Surveying The Landscape

Tyler Durden's picture

Via Mark E. Grant, author of Out of the Box,

Surveying the Landscape
 
Look around. Take a good long and hard look because the data is becoming unsettling and it is pouring in from all over the world. In China, where a hard landing was thought to have been avoided; one moment please, not so fast. China’s industrial output is now the weakest since 2009 and the latest figures represent the seventh consecutive quarter of deceleration. Most troubling is that China’s sales to Europe declined -16.2% last month which is a huge drop off and shows clearly the recession that is taking place and worsening on the Continent. Estimates for Chinese third quarter growth are being reduced on an almost daily basis and loan demand has taken a drubbing. The world’s growth engine is sputtering and there will be consequences. In the other driver of Asian growth Japan is markedly weakening. GDP expanded at 2.3% in the last quarter which was down almost 50% from the first quarter of this year. A Bloomberg survey places growth at just 1.00% for this quarter and there may be a negative number by the fourth quarter.
 
In Europe the situation is dramatically worsening with virtually every country in a recession with the notable exception of Germany though I predict they will join the club by the fourth quarter of this year or by the first quarter of next year. Italy just reported out their GDP at -2.5% for the second quarter and their prospects are not good with the third quarter likely to be down more than three percent in my estimation. Borrowing costs are also beginning to weigh on Italy as they have a two trillion dollar sovereign debt where their ten year is +441 to Germany and not likely to get better anytime soon. Even if you are a believer in some new ECB/ESM scheme the German courts will not opine on the ESM until September 12 and then there are still a number of countries that have not approved the plan so that any actualization of some scheme is unlikely to come before late in the third quarter or in the fourth quarter. It is an interesting side note that when Monti took office that the Italian/German ten year spread was just +78 bps so I think it can be said with accuracy that his tenure, as demonstrated by the numbers and not the hyperbole, has not been the rose garden so often praised by Germany and France. In another interesting side note Goldman reported that it had cut its holding of Italian sovereign debt by 92% and if one considers their CDS exposure they have actually gone to a position of almost one billion negative from a plus $2.4 billion position in March.
 
While the Prime Minister of Spain dances around and shouts at Don Quixote’s windmills I think that it is quite likely now that Spain will be forced to officially ask for aid and that it will be soon. Then I think that Italy will follow suit which will rest the funding squarely on the shoulders of Germany and France and with economies totaling just $6.33 trillion or 56% of the United States, there will be real consequences and real pain as the allocations grow for these two countries and as Greece and Portugal line up again at the till. Short term solutions and liquidity do not overcome the fundamentals in the end and paying off debt with an ever increasing mountain of more debt is a concept that historically has often proved to be a failure. I fear that Germany and France face more downgrades and the reality of Germany’s 160% debt to GDP ratio, my calculation, will begin to drive capital out of Germany as the actual numbers are appreciated and considered.
 
Sometime in October, if not sooner, rhetoric is going to be put aside and either another $50 billion is going to be handed to Greece or the charade will stop. The country cannot pay their debts under any scenario imagined and it is just a question if the game will go on a bit longer or not. Of one thing I am sure; it cannot go on indefinitely and when it finally does stop it will not be the “manageable” event that some European politicians contend. It is going to be one sloppy mess that will affect the ECB which will require re-capitalization, it will hit many banks in Germany and France and losses will have to be taken by the EU’s Stabilization funds if not the IMF. Everyone is campaigning for everyone else to take the losses of course and eventually someone will take them and the debts have been allowed to grow big enough so that the hits will not be insignificant. The tension is increasing in both Greece and Europe and the accusations have not been pretty and will get worse so that I think some tipping point will be found before year end. There is now too much strain for the great “Muddle” to continue much longer and as the economy in Greece continues its freefall and as the unemployment numbers spike into the Uganda latitudes; something is bound to crack. Remember that everything is fine up until the day it is not and then it is really, really unfine!
 
For those that think that the Fed will save the day, if not the planet, I suggest to you that you may be in for an unpleasant surprise. There is only so much they can do now and each Fed action is being met by a less and less reaction in the markets and of a shorter duration. The proposed ECB/ESM scheme will also not be that panacea thought by many in my opinion regardless of the hype broadcast out of Europe. The nations that need funding are clearly squared up with the nations that could fund and I remind each of you that those with the gold make the rules. Beggars may shout and scream and appeal to whomever and whatever might get them the money but it is not their decision to make in the end. For those that think America lives in some kind of off-the-world existence and will not be affected by all of this then I invite you back to the planet Earth. With equity volumes declining to five year lows and a range that is bound more by hopes and prayers than actual considerations of earnings or of our GDP I find if highly probable that we will break to the downside while Treasuries continue their march higher in price again as the fiscal dangers become more pronounced and appreciated.
 
For a kick in yield try the trups/hybrids of the British banks. The American bank and finance hybrids and trups have appreciated markedly in recent weeks while the British ones have lagged considerably. Here is a small space than can be taken advantage of now in my opinion.

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GetZeeGold's picture

 

 

You guys are crazy.....I heard everything was fine on CNBC just yesterday.

 

Precious's picture

One hopes at least the mask has been ripped off, and the process of corrective action by the people may begin.

hedgeless_horseman's picture

 

 

Just think about the news flow since I wrote this article 3 months ago...

"Realize that everything is likely to cost more next year, if you can get it, so better to buy it now."

Drought, shooting sprees, FB's IPO fail, PIIGS flail, blackouts, etc.

12 months of long-term, compact, food storage went from $4,500 to $5,200 a 15.5% increase in 90 days.  Transitory?

Are you going to just sit there, or do something?

 

boogerbently's picture

USA prints all the money the world needs in exchange for their gold.

Then we return to the gold standard.

We allow the price of gold to rise.

Badda Bing, Badda Boom

oogs66's picture

Cnbc is mostly bearish now too. Doom is the new norm

Unbezahlbar's picture

yes, "never been a better time...."...Larry said again, every week for the past four years straight.

strongband's picture

mind explaining what all this shows to an ignoramus such as myself, what's output/actual/diverg represent?

malikai's picture

Output is the model price. Actual is the actual price. Diverg is the difference between the two. A positive divergence indicates potential undervalue of the underlying instrument, while negative divergence indicates potential overvalue.

If you go to http://www.quantsig.net and click on "usage", it will explain a bit better. Also might be good to look at "applications".

strongband's picture

interesting - thanks. What is the model based on though?

Svendblaaskaeg's picture

Thanks much, now I feel less stupid

Headbanger's picture

Look at the landscape??   Algos don't need to look at no stinking landscape!

 

 

westboundnup's picture

I have the same feeling now as I did in the Fall of 2007, when everything appeared to be ok on the surface, but the housing market was sliding quickly downward.  The market continued to grind upward without reason.

Stud Duck's picture

Yea, me too. Sort of reminds me of an event in 1969, a Lt was asked about going up hill 861, he advised we all will probably get killed, he was almost right, most of them did!

govttrader's picture

so what your saying is...buy US Treasuries??  Ur a day late buddy!!!

http://govttrader.blogspot.com/

 

 

magpie's picture

Uncle Mario wants you to buy Piigs bonds instead

azzhatter's picture

We're good for it. Just buy

ZeroAvatar's picture

That's the same method ORI uses to spam HIS blog......type a few words, meaningful or not, then post the http.  Try to get near the top.

Meesohaawnee's picture

ok.. weve seen the url gov enough. we get the point. come up with a new thought.

mrktwtch2's picture

wining trade sell the november sp 1475 calls and but the november 1300 puts..and wait for the profits to role in i fwe keep edging higher put some more on each day..

LawsofPhysics's picture

Enough with the growth meme.  The only thing "growing" are stupid breeders.

You don't get something for nothing.  No abundant inexpensive energy, no fucking growth, deal with it.  Better still, think of it as a challenge and actually do something about it, interesting times indeed.

Offthebeach's picture

"...stupid breeder..." Buy Wal-Mart. It's a SNAP!

ElvisDog's picture

Enough with your negativity. I just read that I could win dinner with Barack AND THEY WILL PAY THE AIRFARE!!!!

famousamos's picture

I heard on the teevee that US Banks are hedged.

 

hazek's picture

I'd say he's spot on except for the very last sentence.

Getting Old Sucks's picture

"For those that think America lives in some kind of off-the-world existence and will not be affected by all of this then I invite you back to the planet Earth."

Welcome home, what time yesterday did you land?

ChacoFunFact's picture

people of earth...

there will be no economic recovery until the federal reserve's charter gets renewed for another 100 years. until then expect actual money supply to continue to decline.

JackT's picture

Up n' Down is fine until there are no more Ups.

youngman's picture

I bet when the Europeans are all away on vacation for the month of August....the cats and rats are playing bigtime.......and the Politicans when they come back all tanned and rested and ready to give more speeces......will find the cuboards bare...no cheese left at all...nada..nothing.....and then we will hear them scream...

Stud Duck's picture

That Repub political crap does not belong on this site, sorry man, most people on here are in the real world, not that la la land of the Repub or Dem party.

youngman's picture

I also am awaiting to hear what the CAT president has to say this nex quarter.....he is always positive about cHINA...i THINK HE JUST TOOK ONE IN THE CHIN TODAY WITH China....they have to have sales cancellations....IMHO...ad not just in China..other countries that were supplying China that were buying their equipment....exports and imports are dropping fast...shippers down...the world is slowing

bank guy in Brussels's picture

Regarding Mark Grant's suggestion of investing in 'bank and finance hybrids and trups'

For readers asking 'What is a trup?' - This from the Risk Glossary -

« Trust preferred securities (TruPS) are cumulative preferred stock issued by bank holding companies through a special purpose vehicle. For the issuing bank holding company, TruPS combine benefits of both debt and equity.

The special purpose vehicle is wholly owned by the bank holding company and is usually a trust. It sells the TruPS to investors and uses the proceeds to purchase a subordinated note from the bank holding company. This becomes its sole asset, and cash flows from the note largely mirror the dividends payable on the TruPS. The note has an initial maturity of at least 30 years. Dividends are paid quarterly or semi-annually. Dividends may be deferred for at least five years without creating an event of default or acceleration. »

A Special Purpose Vehicle ... from a bank ... where they can defer dividends for 5 years and pay you nothing without defaulting ... sounds great, uh-huh

http://www.riskglossary.com/link/TruPS.htm

LawsofPhysics's picture

Hey, it's a ponzi world.  Humanity just happens to be the largest one, and banks own it.

Peter Pan's picture

The world is foolishly trying to recapture the eonomic activity of yesteryear even though we now acknowledge that that paradigm was a debt fuelled orgy. A new paradigm is required and it will not be created by financial alchemists but by engineers, book keepers ( not acountants) and scientists who will deal with the situation as a logistical challenge that does not require paper shuffling but optimum resource usage instead.

The rest of us will have to realise that many of yesteyears toys and habits belong to our photo albums and memories. We may also have to rediscover the concepts of prioritization , values and simplicity.

We cannot return to yesterday and all the efforts aimed a doing so will only aggravate the current mess.

youngman's picture

Peter Pan..you nailed it...off to Neverland

eclectic syncretist's picture

It isn't likely to go down that easy.  There is too much bad debt in the system that is not being permitted to be cleared out.  The economic malaise/depression will continue so long as these bad debts are sustained rather than eliminated.  Maybe they'll let the big banks go and then exhume them under different names.

What is money but an illusion anyway?  A federal reserve note is nothing but a receipt of debt against nothing.  A fraud against the Constitution, mankind, and everything good about humanity.  In the minds of TPTB the greatest danger is that people will become aware of the fraud our system encapsulates and nurtures, and that danger is rising.

BeetleBailey's picture

Watched the CBS Evening "News" last night. Endured it, is a better term. They laughingly reported that housing is making a rebound.

ANYONE who gets their news from the MSM - whether local, regional or national is a fucking lame brain.

Getting Old Sucks's picture

I saw that too.  Nothing more than a Toll Bros. commercial.

BeetleBailey's picture

I agree Getting Old....I was waiting for a Toll Brothers commerical at the end of the segment.

But, that was the commerical.

My God; MSM sucks dead donkey dicks.

Offthebeach's picture

Everybody seems to be buying to flip a house. They want junk, fake work done. Like, can't youjust spackle those fist holes and thin down spray the whole mold ridden rooms for $500. Can you do it for less? That's the browken sashes too, right? You'll 'throw' those in.

Muppets are desperate for return so they want to buy the dump with the people piss floors, the open cooking/heat fires in the living room and turn it to Muppet palace.

I'm getting calls from walk out basement into rental cellar dweller space. Even bulkhead only cellars. People are desparate to get some return. Lots of people renting out rooms now, or moving back home.

I call Bernanke housing booomlet on muppets empty pocket quicksand.

WillyGroper's picture

Perhaps ANYONE who believes the MSM would be aptly described.

Totentänzerlied's picture

I was thumbing through Newsweek, noticed an op-ed, "Go on, act like Gatsby this summer. But real aristocrats had a code." Absolutely marvelous, I know how worried I was that it wasn't ok for me to be a brainless conspicuous consumer this summer.

And then there was a full article on how Timmy Geithner has been unfairly portrayed by the media, he won the crisis, you know!

Oh, and a 10 page ad section for various colleges including West Point, but I thought liberals were anti-war???

acetinker's picture

Y'all go ahead and laugh at me, but I'm gonna tell you what our "problem" is.  When God created this realm, It put a small percentage of Its own energy into it.  A percentage of that went into humanity.  Well, the population has grown considerably since then, hasn't it?

There's only so much God available, and it is spread very thinly amongst an ever-growing population.  If you're on this board, you should be grateful because you got more than your fair share of God particles.

You may think this is wierd, but for me, this theory explains everything.

 

Peter Pan's picture

There's only so much God available? Let me assure you there is more than enough God available. The problem however is not whether God is available to us but whether WE are available to Him and His will.

It is not God or the resources of this earth that have failed us, but it is we and our evil and wasteful ways that have clogged the system that have failed and will continue to fail.

ZeroAvatar's picture

I downvoted you because you're a fucking brainwashed idiot  (sheeple). 'His Will'.  Puhleeeeze.  The creator of the universe sent his 'son' (human, no less)

to this lonely planet in a lonely star system on the edge of a lonely galaxy to 'save me from my sins'?  Need more cowbell.

Peter Pan's picture

I didn't agree with the person to who I was responding but I did not down vote him/her, nor did I have to resort to calling him a "fucking brainwashed idiot".

We can debate but we do not have to denigrate.