So much for the US trade renaissance. After posting a better than expected October trade deficit of ($42.1) billion, November saw the net importer that is the US revert to its old ways, with a massive deficit of some $48.7 billion - the worst number since April, far more than the $41.3 billion in expectations, which makes it the biggest miss to expectations since June 2010, driven by a $1.8 billion increase in exports to $182.6 billion, and a surge in imports which rose from $222.9 billion to $231.3 billion. Specifically "The October to November increase in imports of goods reflected increases in consumer goods ($4.6 billion); automotive vehicles, parts, and engines ($1.5 billion); industrial supplies and materials ($1.3 billion); foods, feeds, and beverages ($0.6 billion); capital goods ($0.4 billion); and other goods ($0.1 billion)." And with this stark reminder that the US has to import the bulk of its products, something which a weak USD does nothing to help, expect a bevy of lower Q4 GDP revisions, as this number may push Q4 GDP in the sub-1% category.
With the EURUSD trading rangebound in the past few months, everyone needed a catalyst for a forward direction. Today, we got it courtesy of Goldman's Tom Stolper, who just released yet another EURUSD trade recommendation with a 1.37 Target.
As we discussed in Monday’s Global Markets Daily, we continue to expect the compression in Euro area risk premia to push EUR/$ higher. Having just closed our long EUR/CAD recommendation, and in order to maintain exposure to the theme, we recommend long EUR/$ positions with a target of 1.37 and a stop at 1.29.
So let's get this straight: Goldman's 0.000 batter has a trade recommendation that has upside of 400 pips, and downside of... 400 pips? As always: do the opposite of what Tom Stolper, who is almost as "accurate" as Whitney Tilson in his recommendations, says which also happens to be the same direction as what Goldman's prop desk does.
PIMCO founder and co chief investment officer Bill Gross gives no credence to the trillion dollar platinum coin scheme. "We feel that such an action would not only jeopardise the U.S. Fed and Treasury standing with Congress but with creditor nations internationally - particularly the Russians and Chinese." It appears to be a bit of a stunt by and may be a convenient distraction away from the substantive issue of how the U.S. manages to address its massive budget deficits, national debt and unfunded liabilities of between $50 trillion and $100 trillion. It may also be designed to create the false impression that there are easy solutions to the intractable US debt crisis - thereby lulling investors and savers into a false sense of security ... again. Gross said that subject to the debt ceiling, the Fed is buying everything that Treasury can issue. He warns that we have this "conglomeration of monetary and fiscal policy" as not just the US is doing this but Japan and the Eurozone is doing this also. Gross has recently criticised the Fed's 'government financing scheme.' He has in recent months been warning of the medium term risk of inflation due to money creation and recently warned of 'inflationary dragons.'
- WSJ picks up on excess "deposits over loans" theme, reaches wrong conclusion: Wads of Cash Squeeze Bank Margins (WSJ)
- SAC Is Bracing for Big Exodus of Funds (WSJ)
- Japan unveils Y10.3tn stimulus package (FT)
- China’s Inflation Accelerates as Chill Boosts Food Prices (BBG)
- Berlusconi Denies Responsibility for Italy Crisis (BBG)
- Fed hawks worry about threat of inflation (Reuters)
- And then the lunatics: Fed easing may not be aggressive enough: Kocherlakota (Reuters)
- BOJ Likely to Take Easing Steps (WSJ)
- Draghi Shifts Crisis Gear as ECB Focuses on Economy Inbox (BBG)
- Argentina Bondholders Lose Bid to Get State-Court Review (BBG)
- Regulators Find Major Euribor Shortcomings (WSJ)
- Basel III Punishes Dutch Over Risk That Isn’t (BBG)
- Bondholders in Crosshairs as Merkel Travels to Cyprus (BBG)
In Europe there is hope, as demonstrated by every hope and optimism index over the past two months going vertical. In Europe there is faith, as demonstrated by yesterday's Draghi conference, in which the likelihood of further rate cuts was officially taken off the table (as expected: any further cuts would send rates negative, wreaking even more havoc with money markets). And in Europe, there is reality, as demonstrated by the following chart showing the index of Spanish Industrial Output, which disappointed broadly in November, down 2.3% sequentially and 7.2% Y/Y, sending it to levels not seen since 1993.
"Ever heard of SB3341?" is Rick Santelli's opening salvo in today's rantless discussion of the concerns he has with Illinois' 'Precious Metal Purchasing Act'. While passed in the Illinois Senate last year, and moth-balled in the House since, Rick notes that "the long and short of it is is they want an audit trail to any precious metals, whether you're talking coins or bullion." It does not seem too much of a stretch to this Chicagoan to the 1933 Executive Order #6102 that confiscated gold and cleared the way eventually for Nixon's 1971 disconnect of the dollar from gold. As Liberty Blitzkrieg's Mike Krieger notes: "So let me get this straight. First they want gun registration and now precious metal registration? I’m sure the government would only use such information in our best interests, because as we all know: Your Government Loves You. Sounds reasonable, after all, only 'terrorists' buy guns and gold anyway."
It is not often that early sentiment is defined by developments out of Asia but this is precisely what has happened overnight. The Alcoa "hope rally", which saw the company close red on the day of its earnings, but which sent the markets higher on the CEO's announcement that things in China may be improving, seem to be ending following last night's news out of China which saw December CPI jump to 2.5%, substantially more than expected, following a spike in food costs in part from the coldest weather in 28 years, implying any good news may have already been priced in. This renewed fears that speculation of PBOC easing was largely unjustified (it is) leading to the biggest drop in the Shanghai Composite in 2013, pushing it lower by 1.78%. The offset came out of Japan, where the government approved a JPY10.3 trillion ($116 billion) fiscal stimulus package. This together with expectations of a BOJ 2% inflation rate targeting, are the reasons why the Dollar Yen soared to a fresh multi-year high of over 89.30, which has since regained some of the move. At this point virtually all the Japanese hope has been bought, and the actual BOJ announcement coming later this month will launch the "sell the news" mean reversion.
When institutions protect the liberty of individuals, greater prosperity results for all. Economist Adam Smith formed this theory in his influential work, The Wealth of Nations, in 1776. In 2013, his theory is measured by the Index of Economic Freedom. The world average score of 59.6 was only one-tenth of a point above the 2012 average. Since reaching a global peak in 2008, the WSJ and Heritage note, economic freedom has continued to stagnate. From North Korea (the least 'free') to Hong Kong (the most 'free') the following heatmaps break down the 177 countries covered across 10 specific categories. The world’s most-improved country is Georgia, and the country that saw the biggest decline was Belize (we blame McAfee). The United States, with an economic freedom score of 76, registered a loss of economic freedom for the fifth consecutive year, and its lowest score since 2000. Its score is 0.3 point lower than last year, with declines in monetary freedom, business freedom, labor freedom, and fiscal freedom.
When people talk about "cash in the bank", or "money on the sidelines", the conventional wisdom reverts to an image of inert capital, used by banks to fund loans (as has been the case under fractional reserve banking since time immemorial) sitting in a bank vault or numbered account either physically or electronically, and collecting interest, well, collecting interest in the Old Normal (not the New ZIRPy one, where instead of discussing why it is not collecting interest the progressive intelligentsia would rather debate such trolling idiocies as trillion dollar coins, quadrillion euro Swiss cheeses, and quintillion yen tuna). There is one problem, however, with this conventional wisdom: it is dead wrong. Tracking deposit flow data is so critical, as it provides hints of major inflection points, such as when there is a massive build up of deposits via reserves (either real, from saving clients, or synthetic, via the reserve pathway) which can then be used as investments in the market. And of all major inflection points, perhaps none is more critical than the just released data from today's H.6 statement, which showed that in the trailing 4 week period ended December 31, a record $220 billion was put into savings accounts (obviously a blatant misnomer in a time when there is no interest available on any savings). This is the biggest 4-week total amount injected into US savings accounts ever, greater than in the aftermath of Lehman, greater than during the first debt ceiling crisis, greater than any other time in US history.
In the chart below, the blue bar is Toys 'R' Us retail sales for 2011. Red is 2012. Hence our confusion: just which is this "blockbuster" retail season CNBC's Bob Pisani keeps referring to - the blue or the red?
Another day, another epic European close trend reversal (or is it POMO that is driving that odd timing-based shift?). S&P 500 closes at 5-year highs. Today's ramp was brough to you by the algos that needed to enable high volume exits in AAPL and a Draghi-driven 200pip run in EUR against the USD (as the ECB head basically shut the door on rate cuts anytime soon). VIX slid lower (relatively outperforming stocks) but mid-dated VIX futures actually rose modestly today (to steepest in a year!); high yield credit ETFs tested new highs (but cash never followed) and even that collapsed again at the close; the USD dropped the most in 4 months (even as JPY weakened); and Silver surged (+2% on the week) along with gold (as oil slid in the afternoon). It appears that so far this year risk-assets in general had been less exuberant than stocks - but first Treasury yields, then VIX, and now FX markets (EURJPY today), and increasingly Gold (and Silver) are shifting to catch up to stocks. Today saw equities ramp from the end of POMO on to catch up to EUR-driven risk model perception, with AAPL trading like a penny stock (or HLF). The great recoupling of risk-assets from pre-holidays is almost complete...
Jim Grant spends exactly the correct amount of time (zero) discussing the "urban myth' of the trillion dollar coin in this brief interview on CNBC; instead deciding to try and strike up some intelligent understanding of the dire situation we face. By providing context for our massive 16 trillion dollar debt (360 million pounds of $100 bills), and explaining how exponential the idiocy has become, Grant brings us full circle as he explains to the money-honey that once upon a time our debt was backed by gold, and "there was only so much gold and so many dollars," thus limiting our exuberance, but "now we have neither the gold covering the dollar nor do we have interest rates constraining us [thanks to Bernanke et al.]; the only thing remaining to constrain us is some sort of civil discussion, a numerate discussion about the debt," which it appears the bespectacled and bow-tie-bound bond brain-box hopes is possible. "The debt has increased twice as fast as federal receipts," he warns, adding correctly that "the United States is truly submerging."
Mercantilist trade policies have returned in a big, big way. States around the world including in the West, and especially America, have massively adopted corporatist domestic policies, even while spouting the rhetoric of free trade and economic liberalism publicly. A key difference between a free market economy, and a corporatist command economy is the misallocation of capital by the central planning process. While mercantile economies can be hugely productive, the historic tendency in the long run has been toward the command economies — which allocate capital based on the preferences of the central planner. This means that the competition is now over who can run the most successful corporatist-mercantilist system. This is the worst of both worlds for America. All of the disadvantages of mercantilism — the rent-seeking corporate-industrial complex, the misallocation of capital through central planning, the fragility of a centralised system — without the advantage of a strong domestic productive base.
What will the world look like two decades from now? Obviously, nobody knows, but some things are more likely than others. Companies and governments have to make informed guesses, because some of their investments today will last longer than 20 years. In December, the United States National Intelligence Council (NIC) published its guess. The NIC foresees a transformed world, in which “no country – whether the US, China, or any other large country – will be a hegemonic power.” This reflects four “megatrends”: individual empowerment and the growth of a global middle class; diffusion of power from states to informal networks and coalitions; demographic changes, owing to urbanization, migration, and aging; and increased demand for food, water, and energy.