scramble in weeks (as opposed to the US daytime trading session, when the JPY is sold off to push carry-driven stocks higher). Low volumes have only facilitated the now usual buying at the all time highs: The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing - yesterday’s S&P 500 volumes were about half that compared to the last trading day of 1H13.
There are some out there in the economic world that believe that banknotes are detrimental to the health of the economy and that they are currently stifling the recovery of the markets. Their solution: burn the damn things and let them go up in smoke. Replace them with electronic money and then the central banks around the world will be able to do more than just providing alternatives that don’t work to revamping the financial markets and boosting economic growth.
Hot on the heels of last week's dismal Japanese data, tonight's Industrial Production data missed rather dramatically as once again the hockey-stick'ers of hope rebound from last month's post-tax-hike plunge did not appear. USDJPY is still fading (4th day in a row), as Goldman concludes rather ominously (having folded like a lawn-chair on their J-Curve exuberance), the post-tax-hike correction is larger than the government and the market anticipated, and in view of our outlook for a slump in real wages and a resultant delayed recovery in domestic demand, we look to external demand to drive economic growth in FY2014. However, we highlight risk factors in the form of protracted weakness in China and other Asian economies and a decline in corporate Japan’s structural export capacity. Sadly for the hopers, hard data continues to miss both the production survey forecast and consensus.
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
For a week or two, the 'news' appeared to confirm the 'hope'; faith that Q1's dysphoria would emerge phoenix-like into Q2 euphoria as a 'hibernating' American public emerging from their weather-shelter and spent-spent-spent all their borrowed-borrowed-borrowed money. That ended last week! Despite the dramatically low volume liftathon in stocks since the FOMC meeting, major risk markets around the world are cracking. European bonds and stocks had a bad week, Treasuries rallied the most in 6 weeks, and the key to it all, USDJPY, slipped to 4 week lows. Why? As the chart below shows, US macro data is collapsing again (right on cue) and stands at 2-month lows... (and is the worst-performing macro nation in the world this year!)
As individuals, it is entirely acceptable to be "optimistic" about the future. However, "optimism" and "pessimism" are emotional biases that tend to obfuscate the critical thinking required to effectively assess the "risks". The current "hope" that Q1 was simply a "weather related" anomaly is also an emotionally driven skew. The underlying data suggests that while "weather" did play a role in the sluggishness of the economy, it was also just a reflection of the continued "boom bust" cycle that has existed since the end of the financial crisis. The current downturn in real final sales suggests that the underlying strength in the economy remains extremely fragile. More importantly, with final sales below levels normally associated with the onset of recessions, it suggests that the current rebound in activity from the sharp decline in Q1 could be transient.
The economic releases of the past few days are putting the lie to the Keynesian escape velocity myth. The latter is not just around the corner—-and 2014 is now virtually certain to mark the fifth year running when the boom predicted by Wall Street economist at the beginning of the year fizzled as actual results unfolded.
Despite exuberant Services and Manufacturing PMIs, Bloomberg's index of CEO sentiment remains stagnant near 2014 lows as April's hope for Q2 has faded into 'more of the same' by June. As Bloomberg's Rich Yamarone points out, in reality (in spite of all the hope), the second quarter is drawing to a close and it was a rough one for corporate America, with CEOs citing "slower growth in household income overall", "the recovery remains fragile, especially for customers on a budget", and perhaps most concerning, "whether or not this softness in store traffic is representative of a permanent sea change in customer behavior or a temporary phenomenon is hard to tell at this stage."
The CEOs of U.S. companies are compensated exceedingly well with the heads of the S&P 500 paid 331 times as much, on average, as production and nonsupervisory employees. As we wrote a month ago while explaining the 'mystery and completely indiscriminate' buyer of US stocks: "since a vast majority of executive compensation agreements are tied to company stock "performance"; C-suites are perversely happy if their own corporate cash is used to buy the stock near or at all time highs: after all management year end bonus will simply benefit that much more, while keeping activist investors delighted (and away from the embarrassing public spotlight)." Sure enough, as HBR explains, executive comp in recent decades comes down to four words: stock options and restricted stock (and more and more in the last few years).
- Yellen Spending Recipe Lacking Key Ingredient: Bigger Wage Gains (BBG)
- Ukraine signs trade agreement with EU, draws Russian threat (Reuters)
- GM Documents Show Senior Executive Had Role in Switch (WSJ)
- Australian Report Postulates Malaysia Airlines Flight 370 Lost Oxygen (WSJ)
- World’s Biggest Debt Load Lures Distressed Funds to China (BBG)
- GPIF Rushing Into Riskier Assets Before Ready, Okina Says (BBG)
- Japan Prices Rise Most Since ’82 on Tax, Utility Fees (BBG)
- Italian Debt Swells to Rival Germany as Bond Yields Slide (BBG)
- China’s Manhattan Project Marred by Ghost Buildings (BBG)
- BOE's Carney Says Rates Won't Rise to Levels Previously Considered Normal (WSJ)
Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.
This morning’s Q1 GDP revision might have been a wake-up call. After all, clocking in a -2.9% - cold winter or no - it was the worst number posted since the dark days of Q1 2009. Well, actually, it was the fourth worst quarterly GDP shrinkage since Ronald Reagan declared it was morning again in American 30 years ago. Stated differently, 116 of the 120 quarterly GDP prints since that time have been better. Even when you adjust for the Q1 inventory “payback” for the bloated GDP figures late last year, real GDP still contracted at a -1.2% annually rate. Still, within minutes of the 8:30AM release, the Wall Street Journal’s news update did not fail to trot out the “do not be troubled” mantra. When the daily narrative is this lame it is no wonder that our happy talk financial system drifts toward the wall. The Cool-Aid drinkers have simply lost touch with reality.
- Minorities Seen Driving U.S. Household Growth (Reuters)
- GM prepares to recall some Cruze sedans with Takata air bags (Reuters)
- PBOC Halts Repos as China Money Rate Climbs to Seven-Week High (BBG)
- Ukraine Optimism Wavers on Peace as Cease-Fire Winds Down (BBG)
- Economic Rebound Seen Undercut by Weak Pay as Vote Winner (BBG)
- Cracks Open in Dark Pool Defense With Barclays Lawsuit (BBG)
- The Survivor: How Eric Holder outlasted his (many) critics (Politico)
- IBM, Lenovo Tackle Security Worries on Server Deal (WSJ)
- Militants take Iraqi gas field town, president calls parliament session (Reuters)
- Carney Surprises Confounding Markets as BOE Manages Guidance (BBG)
Following yesterday's S&P surge on the worst hard economic data (not some fluffy survey conducted by a conflicted firm whose parent just IPOed and is thus in desperate need to perpetuate the market euphoria) in five years, there is little one can comment on how "markets" react to news. Good news, bad news... whatever - as long as it is flashing red, the HFT algos will send momentum higher. The only hope of some normalization is that following the latest revelation of just how rigged the market is due to various HFT firms, something will finally change. Alas, as we have said since the flash crash, there won't be any real attempts at fixing the broken market structure until the next, and far more vicious flash crash - one from which not even the NY Fed-Citadel PPT JV will be able to recover. For now, keep an eye on the USDJPY - as has been the case lately, the overnight USDJPY trading team has taken it lower ahead of the traditional US day session rebound which also pushes the S&P higher with it. For now the surge is missing but it won't be for longer - expect the traditional USDJPY ramp just before or as US stocks open for trading.