Despite record low coupon issuance and a net negative issuance that is enabling technical flow to dominate any sense of releveraging risk in favor of the 'safety' of corporate bonds, the credit cycle is deteriorating rather rapidly in both the US and Europe. As these charts of the upgrade/downgrade cycle from Barclays show, things are as bad as they have been since the crisis began in terms of ratings changes among investment grade and high-yield credit. Combine that with the historically dismal seasonals for credit in the next three months and we urge caution.
Every summer, my colleagues and I invite young people from all over the world for an intensive 4-day workshop about freedom and entrepreneurship. This year’s workshop just concluded yesterday afternoon, and it was, without doubt, the best one ever. For the past several years, we have been conducting this event at a lovely resort in the Lithuanian countryside. It’s a pretty place– a nice, comfortable, relaxing environment away from all the noise and distraction of daily life. Now, I pay for the whole thing myself. I rent out the entire resort and pick up the total cost of food, lodging, entertainment, etc. For this year’s event, my staff was able to negotiate the same price as last year, and I was happy about this. But after the first two days, we began to notice something different: the resort was actually skimping out on our food portions! In other words, they kept the price the same as last year… but they were delivering less value than before. In this case, it was in the form of food portions that were at least 10% smaller!
First thing today we reported that India just suffered what may have been the biggest blackout in history, after half of the country's population of 1.2 billion, or just under 700 million was without power, as the electric grid of more than a dozen states suffered an epic collapse. Below we shares some pictures courtesy of Times of India giving some sense of what it means for two Americas worth of people to live without electricity indefinitely. Of note: the calm, peace and order despite the epic traffic jams and crowds. One wonders what would happen in the US if the entire country was without electrcity for even just one hour. Finally, one wonders what the impact to the Indian, Asian, and Global economy will be as a result of the complete halt that at least half of India - one of the world's core marginal economies - has ground to do.
In an administration that has completely lost its mind, and in which the solution to every problem is the forgiveness of debt to those who lived beyond their means, FHFA's Ed DeMarco is a lone voice of sanity. In a letter to Tim Geithner, the FHFA has the temerity to tell the truth and say that "after extensive analysis of the revised [Principal Reduction Act]...FHFA has concluded that the anticipated benefits do not outweigh the costs and risks... FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today."Via Bloomberg:
- *FANNIE MAE, FREDDIE MAC WON'T WRITE DOWN LOANS, DEMARCO SAYS
- *FHFA'S DEMARCO SAYS PRINCIPAL REDUCTION WON'T BENEFIT TAXPAYERS
Needless to say, when presented with a minority opinion that socialism just may not be the answer, Geithner was not happy and penned his own response. Both are presented below.
The catalyst for the major turnaround in markets last week was comments from ECB President Draghi that he was prepared to do whatever it takes to preserve the Euro and ensure monetary policy transmission. While this is nothing more than stating his mandate (and that water is wet), the focus on 'transmission' caught the attention of many and Barclays provides a succinct flowchart of just where those transmission channels are broken. However, with SMP empirically a losing proposition for sovereign spreads, LTROs having had no impact on loans to non-financial corporates, and rate cuts not reaching the peripheral economies (and in fact signaling further divergence); it seems that short of full-scale LSAP (which JPM thinks will need to be a minimum EUR600bn to be in any way effective), whatever Draghi says will be a disappointment and perhaps that explains the weakness in European sovereigns this week as exuberance fades (or is the game to implicitly weaken the EUR to regain competitiveness).
We have long argued that auto manufacturers have been channel-stuffing (and subprime-lending) themselves back into a disaster and as such class-action lawsuits have begun. Recently we also pointed out the epidemic of dealer-inventory-stuffing in China (and again this morning the Chinese luxury car market's over-stuffing). So today's report from Reuters that German auto manufacturers have been stuffing dealer channels just like the rest of the world as Europe's largest car market is in recession even if few outside of the industry would know it. "Essentially, the carmakers are deceiving their shareholders, since they make it look as if the vehicles were actually sold. They want to pull the wool over their eyes," as three in every ten new vehicles in Germany are sold not to customers, but to carmakers and their dealers - a type of automotive industry pump priming known as "self-registration". At nearly half a million such registrations in the six months through June, the total is greater than the entire new car market in Spain. Is Germany's economy really what it is reported to be given all this fake demand pull-forward - or is it a total fraud?
While expectations of a Draghi rescuing us all from our bad selves remain extreme - well he did promise! - it seems the market that one would expect to be the most likely to benefit from his 'Aid' is increasingly not Kool. The last two days have seen Italian and Spanish sovereign bond spreads turn back down - even as stocks in those countries keep up the good wealth-building work (with the front-end wider by around 30bps today alone). At the same time, financials have seen their credit risk widen back out (especially seniors) and XOver (the European high-yield credit market) did not exude the kind of equity ebullience that we are used to in a pure risk-on, central-bankers-have-our-back period.
Rumors are circulating that reports of the demise of the Chinese auto market may be exaggerated now that even David Einhorn is forced to defend his GM long (because it "has a strong cash position" - sure, and stuffs channels like no other) however stripped of stereotypes and hype, the reality is that even the one time impregnable ultra luxury car market in China is now faltering at an ever faster pace. BusinessWeek reports: "Waiting lists for ultra-luxury cars in Hong Kong are getting shorter and used-car lots are cutting prices on Lamborghinis, Ferraris and Bentleys in the latest sign of China’s slowdown. At first glance, the numbers are deceiving: Sales of very expensive new autos surged 47 percent in the first six months, according to industry analyst IHS Automotive. Look more deeply, however, and another picture emerges, especially in the city’s used-car lots." The picture is ugly: "“The more expensive the car, the more dry the business,” said Tommy Siu at the Causeway Bay showroom of Vin’s Motors Co., the used-car dealership he founded two decades ago. Sales of ultra-luxury cars have halved in the past two or three months, he said. “A lot of bankers don’t want to spend too much money for a car now. At this moment, they don’t know if they’ll have a big bonus.”" Sad: they should all just go to Singapore and manipulate Libor. Oh wait, too soon?
Was it only two months ago that Faceplant was heralded as bringing in the new era of, well something... the public markets are a cruel friend it seems as FB just traded with a $21 handle for the first time - down a marvelous 53% from its IPO-day highs... Volume exploded once it crossed that barrier as we suspect Margin Stanley was aggressively defending its new line in the sand (how did that defense work at $38, $37, $35, and $30 - but maybe this time is different).
This is what happens when the BIS is limited to buying EUR and selling gold at one time: something leaks. In this case the Swiss 2 year which is plunging to -0.45% sending the curve negative to the 6 year mark, while in Germany the Bund curve is now negative to the 3 year mark. And so Europe is unfixed again - even though the SNB seems to 'love' EUR as it is entirely unable to diversify its reserves which now have surged to 60% EUR as questions over the sustainability of the peg increase.
Central bankers present themselves as Masters of the Universe. They are, but only in their own little Theater of the Absurd. In the real world, they are as clueless as any other mortals about the unintended consequences of their actions and the speed with which the corrupted, unsustainable financial Status Quo will decay and die. To admit the usustainable is not sustainable would bring the entire rotten edifice crashing down, so the central bankers invite us into their little Theater of the Absurd and evince a phantom confidence in their phantom solutions that depend on phantom assets.
Just when you thought it was safe to hope for more bad news being good news we complete the triumvirate of housing, manufacturing, and now confidence all beating expectations. But we Moar QE. Consumer Confidence just beat expectations for the first time in 5 months rising to its highest level since April as it appears the self-reinforcing 'Fed's got your back' belief once again becomes a self-defeating 'how can we QE when everything's peachy' scenario. To wit, 12-month inflation expectations rose from 5.3% to 5.4% - as we noted the inflation-argument for NEW QE here. This is simply remarkable levels of cognitive bias considering the savings rate just rose to a one-year high implying people are expectation deflation - dis-inflation at the least. It would appear that indeed - given the market's downward trajectory - that the stealing of one's own punchbowl realization is occurring.
If there was one thing the market did not nead 24 hours ahead of the FOMC in the aftermath of the better than expected Case Shiller May print (yes, 2 months ago) it was a follow up beat by the Chicago PMI, as this would only make any further forceful QE tomorrow less than likely. Sure enough, this is just what happened, as the PMI printed better than expected rising from June's 33 month low, printing at 53.7 from 52.9 in June on expectations of a modest decline to 52.5. And so in a market in which everything continues to be driven by hope and prayer that Bernanke will wake up at just the right angle, Risk is once again suddenly OFF. If there was one saving grace it is that the Seasonally adjusted Employment index plunged from 60.4 to 53.3 (60.0 to 57.0 NSA) which is the lowest print since July 2011 which in turn brings it back to May 2010. This leaves hope that the NFP print on Friday will come negative. However, that will be too late for the August FOMC meeting. Oh well, there is always hope that in September the Fed's mind will change as long as some more horrible economic data comes between now and then.
The unemployment rate across the 17-nation euro-zone reached its highest level on record (22 years) at 11.2% and becomes Europe's second scariest chart. The silver medal in scary factor is quite an accomplishment with parabolic TARGET2 exposures and plunging core short-term yields but the gold medal holder remains the extreme levels of youth unemployment that remain in the periphery. It would appear that Europe, in its haste to follow the lead of the US in cost-cutting and blood-letting amid a significant depression recession that clearly CEOs do not believe wil be short-lived, is seeing "Companies generally are under serious pressure to keep their labor forces as tight as possible to contain their costs in the face of the current limited demand, strong competition and worrying and uncertain growth outlook,” and as Reuters points out from IHS's Howard Archer, "there looks to be a very real danger that the euro-zone unemployment rate could reach 12 percent in 2013." May's unemployment was revised up from 10.1% to 11.2% as even glorious employer-uber-alles Germany saw the ranks of the unemployed swell.