As the following two charts show, despite the rest of the world being mired in an entirely lackadaisical muddle-through (in terms of both manufacturing and non-manufacturing PMIs), the US is representing itself as the new growth engine with an expanding and rising economy (if the 'recovery-is-right-around-the-corner' data is to be believed). Of course, we are hearing the term 'decoupling' and 'cleanest dirty shirt' once again (begging the question Rick Santelli has asked numerous times "so why not remove the Fed's training wheels") but we remind, there is never a decoupling in the highly interconnected global economy (and its stagnant trade volumes). Our simple question is, with all this dramatic divergence from the rest of the world, stagnant income growth, and anemic manufacturing job growth at best, how will the consumer-driven US sustain its exuberance?
Confidence leads to spending; spending strengthens the economy; and economic strength buttresses confidence. It’s a circular, self-fulfilling prophesy. Confidence can also fuel market movements. Belief that the price of an asset will rise causes people to buy the asset... making its price rise. This is another way in which confidence is self-fulfilling. But, of course, as Oak Tree Capital's Howard Marks points out, the confidence that underlies economic gains and price increases only has an impact as long as it exists. Once it dies, its effect turns out to be far from permanent. As the economist Herb Stein said, "If something cannot go on forever, it will stop." This is certainly true for confidence and its influence. As far as confidence today, Marks notes significant uncertainty is one of the outstanding characteristics of today’s investing environment. It discourages optimism regarding the future and limits investors’ certainty that the future is knowable and controllable. In other words, it saps confidence. This is a major difference from conditions in the pre-crisis years. In fact, Marks warns he doesn't remember when his list of 'uncertainties' was this long...
In honor of those who inform...
Another month, another launch of monthly bond issuance by the US Treasury which today sold its first salvo of $32 billion in 3 Year debt at a yield of 0.631%. This yield was better than the When Issued 0.638% indicating demand for the short-end of the curve is crept back after two consecutive auctions in which yields were consistently higher. However, the previously noted decline in Bid to Covers is persisting and as can be seen on the chart below appears to have peaked in the summer of 2012 and is all downhill from there. This auction's BTC of 3.214 was lower than July's 3.350 and well below the TTM average of 3.484. The internals were more impressive, however, with Directs allotted 14% of the auction and Dealers taking down 44.7% (with 3 Years no longer special in repo there was no Primary Dealer scramble to procure collateral). This meant Indirects ended up with 41.4% of the auction: this was the highest allocation to "foreigners" since the debt ceiling crisis or August 2011.
There has been much discussion about fund flows into domestic mutual funds in the past few weeks for one simple reason: there have been inflows into domestic mutual funds (as tracked by ICI). For some reason, pundits correlate this inflow with the move higher in stocks. What remains unsaid is why there was little to no discussion of fund flows into domestic stock funds for about 90% of the time in the past three years. The reason is just as simple: there were no inflows, as can be seen on the chart below. There were, however, other "exogenous" events during this time: such as QE2, LTRO 1 + 2, Draghi's whatever it takes language and Operation Twist of course, and then QE3 which will likely continue indefinitely and be replace by QE4 the second it is fully "tapered." So what is relevant: inflows (or, gasp, outflows) or whatever central banks do? You decide.
What the US wants in Egypt is what it failed to attain in Iraq - stability of the kind that assumes US control over the situation. In Iraq’s case, this meant control over one of the world’s biggest oil resources. In Egypt’s case it means a smooth ride for American foreign investment, a wide reach over one of the busiest shipping zones in the world and an assurance of peace with Israel. But now Washington finds itself in a tricky position. It needs to make sure that any new Egypt is friendly with Israel, but it also needs to make sure that it caters to Saudi Arabia’s vision of a new Egypt. So far, so good--minus the stability factor.
Mainstream media is blaming the weakness in gold on the fact that a "slew of positive data" from the EU 'proves' there is no crisis. However, if that data is so positive - and proclaimed so by EU's Ollie Rehn, then why did European stocks drop the most in a month. JPY strength continues to a six-week high against the USD and testing recent highs against the EUR as we posit that equity (and credit) weakness is much more about Tapering on the US deficit than any other fundamental reason. Of course, EU bonds managed small gains (illiquidity is extreme this week) even as EU stocks dropped almost across the board.
I fully expect that tens of thousands of young Americans will be visiting Yemen in the near future.
In January, the Pew Charitable Trusts published a study showing that 61 U.S. cities have an aggregate pension funding gap of $99 billion and an additional shortfall of $118 billion for retiree health benefits. These figures were widely cited by the media in the aftermath of Detroit’s bankruptcy filing. They refer to fiscal year 2009, which was the latest year with a full data set. Unfortunately, Pew’s analysis is ridiculously optimistic.
In April, according to JOLTS, there were 108K job additions. According to the NFP data, the job gain was 199K or 84% more than per JOLTS
In May, according to JOLTS, there were 109K jobs additions. According to the NFP data, the job gain was 176K or 62% more than per JOLTS
In June, according to JOLTS, there were 120K jobs additions. According to the NFP data, the job gain was 188K or 57% more than per JOLTS
Adding across for all of 2013, JOLTS would have us know that only 837K jobs were added (or 140K per month average). Compare this to the 1,185K new jobs according to the Establishment Survey (198K per month average).
-> A 42% difference!
With the better-than-expected trade deficit confirming Taper is closer and IBM (following Credit Suisse downgrade) weighing on the Dow (knocking 32 points off), US equity markets are struggling this morning. Treasuries are leaking higher in yield and gold, silver, and oil are all sliding quckly post the data this morning. Perhaps most interesting is the deja vu underperformance of the high-yield credit and Japanese stock markets recently as JPY carry unwinds (a la Taper tantrum) re-emerge (and US equities - as they did the last time - are the last to get the joke).
Better to engineer a mini-crisis while you're still in control than let a crisis you can't control run away from you. One of the most widespread misconceptions about the Federal Reserve is that its policies are based solely on economic data and models. This misconception is not accidental but the result of carefully managed public relations: The Fed fosters a public image of dispassionate experts working econometric magic that mere mortals (i.e. non-PhDs in Economics) cannot possibly understand. The reality is the Fed is as much a political and PR machine as it is a financial institution.
Embassy evacuations are so last week. In an apparent escalation of the threat level to some unspecified color, earlier today the U.S. Air Force flew some American personnel out of Sanaa, Yemen, the Pentagon said, as the United States told its citizens to leave the country and ordered the evacuation of non-essential government staff "because of a terror threat." Reuters quotes Pentagon spokesman George Little who said in a statement that "in response to a request from the U.S. State Department, early this morning the U.S. Air Force transported personnel out of Sanaa, Yemen, as part of a reduction in emergency personnel." He did not specify which types of personnel were involved or where they were taken. "The U.S. Department of Defense continues to have personnel on the ground in Yemen to support the U.S. State Department and monitor the security situation," the statement said.
With Italy's sovereign bond yields hovering at 3 year lows, one could be forgiven for falling for the constant stream of gibberish from EU leaders that the worst is over. However, aside from the 'promised' OMT foot on the wind-pipe of non-domestic bond vigilantes (fighting an inexorable demand from self-referential banks and pension funds bidding for BTPs), the situation remains bad at best and in terms of debt-to-GDP, the worst since 1925 when Mussoilini was proclaimed fascist dictator. With Letta and his allies forming the 64th cabinet since WWII (and 27th since 1980) his lifespan seems limited to change anything and with Italy accounting for 16.5% of the EU's GDP (and forecast to contract 1.9% next year) - the current real GDP is smaller now than in 2001. Attempts to revive growth are about to be thrown into tumult once again as Berlusconi's party threatens mass resignation. As we noted last night, do not be fooled by the apparent tranquility in Europe.