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Guest Post: Whilst We All Await The Outcome Of The EU Summit I Want To Draw Your Attention Elsewhere

Tyler Durden's picture




 

From Maurice Pomery of Strategic Alpha

Whilst we all await the outcome of the EU summit I want to draw your attention elsewhere:

Whilst the US equity markets closed down 2% last night, it is clear that there is little appetite to put on new trades in front of this summit meeting as evidenced by the lack of interest in Asia. Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble. The fall on Wall St was, in my opinion, more on the back of further weak data from the housing market in the US and consumer confidence which is collapsing fast, as the Case Schiller disappointed yet again. Is operation twist going to help? If the answer is no then Bernanke will have to try something else and this view is building as the fall in equities was accompanied by a fall in the Dollar and a steep rise in precious metals, all signs that fears of further QE are building.

There are some issues away from the EU crisis that I think need attention and one of them is deleveraging and a drying up of demand. The cash price of iron ore for immediate delivery to China, a benchmark for Asia, dropped the most in more than two years as demand from steelmaker’s wanes. Last week, Chinese steel prices plunged the most since the 2008 global economic crisis, signalling mills may further curb output. China seemingly has enough stockpiled to last some time and the likes of Australia and other exporting nations are likely to feel this as demand globally drops led by steep declines of demand from the developed world.

I have been warning you all of this and the impact on global growth but this steep fall in Iron ore is very concerning. Copper prices had been in a steep decline before speculation on further QE from the Fed put a spark back in demand but physical demand is still low and is the best leading indicator for global growth prospects. Additionally and another point I have tried to highlight is that the consumer in the developed world is starting to deleverage as evidenced by the rise in savings ratios in the UK and less money being spent on credit cards. Across the developed world the consumer is considering the impact of rising unemployment and rising essential costs and the household debt burden is still enormous. Demand side dynamics do matter; third-quarter profits at 3M, one of the US’s biggest industrial conglomerates, missed Wall Street expectations and the company slashed its outlook for full-year earnings, as sales of consumer electronics dropped, reflecting what the company said was “generally slowing economic growth in the developed world”. Cummins, one of the world’s biggest engine-makers, also cut its full-year outlook, citing a sharp drop-off in demand in emerging markets. Expect a lot more of this.

Interestingly or rather strangely, the extremely low levels of consumer confidence has yet to hit retail sales in both the US and UK but looking at the numbers I would suggest they are very likely to soon or the data is being manipulated! Consumers are closer now to getting maxed out on credit and they won’t get or want any more. Yes the very wealthy have been spending on the likes of Louis Vuiton but the majority are beginning to save and shed debt. This MATTERS. Even in Canada growth is being scythed lower as the finance minister cuts growth from 2.8 to 2.1%! Europe is as good as in a recession as I mentioned yesterday and this will impact whether they come up with a deal or not tonight and in my opinion too many analysts are missing what is going on with the economics out there.

US consumer confidence is collapsing and there is no other word for it. The Conference Board's index of consumer confidence posted yet another decline in October, falling to 39.8 (previous: 46.4) - the weakest reading since the end of the recession! Looking at the detail there is a rather worrying issue here as the decrease reflects declines in both the present situation and expectations components, whereas the previous, more recent major moves down in the index were driven primarily by the expectations component. This means the concerns are NOW. Spending will now surely take a hit and some shocks in retail sales are on the way in the US and in the UK as deleveraging is forced upon the masses. I cannot highlight or stress how important this issue is to growth everywhere. As prices increase and wages stagnate, things are going to get tougher into the winter and I note with interest the component in the US data highlighting concerns over future earnings. In the past low confidence has not always hit sales but in my mind things are different as the debt burden is almost unbearable and many have little credit left, adjustments will have to be made.

When these adjustments come through, in my mind very soon, the Fed and other central banks may see a steep move towards deflation as growth stumbles and economies go back into recession, probably led by the EU then the UK and finally the US. The world cannot fill that massive customer void. The timing of this could be dreadful as just at a time when the world needs China and the other Asian exporters to pull us through, the hard landings will hit. Global growth expectations are far too optimistic and policy shifts will be swift where possible. What the world does not need right now is a falling Dollar as that complicates matters worse but it is of little concern to Bernanke and Geithner as they are concerned about America and rightly so.

Again I reiterate that a world where we have deleveraging from Sovereigns (which demands draconian austerity measures), banks (lack of credit supply to small businesses, the essential for growth) and the consumer, is not a world that is going to grow. In fact the speed of the fall could surprise. Data suggests to me that the EU issue is not the main concern, it is deleveraging and this will dominate long after the EU idiots come up with some compromise to delay things further.

 

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Wed, 10/26/2011 - 07:07 | 1811542 I am Jobe
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Top Ramen for Christmas Bitchezzzz.

Wed, 10/26/2011 - 08:37 | 1811798 LongBallsShortBrains
LongBallsShortBrains's picture

By next Christmas, that statement may be bragging.

Wed, 10/26/2011 - 07:10 | 1811543 HD
HD's picture

This must be BS. If any of this was true you know it would be all over CNBC...right?

Wed, 10/26/2011 - 07:21 | 1811575 cossack55
cossack55's picture

Good one. What would be even better...."CNBC is all over."

Wed, 10/26/2011 - 07:09 | 1811547 spankfish
spankfish's picture

"Whilst we all await the outcome of the EU summit I want to draw your attention elsewhere"

Not more slight of hand... please don't tell me that.

Wed, 10/26/2011 - 07:13 | 1811556 apberusdisvet
apberusdisvet's picture

 

Deflation:  Bernanke's phukked

Inflation:  we are phukked

So what's your choice, pilgrim?

Wed, 10/26/2011 - 07:22 | 1811580 cossack55
cossack55's picture

Stagflation/biflation: everyone is phukked

Make me happy

Wed, 10/26/2011 - 07:14 | 1811561 broke433
broke433's picture

Maybe Equities were down 2% because it went up 20% and gold fell from 1920 to 1600 so it went up. Dollar didn't move at all.

Wed, 10/26/2011 - 07:17 | 1811565 spankfish
spankfish's picture

EU idiots are useful idiots to the bankers... how apropos.

Wed, 10/26/2011 - 08:00 | 1811687 CPL
CPL's picture

Shhhh, you aren't supposed to tell that secret yet, that was for next month when all those involved understand how screwed they got by their central banks.

 

 

Let's wait for it.

Wed, 10/26/2011 - 07:18 | 1811569 lolmao500
lolmao500's picture

According to the data released by the government for April to September, imports of gold and silver rose by a whopping 80% to $31.1 billion in six months.

Investors in India appear to be moving out of cash and into gold and silver. As poorly performing equities hit valuations, analysts and traders insist there is an acceleration in the investing community to switch into precious metals.

Wed, 10/26/2011 - 07:21 | 1811572 topcallingtroll
topcallingtroll's picture

Fear of qe3 and speculating in the markets that qe3 is imminent are proably the wrong way to go. At this point bernanke seems content to await the results of previous intervention.

Yes I am sticking with my topcall in gold.
I dont believe that europe is going to pull out a 1.4 trillion bazooka. The germans are intent on killing themselves with deflation

Wed, 10/26/2011 - 07:22 | 1811581 El Gordo
El Gordo's picture

Well, bring it on and let's see who has what.

Wed, 10/26/2011 - 07:27 | 1811593 xcehn
xcehn's picture

The retail data is being manipulated? Now that would be a surprise! LOL People are mostly shopping for necessities and some are actually preparing for the economic blowback.

Wed, 10/26/2011 - 07:28 | 1811596 dcb
dcb's picture

OK, I don't kow the fed operation twist days, but I do know yesterday was one. so the boys should have front run bonds, and be selling them (at end of day yesterday?) with a buy on stocks near the close? not sure if this would work, but honestly someone eeds to do a analysis of the market on twist and non twist days.

Wed, 10/26/2011 - 07:30 | 1811601 RoadKill
RoadKill's picture

God the world is screwed up. I'm massively short, but since stuff like FAZ and SMDD are denominated in USD, I'm still screwed when this hits the US (and it will because our debt and deficits are way worse then France & Germany). Can't buy real commodities (oil, copper) because demand will drop off a cliff. Can't buy the currency of any non-indebted, surplus currency because they all rely on commodity exports (or I'n the case of Switzerland they are run by retards). Can't buy land because I want to remain mobile incase Commrade O wins reelection and try's to tax me at 90%.

And don't give me the gold and silver ponzi pitch. They have no intrinsic value other then what you convince the next schmuck to pay. 0 industrial demand is NOT a good thing. What happens if in the post apocalypse future we decide to use something other then gold and silver?

Its pretty easy to be depressed if you want too be

Wed, 10/26/2011 - 08:47 | 1811822 beaker
beaker's picture

There's always booze and ammo.....

Wed, 10/26/2011 - 07:30 | 1811602 RoadKill
RoadKill's picture

God the world is screwed up. I'm massively short, but since stuff like FAZ and SMDD are denominated in USD, I'm still screwed when this hits the US (and it will because our debt and deficits are way worse then France & Germany). Can't buy real commodities (oil, copper) because demand will drop off a cliff. Can't buy the currency of any non-indebted, surplus currency because they all rely on commodity exports (or I'n the case of Switzerland they are run by retards). Can't buy land because I want to remain mobile incase Commrade O wins reelection and try's to tax me at 90%.

And don't give me the gold and silver ponzi pitch. They have no intrinsic value other then what you convince the next schmuck to pay. 0 industrial demand is NOT a good thing. What happens if in the post apocalypse future we decide to use something other then gold and silver?

Its pretty easy to be depressed if you want too be

Wed, 10/26/2011 - 07:32 | 1811610 GeneMarchbanks
GeneMarchbanks's picture

No trifecta?

Wed, 10/26/2011 - 07:30 | 1811603 spankfish
spankfish's picture

"Demand side dynamics do matter; third-quarter profits at 3M, one of the US’s biggest industrial conglomerates, missed Wall Street expectations and the company slashed its outlook for full-year earnings, as sales of consumer electronics dropped, reflecting what the company said was “generally slowing economic growth in the developed world”. Cummins, one of the world’s biggest engine-makers, also cut its full-year outlook, citing a sharp drop-off in demand in emerging markets. Expect a lot more of this."

Hmmm... time for Uncle Sammy to pimp the markets.  Whos's turn is it to push the "buy button" on the high frequency computers?

 

Wed, 10/26/2011 - 07:31 | 1811608 GeneMarchbanks
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'Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble.'

Any chance this has something to do with China/Australia housing deflating? Thought so...

Wed, 10/26/2011 - 07:43 | 1811642 Al Gorerhythm
Al Gorerhythm's picture

 Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble.

And that is not taking into account that the BLS's version of statistical manipulation in Australia, removes any measurably volatile price movements from the basket of goods or services that it measures. They probably don't remove any donward volatile price movements though, as that would deny them the lower inflationary number. It's global. Government and their minions protecting their powerbase and jobs.

Wed, 10/26/2011 - 07:53 | 1811671 Maxcredit
Maxcredit's picture

This could be a good time to be short the Aussie dollar (I am).

Also working for riotinto they are way to bullish on the iron ore price staying at these levels and spending way to much capital on upgrades.

I find it hard to short my employer.(not realy this could be a good trade)

 

Wed, 10/26/2011 - 07:57 | 1811679 GeneMarchbanks
GeneMarchbanks's picture

'This could be a good time to be short the Aussie dollar (I am).'

Aussie banks too.

Wed, 10/26/2011 - 08:04 | 1811702 Snakeeyes
Snakeeyes's picture

On the other hand, U.S. mortgage purchaser applications rose suddenly as did mortgage refinanciong applications.

http://confoundedinterest.wordpress.com/

Or is this the tipping point where households start hunkering down for the financial storm of the century? Hint: houses deflate with everything else!

 

Wed, 10/26/2011 - 08:24 | 1811754 DarkestPhoenix
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Sweet!  I just found a place where I can get a house for a hundred bucks!

Wed, 10/26/2011 - 08:16 | 1811728 Everybodys All ...
Everybodys All American's picture

53 : 1 leverage right now. I don't think the fed is willing to go beyond this level. They will jaw bone a lot but I don't think they are all that willing to act right now. Especially if they can elevate stocks without a QE program,

Wed, 10/26/2011 - 08:42 | 1811808 LawsofPhysics
LawsofPhysics's picture

Makes sense.  Why "do" anything when the rumors of doing something seem to be working just fine.

Wed, 10/26/2011 - 08:42 | 1811814 lolmao500
lolmao500's picture

The Real IRA has admitted bombing two banks in Northern Ireland as well as the UK City of Culture office in Derry, and has warned that it will continue to target economic interests.

In a statement to the Guardian laced with anti-capitalist rhetoric, the Real IRA said the bombings and future targeting of the banking system were its response to bankers' "greed" and were meant "to send out the message that while the Irish national and class struggles are distinct, they are not separate".

Wed, 10/26/2011 - 08:49 | 1811830 monopoly
monopoly's picture

A good summary of where we are. But most of us here already know what is going down.

Wed, 10/26/2011 - 08:55 | 1811860 Shizzmoney
Shizzmoney's picture

 As prices increase and wages stagnate, things are going to get tougher into the winter and I note with interest the component in the US data highlighting concerns over future earnings.

THIS.  SO THIS.

Watching MSNBC yesterday, there was a Congressman, Chaka Fattah (D - PA), so who said there was a "recovery" underway.  He claimed that Obama's policies (read: Bernanke) on the economy has spurred a "recovery" and that evidence of this was retailers would be announcing over 100K jobs and how this would "help" the recovery. 

The recovery has nothing to do with creating a bunch of shitty, low paying, part time with no benefits jobs that retailers have been creating around this time since the 1990s (and which they'll layoff once the XMAS season is over....esp an upcoming shitty XMAS season). 

I worked in retail, I know how the seasonal cycles work.....it was an insult to my intelligence that any govt official would claim this is an example of the "recovery".  It's like when census hires were part of the 2010 "Dow-boom". 

There has been NO recovery, just a duct-tape patch over a fiat value leak which is about to burst again.

Now, I am not saying it is Rep. Fattah's fault.  He only regurgitates what is told to him, and to be quite honest, the majority of Dems and Repubs don't know enough about the mathematics of growth and economics to figure out what the real problem is (extraction of value from fiat currency by central banks, who protect wild speculation).  Maybe since they are paid by these TBTF institutions, maybe they don't WANT to recognize the real problem.  This problem usually exists when a private organization prints your cash, and not the people (Congress).

When the market contracts, so does debt.  Debt cannot contract in a fiat system; that leads to deflation, which leads to higher interest rates.  Like inflation, it becomes a tax on the people, mostly small business who now cannot get rates on loans to spur growth.  This effects what employers can hire/pay for jobs, and the prices of the good they sell.

This leads the "free market" (whats left of it) to naturally correct itself....and that is usually by the rise of value of precious metals.

Wed, 10/26/2011 - 09:22 | 1811976 bob resurrected
bob resurrected's picture

No printing of any euro or usd will happen until the voters beg for it. Major banks will fail and millions will have restricted access to their remaining funds. Only then will the printing begin. Comay Mierda

http://www.zerohedge.com/news/ft-reports-europe-sacrifice-its-banks-bail...

Wed, 10/26/2011 - 09:53 | 1812137 KandiRaverHipster
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the pitfalls of expecting consumers from agrarian societies to pick up the consumption

Fri, 07/13/2012 - 05:09 | 2612092 l.hauri
l.hauri's picture

I am not sure that it is the best way to draw attention. You should reconsider your opinion.

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