Today may be the final snorefest before tomorrow Uncle Ben Chairsatan disappoints everyone (sending the market even higher on hopes and prayers he is really saving the super-duper nitrous turbo bazooka for the Sept 13 FOMC meeting) with nothing actionable coming through the J-Hole teleprompter, but that doesn't mean the day has to be boring. Luckily, Goldman has made sure of just that with a report on the surprising higher than expected rise in German unemployment, which coupled with yesterday's higher than expected inflation in Deutschland (they didn't build that inflation, someone else did it for them) is certain to get all ze Germans in a very bailouty moody. However, this being Goldman: the bank that runs the ECB, the Fed, the BOC, and soon, if all goes according to plan, the BOE, the base coverage is enough to make one's head spin. To wit: 'Unemployment edges higher, but employment continues to rise." In other words, add both German employment and unemployment to that other list of items that just goes up come hell or high water, such as stocks, bonds, VIX, crude, gold, blood pressure, coffee consumption, and so forth. Why, one may ask? Simple - "the new central-planned normal." Which of course is the same as the old central-planned normal from circa 1954 Stalingrad.
It's been a while since the ridiculous "China bails out Europe" rumor made the scene: in fact, the last time we can find with definitive confirmation was back in September of 2011, just before the bottom fell out of Europe, and when the FT, based on "anonymous sources" tripped over itself to report that "[insert European country] is in talks with China to buy bonds, assets." Sure enough, now that Merkel came, and saw, but hardly conquered Beijing, it is the turn of China's Wen Jiabao to add his 10 pips to the EURUSD rumormill: Reuters reports: "China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months." Naturally, considering how often this rumor (re)appeared in the past it will be excusable if nobody but the dumbest vacuum tubes fall for it this time, especially considering that the Chinese economy itself is going down in flames faster than the October Iron Ore contract. And lest there be any confusion, China's commitment is about as definitive as a Best Buy LBO "preunderwritten" with a Jefferies highly confident letter: "China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," [Wen] said after meeting Merkel." Ah, conditional aid. The kind that gets Mario Monti to break out the petulant ex-Goldman child act and refuse to leave the Belgian catered dining room until the beggees succumb to his technocratic platitudes. Needless to say, we'll believe China's "continued" investment in Europe when we see it.
If you haven't heard yet, the United States of America just hit $16 trillion in debt yesterday. On a gross, nominal basis, this makes the US, by far, the greatest debtor in the history of the world. It took the United States government over 200 years to accumulate its first trillion dollars of debt. It took only 286 days to accumulate the most recent trillion dollars of debt. 200 years vs. 286 days. This portends two key points:
- Anyone who thinks that inflation doesn't exist is a complete idiot;
- To say that the trend is unsustainable is a massive understatement.
This is banana republic stuff, plain and simple... and smart, thinking people ought to be planning on capital controls, wage and price controls, pension confiscation, and selective default. Because the next trillion will be here before you know it.
The Kangaroo In The Metals Mine: Fortescue Trying To Raise $1.5 Billion From 20 Banks As Iron Prices ImplodeSubmitted by Tyler Durden on 08/30/2012 04:19 -0400
While last week's surprise announcement that GM was desperately seeking up to $5 billion in additional cash through a new revolver (meaning the administration's pride and bailed out joy, Government Motors, is once again burning far too much cash and that channel stuffing only pays in porn movies) took precisely nobody by surprise (at least not anyone who has been following our 2 year long series tracking AOL GM's dealer inventory warehousing habits), a far more sinister cash need has developed a very short time ago in a continent far, far away. Because while we have also noted the collapse in steel inventories and iron ore prices , which have recently imploded to 3 years lows as the Chinese hard landing, no longer maskable or avoidable, is finally sending shock waves around the world, as well as what these mean for a world that is sliding into a deep recession, promises by various impotent central bankers notwithstanding (see here, here and here), so far this wholesale collapse in the iron market had not translated into discrete events at the corporate level. Until now that is, because that second derivative of the "Chinese economic miracle", Australian hyper-levered iron ore miner, Fortescue, which is the fourth largest in the world, and is also the kangaroo in the iron ore mine for not only China, but Australia as well (and with a cornucopia of junk bonds in its balance sheet, a massively levered one at that) just telegraphed to the world that it is in desperate need of cash. According to Bloomberg, Fortescue Metals Group has approached about 20 banks as it markets a $1.5 billion loan in syndication, according to three people familiar with the matter.
The market over the summer has been quieter than we had expected - thanks to Draghi's threats placating-words and Bernanke's promises. Equities rallied, Bunds and Treasuries sold off, and government spreads in Europe declined. All these markets look more constructive. However, the event calendar in the near future is very heavy, notably the political one. This article from UBS' global strategy group does three things. First, they provide a list of events until the end of the year. Second, the relative importance of the various events are ranked; and finally, they provide, where needed, a comment on what to expect. We still believe three topics will drive markets: (1) the ongoing European sovereign crisis, where we see some progress (albeit slow) as Draghi has pushed forward his agenda and found some support from politicians; (2) the political issues in the US, although the main change is the more dovish Fed; and (3) world growth, which has been disappointing and is a major risk to monitor.
With an almost perfect six-year lag, the S&P 500 appears to be following the same path as it did into the Subprime crisis from the Feb 2003 lows - almost too accurately. The analog is stunning 'optically' and even more concerning from a behavioral perspective. By this time in 2006, we had seen the US Home Construction Index drop 40%, Subprime lenders going bankrupt left and right, Magnetar Capital had started to create CDOs with the express intent of failing, and Nouriel Roubini had just given his IMF presentation on the forthcoming US housing bust and major recession. Despite all of this, which in hindsight was extremely worrisome, the S&P 500 managed to gain 200 more 'the Fed has our back'-points before cognitive dissonance finally gave in to the reality that the 'music had stopped' - first out wins, and large crowds and small doors don't mix. With the current market rising on ever-decreasing volumes (in futures and stocks - so it's not about the high-price equities), divergence between the new highs in equity indices and falling 'net new highs' in NYSE stocks, and near-peak post-crisis level of complacency in options prices, it seems risk and reward are at best skewed neutral, and at worst flashing red warning signals.
Feel like every day Europe is juggling hot potatoes? You are not alone. As the following graphic summary from Citi's Matt King (whose insight into Europe, liquidity conduits, shadow banking and a comprehensive picture of modern financial "innovation" has rapidly become second to none) shows, the hot potatoes are getting hotter by the minute, and are flying ever faster and higher. But the kicker: King has the best punchline on Europe we have yet encountered: "Losses are unquantifiable" Q.E.D.
The outcome of the next round of monetary policy will be similar to those in recent history mentioned in this paper... "Perceived inflation will go through the roof. We’re talking about near 0% interest rates around the developed world (near-term rates in Germany hit 0% in the auction at the end of May and are expected to go negative). Oh yeah, and massive inflation. I think gold will have no trouble hitting $3,000/oz in the medium-term and I see copper tripling over the next decade. This is, of course, until we hit the next bubble sometime around 2018 and start over again. The trend remains: since the stock market crash of 1987, through the dotcom bubble, and into the real-estate & stock market bubbles of 2007, each euphoric high and ensuing crash have been more extreme than the last. These extremes are fueled by the easing that is meant to cure us. The policy that we are facing within the coming months/years will, as the trend dictates, trump them all, and so inevitably will its hangover."
Following the dismal failure of Draghi's OpEd this morning (which we assume was a reprint of his much-anticipated - and now cancelled - speech from J-Hole) to jawbone anything but a very brief pop in EURUSD, we thought it useful to aggregate all the great-and-good deeds the ECB elder is considering (and why). Europe remains in a long-term deleveraging phase (as much of the developed world finds itself). This lack-of-demand for credit has crushed the so-called 'money-multiplier in Europe, just as it did in the US (which we discussed in detail here as worse than the Depression); as banks have simply stockpiled the vast sums of LTRO/ECB-collateralized funds. This has left him feeling less than his normal omnipotent self and so he is forced to act even more extremely (or talk about acting that way). The following matrix from Morgan Stanley outlines his policy options under various scenarios as we note few (aside from a rate cut) are actionable in the short-term, and even fewer are likely to make any difference to this long-term deleveraging-cycle
With a $3.8 trillion yearly budget, the US Government is the most powerful entity in the world. This simple infographic shows how the money was spent.
A couple of weeks ago we wrote about how the Portuguese citizenry was being forced to sell its gold in order to eat. It seems that the Italians have now joined this illustrious club. What do you expect when you allow Goldman Sachs to impose technocrat dictator Mario “Three Card” Monti as your political leader?
The pawnbrokers, ...can hardly keep up with business. They normally have the gold quickly melted down and sent abroad, making it one of Italy’s fastest growing exports. Official gold sales to Switzerland leaped 65 per cent last year to 120 tonnes, up from 73 tonnes in 2010 and 64 tonnes in 2009.
That’s not just gold being exported, that is wealth being exported. China says thanks. At least you protected your bankster class from taking a hit on their bond portfolios.
Recent market trends such as equity and debt strength, the periphery outperforming the core, Europe outperforming the US, banks outperforming non-financials, and unsecured credit outperforming secured all seem predicated on the belief that there will be a funding plan for Spain and Italy. The ECB's gradual draining of assets from the market combined with hopes of more liquidity (something we are already not short of) has created a problem of 'excess demand' but, as Citi's Matt King notes, this 'scarcity factor' has suspended normal market relationships. The question is, across a variety of scenarios, which recent market trends are more vulnerable than others.