Overnight Nikkei Crash Drags Risk Lower

While there was little macro news to report overnight, the most notable development was yet another USDJPY-driven crash in the Nikkei 225 which plunged by a whopping 576 points, or 4%, to 13825, while the Yen soared to under 96.80 in the longest series of gains since mid-June before recouping some of the losses on pre-US open program trading. The reason attributed for the move were reports that Japan would adhere to pledge to cut its deficit which is the last thing the market wanted to hear, as it realizes that boundless QE is only possible in a context of near-infinite deficit spending.  The index, which has now become a volatility joke and woe to anyone whose "wealth effect" is linked to its stability, pushed not only China's Shanghai composite lower by 0.7% but led to losses across the board and as of this moment is seen dragging US equity futures lower for the third day in a row.

Bank of England Announces 7% Unemployment-Linked "Forward Guidance" But Credibility Questioned

Moments ago the Bank of England's Mark Carney, very much as expected and warned previously, announced for the first time as part of the BOE quarterly Inflation Report press conference (the full August inflation report can be found here) the official linkage of monetary policy outlook to unemployment and pledged to expand stimulus if needed as he tried to quell investor bets on higher interest rates. Specifically as part of the BOE's forward guidance, Carney linked interest rates to a 7% unemployment threshold while forecasting that unemployment would be higher than 7% until at least Q3 2016, or in other words, no threat of an end of extraordinary monetary policy any time soon. However, while the market enjoyed the announcement initially and sent cable 100 pips lower to 1.5200, the initial dovish mood was quickly reversed after the market observed that Carney's statement carried with it three "knock out clauses" which made the forward guidance far less explicit and put doubts into the market about the credibility of this latest monetary experiment as a result unwinding an initial 100 pip drop in cable and sending it over 200 pips higher from the lows.

Crossing The Rhine...To Escape 10% Unemployment

"Many people still refuse to work in Germany; it's the language and demons of the past," but for many, crossing the Rhine is now the only option to escape the dismal depression-like economic environment that is engulfing France (as we most recently discussed here and here). As one border-crossing employee noted, "in Germany, they take people more easily and train them for new work even if you have worked in a totally different area than the one asked for," and with unemployment in Alsace (France) at about 10% and the jobless rate in the bordering German state of Baden-Wuerttemberg at a mere 4%, it is little wonder that an increasing number - around 24,000 French people (from this 'symbolic' region) are crossing over for work.

Some Questions On "Confidence" From Howard Marks

Confidence leads to spending; spending strengthens the economy; and economic strength buttresses confidence. It’s a circular, self-fulfilling prophesy. Confidence can also fuel market movements. Belief that the price of an asset will rise causes people to buy the asset... making its price rise. This is another way in which confidence is self-fulfilling. But, of course, as Oak Tree Capital's Howard Marks points out, the confidence that underlies economic gains and price increases only has an impact as long as it exists. Once it dies, its effect turns out to be far from permanent. As the economist Herb Stein said, "If something cannot go on forever, it will stop." This is certainly true for confidence and its influence. As far as confidence today, Marks notes significant uncertainty is one of the outstanding characteristics of today’s investing environment. It discourages optimism regarding the future and limits investors’ certainty that the future is knowable and controllable. In other words, it saps confidence. This is a major difference from conditions in the pre-crisis years. In fact, Marks warns he doesn't remember when his list of 'uncertainties' was this long...

FBI Probing Holes In Early Economic Data Release

Frequent readers are aware that one of our favorite topics is forensic market evidence confirming early release of market moving data to select "buyers" of said data, who then can trade ahead of the crowd and make illegal profits. The most recent example of just this took place last Friday when someone or something was leaked the non-farm payroll data as much as three second early. But while various third party profit-seeking intermediaries such as Deutsche Boerse's MNI, UMichigan consumer confidence and others have acknowledged to presell early dissemination of specialized data to subscribers such as well-paying high frequency traders, at least government data was said to be exempt from such a profit motive. At least until now: the WSJ reports that the FBI "has discovered vulnerabilities in the government's system for preventing market-moving economic reports from leaking to traders before public release. Law-enforcement officials found "a number of operational vulnerabilities" involving "black boxes" used by several departments to control the release of sensitive economic data such as the monthly unemployment rate, according to a report by the inspector general at the Commerce Department."

Guest Post: Why The Unemployment Rate Is Irrelevant

The media, the financial markets and investors have become fixated on the unemployment rate, as reported by the Bureau of Labor Statistics, particularly since it was directly linked by the Federal Reserve to its current bond buying program. What is clearly evident is that, despite the headline reports, there is clearly an alarming divergence in employment from the long-term trend.  The structural shift in employment away from manufacturing and production to a service and outsourced based economy has clearly created a deviation that will not likely be corrected for decades to come.  The implications for the Federal Reserve, and the economy, should be concerning.  While the hope is that the economy will suddenly spark back towards stronger growth; the supply/demand imbalance suggests otherwise.

El-Erian Warns "Don't Be Fooled" By Europe's Tranquility

August is traditionally Europe’s holiday month, with many government officials taking several weeks off. In the process, important initiatives are put on hold until the “great return” at the beginning of September. This year, there is another reason why Europe has pressed the pause button for August. With a looming election in Germany, few wish to undermine Chancellor Angela Merkel’s likely victory.  Some of the recent economic news has seemed to justify this approach. Yet no one should be fooled. This summer’s sense of normality is neither natural nor necessarily tenable in the long term. It is the result of temporary and – if Europe is not attentive – potentially reversible factors. If officials do not return quickly to addressing economic challenges in a more comprehensive manner, the current calm may give way to renewed turmoil. In essence, Europe (and the West more generally) owes its recent tranquility to a series of experimental measures by central banks; consequently, the resulting surface calm masks still-worrisome economic and financial fundamentals.

Guest Post: Trying To Stay Sane In An Insane World - Part 2

This insane world was created through decades of bad decisions, believing in false prophets, choosing current consumption over sustainable long-term savings based growth, electing corruptible men who promised voters entitlements that were mathematically impossible to deliver, the disintegration of a sense of civic and community obligation and a gradual degradation of the national intelligence and character. There is a common denominator in all the bubbles created over the last century – Wall Street bankers and their puppets at the Federal Reserve. Fractional reserve banking, control of a fiat currency by a privately owned central bank, and an economy dependent upon ever increasing levels of debt are nothing more than ingredients of a Ponzi scheme that will ultimately implode and destroy the worldwide financial system. Since 1913 we have been enduring the largest fraud and embezzlement scheme in world history, but the law of diminishing returns is revealing the plot and illuminating the culprits. Bernanke and his cronies have proven themselves to be highly educated one trick pony protectors of the status quo. Bernanke will eventually roll craps. When he does, the collapse will be epic and 2008 will seem like a walk in the park.

40% Of US Workers Now Earn Less Than 1968 Minimum Wage

Are American workers paid enough?  That is a topic that is endlessly debated all across this great land of ours.  Unfortunately, what pretty much everyone can agree on is that American workers are not making as much as they used to after you account for inflation.  Back in 1968, the minimum wage in the United States was $1.60 an hour.  That sounds very small, but after you account for inflation a very different picture emerges.  Using the inflation calculator that the BLS provides, $1.60 in 1968 is equivalent to $10.74 today. According to the Social Security Administration, 40.28% of all workers make less than $20,000 a year in America today.  So that means that more than 40 percent of all U.S. workers actually make less than what a full-time minimum wage worker made back in 1968.  That is how far we have fallen.

Uncollected Greek Taxes Rise To Record €60 Billion, One Third Of Greek GDP

While Europe, and especially Germany has been understandably "displeased" with having to provide billions in bailout upon bailout funding to Greece every year starting in 2010, all the more so following recent news that Greece has already spent some 75% of its bank bailout cash with no discernible improvement in its economy to show for it, Europes' taxpayers will unlikely be any more pleased to learn that as of the end of June, a whopping €60 billion in past due taxes (an all time record) was owed by Greek businesses and individuals to the state. This is an amount that is 20% greater than the entire external cash handed over by the Troika to keep Greek banks afloat, and represents nearly 30% of imploding Greek GDP.

How Much Is Oil Supporting U.S. Employment Gains?

The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry's lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord.

Cyprus Unemployment Surges 32% Year-Over-Year

With PMIs picking up across Europe, the nations' 'leaders' are spreading the good word that the worst is over (again) and its all sunshine and unicorns from here. But it's not. As Cyprus' Anastasiades glibly comments on small improvements in their capital controls - amid collapsing deposits, bluntly ignoring the reality of a record implosion in the nation's home prices, the facts for the man on the street are dismal. The number of jobless people in the smallest EU nation jumped 32% year-over-year to its highest in the 19 years data has been collected.

Dallas Fed's Fisher: "We Own A Significant Slice Of Critical Markets. This Is Something Of A Gordian Knot"

"This is a delicate moment. The Fed has created a monetary Gordian Knot.  Whereas before, our portfolio consisted primarily of instantly tradable short-term Treasury paper, now we hold almost none; our portfolio consists primarily of longer-term Treasuries and MBS. Without delving into the various details and adjustments that could be made (such as considerations of assets readily available for purchase by the Fed), we now hold roughly 20 percent of the stock and continue to buy more than 25 percent of the gross issuance of Treasury notes and bonds. Further, we hold more than 25 percent of MBS outstanding and continue to take down more than 30 percent of gross new MBS issuance. Also, our current rate of MBS purchases far outpaces the net monthly supply of MBS. The point is: We own a significant slice of these critical markets. This is, indeed, something of a Gordian Knot."


Jan Hatzius' First 2013 Mea Culpa: "Glass Half Full"

Back in late 2012, Goldman's Jan Hatzius did precisely what he did at the end of 2010: predicted that after many years of delays, the US economy would finally soar higher on the back of the reignition of the virtuous cycle driven by now endless Fed micromanagement of virtually every aspect of the economy. We mocked him in 2010 (6 months later he pulled his call following a series of embarrassing mea culpas), and did the same in 2012. So here we are, 8 months later, and this much-delayed recovery has been "delayed" again - just as we thought. Of course, once bitten by the fringe blogosphere, Jan is not willing to pull his recovery call for the second time in a row despite deteriorating GDP and employment data, and instead (like everyone else) if placing his faith with the Fed, despite five consecutive years of disappointment from St. Ben. Maybe this time it will be different... although it won't. In the meantime, from a glass fully full (which is where it was supposed to be by this time in the year), the Goldmanite has now reduced his economic assessment to half that.

Sleepy Week Opens Without Now Traditional Overnight Futures Levitation

Compared to last week's macro-event juggernaut, this week will be an absolute bore, although with a bevy of Fed speakers on deck - both good and bad cops - there will be more than enough catalysts to preserve the "upward channel" scramble in the S&P and the zero volume levitation to new all time daily highs despite the lack of daily bad news. Speaking of Fed speakers, we have Fisher today, Evans’ tomorrow followed by both Plosser and Pianalto on Wednesday.  The key overnight data point was the continuation of July PMIs out of Europe, this time focusing on the service industry. As Goldman summarizes, the Final Euro area Composite PMI for July came in at 50.5, marginally above the Flash reading and consensus expectations (50.4). Relative to the June final reading, this was a sold 1.8pt increase, and building on consecutive increases in the past three months, the July Euro area PMI stands 4.0pts above the March print. Solid increases were observed across all of the EMU4 in July, most notably Italy. The July reading is the highest Euro area PMI level observed since July 2011.