A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.
With the BLS shutdown, and this Friday's NFP report indefinitely delayed, the only labor report this week would be the (highly inaccurate) anticipated ADP Private Payrolls data. Moments ago it came, and disappointed all those hoping that finally, after five years, the Fed's shotgun wealth creation strategy may be working when it not only missed expectations of 180K, instead printing at 166K with the bulk of jobs created in the service-providing sector, but excluding massive downard revisions (July from 198K to 161K, August from 176K to 159K), would have been the lowest print of the past 4 months. And while, finally, some 1000 manufacturing jobs were created in September, for the first time in over a year the high-paying financial sector saw an exodus of 4000 jobs. Wave goodbye to the "third half" 2013 recovery.
Leaving rates unchanged for now, all Draghi has left in his arsenal is to jawbone the EUR down (since we already know the strength of the EUR is hurting corporate earnings). Moar negative rate "possibilities", a sprinkling of "things are not quite as awesome as markets presume", and a hint or two at the need for another VLTRO? And we are sure this time, he will explain exactly how the OMT will work...
If yesterday was the paradoxical government shutdown "relief rally" pushed higher by a last minute VIX smashing ramp, today reality is starting to set in and global stocks and US futures are set to open lower. The FTSE MIB remains the only European bourse to trade in positive territory in today’s session, having touched upon 2 year highs as it is expected the political tumult that threatened to cause a collapse of the Italian government will be resolved today even as the latest news indicate Berlusconi's PDL will support the Bunga godfather after all. Other European equities have failed to benefit from this as market participants remain cautious ahead of the ECB rate decision today when Draghi may or may not (most likely) announce a new LTRO.
Moments ago, Italy's most popular politician flip-flopped on his threats from the past weekend to take down Italy's government, and after realizing he does not have enough support even in his own party to push for early elections and a vote of no confidence for prime minister Letta, Berlusconi announced his party will vote to support the government of the current Premier, a major turnabout that signals he was defeated in his efforts to bring down the government.
No surprise this morning from the ECB, which keeps its benchmark rate at 0.5% and the deposit rate at 0.00%.
At today’s meeting, which was held in Paris, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.50%, 1.00% and 0.00% respectively.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.
More at the press conference in 45 minutes when Draghi may or may not announce yet another forced LTRO, at a time when all of Europe is deleveraging at a record pace.
A US government shutdown, slumping vehicle sales, Aussie trade deficit double what was expected (and building approvals tumbled), Asian growth expectations being cut, and Japan's monetray base is up 46.1% YoY (versus 42.0% exp.)... Japanese stocks are down over 400 points from the US day session highs, falling for the 4th day in a row (down 4.8% from the highs last week) as the third arrow confusion reigns taking the Nikkei 225 back to 3 week lows. The Rupiah (Indonesia) and Baht (Thailand) are weakening (bucking the 3-day weakness in the USD) and Indonesian (+10bps), Aussie, and Kiwi bonds are leaking higher in yield. In general, AsiaPac equities are holding modest gains but Singapore and Japan are taking it on the chin... S&P futures -5 from day-session highs.
- U.S. Government Shut Down With No Quick Resolution Seen (BBG)
- 12 House Republicans now say they’d back a ‘clean’ CR (WaPo)
- Republicans’ 2014 Senate Edge Muddied by Shutdown Message (BBG)
- Obama Shortens Asia Trip Due to Government Shutdown (WSJ)
- Fed Said to Review Commodities at Goldman, Morgan Stanley (BBG)
- Foreign Firms Tap U.S. Gas Bonanza (WSJ)
- Behind Standoff, a Broken Process in Need of a Broker (WSJ)
- Japan Awaits Abe’s Third Arrow as Companies Urged to Invest (BBG)
- Microsoft investors push for chairman Gates to step down (Reuters)
Presented with little comment aside to note that perhaps the House should rename the amendments they propose to "defund" in order to gain a more popular position among the citizenry?
We already noted the apparently 'transitory' weakness in GM's numbers and huge surge in channel-stuffing; but now the full numbers are in and it is not pretty. The annualized domestic vehicles sales collapsed (by the most in 29 months) to 11.66 million - it's lowest in 11 months - missing expectations by the most since January 2009. Stone McCarthy offers some hope that this does not signal "peak autos" for this cycle as they note, "it would appear that sales for September were pulled into August due to the extra selling days for August, stemming from the manner in which the Labor Day weekend fell on the calendar this year. Recall that August sales were firmer relative to expectations and now we have September being weaker."
Still three-plus years left in Obama’s presidency, where mediocrity has been elevated to a highly acceptable status. A good and intelligent man has proven to be an incapable leader, often by making poor choices in the advice received... However, not all has to be lost for Obama; he still has time to reweave a legacy that now appears grey and bleak. And that reweaving will not be on the domestic front; for the economic future of 80 percent of Americans has already been cast... the slope pointing downward no matter what hopeful lies are manufactured in Washington. Reweaving, for Obama, should take place at the international front; a great opening has appeared before him partly by chance and partly by what other world leaders have to gain as well.
Everything looked so good in August. Goldman's global leading indicator (GLI) "swirlogram" had recovered quickly from a 'growth scare' in Q1 and was holding firmly in "expansion" territory. Then reality hit as new-orders-less-inventories worsened, various manufacturing surveys rolled over, industrial metals gave up gains, and Korean exports provided no help. Among the few factors holding up the index from already plunging levels was the Baltic Dry Index (which has collapsed now in the last few days) and Consumer Confidence (which appears to also be rolling over). September's plunge into "slowdown" for the GLI is the biggest drop in 8 months.
This morning's media blitz by Carl iCahn - demanding that AAPL's Tim Cook, borrow money cheap, lever-up, and gift it all back to shareholders through buybacks - reminded us of our previous post on the record high levels of leverage in US corporations. To a point, firms can add debt as earnings and equity value increase - leaving leverage and credit risk somewhat constant. However, the last few years, in spite of Maria Bartiromo's constant drivel of cash on the balance sheets, companies have increased debt faster than EBITDA, leverage is at record levels, and credit markets appear to have peaked (as they did in 2007).