From time to time it is necessary to quietly sit down and assess where we are going. Sovereign revenues cannot, by any stretch of the imagination, support the imbedded costs of countries. Investors of the world are in another reality altogether. They do not want to hear anything about these sorts of things. They are in the state of, "ignore and deplore." You can live there for a while. Government induced fantasies have occupied the center stage before and for some time. Our current denial of reality is fueled by all of the money that the central banks have pumped into the world but that will be diminishing as the Fed and others examine the longer term consequences of their actions. There are always consequences. What has been put off will arrive. It was always just a matter of time.
The first of three Fed speeches is out, and as expected, it contains nothing new save for the ongoing barage of stock market battering for daring to sell on last week's Bernanke warnings that the Fed's monthly flow is set to begin tapering in September. It continues to be as if the Fed is shocked to learn that nothing else matters in this "economy" and, of course, "market" than what the Fed will do and say.
- Fashionable 'Risk Parity' Funds Hit Hard (WSJ)
- No 1997 Asian Crisis Return as China Trembles (BBG)
- Greece Faces Collapse of Second Key Privatization (FT)
- China Bad-Loan Alarm Sounded by Record Bank Spread Jump (BBG)
- Iranian official signals no scaling back in nuclear activity (Reuters)
- Asmussen Says Any QE Discussions at ECB Not Policy Relevant (BBG)
- Flat Japanese consumer prices aid Kuroda (FT)
- Vietnam Devalues Dong for First Time Since ’11 to Boost Reserves (BBG)
- World Bank Sees ‘Vulnerable’ Food System on Climate Change (BBG)
- Fed big-hitters seek to quash QE fears (FT)
- EU Leaders Set to Slow Support for Ailing Banks (BBG)
So much for the great underdog renaissance. Most people will hardly be surprised to learn that in a world in which economic conditions are deteriorating faster and faster for the vast majority of the population, that what little disposable cash flow consumers have is not being spent on a product that was "cool" and "faddy" in 2003, namely the Blackberry. And if there was any confusion the just released Q1 results will confirm this:
- Q1 revenue $3.07 billion, expected $3.37 billion
- Q1 adjusted loss per share -$0.13, exp. +$0.08 with the company blaming the miss on Venezuela's currency devaluation. No really.
- Q1 shipments were 6.8 million, on expectations of 7.45 million. Supposedly the firm formerly known as RIM couldn't blame this on Venezuela.
Nope. Like we said nobody can be surprised by these results. Nobody expect, of course, for the sellside penguin brigade whose trading desks are axed to sell:
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
Nearly a year after revelations of financial fraud involving the Vatican Bank, and months after a German lawyer was picked to become the new head of the bank that is collateralized by the full faith and credit of Catholicism, the scandal is back following news tha a cleric, a spook and a banker were arrested as part of the ongoing Italian investigation into the troubled bank.
Deja Deja Deja Deja Deja Vu... Gold (and silver) are legging lower once again as China's markets open. Spot gold just hit $1180 (down 2.5% from post-US-close highs). Given the state of the short-term funding markets in China, it seems possible that banks are liquidating any- and every-thing to realize cash (copper is also suffering modestly here at the open).
In the aftermath of the record cash crunch in the Chinese interbank market, many financial institutions in China and abroad have been hoping that the PBOC would either end its stance of aloof detachment or at least break its vow of silence and if not act then at a minimum promise good times ahead. Alas, despite repeated confusion in various press reports that it has done that, it hasn't aside from the occasional "behind the scenes" bank bailout. And at today's Lujiazui Financial Forum, PBOC governor Zhou Xiaochuan kept the status quo saying the central bank will adjust liquidity "at the proper time to ensure market stability." That time, however, is not now.
"O’BRIEN: It is a total clusterfuck . . . . They have to move half a billion dollars out of BONY to pay me back . . . . Tell me how much money is coming in and I will make sure it gets posted. But if you don’t tell me, then tomorrow morning I am going to have a seg problem . . . . I need the money back from the broker-dealer I already gave them. I can’t afford a seg problem."
Gold and Silver appear to be in the process of finding a bottom; however, the price action could continue to be choppy in the coming weeks. Ultimately Citi's FX Technicals group, as the following charts suggest, expect both precious metals to move much higher in the long term with the potential for Silver to be the outperformer, as was the case from 2008 to 2011.
The opiate of investors has been central bank liquidity. The degree of stimulus has been unprecedented. But, as BofAML notes, never was so much invested, by so many, on the view that the Fed would stay "behind the curve". It seems - based on gold, credit, bonds, and EM - that no longer can be guaranteed (despite the ongoing anti-Taper jawboning by every Fed head and mouth-piece). It is clear that liquidity withdrawal will not be painless and will sustain higher volatility and BofAML sees two big risks this summer - a market event and/or a macro event.
With stocks experiencing their best 3-day run in six months, Goldman Sachs is quick to prepare the "use the recent downdraft to build toward their strategic allocation to equities" meme. In 16 pages of bright-and-breezy charts and commentary, Goldman interprets the Fed's (dovish) commentary, explains the dovish implications to buy stocks and risky debt, and throws cold-water on the fears of China. It appears we have nothing to fear but fear itself (oh, and a global marketplace experiencing near-crisis-level volatility and deleveraging) because it's all Goldilocks from here - as good is great, bad is good, and no news is absolutely bullish. Contrast this bonds bad, stocks good perspective with Jeff Gundlach's dismissal of the great rotation meme earlier.
The wheels have come off the endless growth via expanding debt machine. Rising interest rates are the final blow to this agenda, and the political and financial classes have no Plan B. They are floundering, clueless, bereft of historical context, creativity and courage. Their failure of imagination is total, complete and catastrophic.
One of the main reasons the entire debt-fueled house of cards propping the western financial system, hasn't collapsed in a smouldering heap so far - a development that has stumped all those who think of the Reinhart-Rogoff sovereign debt matrix as one dimensinal with only debt/GDP as the key variable and completely ignoring the interest rate (manipulated or not) - is that the cash interest payment on the global mountain of debt has been rather tame, courtesy of all developed world central banks going all in with serial, or increasingly more, parallel monetization of debt. However, while the US Treasury has the benefit of the Federal Reserve (and its Primary Dealer tentacles) as a backstopped buyer of all the debt that's fit to print, individual Americans are not as lucky. And as America's massively overindebted student body may be about to find out, there is no surer way to burst a debt bubble than to send its rates soaring. Because unless Congress pulls off a miracle in the next 24 hours and passes legislation that delays an inevitable doubling of rates on the most popular Federal (subsidized) Stafford loans, the interest is set to double from 3.4% to 6.8%.
As excess reserves in Europe continue to fall, prompting some to claim this is positive since banks are "no longer hoarding cash," the reality of a dramatically deleveraging European financial system is far worse. As Goldman notes, lending to Non-Financial Corporations (NFCs) fell by a significant EUR17.2bn month-on-month (seasonally adjusted) in May (with a stunning 19.9% drop in Spain). Perhaps more worrisome, while NFCs have been seeing lower lending, households have been 'steady' for much of the last year - until now. Bank lending to households fell by EUR7.5bn in May. This marks the first material decline since July 2012. Simply put, the European economy (ad hoc economic data items aside) is mired in a grand deleveraging and since credit equals growth - and the ECB somewhat scuppered by a German election looming likely to hold down any free money handouts (and the fact that they cling to the OMT promise reality that is clearly not doing anything for the real economy) - with lending collapsing, growth is set to plunge further. As we noted previously, there is a simple mnemonic for the Keynesian world: credit creation = growth. More importantly, no credit creation = no growth. And that, in a nutshell is the entire problem with Europe.