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Guest Post: Regime Uncertainty And The Fallacy Of Aggregate Demand





According to the Paul Krugman, the “confidence fairy” is the erroneous belief that ambiguity over future government regulation and taxation plays a significant role in how investors choose to put capital to work. To the Nobel laureate, the anemic economic recovery in the United States shouldn’t be blamed on this “uncertainty” but rather a “lack of demand for the things workers produce.” The theory which puts a lack of aggregate demand as being the cause of economic recessions has the issue backwards.  Demand by itself doesn’t add to the stock of goods in society; only production does.  Because economic theory deals with the interactions of mankind it needs to be applicable to all times and places.  On a desert island, only a true charlatan would insist that a “lack of demand” is holding the primitive economy back from its full potential.  Desert islands are no different from today’s economy; both are still dominated by scarcity.  If the world economy is ever going to recover, the obstacles put in business’s place have to be lifted to make way for investment in real, tangible goods and services.  Consumption will come after.

 

 
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Why Risk-Free Assets Are Risky





We all know shorting volatility is dangerous. We learned our lessons from the financial crisis. We all meticulously read “The Black Swan” and then watched the scary movie adaption of the book starring Natalie Portman. We all know that this method produces a steady stream of smooth returns making people think you are a genius until the inevitable disaster forces you to pawn off your Nobel Prize. We all know that shorting volatility will cause you to go insane with a twisted psycho-sexual obsession to master the art of ballet. It’s picking up pennies in front of a convexity steamroller. Knowing these facts we would like to pose a question...Which is riskier right now? Shorting a collateralized far out-of-the-money S&P 500 index put or buying a “risk-free” US treasury bond? Hint: Now the market for safety has an efficient frontier on par with the penny in front of the steamroller trade? If you don’t find that scary then you’re not paying attention.

 
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Coming To A Gas Station Near You?





This is neither from the near (or distant) future, nor from a movie starring Will Smith in which he fights vampire zombies (at least not yet). It's from the here and now, Calabasas, CA to be precise. And it may be coming to a gas pump near you in the immediate future.

 

 
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On This Day In History, Gas Prices Have Never Been Higher (Again)





While we are told to assume it is entirely transitory and speculation-driven, the price to drive your brand new GM Truck (leased for 30 years, interest-only via your EBT card) has never been higher. Do not worry though since this is only temporarily going to mean 'little Timmy' needs to go without food. As a Public Service Announcement, we have also estimated that the opportunity cost of every additional $1/gallon is just 16-20 $0.99 iGizmo apps you can do without for a week (but given sentiment surveys it would seem you do not need any further sedation).

 
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Who Is Winning The Race To Debase?





For nearly 30 years, two of the world's largest economic nations (China and the US) have continually debauched debased the purchasing power of their currency. For the last 12 years, the rest of the world joined in. So who is winning the race to debase now? It appears globalization was really all about currency debasement and exporting inflation (i.e. loss of FX value) with debt being the inflation buffer (i.e. borrow to afford or vendor-financing - see AMZN). The problem now is the entire world is saturated with debt and so there is no-one left to export inflation to anymore. We do indeed live in interesting times.

 
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Bonds Down, Stocks Down, Gold Down, Oil Down, Jobs... Up?





While Europe was ripping higher this morning, commodity prices were slipping quietly lower and Treasury prices higher as the USD was very modestly higher and US equity futures were treading water. The payroll print provided the fuel to pump us up to within a tick of the year's highs in the S&P, smashed the USD weaker, twanged Treasury yields higher and sent Financials and Materials zooming higher. Unable to break those record highs, stocks reversed as Energy (Oil was sliding once again) and Tech (AAPL) led them lower. Within a few hours we had retraced the entire NFP spike in FX and equity markets but Treasury yields kept pushing higher (30Y +14bps on the week). Gold closes green on the week while Oil/Silver/Copper were red as the AUD lost almost 2% against the USD and EUR gained 1%. AAPL tumbled 2%, closing below its 50DMA for its biggest 2-week slide in six months. VIX was jabbed under 14% briefly but ended fractionally lower on the day at 14.4% (-0.2vols). Equities and risk-assets disengaged today and equity's inability to manage a late-day ramp (and AAPL closing at lows) must be a little concerning for the cheerleaders.

 
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Consumer Credit Soars As Uncle Sam Resumes Handing Out Billions In Student Loans With Reckless Abandon





Following a major miss in July consumer credit which declined by $3.3 billion (since revised to a -$2.5 billion decline), it was only natural that August would be the opposite, and see a rebound over consensus. Sure enough, the August total consumer credit number came in at $2.73 trillion, an increase of $18.1 billion from last month, on expectations of an increase by $7.25 billion. Why did the number rise? Same reason as always: a government-funded pump into non-revolving (i.e., Student and Government motor loan) credit which soared by $14 billion while revolving credit posted a modest $4.2 billion increase unable to even offset the July decline. But in headline scanning algo news, this was the highest jump in post-revision (recall last month the Fed completely redid its consumer credit series data which is now useless for any analysis going back before December 2010). Yet oddly even with this massive pump the stock market has refused to rebound and instead is acting in a very odd fashion and the now traditional green color of stock moves has taken on an odd reddish hue that is unfamiliar to the current generation of traders.

 
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The Strangest Number In Today's Jobs Number





While we already presented the explanation for the dramatic drop in today's unemployment report (almost entirely driven by the surge in part-time jobs for economic reasons, hardly a thing to be proud of as more and more full time jobs, especially those on Wall Street, are a thing of the past, while the transition to a part-time worker society has been documented extensively in the past here), there is another number that is by far the most perplexing in today's NFP dataset: that showing the employment of workers in the 20-24 year age category (both seasonally adjusted and unadjusted). See if you can spot the outlier in the chart below.

 
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Guest Post: What Could Go Right?





A number of macro-issues could "go the right way" in the coming months. However, nothing good can possibly come from artifice, propaganda, misdirection and simulacra "fixes." Something must break through the facade for good things to happen. It's a long shot, but we can always hope. Without truth, there is truly no hope.

 
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A Taste Of Unleaded Things To Come





In a follow-up to our discussion yesterday - and perhaps a haunting vision of days to come if the tensions that are so rapidly rising in the Middle East actually spill over - is this chart from Bloomberg of the massive spike in California gas prices. How will this impact the California economy? Especially now they can't count on all that Facebook capital gains tax? Think this is only those silly West Coast 'techies' problem? Think again, as news today is discussing the redirection of fuel supplies to the West Coast, which will inevitably mean a rise in broad US fuel costs as the shortage picture equilibrates.

 
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Hostilities Between Turkey And Syria Resume As Two Countries Exchange Fire





It seems like it was only yesterday that crude plunged ahead of the first presidential debate as the escalation between Turkey and Syria hit a fever pitch, with Syria supposedly firing shell into Turkey and Turkey relatiating promptly, as it concurrently summoned NATO and demanded an Article 4 redress while passing a bill allowing its military to conduct cross-border operations in Syria, essentially giving itself a carte blanche to invade Syria without declaring outright war. Today, 48 hours later, Turkey may just get the opportunity to execute on this brand new law. Reuters reports that "the Turkish military returned fire after a mortar bomb fired from Syria landed in countryside in southern Turkey, the state-run Anatolian news agency reported the governor of Hatay province as saying on Friday. Turkish artillery bombarded Syrian military targets on Wednesday and Thursday in response to shelling by Syrian forces that killed five Turkish civilians further east along the border." Ignore that the official plotline said that Syria "apologized" for its offense, even as "an online video purporting to be from Jabhat al-Nusra, a jihadist group accused of ties to al-Qaeda, claimed responsibility."

 
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Is Bernanke Betting The Ranch On A US Demographic Renaissance





The BOJ pioneered QE in March 2001, with two objectives. The first was to eliminate deflation, which took hold in the mid-1990s; and the second was to shore up Japan’s fragile financial system. Did it work? Yes, for the second objective - the BOJ arguably bought time for banks tied up in NPL disposal; but, unfortunately, QE was not successful in combating deflation. The BOJ’s intended policy transmission mechanism was so-called portfolio rebalancing. Ideally, the buildup in banks’ deposits at the BOJ that earned no return (but carried zero risk) should have prompted banks to seek higher returns (with higher risk) and thus increase their lending. But portfolio rebalancing did not kick in for several reasons; most of which are the same as are occurring in the US currently. More fundamentally, however, Japan's demographics hindered any hopes of a capex-driven recovery - and policy can do little to affect that. While the US faces a less dismal demographic picture, the Japanese experience highlights that other policies (as Bernanke himself admits) are required for any sustained benefit in the real economy.

 
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Goldman Sees Stock Plunge Then Surge





Goldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he finally released a revised forecast, one that curious still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE. Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth, having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.

 
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50-Day Moving-Average SNAAPL





AAPL is down 1.5% and once again testing its 50DMA. Now trading the range of Tuesday's closing ramp-fest and below its closing VWAP... BTFD?

 
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Europe Is Fixed?





Italy's FTSEMIB is up 5% this week, Spain's IBEX +3%, Portuguese government bond spreads are 82bps lower, and EURUSD is 1.25% higher this week - all biggest bull moves in 6 weeks. It would appear that all is well and Europe is saved - who knew? Credit markets are running tighter in a hurry with subordinated financials and XOver leading the way (as uber-high-beta bets are on) and all European financial and corporate credit indices at post-roll tights (lowest risk in 3 weeks). FYI - European bank senior and subordinated credit risk is now at its lowest in a year - and almost 40% lower than its post-LTRO (remember the encumbrance and deposit outflows) highs. EURUSD is close to multi-year highs relative to swap-spreads - but Europe is fixed so that's ok (especially with Merkel popping over to Athens?). One last thing - the majority of all this strength occurred today.

 
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