Heading into the EU Summit at the end of June, talks about potential debt mutualization proposals to deal with the eurozone debt crisis had gained momentum. Ultimately, as Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations. While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).
One look at the chart and the question that immediately comes to mind is, why? Well, John Aziz's intuition says one thing — the change in trajectory correlates very precisely with the end of the Bretton Woods system. Our intuition says that that event was a seismic shift for wages, for gold, for oil, for trade. The data seems to support that — the end of the Bretton Woods system correlates beautifully to a rise in income inequality, a downward shift in total factor productivity, a huge upward swing in credit creation, the beginning of financialisation, the beginning of a new stage in globalisation, and a myriad of other things. But while oil production recovered and prices fell, wages continued to stagnate. This suggests very strongly that the long-term issue was not an oil shock, but the fundamental change in the nature of the global trade system and the nature of money that took place in 1971 when Richard Nixon ended Bretton Woods.
"Two weeks after a summit that promised to bring solutions to the European financial crisis, the European Union has once again revealed its fundamental contradictions" is how Stratfor's Adrian Bosoni introduces a succinct clip on the reality the European leaders faced once they arrived home after that strenuous weekend of blithering. Between Asmussen and Schaeuble who have steadfastly stuck to the no-monetary-transfer-without-sovereign-transfer tack - which actually make a fair amount of sense on a long-term basis - a robust and unified budgetary regime is precisely what Europe has lacked. Unfortunately, Bosoni notes, "even in a best case scenario this could not be achieved before 2015" thanks to treaties, referenda, and ratifications. In a little over 3 minutes, the analyst outlines exactly what is holding it back and why the short-term is all they have as budgetary discipline is proving particularly difficult for the EU members to maintain (see more Spanish riots tonight). Between Spain's delays in meeting targets, Greece's 'impossible' budgetary goals, Ireland's demands for concessions, and Finland's collateral agreement with Spain, unifying anything over there seems impractical and impossible.
UPDATE: In case you were wondering, IBM's magnicently efficient market behavior today provided 53.6 points for the Dow - which ended the day up only 34.6 points - phew!!
We are sure someone smarter than us can come up with a story and narrative to explain what is going on here. We just sit back and enjoy the beauty of a sentient SkyNet picking off every single stop trade possible.
The subject of revolution is a touchy one. It’s not a word that should be thrown around lightly, and when it is uttered at all, it elicits a chaotic jumble of opinions and debates from know-it-alls the world over. The “R” word has been persona non grata for quite some time in America, and until recently, was met with jeers and knee-jerk belligerence. However, let’s face it; today, the idea is not so far fetched. We have a global banking system that is feeding like a tapeworm in the stagnant guts of our economy. We suffer an election system so fraudulent BOTH sides of the political spectrum now represent a hyper-rich minority while the rest of us are simply expected to play along and enjoy the illusion of choice. We have a judicial body that has gone out of its way to whittle down our civil liberties and to marginalize our Constitution as some kind of “outdated relic”. We have an executive branch that issues special orders like monarchical edicts every month, each new order even more invasive and oppressive than the last. And, we have an establishment system that now believes it has the right to surveil the citizenry en masse and on the slightest whim without any consideration for 4th Amendment protections. Unless tomorrow brings a miraculous shift in current totalitarian trends, revolution may be all we have left...
With Corn hitting its highs again, we are reminded that global food production has been hitting constraints as rising populations and changing diets hit against flattening productivity, water and fertility constraints, and the likely early effects of climate change. As was described in the recent all-encompassing theory of global-collapse, there is general agreement that one of the contributing factors to the rolling revolutions beginning at the end of 2010 was increasing food prices eating into already strained incomes. It is unclear how much impact easing has had on food prices this time, weather has very much made its presence felt (as we noted here). From one omnipotent force (central bankers) to another (hand of god), the fear is that more broadly, food is likely to be a more persistent problem than oil supply. This is because we require almost continual replenishment of food to stay alive and avoid severe social and behavioral stress - food is the most inelastic part of consumption. This says nothing of the pernicious inflationary impact that will likely quell the kind of free-flowing printing so many hope to see from China et al.
Is it us? Today felt very nervous. The equal narrowest range in S&P 500 e-mini futures (ES) in over 3 months along with dismally low volume and even worse average trade size as we peaked over July 5th's swing high and fell back. Aside from the farcical trading in the big Dow supporting stocks that we just noted, most asset classes traded along with stocks - in a very narrow range. The big movers were oil - up over $92 - on Israel-Iran tensions (among other things) and the major financials - which in general have retraced all of their post-EU Summit euphoria now (with MS breaking down 6% today). EURUSD did its by no standard dip and rip through the US open to EU close and ended the day unchanged. Treasuries limped a little higher in yield (~1-2bps). VIX plummeted to 15.45% (zero premium to realized vol), down 0.75vols - its lowest close in over 3 months - but this was not enough to provide any more juice for stocks which meandered, ending fractionally higher. Gold and Silver slithered sideways - with a very modest upward bias as Copper was helplessly led a little higher by Oil's exuberance and a slight limp lower in the USD on the day as the AUD extends its gain to 2% on the week against the greenback. We can't help but reflect on this chart as we see a retest on low volume and low average trade size following the very same path as last year. For now, complacency rules.
Market-top economics could be an entire university course, if people cared enough about such phenomena. Most only consider the signs of a market top months or years after a crash when some unyielding economics researcher puts the pieces together. As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is. In a previous article we provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities. With today's 5.4% slip in existing home-sales, let's go with the latter.
The world's largest hedge fund is not as sanguine about the hope that remains in the markets today. The firm's founder, Ray Dalio, who has written extensively on the good, bad, and ugly of deleveragings, sounds a rather concerned note in his latest quarterly letter to investors as the "developed world remains mired in the deleveraging phase of the long-term debt cycle" and has spread to the emerging world "through diminished capital flows which have weakened their growth rates and undermined asset prices". Between China, Europe, and the US, which he discusses in detail, he sees the lack of global private sector credit creation leaving the world's economies highly reliant on government support through monetary and fiscal stimulation. The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country's decline tends to reinforce another's, making a self-reinforcing global decline more likely and a reversal more difficult to produce. After discounting a relatively imminent return to normalcy in early 2011, markets are now pricing in a meaningful deleveraging for an extended period of time, including negative real earnings growth, negative real yields, high defaults and sustained lower levels of commodity prices. Lastly he believes the common-wisdom - that the Germans and the ECB will save the day - is misplaced.
For investors, the continued increases in profitability, at the expense of wages, is very finite. It is revenue that matters in the long term - without subsequent increases at the top line; bottom line profitability is severely at risk. The stock market is not cheap, especially in an environment where interest rates are artificially suppressed and earnings are inflated due to "accounting magic." This increases the risk of a significant market correction particularly with a market driven by "hopes" of further central bank interventions. This reeks of a risky environment, which can remain irrational longer than expected, that will eventually revert when expectations and reality collide.
As we warned yesterday, the curse of the inverse correlation between CNBC appearances and investment performance has struck once again. The rumor is true as everyone's favorite knife-catching, Buffett-following, leveraged beta fund manager Whitney Tilson has split from his 'colleague' Glenn Tongue who has gone off to run his own 'unencumbered' fund. As the full letter below (h/t DealBreaker) explains, he couldn't be more optimistic about T2's future (so this is a good thing then?) and have no fear since he sees 'a target rich environment' as he has already picked up some 'low hanging fruit'. We wait with bated breath for the next letter...
Most of you that are taking the time to read this have already experienced some level of "waking up" over the past several years or longer. Most of you have also probably felt from time to time that the knowledge you possess is a burden and have fully appreciated the meaning of "ignorance is bliss." We know this because we have felt these very same emotions at times. The most important thing to remember; however, is that we are just awake individuals within a wave or cycle of awakening. There were those that came before us and there will be many, many more to come after us. Most importantly, once you are truly awakened you never go back to sleep.
Hidden under the covers of this morning's already dismal headline print in the Philly Fed data was a considerably worse than expected employment sub-index. Historically this has correlated highly with the non-farm payroll print and suggests (albeit correlation is not causation but gathering real evidence of a slowdown is) that we are heading for a negative print in the next employment report.
In the U.S. economy, the driplines are debt-based spending and leverage. Thanks to endless intervention and manipulation, the economy is now totally dependent on massive debt-based spending and increased leverage for its "growth." The person or business that becomes dependent on welfare loses resiliency and resourcefulness. To the degree that economies become dependent on debt and leverage just like individuals and companies become dependent on welfare, entire economies lose their resilience and resourcefulness. A healthy forest offers another apt analogy. A healthy temperate-region forest depends on occasional forest fires to clear out deadwood and refertilize the depleted soil with ashes. In suppressing all fires--what we might call "stress" and feedback-- management virtually guaranteed that when the forest was eventually set ablaze by a random lightning strike, the resulting fire would be catastrophic because the deadwood had been allowed to pile far higher than Nature would have allowed. The "managers" of the economy have let a couple hundred billion dollars in bad debt burn, and they think the $15 trillion economy is now restored to health. Writing off a couple hundred billion is like letting a few acres of grassland around the parking lot burn and reckoning you've cleared the entire forest of deadwood. The buildup of deadwood--fraud, impaired debt, leverage, bogus accounting, malinvestments, promises that cannot possibly be met and the multiple pathologies of crony capitalism--continues apace, untouched by Federal Reserve intervention. Masking risk and suppressing feedback do not restore resiliency or vitality; they cripple the system's ability to respond to reality.