Several months ago it seemed that not a day could pass without someone, somewhere making fun of GM's biggest post-bankruptcy flaming failure to date: the Chevy Volt (gross and net of channel stuffing). Of course, since it was all in the name of ecological progress and carbon footprint reduction, most media observers let it go as merely one of the peculiar hurdles on the way to an utopian future in which America would no longer rely on crude imports from evil petroleum cartels. The time has come to redirect ridicule to that other $102,00+ MSRP object of electric aspiration, and henceforth - mockery: the Fisker Karma supercar.
With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.
What is high-frequency trading? We will never exhaustively address this issue here. We recommend that you do your own research on the subject. There are numerous articles on this topic. High-frequency trading (HFT) consists in using sophisticated technology to trade securities. It is highly quantitative, employing algorithms to analyze incoming market data. HF investment positions are held only very briefly, with HF traders trading in and out of positions intraday tens of thousands of times. The important feature is that at the end of a trading day there is no net investment position. Processing speed and access to the exchanges are critical.
While Frau Merkel remains beach-bound somewhere, hence the lack of 'Neins' recently, her deputy chancellor Michael Fuchs made it unequivocally clear this morning in a Handelsblatt interview that Germany had "reached the limit of its capacity" over additional EFSF payments to Greece and reiterated the double-whammy that the ESM should NOT receive a banking license and that the ECB should NOT act as "money printing press in disguise" by extending emergency loans and bypassing EFSF/ESM. A decision about whether Greece should be given the second tranche of its loan will not be made until October, after the Troika finalizes its first review of the second rescue program in September. However, BNP Paribas notes that there have been a couple of developments worth noting over the past week and more are likely in the coming weeks.
A week ago we explained quite clearly why instead of encouraging self-defeating, short-termist behavior by promising to save Europe's insolvent countries if and when needed, which does nothing to resolves Europe's problems and make it worse in exchange for a brief respite from bond selling, the ECB should be doing precisely the opposite: encouraging local governments to understand that there is no magic bazooka from the central banks. Specifically we said that "this Catch 22 of confounding cause and event can continue seemingly indefinitely, although in reality it can't. Because fundamentally what the bond market does is keep sovereigns "honest" - just as Schauble said a week ago, Spanish yields at 7% are not the end of the world - instead what they are is a signal to the country to get its spending in control in order to reduce its deficit, and fundamentally get its house in order - yes, that means getting government spending to a sustainable level and firing hundreds of thousands of workers, as well as probably raising taxes even more. It also means pain all around, but the pain is inevitable and will only be worse the longer reality is denied." This logic is so clear that only a lifelong economist, PhD or Goldman apparatchik can not grasp it: sadly that accounts for most of the people "in charge." Which is why we were delighted to read that at least one person "gets it" - Belgian national bank governor Luc Coene, the same Belgium that is also the heart of the bureaucratic labyrinth known as the EU, who told Belgium's two largest newspaper that "buying the bonds of these countries would only serve to weaken the ECB and do nothing to resolve underlying issues of competitiveness. “It makes no sense for the ECB to start financing those countries,” said Mr Coene, “It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet." Bingo. And not a moment too soon - we really were starting to pull a Mogatu here.
By now it is no secret that the primary beneficiary of the over $7 trillion pumped by global central banks into the financial system in just the past 4 years, and countless other trillions in miss-spent fiscal stimuli has been the stock market. But what about the global economy: after all five years after BNP Paribas stopped withdrawals from their investment funds - the unofficial start of the Great Financial Crisis - whose primary beneficiaries have been corn, gold, silver and brent - we should have seen at least some sustained impact in the economy if all Econ 101 teaches us about the virtuous business cycle is true, and if any of this countless money out of ZIRP air actually made its way into the economy instead of just the stock market. Well, let's take a look shall well. Courtesy of Bridgewater we present a chart of coordinated interventions and their impact not on the stock market, but on the economy. What we find is that it was, is, and will be a centrally planned world after all.
All major macro data from China over the last 2 days have been disappointing. The third quarter started on a surprisingly weak note for China despite all the talks (and hope) on stimulus and monetary policy easing. The macro data pretty much confirm our view that economic growth did not reach a bottom in the second quarter as the consensus used to believe. If anything, the economy seems to be worsening somewhat again. We hope that the consensus is (finally) right and that we are wrong. We hope that we will not be repeating the joke that “the consensus is expecting a recovery in next quarter during every quarter”. Unfortunately, we just don’t see that, and we doubt if the government has the willingness at this point to do much more, and we doubt whether the government really has the ability as the market thinks. We do not see convincing signs of recovery (except, perhaps, Wen Jiabao making waves every other week), and we even struggle to see signs of stabilisation. If we see anything, we are seeing a bottomless pit.
While still of the belief that a wholesale disintegration of the European Monetary Union remains a distinct tail-risk event, Citigroup's chief economist Willem Buiter succinctly summarizes his core view as "the euro-area will stumble and bumble towards an eventual resolution." However, that 'final' solution does not look like your grandma's European Union as he expects nothing more than a "continued Monetary Union, probably without Greece, having undergone both major sovereign debt restructurings in the periphery and financial debt restructurings for banks in the periphery and core." Transcribed from a three-minute clip, Buiter eloquently answers three key questions: How is the Euro crisis (and its consequent solution) shaping up? Does Germany have the upper-hand? and What sort of moral hazard issues might we see in the near future? He concludes "we won't have a smooth solution to this crisis."
Perhaps summarising best how so many of the back-to-school shoppers feel, Reuters cites this insightful 18-year-old thus: "I feel like the economy is messed up [and it] feels like we are still in recession." The equity market's response, of course, is "whatev'" and while it has been three years since the 'official' end of the recession, unemployment among teenagers is the highest since 1964! The anecdotal evidence is starting to pile up as we see retailer after retailer cut outlooks - which is especially concerning since the back-to-school period is the second-biggest selling season after the winter holiday season and as the head of BizDev from Mall of America notes: "We used to see people starting [back-to-school shopping] in late July but I don't see that anymore" as "consumers have shown tentativeness in their spending habits" and are likely to push off the spend until September, and "just shopping when there is a good sale." Once again, consumers have become conditioned to wait for discounts - and sure enough 20%-plus price reductions and more aggressive promotions are planned according to Accenture's retail practice. However, one quote on 'thriftiness' struck a chord: "We are borrowing this year to fund a lot of things that we normally would not have borrowed to do. It makes me nervous, we are selling our second home to help pay for things" - oh, no - not your second home!
Q2 earnings seasons is now (with 93% of firms reporting) over, and it is time for post mortem. The bottom line for those strapped for time is the following: In order to salvage the 2012 earnings consensus for the S&P, the sell side crew and asset managers, as wrong but hopeful as ever, are now expecting Q4 2012 earnings to grow 15% versus 4Q 2011, which is more than twice as fast as any other quarter. Indicatively, Q2 2012 earnings rose at a rate of 3% compared to Q2 2011. Elsewhere, revenues came 2% lower than consensus estimates at the start of the earnings season. In other words, the entire year is now a Hail Mary bet that in Q4, the time when the presidential election, its aftermath, as well as the debt ceiling and fiscal cliff acrimony will hit a peak, a Deus Ex Machine will arrive and lead to a 15% rise in earnings. Why? Because global central bankers will have no choice but to step in and thus lead to a surge in EPS multiples even if the underlying earnings are collapsing. With the presidential election around the corner making Fed QE before 2013 now virtually impossible, with Spain (and Italy) refusing to be bailed out and cede sovereignty thus precluding ECB intervention, and with China spooked by what may be a surge in food costs, this intervention, and any hope that the Hail Mary pass will connect, all look quite impossible.
Reuters summarizes the key facts about the 42-year old House Budget Chair and potential future American vice president. Enclosed also select reactions from various individuals across the political spectrum to his nomination as well as a summary of his lifetime donors as well as those of Joe Biden.
In the euro area overnight rate targeting has produced roughly a 130% expansion of the true money supply in the first decade of the euro's existence – about twice the money supply expansion that occurred in the US during the 'roaring twenties' (Murray Rothbard notes in 'America's Great Depression' that the US true money supply expanded by about 65% in the allegedly 'non-inflationary' boom of the 1920's). This expansion of money and credit is the root cause of the financial and economic crisis the euro area is in now. This point cannot be stressed often enough: the crisis has nothing to do with the 'different state of economic development' or the 'different work ethic' of the countries concerned. It is solely a result of the preceding credit expansion. Since long term interest rates are essentially the sum of the expected path of short term interest rates plus a risk and price premium, the central bank's manipulation of short term rates will usually also be reflected in long term rates. In the euro area's periphery, the central bank has lost control over interest rates since the crisis has begun. The market these days usually expresses growing doubts about the solvency of sovereign debtors by flattening their yield curve: short term rates will tend to rise faster than long term ones. This in essence indicates that default (or a bailout application) is expected to happen in the near future. It is possible that this effect has also influenced the ECB's decision to concentrate future bond buying on the short end of the yield curve. However, as is usually the case with such interventions, there are likely to be unintended consequences.
To get private debt to a sustainable level via tax cuts, Ryan would have to cut taxes to zero for a very long time (and hope that people use their tax cut to pay down debt instead of spending it at Chipotle and the Apple Store). The biggest problem with that? Over 75% of Federal spending is mandated by law, and so US public debt — which Ryan believes is the real problem — would soar (as has happened in Britain). Ryan might seem worried about the future possibility of massive public debt (as opposed to the current reality of massive total debt), but his plan could conceivably result in much higher public debt — after all the OMB and CBO have gotten it all very wrong before, just twelve years ago foreseeing massive tax surpluses of $48 and $87 billion respectively in 2012. So does he have any real plan to significantly raise revenues? In his entire 98-page manifesto, Ryan doesn’t name any — but he has ruled out taxing capital gains as income, surely the biggest tax loophole of all, and one that has seriously benefited his running mate.
Mitt Romney is set to announce his choice for running mate tomorrow morning according to Bloomberg news. The wires are alive with multiple sources confirming it will be none other than Paul 'budget-bill' Ryan - which appears to be a more aggressive choice than the safer options as Rubio, Portman, and Pawlenty are all bridesmaids and not the bride. Ryan-ney? Rom-an? R-Squared? Ro-Ry?