Consumer Confidence

When Ben Bernanke launched QE 2 in 2010 he outlined a third mandate for the Federal Reserve - the boosting of consumer confidence. He stated that the goal of QE 2 was to boost asset prices in order to spur consumer confidence through the "wealth effect" which should translate into economic growth. In 2010 he was right, and QE 2 not only boosted asset prices sharply, but kept the economy from slipping into a recessionary spat. As Friday's speech from the economic summit in "Jackson Hole" draws near - Bernanke should be taking a clue from today's release of consumer confidence in considering his next move. 

With inflation expectations soaring and jobs plentiful relative to hard-to-get falling slightly, Consumer Confidence plunged its most in 10 months to a level not seen since November of last year. It seems that despite all the hopes and prayers priced into US equity market valuations, the US Consumer remains unimpressed, unhappy, and unemployed. Of course, the 'good is bad, bad is better' market has interpreted this as a clear QE-on flag (for this millisecond anyway).

• Ringing endorsement: Lithuania to Adopt Euro When Europe Is Ready, Kubilius Says (Bloomberg)
• Credit Agricole net plunges 67% on losses in Greece and a writedown of its stake in Intesa Sanpaolo SpA (Bloomberg)
• Europe finally starting to smell the coffee: ECB Urging Weaker Basel Liquidity Rule on Crisis Concerns (Bloomberg)
• Japan Cuts Economic Assessment (Reuters)
• France’s Leclerc Stores to Sell Fuel at Cost, Chairman Says (Bloomberg)
• China Eyes Ways to Broaden Yuan’s Use (WSJ)
• Berlin and Paris forge union over crisis (FT)
• Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion (Bloomberg)
• Republicans showcase Romney as storm clouds convention (Reuters)
• ECB official seeks to ease bond fears (FT)
• German at European Central Bank at Odds With Country’s Policy Makers (NYT)

Weidmann rejected suggestions that he was isolated on the ECB Governing Council in having such reservations. "I hardly believe that I am the only one to get a stomach ache over this," he said. Alexander Dobrindt, a senior German politician who has been the Executive Secretary of the Christian Social Union of Bavaria since 2009, was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe". A conservative ally of Merkel, Dobrindt echoed Bundesbank’s Weidmann that Greece should leave the currency bloc by next year. The comments show the huge divisions in Germany over the debt crisis now in its 3rd year and the understandable concerns of inflation and even hyperinflation. The Bundebank and senior politicians and allies of Merkel may thwart Mario Draghi’s big plans to do “whatever it takes” to solve Europe’s financial collapse. One way or another, the euro is certain to fall in value in the long term.

As Jevons alludes to — and especially in a world where most of us live in an irrigated industrial society — it would seem that there are many other significant factors in determining both long and short term variations in food price — technology shocks, wars, energy shocks, social changes. Food prices are a complex and multi-dimensional equation with a lot of variables. But the impressive thing is that even in a modern agriculturally mechanised and industrialised economy there remains a discernable underlying association between food prices and the solar cycle.

The thoughts of the FOMC from a mere three weeks ago - before a 30bps rise in 10Y yields (40bps in 30Y), 5% rise in the NASDAQ, 8.5% rise in AAPL, and 85bps compression in Spanish bond spreads - are out. It appears little has changed in their muddle-through, always at-the-ready, wish-it-were-better view of the world. Via Bloomberg,

• *FOMC PARTICIPANTS SAW ECONOMY DECELERATING AFTER JUNE MEETING
• *MANY FOMC PARTICIPANTS SAID MANUFACTURING WAS SLOW OR FALLING
• *FOMC PARTICIPANTS DISCUSSED QE, EXTENDING 2014 FORECAST ON RATE
• *FED STAFF SAID MARKETS HAVE LARGE CAPACITY TO HANDLE MORE QE
• *MANY FOMC PARTICIPANTS SAW NEW QE AS BOLSTERING U.S. RECOVERY
• *MANY ON FOMC FAVORED EASING SOON IF NO SUSTAINED GROWTH PICKUP

Translation: "Many on FOMC want the S&P at all time highs without actually doing any QE, ever, because that will mean the Fed is officially out of bullets"

This month marks the 50th anniversary of Thomas Kuhn’s The Structure of Scientific Revolutions, one of the landmark philosophical texts of the last century.  The central thesis of the book is that science advances in fits and starts, clustered around the advent of new 'Paradigms' - a term that Kuhn introduced in the book and much of academia subsequently coopted as their own.  This was a novel thought for the times, since the conventional philosophy held that science advanced through the ages in plodding but rigorous steps.  Kuhn’s observation about science is equally applicable to capital markets, for the range of 'Paradigm shifts' underway goes a long way to explaining everything from why companies refuse to invest to why earnings multiples on U.S. stocks remain so low.  Today, in celebration of Kuhn's opus, ConvergEx's Nick Colas offers up a list of the 'Top 10 Paradigm Shifts' currently underway; and notes that new paradigms don't often have as much to them as the old ideas they replace.  They are often actually inferior.  Over time they get their bearings, yes.  But the transition is rough.

Markets taking any negative news as additional must-have accelerators of a bail-out.

Time being of the essence.

But what if things just drag on? 

University of Michigan Consumer Confidence came modestly higher than expected and limped higher off the lowest levels of the year. However, aside from this apparently positive event (accoding to some media pundits), there are two worrying things shifting rapidly. Consumer outlook for the economy (as opposed to current conditions) dropped to their lowest of the year with the largest 3-month drop in 11 months (so much for hope?); and inflation expectations soared by the most in 17 months.

Just when you thought it was safe to get back in the water of shark-infested algos; just as we hit multi-year equity index highs (with the entire interest rate complex devastatingly divergent still - despite very-recent weakness), we thought it might be at least a little instructive to remember what happened in the late 1970s as analog. These 3 simple charts of Consumer Confidence, Capacity Utilization, and Initial Jobless Claims show just what can happen when you think it's all over. While there are many 'goal-seeked' analogs, we find these extremely timely given the somewhat similar underlying conditions that the world faces; to wit, Citi notes: "A Middle East 'tinderbox' that is very susceptible to a food price shock and a likely cause of an Oil price shock (as we saw in 1973-1974 and again in 1978-1979)."

Last week was a scratch in terms of events, if not in terms of multiple expansion, as 2012 forward EPS continued contraction even as the market continued rising and is on the verge of taking out 2012 highs - surely an immediate catalyst for the New QE it is pricing in. This week promises to be just as boring with few events on the global docket as Europe continues to bask in mid-August vacation, and prepare for the September event crunch. Via DB, In Europe, apart from GDP tomorrow we will also get inflation data from the UK, Spain and France as well as the German ZEW survey. Greece will also auction EU3.125bn in 12-week T-bills to help repay a EU3.2bn bond due 20 August held by the ECB. Elsewhere will get Spanish trade balance and euroland inflation data on Thursday, German PPI and the Euroland trade balance on Friday. In the US we will get PPI, retail sales and business inventories tomorrow. On Wednesday we get US CPI, industrial production, NY Fed manufacturing, and the NAHB  housing index. Building permits/Housing starts and Philly Fed survey are the highlights for Thursday before the preliminary UofM consumer sentiment survey on Friday.

• Regulators irate at NY action against Standard Chartered (Reuters)
• Recession Generation Opts To Rent Not Buy Houses To Cars (Bloomberg)
• Egypt launches air strikes on militants in Sinai (Reuters)
• Loan-Shark Lending Surge Feared In Japan (Bloomberg)
• US seeks $3bn for Sudan oil deal (FT)
• Home Prices Climb as Supply Dwindles (WSJ)... not really- just money laundering in the form of ultra luxury home purchases soars
• A lifeline is thrown to the periphery - Smaghi (FT)
• Standard and Who? Greece Credit-Rating Outlook Lowered by S&P as Economy Weakens (Bloomberg)
• BOE Cuts Growth Forecast, Sees Inflation Below Goal in Two Years (Bloomberg)
• S&P Takes CreditWatch Actions On Four Spanish Banks (Reuters)
• Japan Gets Reprieve as Drop in Oil Eases Trade Impact (Bloomberg)

Rosy econ data + low valuations in markets + cure to European debt crisis, Abercromie & Fitch, Aeropostale, etc. a screaming buy?

• U.S. nuclear bomb facility shut after security breach (Reuters)
• EU Commission Welcomes Greek Reform Pledge, Wants Implementation (Reuters) -> less talkee, more tickee
• China Cuts Stock Trading Costs to Lift Confidence (China Daily) as France hikes transactions costs
• Holding Fire—for Now—but Laying Plans (WSJ)
• ECB-Politicians’ Anti-Crisis Bargain Starts to Emerge (Bloomberg)
• Dollar falls back as non-farm payrolls loom (FT)
• Ethics Plan to Raise Consumer Confidence (China Daily)
• Brazil backslides on protecting the Amazon (Reuters) - fair weather progressive idealism?
• Japan Foreign-Bond Debate May Boost BOJ Stimulus Odds (Bloomberg)
• Japan’s Lower House Passes Bill to Let Workers Stay on to 65 (Bloomberg)