In a little under seven minutes, the world of CNBC provided something for everyone in this epic confuse-a-rama between Rick Santelli, Steve Liesman, and Brian Sullivan. The president's jab at 'trickle-down' economics (with an eye to Bernanke's recent asset-wealth-inflation efforts) was the premise for the discussion but it went to an 11 on the Spinal Tap amplifier of self-deception and circular logic. The question is initially well-posed and subsequently addressed by Santelli who describes the broken pipeline from the Fed to the bank's reserves that is not allowing trickle-down of Bernanke's largesse. Liesman argues that the lowering of rates helps borrowers (all the middle-class apparently) as they pay lower costs on their debt (seemingly ignoring the fact that Santelli just said the 'flow ain't happening' - and the fact that retail-to-wholesale mortgage spreads are at record highs). This is then followed by Sullivan with his insightful quip that the inflationary by-product of Bernanke is higher costs of food/energy which buffers the benefits of lower interest costs... and that is where Liesman goes into full-propaganda mode...
We, like Morgan Stanley's Greg Peters, are skeptical of the Fed's apparent belief that wealth effects can support a struggling recovery. Recent gains are small versus the wealth lost in recent years. More importantly, wealth only matters when it lowers saving. It seems that weak income growth through the recovery has depressed saving – stopped saving rising to fully reflect wealth destruction – which implies wealth increases now will not trigger a typical growth-boosting drop in saving. With poor fundamentals seemingly trumping central bank policy - as macro data and bellwether stock warnings highlight the downside risks of complacency. But, the housing recovery, we hear you cry? Not this time - given weak income growth; and as far as feeling wealthy, the 'right' savings rate to achieve that dream remains well beyond most in anything but the absolute riskiest assets - and implicitly lowers consumption.
The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested. While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery. This is particularly troublesome when looking at a large portion of the population rapidly heading towards retirement whom will become net drawers versus net contributors to the economic system. The important point for investors, who have a limited amount of time to plan and save for retirement, is that "hope" and "getting back to even" are not successful investment strategies.
There was a time when student loans, now almost entirely funded by the US government, and thus a general obligation of all US taxpayers who however have no recourse to ever collect on any collateral, were spent on such trivial things as, well, higher education. Sadly, it appears that that is increasingly no longer the case. To wit: "feds accuse Newport man of using school loans on drugs, motorcyles, games and tattoos." At least no iPhone 3, 3S, 4, 4S or 5 was purchased using private and taxpayer cash.... in this case.
The world and their mum will be overjoyed all is fixed again in Spain and Apple can be bought safely as today's ramp-a-palooza in risk-assets indicates. However, the 100-pip run in EURUSD which 'correlated-ly' ramped everything did more damage than good in the long-run as Oil prices surged off their 'see QEternity inflation is only transitory' way. WTI topped $92 (up over 3% off yesterday's lows) as Gold and Silver surged on the day to end up around 0.25% on the week (in the face of a 0.25% strengthening in the USD on the week). JPY strength and moreover EUR's push dragged the USD 0.5% lower from yesterday's peak and provided just the lift to get the S&P back to Monday's lows, filled a gap in AAPL's chart and lifted the financials ETF briefly back up to unch from pre-FOMC. Volume and trade size was large as we ramped and drifted once we topped - which smells a lot like pros selling into a stop-run-driven strength. Equities pulled back into the close (even as VIX limped back under 15% down almost 2 vols today) catching down to risk-asset's slightly less ebullient perspective.
"Hoover-esque. Spain's has unemployment near 25% and yet the govt is proposing tax increases and a raiding of social security funds in an effort to rein-in its budget deficit. (The deficit was 4.77% for the first 8 months.) The rub is whether Spain will be able to cut enough to obtain EU support (probably) and whether there will be an eventual haircut for current debtholders (probably). Catalonia, Valencia and other regions will probably need $20B of aid, the sen. debtholders of the weak banks will be forced to take losses, and there might be some sharing of losses among all banks. An estimated decline in GDP of 1.7% (per the Economy Ministry), the IIF's recent estimate of addl bank loan losses up to EUR260B, and depositor flight hurt. From 2008 to 2011, Spain's debt jumped from EUR436B to EUR735B while its GDP declined from EUR1.09T to EUR1.07T."
With EURUSD now 100pips higher, equities holding gains, and Monti confirming to the world that his Spanish friends have made considerable moves here, we leave it up to BNP to point out the sad reality of what we have just been sold. The 2013 budget does indeed focus on spending cuts (worth potnetially 0.75% of GDP next year) which is providing a headline of epic austerity, but the use of the social-security fund to buy time, the overly optimistic growth forecasts for 2013, and the lack of detail on structural reform was disappointing (or should have been to anyone who actually listened). It seems Spain has effectively agreed the terms for financial aid, without agreeing the terms of financial aid and while their hope is that the leftovers from the banking bailout fund will ease some pain; it seems the regional angst (Catalonia for example) and the fact that, as we noted a month ago, Spain only has enough cash to see it through to October, leaving them likely to need EUR30-50bn minimum asap.
In a fiery article written today, Telegraph's Ambrose Evans-Pritchard unleashes a scathing critique of Europe's AAA club for daring to demand that Spain actually follow through with what they have been pretending to be doing, namely cutting spending and promoting improved government tax collections. We now know that Spain did neither, with spending increasing while tax revenues dropped from last year (and as we will not tire of pointing out, if the government has lost sight of the ball, and the economy is collapsing, it is not due to a cut in spending but due to its own inability to govern - something the people in a democratic regime usually are quite capable of fixing on their own). But complying with agreements in a broke Europe is not part of the New Normal. His summation, phrase briefly is as follows: "We discover – yet again, you might say – that Germany, Holland, and Finland will not stand behind their solemn pledge of solidarity when push comes to shove. Spain’s premier Mariano Rajoy has been betrayed. Nobody should be entirely surprised if he and the Spanish arch-nationalists in his circle offer a condign riposte, and bring down the entire temple on the heads of the creditor powers." Of course, none of that is true, and what Germany, Holland and Finland are doing is doing their best to get dragged into the money pit that the rest of their insolvent socialist neighbors can so efficiently dug in the last several years. What the article really is, is simply Ambrose's contrition for misreading the balance of power in Europe. Like so many others, he was all too eager to swallow the misdirection narrative that as a result of Mario Monti's stubborn gambit at the June 27th Euro-summit, the balance of power had finally shifted from the exporting, rich and quite solvent nations, to their liquidity and bailout addicted neighbors, something we claimed all along was a major mistake.
Last summer, two researchers from the New England Complex Systems Institute published a short paper examining the correlation between rising food prices and civil unrest. It was a timely analysis, to say the least. A number of food riots were occurring throughout the world, not to mention waves of revolution sparked by the high cost of food. This is nothing new; throughout history whenever people have struggled to put food on the table for their families, social unrest has been a common consequence. If food prices continue to rise, agriculture will be one of the best investments of the decade. Even if all the world's food challenges are magically solved, it's hard to imagine being worse off for having your own food supply.
Presented with little comment as the populist media mogul steps back into the European political landscape with these little beauties:
- *BERLUSCONI SAYS EURO A `SCAM' WITHOUT CENTRAL BANK BACKING IT
- *BERLUSCONI SAYS GERMANY LEAVING EURO WOULDN'T BE A TRAGEDY
- *BERLUSCONI: BAILOUT CONDITIONS WOULD LEAD ECONOMY TO COLLAPSE
- *BERLUSCONI SAYS ITALY RISKS HEADING TOWARD 'ENDLESS CRISIS'
It appears he has a new plan then - Allow Germany to leave; and let the rest of the broke insolvent European countries print themselves to socialist utopia. Vote Bunga...
A massive 13% collapse in durable goods, the biggest since January 2009; a $20 billion miss to annualized Q2 GDP estimates, and well below the lowest estimate, 60+ weeks of constant upward BLS revisions to initial claims "data" and not to mention assorted atrocious economic (note: not to be confused with market - the two are now completely unlinked) data from around the globe. And what does the White House say: the data shows that the "US is making progress." We sure wouldn't want to know what it would look like if after 3 episodes of easing, trillions injected into the economy via the Fed, and of course $6 trillion in extra debt the US was not making progress. Oh and yes, everything else is Bush's fault.
As the words were spewing from the mouths of Saenz, Montoro, and Guindos - with little to no substance at all, so EURUSD started to push higher - in a hurry. In today's quiet market, the correlated-monkeys took over and US equities - thanks to weakness in the USD - and Gold and Oil spurted higher. AAPL - as the high beta proxy for all things market - surged 2% (we assume as the Spaniards will need to buy more AAPL stock to fund the shortfalls in their pension funds). The bottom-line is we have fallen for a few days and so a bounce is not unlikely but the timing and size smells very fishy and the front-running of quarter-end front-running wind-dressing front-runners remains a quagmire of circular logic to us. The bottom-line is that the media can now say the words "the market seemed to 'like' what Spain was saying - is the bottom in?" despite there being no news at all.
The Fed can create money but if it doesn't end up as household income it is "dead money." In the consensus view, the Federal Reserve's unlimited quantitative easing (QE3) programs will do two things: 1) boost stocks and other "risk on" assets and 2) generate inflation. The two follow-on effects are related, of course; gold and other hard assets are rising in anticipation of higher inflation. But all is not quite as it seems when it comes to the inflationary effect of creating money. Add all this up and here's what we get: money is not just being created by the Fed, it's being destroyed by declines in asset valuations and writedowns of impaired debt. Money velocity is plummeting and banks are hoarding Treasuries as much-needed collateral. As for the "wealth effect," it only affects the 5% who own enough equities to make a difference. That narrows the whole "wealth effect" to 7 million people out of 142 million workers.
Today's prime-time event is about to begin. In a few moments (pending further delays) Mariano Rajoy will begin listing the terms of his 2013 Austerity Budget which is expected to delineate the cuts, and further austerity measures (which so far have been non-existent - recall that Y/Y Spain has seen its tax revenues slide by nearly 5% while spending has increased by almost 9%) which will be a precursor to the Spanish bailout, that Spain has less and less time to enact before it runs out of cash. This could possibly lead to further violent outbursts among the throw of protesters which has once again surrounded parliament, as happened on Tuesday, depending on the resolve of the protesters.
Lots of headlines but little action. Germany will not be pleased:
- SAENZ SAYS SPAIN PLANS 43 NEW LAWS TO BOLSTER ECONOMY
- SAENZ SAYS REFORM PLAN IS TO MEET PLEDGES TO EU PARTNERS
- SPANISH BUDGET BASED ON UNCHANGED ECONOMIC FORECASTS, SEES GDP DOWN 0.5%
In other words everything will be massively wrong for the country with the epic bank run. And the one the people have been waiting for:
- SPAIN TO TAP €3 BILLION FROM SOCIAL SECURITY RESERVES IN ORDER TO FUND LIQUIDITY NEEDS.
Incidentally this is the same fund which has 9 months of pension reserves and is invested in... drumroll... Spanish Bonds! And cue to the riotcam.