It takes all of three seconds on the ground in Spain to realize that this country is hurting. Big time. It’s amazing what the combination of debt, deceit, and a bona fide banking collapse can do to a nation. Consequently, depositors are moving money out of the country en masse, often to the tiny principality of Andorra next door - a highly capitalized, low tax banking jurisdiction. This leaves the already thinly-capitalized Spanish banks in an even weaker position. As we have painstakingly pointed out a number of times, the way the banking system works in most of the world is a complete fraud since most banks only hold a tiny percentage of their customers’ deposits in cash. The moment there are more than a handful of depositors wanting their money back, the bank has a big problem. This is happening nationwide in Spain. As such, the IMF is now recommending that Spain (and other nations in the eurozone periphery) take action “at the national level” to stem this flight of funds and prevent people from moving money abroad. Capital controls by any other name should smell so foul.
Stocks popped on some bloomberg flashing red headlines from the Fed's Beige Book but quickly faded as bonds did not move. The reality - summed up in the worldcloud - is 'mixed' - for sales, for prices, for demand, for jobs:
- *FED DISTRICT BANKS SAID `CREDIT STANDARDS WERE LITTLE CHANGED'
- *FED DISTRICT BANKS SAID MANUFACTURING WAS `SOMEWHAT IMPROVED'
- *FED DISTRICTS SAID `OVERALL LOAN DEMAND INCREASED SLIGHTLY'
- *MOST FED BANKS SAID `WAGE PRESSURES REMAINED MODEST'
- *FED BANKS SAID `EMPLOYMENT CONDITIONS WERE LITTLE CHANGED'
- *FED DISTRICTS SAID CONSUMER SPENDING WAS `FLAT TO UP SLIGHTLY'
As class-warfare implicitly breaks out - trumpeted by our political leaders - it seems that there is another, much more relevant, trend that is occurring that strikes at the heart of our nation. With Friday's jobs number still fresh in our minds, Citi's Steve Englander takes a look at one small slice of the demographics subject and found a rather concerning and little discussed fact. Employment-to-population ratios among older individuals have gone up in recent years, in contrast to the so-called prime-aged 25-54 cohort, where employment-to-population is much lower than earlier. It seems the real divide in this nation is not between rich and poor but old and young - as the 55-plus (and even more 65-plus) are forced to stay in the workplace as retirement remains a dream (thanks to ZIRP and Keynesianism's excess crises from boom-to-bust leave median wealth well down - even if the rich are 'ok').
The greatest and most often exploited weakness of any revolution for freedom is the inability of the downtrodden populace to identify the true enemy. Even the most successful battles against despotism, like the American Revolution, often only had a distant sense of who they were really fighting against. In the coming years, the American people will face numerous threats; some real, some imagined in the sterile conference rooms of a black-hearted think tanks. But, the most terrifying threat to our cultural roots of free thought, expression, and prosperity is wielded by a very particular and exclusive group of thin-blooded ego-maniacs. Identifying them is not difficult. Hiding their true nature is nearly impossible for a person or institution whose narcissism is so pronounced. They adore their own insanity and wish to share it with the world.
We had the knee-jerk reaction spike. That was faded. Then we had the retest as hope remained - though it was led by the most defensive sectors as we have pointed out. That was faded. Double-top? S&P futures now sit at the top of the Draghi/ECB spike cliff...
Some prefer to see the 'employment' glass half-full, some half-empty, and others see the glass smashed into a million shards on the keynesian kitchen floor. The zealousness with which the 'number' has been dismissed and praised has generated more questions than answers. Goldman's Jan Hatzius addresses the question of the pace of progress in the labor market, the reasons for the contrast between GDP and employment, the amount of slack left, and the implications for Fed policy.
As we all know, what matters isn't our nominal earnings, it's what our earnings can buy that counts. If it takes an hour of labor to buy four gallons of gasoline, it doesn't really matter if we're paid $1.60 an hour and gasoline costs 40 cents a gallon or we're paid $16 an hour and gasoline costs $4 per gallon. Ditto $16,000 an hour and $4,000 per gallon. What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons. This is called purchasing power, and rather naturally the Status Quo has worked mightily to cloak the reality that our purchasing power of the bottom 95% of wage earners has been declining for decades. Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.
Between the IMF's European growth expectations and deleveraging needs, it seems reality is sinking in a little in Europe. All equity indices are closing red today with Spain and Italy worst and banks underperforming. The most interesting feature we noticed is that once again - now the seventh day in a row - European sovereign spreads have deteriorated notably from the US day-session open to the European close. Spain and Italy 10Y bond spreads are 15 and 8bps wider (only) on the week but notably Spanish and Italian equities are down 3.2% and 2.8% respectively this week. EURUSD is practically unch at the EU close - up 60 pips from overnight weakness.
Something changed in the FX market after QEternity was announced. As CitiFX notes, active traders in the EURUSD market had generally behaved as trend-followers throughout the summer - in the lead up to QE3; but in the last few weeks, that pattern has changed dramatically. The heavy selling of EUR which took our positioning indicator from a record high in mid-September to negative territory came despite resilience in spot. Thus investors now appear more inclined to sell into strength from EUR. This could reflect frustration with EUR’s inability to sustain breaks beyond recent ranges and desire among investors to lock in gains among longs. Combine this positioning with the fact that EURUSD is trading over 300 pips rich to its swap-spread-implied fair-value and perhaps trading the range - as opposed to looking for breakouts - is a better bias currently.
After the kneejerk stop-run reaction to the FOMC's announcement of QEternity - that juiced stocks to the year's highs, there has been no follow-through at all among the cyclical or recovery-sensitive sectors. In fact, all the sectors that ran on QE3 hopes have retraced dramatically. With today's further slump in Energy and Materials (as earnings begin to cast doubt on the hope-rally), they are now down over 5% from the post-QE peak.
As if we needed further confirmation of the un-reality of Friday's BLS data, the JOLTS data just printed with the largest two-month drop in ten months (and the first two-months-in-a-row of falling job openings this year). Of course this is data for August and the unemployment rate was for September - which we are sure makes all the difference...
There should be three objectives for a well-functioning monetary system: i) internal balance, ii) allocative efficiency and iii) financial stability. The international financial and monetary system (IFMS) has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, this recent Bank of England paper finds that today’s 'fiat' system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System, with the key failure being the system’s inability to maintain financial stability and minimize the incidence of disruptive sudden changes in global capital flows. There is little consensus in the academic literature, or among policymakers, on what are the underlying problems in the global economy which allow excessive imbalances to build in today’s IMFS and/or which impede the IMFS from adjusting smoothly to counteract these imbalances. Critically though, while the fiat money system we are currently does indeed exhibit lower GDP growth volatility (by design), it has dramatically more incidents of banking and currency crises than under a Gold Standard.
A rare glimpse inside "probably the world's biggest" 'market-maker' GETCO as it provides estimates of over 20% of 'liquidity' to the daly trading volume on US stocks. Meet the people that stand ready to feed the machines (oh wait) that stand ready at all times (except when most needed) to bid or ask...
Whether it is US companies' reporting or Chinese data confirming, times are getting tougher for the world's engine of growth. So, like every well-balanced western nation, instead of turning to meditation and exercise, beer appears the chosen method of stress-relief for the Chinese. As Bloomberg Briefs notes, three of the top six brands of beer in the world are Chinese with the great nation consuming 50 billion liters per year - more than double the US 24 billion. Do not worry though, USA is still #1 at 74 liters per capita per year relative to China's 37 liters. It would seem the start of their recession is perfect timing for them to make a run at increasing that average yearly intake. Already this year, Chinese domestic beer production is up 2% YoY and imports are up 100% - perhaps the only 'rising' data point the nation has seen; and maybe the next great anti-growth indicator.
Plans To Create World's Largest Aerospace And Defense Company Fail As EADS And BAE Shelve Merger PlansSubmitted by Tyler Durden on 10/10/2012 08:09 -0400
In the beginning there was much hope, especially among M&A ibanker advisors, that the creation of the world's largest aerospace and defense company would be not only a fee bonanza but a statement that even in Europe's ongoing economic depression one can cobble together megadeals. Then things got sour as little by little the realization that the deal may fall through started creeping in. Moments ago, all hope was lost as both parties pulled out of further merger talks. From Reuters: "- EADS and BAE Systems will not ask for an extension to their merger talks on Wednesday, sources close to the negotiations said, calling an end - for now - to a plan to create the world's largest defence and aerospace company. "We will not be filing for an extension. It's over," one of the sources said. The two companies had until 1600 GMT to ask for an extension to the talks, which have come up against fierce governmental opposition as France and Germany sought to maintain control while Britain wanted less state ownership."