"A serious inflationary disaster will only be prevented if governments succeed in reducing their deficits and stop selling bonds" is how the infamous destroyer of Krugman, Pedro Schwartz, describes the dangerous 'tennis match' being played between The Fed and The ECB. In an excellent interview with GoldMoney's James Turk, the Spanish 'Austrian' economist talks about bank regulation, the creation of money out of thin air, and the beauty of a trult free market system. From fictional reserve lending to the fragility (and boom-bust cycles) of our financial system, the mild-mannered 'Keynesian-Krusher' concludes that "there has to be a change in social mentality - so that people realize that nothing is free, and the government has to shrink."
A funny thing happened on the way to QEternity - multiples expanded by an aggressive 2x to reach their highest in two years as the print-gasm hope was 'priced in' to the nominal value of the US equity indices (and fundamentals didn't matter). During this period, which was all about anticipation of the Fed, the real economy (that is earnings and revenues) have been disappointing. From here, now that Ben has blown his eternal wad, it is up to EPS and multiples - which leaves us with a little problem. As the chart below shows, the next few quarters are the very picture of hopes, dreams, and unicorns as Q4 EPS is somehow magically expected to stop a straight line decline in YoY profits - and soar by 10%. The driver of this miracle is the good old US Consumer - as discretionary spending now accounts for 100% of the expected EPS growth and 300% of the revenue growth for the post-election, pre-year-end extravaganza that is the lame-duck 'fiscal-cliff'-denying lead up to the holidays. As we said yesterday, either you believe in math or you believe in magic.
Equity markets drifted from an unch open to the overnight post-BoJ highs - albeit in an 8 point range and low volumes once again, before giving it all back in the last few minutes - as it dumped to VWAP (again!!). In other 'real' markets, Treasuries rallied - led by the long-bond playing catch up, the USD sold off on the day - aside from a post-BoJ recovery higher which was dissolved into the US day session open, Gold/Silver/Copper inched higher as the USD weakened but Oil continued its post-QE ritual sacrifice - now down 5.5% from pre-FOMC (back under $92) as the Saudi's promise more supply and the IEA build was heavy. Credit markets underperformed - but we suspect this was pre-roll moves and is not too signal-prone. Some standouts in the unreal world of our efficient equity markets, JCP's remarkable rip-and-dip, AAPL's rapid devolution from record highs to VWAP and an unch close at the last minute on huge volume, and QCOR's multiple-halt day ending down 48%. VIX (fell modestly) and the S&P 500 are back in sync and tracked each other all day. After the day-session close (small green), S&P futures drifted further down and ended practically unchanged - on a heavy volume push.
While the currency printers, print, and will do so until the complete collapse of the current monetary regime, corporate revenues continue to collapse. The latest casualty: concurrent economic activity indicator Norfolk Southern, which just slashed its Q3 EPS forecast to $1.18-$1.25 on Wall Street expectations of a $1.63 print. This will be lower than a year ago. The reason: reduced coal and merchandise shipments will lead to a $120 revenue decline. Then again, in Bernanke's world, neither energy nor actual trade are important. Print on, and BTFD!
It seems that the recent foray of Mayor Bloomberg into determining what one may and may not consume based on calorie count, was just the appetizer, so to say. As some may recall, back in March we wrote that based on OECD predictions, up to 75% of the US nation will be overweight or obese. Now, none other than Uncle Sam has gotten wind that his population will soon be primarily made up of fat people. So he has a solution, which is in the vein of all other solutions where Uncle Sam is concerned: regulate, regulate, regulate.
Rumors about the death of the South African miner strike seem to have been greatly exaggerated following the agreement by Lonmin to hike miner pay by 22%. The reason: the precedent has now been set and everyone else demands equitable treatment: i.e., the same pay hike as Lonmin agreed to. From Al Jazeera: "South African police have fired tear gas and rubber bullets to disperse protesters near a mine run by the world's biggest platinum producer Anglo American Platinum, as unrest spreads after strikers at rival Lonmin won big pay rises. Within hours of Lonmin agreeing pay rises of up to 22 per cent, workers at nearby mines called for similar pay increases on Wednesday, spelling more trouble after six weeks of industrial action that claimed more than 40 lives and rocked South Africa's economy." For those curious what it means when the precedent has been set and one corporation has caved on the issue of pay here it is: "Police clashed with a crowd of men carrying traditional weapons such as spears and machetes in a township at a nearby Anglo American Platinum (Amplats) mine outside the city of Rustenburg. Officers fired tear gas, stun grenades and rubber bullets to disperse an "illegal gathering", police spokesman Dennis Adriao said. He had no information on any injuries." So much for the strikes being over: thanks to Lonmin's caving, they have only just started.
While we are bombarded with talking heads telling us that there is money-on-the-sidelines and everyone is so bearish with the market climbing a wall of worry, the reality - as we see across multiple asset classes - is that investors are overweight risk assets (e.g. credit investors overweight IG and HY and mutual fund cash at record lows), near-extreme levels of bullishness (AAII and Put-Call Ratios), near extreme levels of non-bearishness (AAII), and yet credit investors believe markets are overvalued (though still buying) even as IG and HY bonds are seeing near-record highs in advance-decline.
In a strange centrally-planned 'see-it's-only-transitory' trick, crude oil prices have suffered a significant post-coital hangover each time the Fed has engaged its QE-warp drive. As the following chart shows, the current swing lower is ahead of pace compared to the previous two 'schemes' which stopped dropping after 10 days (QE2) and 20 days (QE1). It's almost as if someone wanted to prove that extreme monetary policy does indeed have no inflationary impact on the price of energy - or perhaps its just an over-crowded and obvious pre-QE trade coming undone in a hurry (like stocks?)
After last week's presentation, DoubleLine's Jeff Gundlach (having rotated his spec play from Long Nattie, Short AAPL - which was a winner - to Long SHCOMP, Short SPX) committed the cardinal sin in a great interview this morning with CNBC's Gary Kaminsky. The apocryphal 'new' bond guru noted that he is against big government, doesn't like risk assets at these levels, believes QE will end in higher rates (adding that he would not be surprised to see 10Y yields 100bps higher by the end of the year), but most abhorrently: "the obsession with Apple is a truly remarkable social phenomenon - the stock is over-believed and over-bought. There is NO exit for the Fed, QE3 will be ineffective, and it is more likely that the Fed buys all the Treasury bonds that exist." Two must-see clips covering why buy-and-hold is completely dead thanks to government intervention to his preference for secured credit funds (where have we heard that before?) to the huge risks in buying financial stocks and the vulnerability of risk-assets - as the world realizes the circular financing reality of Europe.
With their recently announced additional bond purchase programs, both the Fed and the ECB have added a new chapter to their respective handbooks. While at first glance they are both simply the end-game of money-printing-monkeys, Morgan Stanley sees some similarities but more differences that are critical to understand when judging the awesomeness (or not) of these actions. The ECB’s Outright Monetary Transactions (OMT), in contrast to the previous SMP program, will be ex ante unlimited in size but conditional upon government action. Likewise, the Fed’s additional purchases of agency MBS are ex ante unlimited in size (the monthly pace will be US$40 billion but the program is open-ended) and conditional (though not upon government action but labor market performance). Another parallel is that there was only one dissenting member each in the two policy committees (Jeffrey M. Lacker and Jens Weidmann). However, this is where the similarities end. Looking at the details, the two programs actually differ in five important respects.
Retail has long been a source of both low-skill entry-level jobs and well-paid careers. Yes, people love to browse and stroll down the mall or shopping district, and this social/novelty function will continue. But can retailers make money off of people browsing? If retail contracts, what does this do to skyhigh commercial property valuations? The same can be asked of cubicle-farm office parks. As telecommuting and contract labor expand, the need for energy-wasting office parks and long commutes will also decline. Technology cannot be stopped, and neither can the drive to cut costs by cutting what can be cut, labor. We can legislate certain aspects of how technology is used, and fiddle with tax incentives and trade restrictions, but we cannot make people drive somewhere to go shopping or stop the 3-D printing/fabrication revolution. What all this calls into question is the entire financialization (debt-based)-consumerist model of "growth" and employment. Decades ago, young men were employed to pump gasoline at gas stations; these jobs all went away as self-service fueling became the norm. At least one state (Oregon, I believe) mandates that all gasoline is pumped by an employee of the station. This rule has created hundreds of jobs that are not necessary in terms of market-demand but that are certainly welcome.
The record US, and global, drought has come and gone but its aftereffects are only now going to be felt, at least according to a new Rabobank report, which asserts that food prices are about to soar by 15% or more following mass slaughter of farm animals which will cripple supply once the current inventory of meat is exhausted. From Sky News: "The worst drought in the US for almost a century, combined with droughts in South America and Russia, have hit the production of crops used in animal feed - such as corn and soybeans - especially hard, the report said. As a result farmers have begun slaughtering more pigs and cattle, temporarily increasing the meat supply - but causing a steep rise in the price of meat in the long-term as production slows. "Farmers producing meat are simply not making enough money at the moment because of the high cost of feed," Nick Higgins, commodity analyst at Rabobank, told Sky News. "As a result they will reduce their stock - both by slaughtering more animals and by not replacing them." Somewhat ironically. food prices are now being kept at depressed prices as the "slaughtered" stock clears the market. However once that is gone look for various food-related prices to soar: a process which will likely take place in early 2013, just in time to add to the shock from the Fiscal Cliff, which even assuming a compromise, will detract from the spending capacity of US (and by implication global) consumers.
Since the very beginning of my public writings, I have leaned heavily towards the path of inflation, by which I mean money printing or its electronic equivalent, because even a cursory review of history will show that leaders have always chosen a little money printing today and the possibility of inflation tomorrow over the immediate pain of having to live within their means or with the consequences of their poor decisions. That was just a fancy way of saying 'humans will be humans,' and while our technology has advanced tremendously over the past few decades, our DNA blueprints are virtually identical to those found in people living 50,000 years ago. History can tell us much. Our current predicament has its roots way back in the early 1980s, when something changed in our collective psyches that allowed us to abandon thrift and savings in favor of spending and borrowing.
With tomorrow's CDS roll (when indices change composition and on-the-run maturities are extended) and Friday's major equity option expiration and S&P index reweightings, it would appear, as UBS' Art Cashin notes, that the action of the last few days (and even last week) will be largely driven by the creation of complex strategies to "milk out every ounce of profit that might be available in such huge [technical] shifts." Combine this technical factor with the Autumnal Equinox, of W.D.Gann infamy, and the stage is set for fireworks as we approach Friday.
It's almost as if someone is actively trying to force the Muslim world to launch an all out war against the "developed" west. A week ago, it was a film mocking Mohammad which led to the death of the US ambassador in Libya. Today, it is a French magazine which has ridiculed the Prophet Mohammad by portraying him naked in cartoons, which, as Reuters logically adds, "threatens to fuel the anger of Muslims around the world who are already incensed by a film depiction of him as a womanizing buffoon." It is as if the anti-Iran strategy of antagonizing the country to its breaking point, merely so the first attack comes from them in response to endless provocations, and a defensive retaliation can be spun to the "free world", has now been adopted against the entire Muslim world now, and all the insolvent Western countries are praying they get attacked just so the media spin will coalesce the sheep around the "developed" democracies in an all out "retaliatory" assault, which among other things, liberates tens of millions of barrel of oil equivalents, even as it spreads democracy and unlimited credit cards.