Recession

Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.

Market focus tends to be almost solely on Chinese and Indian demand but demand is broad based throughout increasingly important Asian gold markets. Demand for gold remains robust in most Asian countries where consumers are buying gold as a store of wealth due to concerns about their local paper currency.  This phenomenon is happening throughout Asia including in Malaysia, Indonesia, Thailand and Vietnam and other large Asian countries (see news below regarding demand for gold by investors in Thailand).   AFP have a very interesting article on Vietnamese ‘gold fever’ which recounts how  “stashing gold at home rather than having cash in the bank is a generations-old habit in communist Vietnam”. And old habits are dying hard even if an ounce of gold bullion can now cost up to US $100 more in Hanoi than anywhere else in the world due to government meddling in the gold market. AFP quote 60-year-old retiree Truong Van Hue “I still like to keep my savings in gold. It's safe for retired people like me. I can sell the gold any time, anywhere, when I need cash,” he told AFP. Although the treasure has long been perceived as a safe haven, the recent gold rush has alarmed Vietnam's government, which is faced with an 18 percent inflation rate and an unstable national currency, the dong.

• Greek Parliament Backs Austerity as Rioters Burn Buildings (Bloomberg)
• China CIC Wary of EU Government Bond Investments (Reuters)
• Spain Unions Decry New Labor Rules (WSJ)
• China Tells Banks to Roll Over Loans (FT)
• We're Not Greece: Italian Prime Minister Monti (CNBC)
• Bernanke’s Labor Pessimism at Odds With U.S. Growth (Bloomberg)
• Obama Budget Seeks Funding for Trade Unit (Bloomberg)
• Obama's Election-Year Budget to Target Rich (Reuters)
• China May Need to Fine-Tune Policy This Quarter, Wen Says (Bloomberg)
• China’s Xi Seeks Second Front for U.S. Ties in Return to Iowa (Bloomberg)
• Why Greece and Portugal Ought to go Bankrupt (FT)

Tonight's protest in Athens has all the makings of the vintage ones from May of 2010, and the nigh is still young. Here are some updates:

• FTW: Public order minister resigns in Greece as fires burn - BBC
  
• Rioting spreads across central Athens, at least 5 buildings set ablaze - AP 
• 2:02PM EST: FIRES ARE BURNING SEVERAL SMALL BUSINESSES AROUND ATHENS AS PROTESTERS CLASH WITH POLICE NEAR GREEK PARLIAMENT
• 1:52 PM EST: POLICE ARE CLEARING PROTESTERS FROM OUT IN FRONT OF GREEK PARLIAMENT BUILDING
• 1:50 PM EST: ATMS ARE REPORTEDLY EMPTY AROUND ATHENS... STILL UNCONFIRMED WORKING TO CONFIRM THIS 
• 1:48 PM EST: LARGE FIRES ARE REPORTED AROUND ATHENS... INCLUDING A BRANCH OF EUROBANK AND STARBUCKS
• Skai TV reports that police have run out of tear gas & have asked for more supplies to be brought

As a reminder, the final vote is not until midnight.

With major trade partners battered by recession, the latest trade data seem to give credence to a China hard-landing crash scenario by some forecasters.

S&P just downgraded 34 of the 37 Italian banks it covers. Below is the full statement. And so get get one second closer to midnight for Europe's AIG equivalent: A&G. As for S&P, this is the funniest bit: "We classify the Italian government as "supportive" toward its banking sector. We recognize the government's record of providing support to the banking system in times of stress." Even rating agencies now have to rely on sovereign risk transfer as the only upside case to their reports. Oh, and who just went balls to the wall Italian stocks? Why the oldest (no pun intended) contrarian indicator in the book - none other than permawrong Notorious (Barton) B.I.G.G.S.

You know times are hard when you can't even give your distressed assets away!!!

The cost of oil has declined sharply from mid-2008, yet consumption has tanked from 54.8 MGD in July 2008 to 42.4 MGD in July 2011. That's a hefty 21% decline. What other plausible explanation is there for the decline from 42.4 MGD in July 2011 to 30.9 MGD in November 2011 other than a dramatic decline in discretionary driving? That 27% drop in a few months in unprecedented, except in times of war or sharp economic contraction, i.e. recession. If we stipulate that vehicles and fuel consumption are essential proxies for the U.S. economy, then we can expect a steep decline in economic activity to register in other metrics within the next few months. Such a sharp drop would of course be "unexpected" given the positive employment data of the past few months. But as the data above shows, employment isn't tightly correlated to gasoline consumption: gasoline consumption reflects recession and growth. In other words, look out below.

As Brent and WTI prices ebb and flow from local and global fundamentals and risk premia, Morgan Stanley notes that to be bullish from here, one would need to believe a supply disruption is coming. Considering conflict with Iran, sustained Middle East tensions, and the potential for sustained supply disruption their flowchart of price expectations notes that prices follow inventories and that as price rises, fundamentals will weaken (as without an OPEC production cut, inventories would balloon by 2Q12) and therefore to maintain current prices across the curve, supply risk premia must continue to grow. They raise their estimate for 2012 average Brent price to $105/bbl from $100/bbl which leaves them bearish given the forward curve priced around $115/bbl, as their base case adjusts to a belief that Middle East tensions persist but a conflict with Iran does not occur as they address QE3 expectations and EM inflation/hard landing concerns.

Remember last year when the tiniest snowfall was reason for everyone and their grandmother to miss every possible estimate, always blaming it on the weather? Or rainfall in the spring? Or warm weather during the summer? Oddly enough one never hears about the opposite: the beneficial, and one-time, impact to trendline due to countertrend weather, such as the fact that we just had April weather in January. Granted, nobody in the programmed MSM will touch this topic, which is why we go to the most trustworthy filter of real economic data - David Rosenberg. "...Be careful in assessing the seasonally adjusted data when January weather feels like April. It was four to five degrees warmer than usual and the third fewest snowflakes to hit the ground in the past 50 years. On top of that, let's not lose sight of what real GDP did in Q4 — considerably below consensus view from last summer and sub-1% at an annual rate once inventories are stripped out. The only variable preventing real GDP from stagnating completely was the fact the price deflator collapsed to just 0.4% at an annual rate. If it had averaged to what it was in the previous three quarters, real GDP growth would have come in close to a 0.7% annual rate. Strip out the inventory build-up and real sales would have contracted at a 1.3% annual rate and recession would be dripping off everybody's tongue right now."

Here comes the (re)crash and the search for shortable stock is on! The good thing about bankruptcy is that despite silly manilly market, bankrupt is bankrupt and the stock will act accordingly. Ask GGP/LEH investors.

As rumors of the imminent iPad3 (and FoxConn hacking) spread across the web and a general sense of cult-like euphoria washes away the reality of a considerably weaker earnings picture (and outlook) than even downgraded expectations had prepared for, we present two charts, via JPMorgan, of just how grossly distorted the picture of US economic health (implicitly via US corporate earnings) has become, thanks to Apple. While ignoring Apple as a provider of 'wealth' is akin to Monty Python's "What Have The Romans Ever Done For Us?" comment, we worry that so much 'expectations' burden should fall on the shoulders of a company that relies on constant 'successful' innovation and constant low cost wages (no growth) to merely maintain current growth and earnings while facing constant and massive competitive threats from every side of its business (especially with austerity/recession/credit-constrained Europe as the largest sequential growth driver in the last surprising quarter). While 'Let Them Eat PSI' is the clear message for the Greeks, it would appear the US investor is truly satisfied by its extra large helping of iPad meals, even as 'explicit' job creation in the US via this main driver of US earnings remains de minimus (recognizing of course the peripheral impact of developers into this infrastructure that however do not amount to too much in terms of earnings or GDP as is painfully obvious from these charts). As goes AAPL, so goes the US?

Rising consumer credit means more consumption which leads to stronger economic growth.  Let me explain.  Individuals go to work to produce a good or service for which they are paid a finite amount of money for.  With that income they pay taxes which leaves them with discretionary income from which to live on.  Pay the rent, utilities, insurance and healthcare, food, clothes and put gas in the car and that pretty much consumes the majority of the paycheck.  Today, the situation is quite different and a harbinger of potentially bigger problems ahead.  The consumer is no longer turning to credit to leverage UP consumption - they are turning to credit to maintain their current living needs. Take a look at the chart of personal consumption expenditures (PCE) versus total consumer credit.  Notice in the past year as consumer credit rose you saw an increase in PCE.  In the last two months consumer credit has exploded higher but there has been virtually NO increase in PCE levels on a month over month basis.  Retail sales during the Christmas shopping season we disappointing and this was even with a large decrease in gasoline prices. This situation becomes even more apparent when we begin to look at the longer term trends of real disposable incomes, consumer credit and personal saving rates.

The idea that the very same economic forces that are currently plaguing Greece, et al., are somehow not relevant to the United States' circumstances does not hold water.  As goes the rest of the world, so goes the US. When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning. This report lays out the case that the US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people.

Yesterday we dedicated a quick post to the glaringly obvious - the complete decimation-cum-implosion of the Greek economy. Today we learn that the obvious apparently continues, following a Reuters report that according to an Italian source, Q4 GDP declined more than the 0.2% drop in Q3, and that there was no improvement in Q1 of 2012. In other words, Italy's economy is now contracting at an at least 0.3% annualized run rate. More as we get it, but it's not like any details will make the news any less bulllish, because this is obviously great news: the accelerating recession is far better than the "priced in" apocalyptic depression that the market was expecting. In other words, by simple inversion worse than expected is better than unexpected. Or something.