Having spent much of the day attempting to explain the difference between nominal and real wealth creation and that asset price movements are different to the economy, we turn back to Michael Cembalest of JP Morgan to set the story straight on one of the most frequently cited reasons for the rally: "It's the economy, stupid". It is hard to disagree that there are positive signs, but as the JPM CIO opines, let's be realistic: US growth is projected to be ~2.5% for 2012. Some argue that profits are the driver, and they are doing well, but their apparent strength is masked by a sad truth that gets little exposure. Looking at where those profits come from shows that if labor compensation grew at trends comparable to prior recoveries, a big chunk of current-cycle profits would disappear (quicker than a rehypothecated 2Y BTP under Corzine's watch). Cembalest summarizes that while this doesn't mean these profits are entirely illusory; it does mean that they come with related costs: such as weak household income and bloated government budget deficits - which have a cost as well (don't they?).
In a must-watch follow-up to his original Punk Economics Lesson, David McWilliams describes how the new bankocracy in Europe will lead to a massive injection of liquidity; blowing bubbles in financial assets while the citizenry is bled dry (ring any recent bells?). The banks again get all the money they need while the average citizen shoulders the burden. Specifically in the case of the Greeks, they are left with the uncertainty of a return to the Drachma or the certainty of decades of indentured servitude. Enter the ECB with their cash-for-trash deal. This is a scam, he proclaims correctly, insolvent banks lending to insolvent governments and we are calling it success? The banks can turn a tidy profit, but the straight-talking Irishmen asks the question every Greek citizen should be asking: "where does the profit come from?" The answer: the average tax-paying European citizen, and it is this that provides the comfort for the Germans to allow the Greeks to default without bringing down every bank in Europe in a contagious cascade of margin calls, un-hypothecation and deleveraging. Critically, the question is not if or when Greece will default but will they be allowed to default enough? The lesson for all is that to stay in the Euro, all European nations have to become more like Germany - which is very different from the community of equal nations that the Europeans signed up for 20 years ago at Maastricht. Don't be fooled that the European debt story is over, it is not. In fact, he finishes - rather ominously, the interesting bit hasn't even started yet.
Yesterday, in our daily list of shocking discoveries of just how far forward Greece is willing to bend over, we realized that not only will Greece not receive a penny (or is that a drachma?) from Europe, but it itself will have to fund the European bank bailout via a Greek-funded Escrow account. In today's 'insult to rape' chronicles, we discover that before Greece is even given permission to bail out Europe's banks, its creditors first demand that the province of Bavaria Sachs, formerly known as Greece, satisfy a checklist of 38 specific conditions, which the now fully colonized nation will have to complete before the end of the month (so in about 5 days), before it is permitted to transfer taxpayer cash to French, German, Italian and Spanish banks. How anyone, even the world's most degraded debt slave, is willing to subject themselves to such humiliation is simply inconceivable.
Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots. Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds. Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just want to protect their bets and not wait around for Greece to really stabilize for repayment.
Since at this point US society is irrevocably split into two camps, on one hand those who believe Keynesian propaganda, where the only cure for unsustainable debt is more debt, and on the other those who believe that a return to a gold standard is the only way to prevent an epic socio-political collapse, also known in official US circles as "extremists", and since we know that the status quo will never let the latter get their way without a fight (quite literally and quite violently), it is only logical that 'if you can't beat them you have to join them'. In which case we believe that instead of breaking windows, or starting wars, or even expecting a growth boosting alien invasion that would lead to a surge in GDP that may or may not come, one should not only go for broke, but do so in style. As such we propose that the US, already the world's most expansionist and aggressive foreign policy power, not like there is anything wrong with that of course - it is all for the sake of liberating oppressed foreign oil, should one up itself and build the true symbol of its contemporary socio-historical status: the Imperial Death Star. Yet the real benefit in addition to blowing up various alien world that refuse to bail out the world's central bank confederacy, is that the cost of construction of said Keynesian masterpiece, would be an epic $852 quadrillion, which in turn would go straight to US GDP.
When one puts aside all the histrionics, all the melodrama, all the irrelevant secondary bullshit such as appearance, charisma, ability to tele-evangelize, all the irrelevant policies such as what planet the US should colonize or how women should procreate, and focuses on just one thing: which presidential candidate (not to mention president) will do the right thing for America, which is to make sure that it doesn't collapse under a record debt load, there is just one answer. And it is not even ours: it comes from the impartial Committee for a Responsible Federal Budget Project, aka US Budget Watch ("U.S. Budget Watch neither supports nor opposes any candidate for office. Its reports are intended to promote understanding and discussion of the federal budget and how specific policy proposals would affect the deficit") which today released an analysis on debt sustainability titled "The GOP Candidates and the National Debt." The answer is in the chart below.
2012 is proving to be the 'Year of the Central Bank'. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.... All of this pervasive intervention most likely explains more than 90 percent of the market's positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for "coordinated action". It does work in the short-term.... But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.
Overnight action saw EURUSD surging over 1.33 and retracing back into the US open as broadly European equity markets started to play catch up to European credit's recently weak performance. Couple that with a miss in jobless claims and the rise in WTI and Brent prices and shortly after the US open S&P futures fell 9pts rather rapidly. However, fears of margin compression or consumer spending impacts were quickly dismissed as every asset class took off and never looked back - as only one thing matters (and USD weakness and commodity strength confirmed that belief). Having underperformed the last day or two, HY credit jumped higher, catching up with IG and HYG's recent performance and over-taking stocks, as high beta took over again on the heels of what can only be assumed is central bank largesse as financials and energy names outperformed. There were some 'odd' disconnects among the broad asset classes today with Treasuries rallying euphorically after the strong 7Y auction, Gold rallying well and then losing a lump on a Zero Hedge margin rumor, and up-gaps in EUR (and down in USD) into the close to sustain the rally. While Oil was notably higher on the day, Silver took the honors - now up over 6% on the week - as Brent-WTI compressed this afternoon as the latter pushed above and held $108.5. The Treasury-Stock disconnect continues to grow, and yet when we adjust for the USD-numeraire, the two asset classes agree wholeheartedly on low-/no-growth - perhaps it is time for the 'transitory' word to re-appear.
AIG just conducted a two-fold master class of i) how to confuse Wall Street of having "superb" earnings, and ii) how to avoid paying any corporate taxes for years to come. Because as part of the company's just announced massive $19.8 billion profit, a whopping $17.8 billion was nothing short of the oldest tax accounting gimmick in the book - the release of a valuation allowance (i.e., deferred tax liability vs deferred tax asset conversion). In other words, apples to apples, the real Net Income attributable to shareholders was not $19.8 billion but realistically $2 billion, which would compare to last year's $11.2 billion if only it was not for a $13.5 billion gain on divested business posted in Q4 2011, when the company again was fudging numbers like a drunken sailor. Anyway, we are confident even the algos will figure it out eventually. But the real slap in the face coming from this bailed out company is that as a result of this accounting change, AIG will essentially not pay any taxes for years to come, most likely until its next insolvency.
We need to look to Europe now to see what TPTB have in store for us. This is the consummate problem, reaction, solution game being played for all the marbles. First, you get the problem “spiking interest rates for the peripheral countries.” Then the “reaction,” financial panic and fear. Finally the “solution.” The placement of unelected technocrats as the leaders of Greece and Italy with ties to all the power structure’s institution such as the Trilateral Commission, the Bilderberg group and of course Goldman Sachs. It is like a coup that takes the shadow government from the shadows and puts them in your face. The reason that this is so key is because we are next. They don’t want to roll up everything at once. If they can get Europe safely consolidated then they will move here. That is when interest rates in the U.S. will spike (problem), and we get panic (reaction) and then the solution (bankster technocratic committees in charge and the IMF to the rescue, ie loss of sovereignty). This is the plan and I see it as clear as day.
While the headline-chasers will allocate cause to effect for every twitch and ditch in asset prices, JPMorgan's Michael Cembalest appears to agree with us that nothing else matters but central bank balance sheet expansion. As we discussed earlier in the week, major central banks have injected nearly $7tn into world markets since 2007 and while the obscene rise in gas prices should somewhat self-limit the print-fest, it appears not before another bubble has burst as central bankers feel safe on this path given their microscopic focus on their own inflation-measures. Whether it be asset-reflation, boosting bank capital, pulling forward consumer demand, or government-reacharound financing, Cembalest sums up: super-easy monetary policy supports markets right now, prompting his question: "Who knew that unlimited money printing would be such a clean and simple solution to the world’s problems? I would love to read a book called “Reliable Central Bank Exit Strategies”, but I don’t think it has been written yet. Enjoy the ride."
We have only one question: "If a 20% rise in global stocks required a $2 trillion expansion in aggregate assets, which also took EUR-Brent to all-time record highs and WTI to over $107 $108, where will the next 20% come from, and how will the economy fare with $150 WTI?"
Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year. Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?