Real estate

It’s important to put yourself in the minds of OECD policy makers. They are largely managing a retirement class that is moving out of the workforce and looking to draw upon its savings -- savings that are (mostly) in real estate, bonds, and equities. Given this demographic reality, growth in nominal terms is undoubtedly the new policy of the West. While a 'nominal GDP targeting' approach has been officially rejected (so far), don't believe it. Reflationary policy aimed at sustaining asset prices at high levels will continue to be the policy going forward.  While it’s unclear how long a post-credit bubble world can sustain such period of forced growth, what is perfectly clear is that oil is no longer available to fund such growth. For the seventh year since 2005, global oil production in 2011 failed to surpass 74 mbpd (million barrels per day) on an annual basis. But while the West is set to dote upon its retirement class for many years to come, the five billion people in the developing world are ready to undertake the next leg of their industrial growth. They are already using oil at the margin as their populations urbanize. But as the developing world comes on board as new users of petroleum, they still need growing resources of other energy to fund the new growth which now lies ahead of them. This unchangeable fact sets the world on an inexorable path: a competitive race for BTU.

Who will buy our debt in the coming months and years? Europe is saturated with debt and doesn’t have the means to purchase our debt. Japan is a train wreck waiting to happen. China’s customers aren’t buying their crap, so their economic miracle is about to go in reverse. The Federal Reserve cannot buy $1 trillion of Treasury bonds per year forever without creating more speculative bubbles and raging inflation in the things people need to live. The Minsky Moment will be the point when the U.S. Treasury begins having funding problems due to the spiraling debt incurred in financing perpetual government deficits. At this point no buyer will be found to bid at 2% to 3% yields for U.S. Treasuries; consequently, a major sell-off will ensue leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity. In layman terms that means – the shit will hit the fan. The Federal Reserve and Treasury will be caught in their own web of lies. The only way to attract buyers will be to dramatically increase interest rates. Doing this in a country up to its eyeballs in debt will be suicide. We will abruptly know how it feels to be Greek....The entire financial world is hopelessly entangled by the $700 trillion of derivatives that ensure mass destruction if one of the dominoes falls. This is the reason an otherwise inconsequential country like Greece had to be “saved”.

Unlike yesterday's modest manufacturing ISM beat, today's follow up March Services ISM is out at 56.0, reverting back to the Schrodinger theme so prevalent these days, missing the consensus of 56.8, and down from 57.3 in February, posting the first sequential decline since September 2011, and the first miss to expectations in 4 months. The core New Orders indicator was down from 61.2 to 58.8, still above 50 for 32 consecutive months. The backlog of new orders also dropped from 54.5 to 52.5 Amusingly, despite every energy commodity surging, the Prices index in March somehow posted a miraculous drop from 68.4 to 33.9. The only series that was contracting, and unchanged at 49.5, was supplier deliveries, even as inventories increased once again, from 53.4 to 54.0. And if the ADP report was enough to give traders a headache whether or not more QE is coming, today's final economic data point, refutes the latest jobs strength ahead of the NFP, once again leaving everyone into the dark as to the Chairman's true intentions.

Bernanke has laid the groundwork for the next massive dislocation.

Seasonal adjustments are not forever. 

The only European "thinktank" that has been more correct about predicting developments in the continent than any of its peers ("Greece will never default" - nuf said), has released a new briefing, this time looking at the latest European hotbed of trouble (which is not new at all, just the realization that the LTRO benefit has faded has finally set in), Spain, and specifically if its bank will be forced to seek a Eurozone bailout. OpenEurope is diplomatic about it but the conclusion is that all signs point to yes. Furthermore, as recent general strikes across the country, coupled with occasional rioting, showed, Rajoy's agenda of enacting austerity which will be critical to receive German assistance simply to make Spain the latest German debt slave, may have some problems being enacted. Yet the biggest catalyst for the housing-heavy exposed Spanish banks is that, as Open Europe finds, of the €400 billion in loans made to residential sector, €80 billion is toxic. And only €50 billion in reserves are available. Hence the simple math: at least a €30 billion shortfall will need to come from Europe. And this assume no further declines in home price, which however are set for a record price drop this year. So... LTRO 3 anyone as the focus once again shifts to "deja vu Greece?"

What a quarter! The Dow up 8% and enjoying a record quarter in terms of points — 994 of them to be exact and in percent terms, now just 7% off attaining a new all-time high. The S&P 500 surged 12% (and 3.1% for March; 28% from the October 2011 lows), which was the best performance since 1998. It seems so strange to draw comparisons to 1998, which was the infancy of the Internet revolution; a period of fiscal stability, 5% risk-free rates, sustained 4% real growth in the economy, strong housing markets, political stability, sub-5% unemployment, a stable and predictable central bank. And look at the composition of the rally. Apple soared 48% and accounted for nearly 20% of the appreciation in the S&P 500. But outside of Apple, what led the rally were the low-quality names that got so beat up last year, such as Bank of America bouncing 72% (it was the Dow's worst performer in 2011; financials in aggregate rose 22%). Sears Holdings have skyrocketed 108% this year even though the company doesn't expect to make money this year or next. What does that tell you? What it says is that this bull run was really more about pricing out a possible financial disaster coming out of Europe than anything that could really be described as positive on the global macroeconomic front. What is most fascinating is how the private client sector simply refuses to drink from the Fed liquidity spiked punch bowl, having been burnt by two central bank-induced bubbles separated less than a decade apart leaving David Rosenberg, of Gluskin Sheff, still rightly focused on benefiting from his long-term 3-D view of deleveraging, demographics, and deflation - as he notes US data is on notably shaky ground. This appears to have been very much a trader's rally as he reminds us that liquidity is not an antidote for fundamentals.

• Mixed signals from China's factories in March (Reuters)
• EU wants G20 to boost IMF funds after Eurogroup move (Reuters)
• Euro Leaders Seek Global Help After Firewall Boosted (Bloomberg)
• Euro-Region Unemployment Surges to Highest in More Than 14 Years (Bloomberg)
• Big banks prepare to pay back LTRO loans (FT) ... don't hold your breath
• Coty Inc. Proposes to Acquire Avon Products, Inc. for $23.25 Per Share in Cash (PRnewswire)
• Spain Record Home Price Drop Seen With Bank Pressure (Bloomberg)
• Firm dropped by Visa says under 1.5 million card numbers stolen (Reuters)
• Japan Tankan Stagnates With Yen Seen as Threat (Bloomberg)
• Fed to buy $44 billion Treasuries in April, sell $43 billion (Reuters)

The United States of America (and the rest of the world for that matter) has not fundamentally grown much at all over the last 40 years. We have instead replaced fundamental growth with the illusion of growth brought on by constantly increasing the monetary supply, aka, inflation. But like any good Ponzi scheme, even this one has a limit and investors briefly approached it in 2008.  When it looked like our global banking system was going to collapse, investors started dumping everything in site, essentially a de facto rejection of dollar based assets.  Alas, this terrible 'fiat' system is finally coming to its' inevitable end.  And good riddance at that. The death of fiat money will be the best thing to happen to human freedom and liberty in over 100 years.  However, you must realize that the deflation associated with the collapse of the dollar-based fiat monetary system will wipe out decades worth of false asset price growth in a very short time.  Think days or months.

Inflection point, yes. There yet, no. 

CA AG Kamala Harris wants to change CA from a non-judicial state into a judicial state for foreclosures. Disaster.

"Even Wile E. Coyote had to come back down to earth sooner or later", says Charles Biderman, founder of TrimTabs Investment Research. In his opinion, the prices of stocks and bonds - enabled by excessive financialization of our economy and central bank money printing - have been defying gravity for a dangerously long time.  If we continue to do all we can to preserve the status quo -- to maintain "phony" asset price levels as Charles calls them -- at best we will restrict overall growth and handicap the economy. The problem isn't so much the unfairness and malinvestment evident in a rigged market. As Charles shrewdly asks: what happens when the market becomes un-rigged? We've never experienced the unwinding of an entirely manipulated financial system, so we can't predict for sure. But at this point, a painful collapse of our markets and loss of the US dollar as the world's reserve currency seem entirely plausible.

Ben's selling the same old crap

The sharp drop in the personal savings rate in the month of February, which just hit to lowest level since January of 2008, is indicative of the problem.  While personal savings rates could be bled down further to sustain the current level of subpar economic growth - the world today is vastly different than prior to the last two recessions where access to credit and leverage we very easy to obtain.  It is entirely possible, that in the very short term, we could see personal consumption expenditures continue to make some gains even in the face of the obvious headwinds.  However, it is important to keep these month to month variations in context with longer term historical trends.  Personal consumption is ultimately a function of the income available from which that spending is derived.  As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles.

As expected, the latest economic data point, ahead of what we now believe will be an NFP miss, the Chicago March PMI, has come and gone and it was merely the latest in a long series of misses. While the headline disappointment was modest, printing at 62.2, below expectations of 63.0 and down from 64.0, it was at the subcomponents that the pain was most acute: New Orders dropped from 69.2 to 63.3, Prices Paid soared from 65.6 to 70.1, the highest since August, any growth focusing again on inventory build up - hence hollow - from 49.6 to 57.4, the largest gain since December 2010 as the restocking continues furiously in what appears forever, but most importantly, the Employment Index which slid from 64.2 to 56.3, the biggest drop since February 2009, and virtually all job gains in 2012 have now been given up. Yet the biggest caution was not anywhere in the indices, but in one of the survey responses: "Tipping point for oil pricing and impact on raw materials and Total Cost of Operations (TCO) is fast approaching." Once the tipping point for oil comes and passes, that's the ballgame, and the only option for the Fed will be to create another Lehman-like deflationary collapse.