Equity markets have pulled away from the rest of risk in a wonderfully dramatic manner this morning as they set their sights on the pre-election highs and the running of the stops. We are now back at Bernanke QE3 spike levels - which we are sure makes perfect sense to someone - anyone, Bueller? For now, it seems like we auctioned up to clear out any last remaining weak hand shorts given the lack of support for this from any other market.
Reuters has disclosed the outcome of the Greek debt buyback, citing a Eurozone official, which while completed at €32 billion, has missed it hard goal by €450 million, and as a result the completely unbelievable Greek 2020 debt/GDP target will be 126.6% instead of 124%. Reuters also reports that the average price on the buyback was 33.5 cents on the euro. As a result of the higher price paid for the buyback, the outcome is that Greek debt/GDP will be reduced by 9.5%, or less than the 11% targeted. Earlier, it was also reported that with virtually all Greek banks having sold out of their Greek bond exposure, all Greek private debt is now in foreign hands. It is unclear how holdouts will be dealt with, and what, if any, rights they will have following the transaction. Finally, as to the 2020 debt/GDP target, one can only hope that the Greek GDP, which is a rather critical component of the debt/GDP calculation, will now rise in a straight diagonal line up and to the right as the Troika expects it to do. Sadly, it won't.
Relative to interest rates (and swap spread differentials), the EURUSD is at almost its most 'expensive' in 15 months. It appears support for a 'strong' EUR is waning; as the swap rate tends to signal, even ECB President Draghi - as Bloomberg Briefs notes - suggested support on the Governing Council for a reduction of the main policy rate has increased appearing to have used the downward revision to the Eurosystem staff GDP forecasts as an excuse to soften his tone. Between Spain's auctions hitting a wall of 'virtual intervention limits' and Italy's political turmoil, it appears (at least fundamentally) that the EUR should be weaker (we suepct currently aided by incessant repatriation flows). Options markets are pricing in expectations of further weakness but it appears the EURUSD rate remains bound by the Fed-to-ECB expectations of a wholesale Spanish bailout (increase in ECB balance sheet) and the Fed's expansion via QE4. For now, positioning is not indicating any squeeze with the net speculative shorts at the lowest level since September 11 - coincidentally the last time EURUSD was so rich to swap spreads.
While everyone loves a good inspirational movie - Rudy (every underdog has his day), Field of Dreams (if you build it they will come), Million Dollar Baby (be relentless); it is a somewhat sad reflection of reality that in fact - hope and trying hard is simply not enough (especially when you are a debt-saturated global economy). Two data points highlight this better than any others. Today we see wholesale inventories relative to sales at multi-year highs (aside from the great recession's peak) - having risen for almost two years now as we have built 'stuff' but the buyers just haven't come. And to rub a little more salt into the eternal optimist's wounds, it appears that Small Business Optimism has continued its divergence from equities (which notably saw stocks crash the previous two times). Equities remain the hope-driven liquidity-fueled home of the algo-optimist while all around struggles '300'-like with economic reality. Are stocks about to have their "I see dead people" moment?
Warren Buffett is one of America’s biggest bailout beneficiaries, having profited hugely from buying into firms whose assets were subsequently bailed out. Shortly after the crisis began in 2008, Warren Buffett loaned money to, and bought options from, Goldman Sachs, seemingly with the knowledge the bailout of AIG — a counterparty to which Goldman had massive, massive exposure — would take place. Dimon as Treasury Secretary would intend more of the same. Dimon and Buffett and others like them believe in having their cake and eating it. Buffett and Dimon surely have in mind more cronyism, bailouts and free lunches, but the reality of the next four years and beyond may be very different indeed.
So just what is below "stall-speed" growth in the New Normal? And with 48 out of 49 economists now predicting what we said would happen back in September, namely that the Fed will go all in with QEternity+1 and take its balance sheet to $4 trillion (and then $5 trillion in 2014) yet firmly holding their 2013 year end GDP forecast at 2.0%, lower than Q3 2011's 2.7%, does it mean that even $1 trillion in additional flow and stock from the Fed can barely keep the economy above the Old Normal stall speed definition? What exactly would happen if the Fed were to not monetize hundreds of billions in debt? We shiver to even think.
Yesterday's trading was a balance between Italy fears and fiscal cliff hopes-fears-and-hopes-again. While UBS' Art Cashin notes that on the bright side, this will all be over on December 21st when the Mayans predicted the end of the world, he also details what is perhaps even more fearsome - not-the-end-of-the-world as, in his words, demographics, destiny, and the fiscal cliff loom very large not just for the next few weeks but heading out over the next decade as baby boomers retire. As Cashin so wisely points out: "Somewhat lost in the posturing is the fact that the Fiscal Cliff was put in place to force Washington to address the exploding government debt problem. That problem is greatly exacerbated by the rapidly changing demographics in this country. If you fast forward 20 years until all the boomers are retired government debt (taking into account unfunded liabilities) soars to $202 trillion. Perhaps worth remembering that "The real problem is that regardless of the resolution it will not solve anything. We have passed the point of no return. We cannot mathematically solve this debt problem. We can only slow its progression."
The US Census Bureau reported that in October, the total deficit with China hit a record $29.5 billion. What did America need to export so much that it is willing to impair its GDP (net imports are a GDP drain) and boost the GDP of China? "Primarily computers and toys, games, and sporting goods." In other words, gizmos and iPhones. And no, China did not buy US bonds - recall that China has boycotted US Treasurys for precisely one year - so the age old equality that we export China worthless paper in exchange for just as worthless gizmos, yet somehow everyone benefits, is no longer valid. What the US does, however, export to China, is inflation, courtesy of the USDCNY peg, and is the reason why the PBOC is still terrified, and certainly will be after Bernanke announces QE4EVA (RIP QEternity) tomorrow, to ease more as the last thing it can afford is to create its own inflation in addition to importing America's.
The boost to GDP from the declining US trade deficit is over. While the September trade deficit number was revised further lower, to $40.3 billion from $41.5 previously, October saw a pick up to $42.2 billion, slightly less than the expected $42.7 billion, but a headwind to Q4 GDP already. As a result, expect a modest boost to Q3 GDP in its final revision, even as Q4 GDP continues to contract below its consensus of sub stall-speed ~1%. The reason for the decline: a 3.6% decline in exports of goods and services. This was the biggest percent drop in exports since January 2009 as the traditional US import partners are all wrapped in a major recession. What helped, however, was the offsetting drop in imports by 2.1%, the lowest since April 2011, as US businesses are likewise consumed by a concerns about the global economy. And without global trade, whose nexus just happens to be Europe, there can be no global or even regional recovery. So far, all hopes of a pick up in global economy have been largely dashed. Yet one country benefits from the ongoing US slump is China: imports from China - consisting primarily of computers and toys, games, and sporting goods- jumped 6.4% to a record $40.3 billion, offset be a modest rise in exports - primarily soybeans - to $10.8 billion, bring the China deficit to a record $29.5 billion from $29.1 billion in September. Of course, one wouldn't get that impression looking at the Chinese side of the ledger: the Chinese Customs department, reported a September and October trade surplus with the US amounting to $21.1 and $21.7 billion. One wonders, somewhat, where the over $16 billion difference has gone.
While Europe's confidence-inspired rally is floating all global boats in some magical unicorn-inspired way, the reality is that on the ground in the US, things have never looked worse. The NFIB Small Business Outlook for general business conditions had its own 'cliff' this month and plunged to -35% - its worst level on record - as the creators-of-jobs seem a little less than inspired. Aside from this unbelievably ugly bottom-up situation, top-down is starting to be worrisome also. In a rather shockingly accurate analog, this year's macro surprise positivity has tracked last year's almost perfectly (which means the macro data and analyst expectations have interacted in an almost identical manner for six months). The concerning aspect is that this marked the topping process in last year's macro data as expectations of continued recovery were dashed in a sea of reality (both coinciding with large 'surprise' beats of NFP). We suspect, given the NFIB data, that jobs will not be quite so plentiful (unadjusted for BLS purposes) the next time we get a glimpse.
In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.
It appears that unlike UBS, which enjoys transacting in bulk, and announcing the firing of thousands of bankers en masse concurrent with the flurry of pink slips, its more nimble (but just as LIBOR-troubled) Swiss colleague, Credit Suisse, prefers transacting in the pink slip shadows. Specifically, instead of opting for large-font headlines, Credit Suisse prefers to keep its workers on their toes, and yesterday once again warned 120 unidentified employees in its 1/11 Madison Avenue NY headquarters are about to be laid off via the DOL's WARN website. This is only the fourth time in the past year CS has opted for this stealthy method of motivation, laying off 268 in November 2011, December 2011, October 2012 and now this. Why motivation? Because by keeping the list of unlucky souls who will start getting pink slips as soon as December 30, it is motivating everyone to work far harder and preserve the hope that the bell tolls not for them. Indeed: a truly brilliant employee motivational mechanism.
- Fed Seen Pumping Up Assets to $4 Trillion in New Buying (BBG)
- China New Loans Trail Forecasts in Sign of Slower Growth (BBG)
- U.S. "fiscal cliff" talks picking up pace (Reuters)
- Insider-Trading Probe Widens (WSJ)
- U.K.'s Top Banker Sees Currency Risk (Hilsenrath)
- Three Arrested in Libor Probe (WSJ)
- Nine hurt as gunmen fire at Cairo protesters (Reuters)
- Egyptian President Gives Army Police Powers Ahead of Vote (BBG)
- Pax Americana ‘winding down’, says US report (FT)
- Japan Polls Show LDP, Ally Set for Big Majority (DJ)
- HSBC to pay record $1.9 billion U.S. fine in money laundering case (Reuters)
In a session that has been largely quiet there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.