"Houston, we have a problem"
The US is clearly heading into another recession in the context of a larger depression. And it’s doing this while in the worst economic shape in its post-WWII history. We’ve never once entered a recession when the average duration of unemployment is at an all time high, industrial production has failed to break above its previous peak, and food stamp usage is at a record high. We’ve never done this.
Organic growth is slow and painful (Boo!), central bank money fast, cheap and with few strings attached (Yes!)…And anyway, QE and other supports have already been priced in… Can’t change the programme.
"Business has gone from great to terrible in a matter of months. The sad truth is that most of my clients have already sold all of their gold rings," is anecdotal evidence of a growing trend that Bloomberg reports in Portugal. The central bank holds more gold relative to the size of the country’s economy than any euro country, mostly accumulated during former dictator Antonio de Oliveira Salazar’s 36 years in power, based on data compiled by the World Gold Council. The law prevents proceeds from selling any gold reserves from going toward the government’s budget. With the Portuguese unemployment rate at a euro-era record of 15 percent in the second quarter, citizens are wondering who will help bail them out now that their job and gold are gone: "We have no more gold to save us from being kicked out this month," encapsulates a growing trend in debt crisis-stricken Europe as household gold supplies dry up after record prices and a deepening recession prompts a proliferation of places to exchange the metal for money.
European equities opened higher, risk appetite boosted following overnight comments from Chinese Premier Wen that easing inflation in China left more room for monetary stimulus. However, summer thin volumes saw these gains pared, with particular underperformance in the FTSE 100, which currently trades in negative territory, despite stronger than expected UK retail sales for July. European CPI data for July was in line with market expectations, with no reaction seen across the asset classes following the release. Elsewhere, reports that Spain is to accelerate the bank bailout and is about to receive an emergency disbursement from the EUR 100bln bailout failed to support domestic bond market; the Spanish 2-year spread with respect to the German equivalent trading 6bps wider, though the Spanish 10-year spread is tighter on the day by 3.2bps and the 10-year yield is lower on the day, currently at 6.852%. The Spanish IBEX is outperforming on the back of this news, led by Bankia and Banco Santander.
- JPMorgan provided rescue financing to Knight (WSJ)
- HSBC hands U.S. more staff names in tax evasion probe (Reuters), HSBC, Credit Suisse Sacrifice Employees to U.S., Lawyers Say (BBG)
- Hong Kong shares slide to two-week closing low, China weak (Reuters)
- Israel Would Strike Iran to Gain a Delay, Oren Says (Businessweek)
- Britain 'threatened to storm Ecuador's London embassy' to arrest Julian Assange (AP)
- You have now entered the collateral-free zone: Spain Said to Speed EU Bank Bailout on Collateral Limits (BBG)
- China Can Meet Growth Target on Positive Signs, Wen Says (BBG)
- Risk Builds as Junk Bonds Boom (NYT)
- Berlin maintains firm line on Greece (FT)
- Brazil unveils $66bn stimulus plan (FT)
The European morning session has been fairly quiet, with European equities opening lower following over night reports from China that the People's Bank of China might buy back government debt in the secondary market making the much speculated reserve ratio requirement cut it less likely. With several market closures across the Euro-area thanks to the Assumption of Mary holiday, volumes have been particularly light, and with a distinct lack of European data, market focus was on the release of the Bank of England's minutes for the August rate decision. As expected, the MPC voted unanimously to keep the APF unchanged at GBP 375bln and the benchmark rate unchanged at 0.50%, though some MPC members noted there was a good case for further expansion of QE. The better than expected UK jobs report also helped strength GBP.
- Investors Shift Money Out of China (WSJ)
- Rajoy Risks Riling ECB in Bid to Avoid Union Ire (Bloomberg)
- Romney-Ryan See Fed QE as Inflation Risk Amid Subdued Prices (Bloomberg)
- Spanish savers offered haircut then money back (FT)
- Must wipe all traces of illegality and settle for $25,000: Standard Chartered Faces Fed Probes After N.Y. Deal (BBG)
- Greece debt report backs cuts plan (FT)
- Greece seeks two-year austerity extension (FT)
- Brevan Howard Looks To U.S. To Raise Money For Currency Fund (Bloomberg)
- Can he please stop buying gold? Paulson, Soros Add Gold as Price Declines Most Since 2008 (Bloomberg)
- BOE Drops Reference to Rate Cut as It Considers Policy Options (Bloomberg)
- EU Banking Plans Asks ECB to Share Power, Documents Show (Bloomberg)
It's quiet out there, quieter than usual. Perhaps this is because Merkel is in Canada today and so hasn't had a chance to crash any dreams of magic money trees yet. The EURUSD however did drop preemptively without any news and touched on 3 day lows moments ago under 1.2280, forcing DraghiFX and his long EURUSD call to pay another margin call. Eventwise, in Europe Spain continues to pretend it does not exist, with its bond yields quietly sliding lower even as the country's economy continues to deteriorate, on expectations that Rajoy will ask for a bailout, when in fact the lower yields go, the more unlikely this event is. Of course, all that needs to happen for the deer in headlight market to snap out of its trance is a reminder of just how broke Spain is before it does need a bailout. In the meantime, Spain is extending unemployment benefits. More importantly, it seems that the Chinese slowdown is about to hit Germany like a brick wall: Hamburg - Europe’s second-largest container harbor - reported its first quarterly decline in container volumes in nine quarter. And now the recession is really coming to Germany.
Republican Presidential candidate Mitt Romney's selection of Rep. Paul Ryan (R-WI) as his running mate has generated renewed interest in the House-passed budget resolution that Ryan authored. Ryan's budget outline would reduce the deficit more quickly and impose more fiscal restraint than the President's budget proposal. However, as Goldman notes. while both proposals would increase revenues due to the scheduled expiration of the payroll tax cut at year end, the President's would raise income taxes as well. Rep. Ryan's plan, on the other hand, would cut spending sharply in 2013 and 2014, even though it assumes a one-year delay in the spending cuts under the "sequester" set to take effect at year-end. If the President wins reelection and/or Democrats hold their majority in the Senate, a bipartisan compromise would be necessary to enact fiscal reforms. This has been difficult to achieve over the last year or so and we expect compromise to be even tougher. We continue to believe that the economic effects of allowing the fiscal cliff to take effect in full will be the greatest motivation for members of Congress to reach an agreement.
No exactly fireworks, but anything that isn’t totally bad these days is good to have.
Good news, but then not so good news?! So, no QE, after all?
It is important to consider how beneficial a debt reset — so long as society comes out of it in one piece — will be in the long run. As both Friedrich Hayek and Hyman Minsky saw it, with the weight of excessive debt and the costs of deleveraging either reduced or removed, long-depressed-economies would be able to grow organically again. This is obviously not ideal, but it is surely better than remaining in a Japanese-style deleveraging trap. Yet while most of the economic establishment remain convinced that the real problem is one of aggregate demand, and not excessive total debt, such a prospect still remains distant. The most likely pathway continues to be one of stagnation, with central banks printing just enough money to keep the debt serviceable (and handing it to the financial sector, which will surely continue to enrich itself at the expense of everyone else). This is a painful and unsustainable status quo and the debt reset — and without an economic miracle, it will eventually arrive — will in the long run likely prove a welcome development for the vast majority of people and businesses.
With less than three months to go, the outcome of the November election remains highly uncertain. SocGen notes that, as always, economic performance over the coming months will be a key determinant of who wins and who loses. If the elections were held today, the most likely outcome would be a Republican win in both Congressional races and a Democratic win in the race for the White House. This means that any new significant legislation will almost certainly have to be a product of compromise. In this sense, we may very well be looking at a status quo in terms of bipartisanship and gridlock which have dominated Washington politics over the past few years. This would be bad news at a time when the country faces a number of serious challenges with significant long-term implications. From the economy to long-term fiscal health, and from the debt-ceiling to Housing, Healthcare, and Energy policy differences, the following provides a succinct review.
As the 'new' normal limps on, PIMCO's Mohamed El-Erian focuses his attention on the political dysfunction that roils the 'new new' normal in an excellent op-ed in Foreign Policy today. The economic and financial system risks breakages that the political system will be increasingly incapable of mending rapidly enough," he opines as he fears sluggishness in economic growth, unacceptably high youth unemployment and long-term joblessness, redoubled debt and deficit concerns, and worsening inequalities between rich and poor leading the US down a path towards Europe's disruption. Sadly, neither Obama nor Romney has yet offered a meaningful, forward-looking economic reform program to address problems such as a malfunctioning labor market, unsustainable public finances, a broken credit system, inadequate infrastructure, and a lagging education system. The warning bells are ringing, and they are ringing loudly. We've already allowed bad economics to lead to bad politics. Now, it's high time to put a stop to the cycle where bad politics undermines an already fragile economy.
Last week was a scratch in terms of events, if not in terms of multiple expansion, as 2012 forward EPS continued contraction even as the market continued rising and is on the verge of taking out 2012 highs - surely an immediate catalyst for the New QE it is pricing in. This week promises to be just as boring with few events on the global docket as Europe continues to bask in mid-August vacation, and prepare for the September event crunch. Via DB, In Europe, apart from GDP tomorrow we will also get inflation data from the UK, Spain and France as well as the German ZEW survey. Greece will also auction EU3.125bn in 12-week T-bills to help repay a EU3.2bn bond due 20 August held by the ECB. Elsewhere will get Spanish trade balance and euroland inflation data on Thursday, German PPI and the Euroland trade balance on Friday. In the US we will get PPI, retail sales and business inventories tomorrow. On Wednesday we get US CPI, industrial production, NY Fed manufacturing, and the NAHB housing index. Building permits/Housing starts and Philly Fed survey are the highlights for Thursday before the preliminary UofM consumer sentiment survey on Friday.