CRB Index

Chairman Bernanke is losing the war to re-inflate the economy and stock market. 

While patriotically buying US equities, or Intrade contracts, is 'believed' to reflexively improve the odds of the incumbent reaching a second term, the correlation between Obama's lead over Romney and stocks is actually not that high. The most highly correlated 'vehicle' for 'impacting' the odds of an Obama victory is, according to empirical data, the CRB Index.

There was a time when sentiment and newsflow mattered, and then Bernanke took over. If there is anything today's soaked vacuum tubes will focus on is that it is the 81st anniversary of the invasion of Manchuria by Japan, as developments in the East China Sea are starting to get decidedly deja vuish, if somewhat inverted. Also notable is the ever louder chatter that Spain will have to be destroyed (bonds plunge), for it to be saved (Rajoy submits bailout request), as we observed over a month ago. For that to happen, the central planners will need to allow the markets to take a deep breath and actually slide, which in turn may crush confidence in central planners' ability to keep markets rising in perpetuity. What's a central planner to do these days to be appreciated anyway. It also means that the days of innocence, when nothing at all matters on the fundamental side, will, just like in Q1 after the LTRO $1.3 trillion injection, be followed by days when fundamentals matter with a vengeance. Alas, we are not there yet. Instead, the best we can do is wonder just what asset will experience today's flash crash du jour following yesterday's still unexplained 5% plunge in crude in minutes. New Normal indeed.

The key event overnight was the German constitutional court's announcement shortly after 8 am CET in which the Krimson Kardinals announced that, as largely expected by everyone except the EURUSD trading algos, there would be no delay in the September 12, 10 am CET injunction decision, as a result of the last minute bid by Peter Gauweiler. As Bloomberg reported, “It’s no surprise the court won’t change its plan,” said Christoph Ohler, a professor of European law at Jena University. “You cannot directly sue over the acts of European institutions in a German court, so it’s difficult to introduce these arguments in this case." The decision to press ahead with the ruling will probably bolster the German government’s faith that the bailout facility will get the court’s backing. German Finance Minister Wolfgang Schaeuble told students last week he was confident the ESM would be approved. “Europe won’t collapse on Sept. 12,” Franz Mayer, a law professor at Bielefeld University, said in an interview last week. “In the end, the court will allow Germany to ratify the ESM, but there will probably be some strings attached. The bigger issue than the actual ruling is what extra language the court will add to the reasoning on where the limits are in the future,” said Mayer. “The markets seem to be quite afraid the judges may spoil certain options for the future, like collectivization of debt within the euro zone." Which leads us to the quote of the morning when even Schauble it appears is channeling Clinton after he said that interpretations on the word "unlimited" can vary. No they can't, and this is precisely the issue that the judges will take offense with, if anything.

In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."

Over the last few weeks markets have recovered from the significant stresses that were building towards the end of May (until yesterday's slow realization). The recovery has been in no small part due to expectations of intervention and that fresh rounds of QE and their equivalents will soon be implemented around the developed world. Deutsche Bank believes that markets are now addicted to stimulus and can’t function properly without it. There is little evidence yet to suggest that markets in this post crisis world have the ability to prosper in a period without heavy intervention, though empirically asset prices benefit from liquidity but that the environment remains fragile enough for them to struggle to maintain their levels when the liquidity stops. Critically, they agree with us that the structural problems the West faces mean that QE and its equivalents and refinements will likely need to be around for several years to come to ensure that the financial system and its economies don’t relapse into a depressionary tail-spin. There is no evidence that we are currently close to being able to wean ourselves off our liquidity addiction. The hope would be that with further injections we can prevent the worst case scenario but the base case remains for the stress and intervention cycle repeating itself as far as the eye can see. Central banks still have much to do.

There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward. On this basis, the market as a whole is overpriced by more than 20%.