- Global easing deluge resumes: Bank of Korea Slashes Policy Rate (WSJ)
- And Brazil: Brazil cuts Selic rate to new record low of 7.25 pct (Reuters)
- With Tapes, Authorities Build Criminal Cases Over JPMorgan Loss (NYT) Just don't hold your breath
- IMF snub reveals China’s political priorities (FT)
- Add a dash of trade wars: Revised Duties Imposed by U.S. on Chinese Solar Equipment (Bloomberg)
- IMF calls for action as euro zone crisis festers (Reuters)
- Dubai Losing Billions as Insecure Expats Send Money Abroad (BBG)
- Softbank in Advanced Talks to Acquire Sprint Nextel (WSJ)
- Lagarde calls for brake on austerity (FT)
- EU lambasts Turkey over freedoms (FT)
- Race Tightens in Two States (WSJ)
We have been very active in our discussions of the impact of the pending rise in food prices around the world (from central bank largesse to weather-related chaos). As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years. Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly in the October prints at the latest. While the effects, for now, are expected to be less extreme than the 2010-2011 episode, the timing as the US enters its fiscal-cliff-prone malaise, could mean a further round of easing will reignite this critical inflationary concern.
Some prefer to see the 'employment' glass half-full, some half-empty, and others see the glass smashed into a million shards on the keynesian kitchen floor. The zealousness with which the 'number' has been dismissed and praised has generated more questions than answers. Goldman's Jan Hatzius addresses the question of the pace of progress in the labor market, the reasons for the contrast between GDP and employment, the amount of slack left, and the implications for Fed policy.
- U.S. Military Is Sent to Jordan to Help With Crisis in Syria (NYT)
- IMF Weighing New Loans for Europe (WSJ)
- Romney Targets Obama Voters (WSJ)
- China’s Central Banker Won’t Attend IMF Meeting Amid Island Spat (Bloomberg)
- Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ (Bloomberg)
- German media bristles at hostile Greek reception for Merkel (Reuters)
- The End Might Be Near for Opel (Spiegel)
- IMF sounds alarm on Japanese banks (FT)
- Cash Tap Stays Dry for EU Banks (WSJ)
- Goldman in Push On Volcker Limits (WSJ)
- IMF Vinals: Further Policy Efforts Needed to Gain Lasting Stability (WSJ)
- King signals inflation not primary focus (FT)
With the market seemingly oblivious to the dismal reality of the fiscal-cliff (from a priced-in perspective) in the same way as equities trade at four-year highs while earnings are at three-year lows; it is perhaps useful to get a grasp of the maelstrom that awaits congress as they begin to tackle the fiscal-cliff on November 12. As we discussed here, the downside potential is considerable with complacency high and just as Goldman expects no real progress to be made until December (at the earliest), the market (i.e. a correction) may be the only lever to move our political elite from their respective higher ground. While talk will be of 'grand bargains', we, like Goldman, remain skeptical that any broad reform package will be completed and instead some short-term extension may be achieved. The following Q&A explains how that sausage could be made in all its gory detail. (e.g. Q: Can Congress actually put together a "grand bargain" fiscal agreement in the short time available? A: It is difficult to see how.)
Confirming a move that will surprise exactly no one, the firm which is best known in the world for two things: i) arbitraging the gullibility of its clients, and ii) flipflopping faster than anyone when the narrative demands it, the WSJ reports that Goldman Sachs has mutated from Obama's biggest financial backer 4 years ago on Wall Street, to one of the most stingiest firms. "Employees at Goldman donated more than $1 million to Mr. Obama when he first ran for president. This election, they have given the president's campaign $136,000—less than Mr. Obama has collected from employees of the State Department. The employees have contributed nothing to the leading Democratic super PAC supporting his re-election. By contrast, Goldman employees have given Mr. Romney's campaign $900,000, plus another $900,000 to the super PAC founded to help him." In other words Goldman has just voted with their wallets, and the bottom line is "Strong Sell" with price target One Term.
For those who still wonder why China has given up on Europe, and is solely focusing on Africa (where none other than Goldman Sachs is opening more offices than any other bank), the IMF explains why the Berlin Beijing Conference 2.0 is now in its peak, if entirely behind the scenes. And yes, the "developed" world wishes it was one big banana republic. Amazing what not having 100%+ debt/GDP will do for one's economic prospects...
The majority of Americans seem OK with just waddling through life, accepting the lies and misinformation blasted from the boob tube and their various iGadgets by their owners, gorging themselves to death on Twinkies and Cheetos, paying 15% interest on their $10,000 rolling credit card balance, and growing ever more dependent on the welfare/warfare state to provide and protect them from accepting personal responsibility for their lives. A minority of critical thinking people have chosen to question everything they see and hear being spewed at us by the propagandist mainstream media. What do 'we, the people' want? As it seems the entitlement “free shit” mentality permeates our culture. The question is whether we will stand idly by, fiddling with our gadgets, tweeting about Honey Boo Boo, or will we regain our sense of duty to the future generations of this country.
This particular news from Goldman and the SEC needs absolutely no introduction, explanation, or conclusion. It is, as Homer J. Simpson would say, "a tidy little package."
- GOLDMAN HIRES EX-SEC INVESTMENT MGMT CHIEF BUDDY DONOHUE: MEMO
- GOLDMAN NAMES DONOHUE GENERAL COUNSEL OF GSAM INVESTMENT COS
Shocking. Absolutely shocking. Elsewhere, completely unfounded rumors that various DOJ staffers are planning to join assorted Mexican drug cartels shortly.
The biggest headlines (and refutations) have been saved for the struggling nations of Europe's periphery. Top-down, this makes sense as PPP-weighted PMIs show Europe notably decoupling (badly) from the rest of the world - with periphery and eurozone-ex-periphery having resynced at these lower levels. This convergence (down) of the core with the periphery is not good news but what is more concerning is that while many investors have assumed the 'pricing' of risk assets in the periphery relative to the core is due mostly to 'contagion', there is in fact a massive fundamental divide between the core and periphery's corporate debt credit quality. With ECB's OMT apparently removing much of the systemic risk premium (though we are clear on our views of this short-term LTRO-esque reaction), the idiosyncratic risk differential between Core and Periphery credit quality is large and getting larger. It seems the need for simultaneous private and public deleveraging in the periphery - especially in Spain - is as critical as ever.
Spoiler Alert: They’re mostly still in office (so much for building suspense).
On October 3, 2008, 338 elected officials (263 House reps, 74 Senators and 1 President) took it upon themselves to save America from certain financial doom by passing the Emergency Economic Stabilization Act of 2008, completely ignoring the will of the American people, opting instead to fulfill a Thomas Jefferson prophesy:
“The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations.”
~ Thomas Jefferson
Even if both the Bush tax cuts and emergency unemployment insurance are extended, the 'sequester' is mostly postponed, and the fresh fiscal drag is confined to the expiration of the payroll tax cut and the new taxes to pay for Obamacare, Goldman estimates suggest that fiscal policy would shave nearly 1.5% from real GDP growth in early 2013. While it seems the 'market' believes that some compromise will be enough to lift the market to new stratospheric heights; we believe, as does Goldman, that the risks are almost exclusively on the downside of this 'not so good' fiscal scenario.
For nearly 30 years, two of the world's largest economic nations (China and the US) have continually debauched debased the purchasing power of their currency. For the last 12 years, the rest of the world joined in. So who is winning the race to debase now? It appears globalization was really all about currency debasement and exporting inflation (i.e. loss of FX value) with debt being the inflation buffer (i.e. borrow to afford or vendor-financing - see AMZN). The problem now is the entire world is saturated with debt and so there is no-one left to export inflation to anymore. We do indeed live in interesting times.
The BOJ pioneered QE in March 2001, with two objectives. The first was to eliminate deflation, which took hold in the mid-1990s; and the second was to shore up Japan’s fragile financial system. Did it work? Yes, for the second objective - the BOJ arguably bought time for banks tied up in NPL disposal; but, unfortunately, QE was not successful in combating deflation. The BOJ’s intended policy transmission mechanism was so-called portfolio rebalancing. Ideally, the buildup in banks’ deposits at the BOJ that earned no return (but carried zero risk) should have prompted banks to seek higher returns (with higher risk) and thus increase their lending. But portfolio rebalancing did not kick in for several reasons; most of which are the same as are occurring in the US currently. More fundamentally, however, Japan's demographics hindered any hopes of a capex-driven recovery - and policy can do little to affect that. While the US faces a less dismal demographic picture, the Japanese experience highlights that other policies (as Bernanke himself admits) are required for any sustained benefit in the real economy.
Goldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he finally released a revised forecast, one that curious still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE. Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth, having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.