Sentiment surveys are sending the all-clear; the US Consumer (that 72% of all economic activity in the US) is as happy as they were five years ago (pre-crash) and American Idol is due to start again soon. However, recency-biased surveys apart, the reality in the data is far more dismal. The Philly Fed's ADS business conditions index is back at its worst since the crisis and decidedly recessionary (critical since it tracks many of the same indicators as the recession-confirming NBER). Even more concerning, as Bloomberg Briefs notes, the stagnancy of real disposable income and contraction of revolving credit has led to a disaster-prone drop in industrial production of consumer goods (-0.9% in October) and a significant slide in the all-important retail sales data. Once adjusted for inflation, retail sales fell to a lowly 1.7% YoY gain and while Sandy's effect is tough to discern, it seems anecdotally to be a net positive due to home supply stores sales - offering little real hope of a surge. Of course with Black Friday, Cyber Monday, and Terrific Tuesday (we made that up) around the corner, we are sure the media will trot out as many CEOs and store-owners to explain how great things are - we will wait for the data.
In what is becoming a monthly parabolic charting tradition, it is again time to update the Spanish bad loan total: in September, Spanish loans that fell into arrears increased by €3.5 billion from August, reaching €182.2 billion in September. This is 10.71% of the total Spanish bank loans of €1.7 trillion, and an increase from 10.5% in the prior month. At the same time, new bank loans expanded 0.2% in September and dropped 4.9% from a year ago, the Bank of Spain said. Deposits rose 1.4% from the previous month and declined 7.3% from a year earlier. Putting the bad loan number in context, it is nearly double the €100 billion that the Spanish banks will receive as part of the bank bailout plan disclosed in July, and well above the "only" €40 billion that Spain promises it will need to actually fund bank capital shortfalls. Putting it into further context, as a percentage of GDP, it would be the equivalent of $2.8 trillion in US loans going bad. Naturally, just like with any "forecast" involving Greece, the final bailout (of both Spain's banks, and the sovereign) will be orders of magnitude higher, but for now everyone is forgiven to stick their head in the sand for at least a few more days/weeks.
The phrase "Constructive Discussions" will have us all pulling our hair out within a few weeks. Markets will be rock and rolled by anything anyone says about the Fiscal Cliff. The received European news-flow, (ie the stuff the Euro Elites want to you read and believe), says. progress on Greek Compromise and close to a solution on Tuesday with Schaeuble confident of "closing the funding gap". All of which means Greece is essentially solved - well for a while longer. As long as no one asks any difficult questions about debt sustainability and unlikely targets, haircuts for the ECB, or how the economy is doing, the Greece will be just fine and dandy. Unfortunately some folk haven't been reading the script - Lagarde has woken up to the fact she heads an "international" organisation and says a solution must be based on reality, solid and sustainable. Asmussen says a new programme will be needed, and the EU Energy Commissioner (?) says debt restructuring for the "official sector" will happen and therefore real losses are unavoidable. er.. who let him opine?
The yellow metal soared 4.9% in euros in one week from the 11 week low set November 2nd and has since fallen 1.3%. The rebound from the November dip means prices should recover to reach the all-time euro high set last month, before rising to the point-and-figure target at 1,395 euros, said the bank’s research. Point and figure charts estimate trends in prices without showing time. Gold may then reach a Fibonacci level of about 1,421, the 61.8% extension of the May-to-October rally, projected from the November low, Commerzbank wrote in its report on November 13th which was picked up by Bloomberg. Fibonacci analysis is based on the theory that prices climb or drop by certain percentages after reaching a high or low. “What we are seeing is a correction lower, nothing more,” Axel Rudolph, a technical analyst at Commerzbank in London, said by e-mail Nov. 16, referring to the drop since November 9th. Rudolph remains bullish as long as prices hold above the November low at about 1,303 euros. Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
With Thanksgiving this Thursday, trading desks will be empty on Wednesday afternoon and remain so until next Monday. So even though it is a holiday shortened week, here are the main things to expect in the next 5 days: Bank of Japan meeting, the European Council meeting and the Eurogroup meeting. Key data releases include European and Chinese Flash PMIs.
- Israel Ready to Invade Gaza If Cease-Fire Efforts Fail (Bloomberg)
- Petraeus: A Phony Hero for a Phony War (NYT)
- IMF'S Lagarde says Greek deal should be "rooted in reality" (Reuters) "rooted" or "roofied"? And where was it until now?
- ECB's Asmussen says Greece to need aid beyond 2014 (AP)
- EU makes budget plans without (FT)
- Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
- Shanghai Composite Dips Below, Regains 2,000 Level (Bloomberg)
- Bond investor takes big punt on Ireland (FT)
- Noda defends BoJ’s independence (FT) Indewhatnow?
- Inaba Says BOJ Could Ease More If Government Reins in Debt (Bloomberg) Actually it's the other way around
- Miles Says Bank of England Can Do More If U.K. Slump Persists (Bloomberg) So much for the end of QE
- US tax breaks worth $150bn face axe (FT)
Those looking for fundamental newsflow and/or facts to justify the latest bout of overnight risk exuberance will not find it. To be sure, among the few economic indicators reported overnight in the Thanksgiving shortened week, European construction output for September tumbled -1.4% from August, after rising 0.6% previously. How long until Europe copycats the latest US foreclosure sequestration, "demand pull" gimmick and gives hedge funds risk free loans to buy up housing (aka REO-to-Rent)? More importantly, and confirming that Spain is far, far from a positive inflection point, Spanish bad loans rose to a new record high of 10.7%. This was the the highest level since the records began in 1962. The total value of these loans was €182.2 billion ($233 billion) in September, according to the Bank of Spain (more on this shortly). The relentless rise indicates that the Spanish bad bank rescue fund will be woefully insufficient and will need to be raised again and again. So while there was nothing in the facts to make investors happy, traders looked to hope and prayer, instead pushing risk higher on the much overplayed Friday "news" that politicians are willing to compromise in the cliff (which as we reported was merely a market ramping publicity stunt by Nancy Pelosi et al), and that Greece may be saved at tomorrow's Eurogroup meeting, for the third time. That this will be difficult is an understatement, with the Dutch finance minister saying no final decisions on Greece should be expected, and his German counterpart adding that a Greek debt writeoff is "inconceivable." In other words, even hoping for hope is a stretch, but the market is doing it nonetheless.
After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. ‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. We think they should go for option one but we fear they will go for option two. In this environment, how can people protect themselves and their property? Our three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver. We are, in our assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. Whenever paper money dies, eternal money – gold and silver – stage a comeback. Remember, paper money is always a political tool, gold is market money and apolitical.
The world is awash with liquidity and yet, despite (or perhaps because of) this, the greatest potential impacts lie from downside risks. The combination of macro growth risks, major economy elections (2013 looks busy), and the plethora of central bank policy meetings over the next year (heavy December) leave a path ahead of forlorn hope - or exuberant anticipation - for many. Summary below...
In a prior post, we discussed the implications of the global shadow banking system having risen to the unprecedented level of roughly 100% of global GDP. By now it should be quite obvious to even the most jaded optimists, that the reason why traditional leverage conduits are no longer applicable (and the only real source of bank credit creation is the Fed via the hopeless blocked up excess reserve pathway), and why credit money (and hence in a Keynesian world "growth") has to come via deposit-free, unregulated "shadow" venues, is that there are no longer enough good money good assets for conventional secured credit creation, and viable levered projected cash flows for conventional unsecured credit creation. Yet not the entire world has gone all in on this gambit, which together with the Fed's money printing, is truly the last bastion of "money' creation. In fact, as the FRB demonstrated, there are three distinct paradigms when it comes to source of credit creation or as it puts it, "financial structure": the US "massive shadow banking system" way, the German "conventional bank deposits funds loan creation" way, and the Saudi Arabian, and soon everyone else, "central planning to the max" way. In a nutshell, these are the three credit system structure extremes, with everything else currently inbetween. These can be visualized as follows:
Together, the market and democracy are what we like to call "the system." The system has driven and enticed bankers and politicians to get the world into trouble. One of the side effects of the crisis is that all ideological shells have been incinerated. Truths about the rationality of markets and the symbiosis of market and democracy have gone up in flames. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? At first glance the world is stuck in a debt crisis; but, in fact, it is in the midst of a massive transformation process, a deep-seated change to our critical and debt-ridden system, which is suited to making us poor and destroying our prosperity, social security and democracy, and in the midst of an upheaval taking place behind the backs of those in charge. A great bet is underway, a poker game with stakes in the trillions, between those who are buying time with central bank money and believe that they can continue as before, and the others, who are afraid of the biggest credit bubble in history and are searching for ways out of capitalism based on borrowed money.
Earlier today, the Financial Stability Board (FSB), one of the few transnational financial "supervisors" which is about as relevant in the grand scheme of things as the BIS, whose Basel III capitalization requirements will never be adopted for the simple reason that banks can not afford, now or ever, to delever and dispose of assets to the degree required for them to regain "stability" (nearly $4 trillion in Europe alone as we explained months ago), issued a report on Shadow Banking. The report is about 3 years late (Zero Hedge has been following this topic since 2010), and is largely meaningless, coming to the same conclusion as all other historical regulatory observations into shadow banking have done in the recent past, namely that it is too big, too unwieldy, and too risky, but that little if anything can be done about it. Specifically, the FSB finds that the size of the US shadow banking system is estimated to amount to $23 trillion (higher than our internal estimate of about $15 trillion due to the inclusion of various equity-linked products such as ETFs, which hardly fit the narrow definition of a "bank" with its three compulsory transformation vectors), is the largest in the world, followed by the Euro area with a $22 trillion shadow bank system (or 111% of total Euro GDP in 2011, down from 128% at its peak in 2007), and the UK in third, with $9 trillion. Combined total shadow banking, not to be confused with derivatives, which at least from a theoretical level can be said to offset each other (good luck with that when there is even one counterparty failure), is now $67 trillion, $6 trillion higher than previously thought, and virtually the same as global GDP of $70 trillion at the end of 2011.
Back in the 1960s, a clever but financially disadvantaged fellow placed a small ad in a national magazine that read something like: Money needed. Please send $1 to the address below. Do it today! No specific need was given, and nothing was promised in return, so that fraud could not later be charged. Yet within a few months, thousands of dollars arrived in his mailbox, a considerable sum in those days. Or so the urban legend goes. A half-century later, many things have changed, but one thing remains unchanged: People still need money, and they have not ceased to innovate ways in which to get it. Clearly there are a lot of new and imaginative ways of moving money around that vie for our attention. Many of them would be considered crowdfunding. Crowdfunding, if thought of merely as the pooling of resources for a common cause, is as old as human groupings. But that isn't the way it's thought of nowadays. The current king of the hill, Kickstarter, launched in April of 2009, has been a great success. So, is crowdfunding the future capital source for every new venture under the sun? Well, probably not... although we can't say for sure, because it does sometimes seem that way as new and imaginative ways of moving money around vie for our attention.
In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard. It should be underscored that it worked pretty darned well. Under this standard, the United States produced more wealth at a faster pace than any other country before, or since. In Part II we focus on the Post-1913 (Fed to Nixon) era and the fact that - for many reasons, politicians felt that a quasi-government agency could make better credit decisions than the market. This regime was unstable, as economists such as Jacques Rueff and Robert Triffin realized. Since then, it has become obvious that without the anchor of gold, the monetary system is un-tethered, unbounded, and unhinged. Capital is being destroyed at an exponentially accelerating rate, and this can be seen by exponentially rising debt that can never be repaid, a falling interest rate, and numerous other phenomena.