headlines

Just because Bernanke did not explain everything in the post-FOMC conference, here is more:

• A FEW FOMC MEMBERS SAID MORE STIMULUS WOULD PROBABLY BE NEEDED
• SEVERAL ON FOMC SAID FED SHOULD STUDY `NEW TOOLS' FOR EASING - C5 Galaxy??
• FOMC PARTICIPANTS SAW MODERATE GROWTH LIKELY IN COMING QUARTERS
• FOMC AGREED `IT WAS PREPARED' FOR FURTHER ACTION AS APPROPRIATE
• FOMC SAW `UNUSUALLY HIGH' UNCERTAINTY FOR JOBLESS, GROWTH
• SEVERAL OTHER FOMC MEMBERS SAW ACTION NEED IF ECONOMY WORSENS

Well, more stimulus was needed, and we got it in the form of Operation Twist 2. Nothing new, but algos need their flashing read headlines.

Peak employment is the theory that due to factors such as efficiency, driven by technological innovation, and demand, developed economies may have already passed beyond the highest point of employment and that from this point onwards employment will continue to fall and unemployment inexorably rise causing increased social tension. Employment is falling, unemployment is rising but hidden behind those headlines is the fact that part time Employment is rising. Less people have full time jobs, more people have part time jobs, which means that the hours of work are being spread increasingly more thinly across the population. Some might argue that it is only because of the economic slump that all of these things are happening and that it is only temporary. But there is enough evidence to suggest that this is a long term trend that has just been disguised by the boom of the last ten years and is only now really becoming apparent. The fear is that we have already passed Peak Employment and the downward trend will continue, perhaps disguised by increasingly more part time employment.

A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.

It seems increasingly the European leaders themselves (absent the self-referential peripheral political paeons) are getting the joke in Europe. Following Buba's Weidmann's rational comments this morning (via Bloomberg):

• *WEIDMANN SAYS CAN'T SOLVE EURO CRISIS WITH EVER BIGGER FUNDS
• *WEIDMANN BANK FINANCING (Bailout - kicking the can) COULD WORSEN WITH EURO CRISIS

Now, Poland's deputy finance minister is pulling back dramatically from their desire to enter the European union:

• *POLAND PLANS `OPPOSITE OF ACCELERATION' IN EURO DRIVE: DOMINIK
• *POLAND SAYS EURO-AREA STABILITY IS NEW CRITERION FOR EURO ENTRY

It seems there is some rational thinking occurring in Europe - no matter how algos react to recycled headlines.

European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.

While early news are still abuzz with last night's largely irrelevant FinMin meeting, which came up with nothing new, but merely regurgitated the June 28 summit decisions in a way to send Peripheral bonds modestly higher, however briefly, the real news this morning will be out of Karlruhe, where the German Constitutional Court - which holds the fate of the European bailout mechanism -  has already said there will be no final decision on the constitutionality issue. The question now is whether the Court will issue a temporary injunction, which however, the court itself admits "will be interpreted by the foreign press as ‘euro-rescue is halted." Instead, what will likely take place is a two step process. As Market News reports, "Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question." Obviously, the court is not in any rush to come up with a definitive judgment. The problem is that Spain is. As is Italy: unless the ESM is able to promptly roll out its rescue functionality, the entire bailout mechanism will be halted and all the "progress" achieved so far will be for nothing. Sure enough, "a delay could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned." Yet not even the German FinMin will dare to tell German's constitutional arbiters to hurry up. Which is why keep a close eye on those Red flashing headlines out of Germany: they can make or break both the Euro, the PIIGS bonds, and broadly risk, if there is indeed a major delay, and certainly, if the court does order an injunction.

UPDATE: AA beats (headlines - at first glance) though Adjusted EBITDA is half Q2 2011's) and is holding modest gains after-hours - though well of initial knee-jerk reaction highs. And AMD (-7% after-hours) just pre-announced cutting revenue from sequentially +3% to -11%!!

Despite the ubiquitous late-day surge to day-session highs in S&P 500 e-mini futures (ES), equities ended the day marginally lower - rejecting the late-Friday surge unreality (as VIX also snapped back up and went sideways at pre-Friday-surge levels all day). The narrowest range in two months for the day-session in stocks (with major financials underperforming and only the Healthcare sector green on the day) was the antithesis of the strength in Treasuries with 5Y at record-low yields and 10Y testing back to 1.50%. Gold also led the day - notably outperforming both the USD-implied weakness and stocks - though the two now-QE-sensitive assets converged into the close - leaving Treasuries in the dust. ES drifted lower all night through the European session and converged with broad risk asset's far less sanguine levels from Friday into the US day-session. CONTEXT and ES tracked each other very well all day long until the last 30 minutes or so when stocks pushed 4-5pts rich. Credit modestly outperformed equities on the day but this was more catch-up from Friday than a new leg up as markets were dismally quiet in both stocks and bonds today - much quieter than Thursday and Friday of last week with ES (day) closing below its 50DMA (despite the late-day grind). EURUSD roundtripped from opening strength to weakness and back to modest strength leaving USD -0.2% (and only AUD weaker against the USD on the day).

All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.

European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.

Those following the EURUSD may be surprised by the rather violent spike higher in the past few minutes. Don't be: it is just the same old European unfounded speculation repackaged and regurgitated as headlines, in this case the following:

• EU SAYS NO SOVEREIGN GUARANTEE NEEDED FOR DIRECT ESM BANK FUNDS

Or, for those whose event memory has a one week cutoff, the exact same thing that the Euro summit from June 28 "concluded" sending the EURUSD higher by 200 pips, only to see it crash to 2 year lows in the week following after Germany made it clear this was not really the case. Turns out it is not really the case this time either:

• Details of how the future system will work remain to be negotiated: Commission spokesman Simon O’Connor

Cue responses from Finland, Holland, Slovakia and maybe, just maybe Germany, all of whom agree to disagree, and some of whom even demand collateral even for just EFSF borrowings.

Attempts to manipulate free markets invariably end badly - after all, they are, supposedly, by their very nature, free. Over the past few weeks, the exposure of the Libor-rigging scandal has monopolized the headlines of the financial press. The rather obvious implication being that given almost half the reported inputs that help establish the Libor rate are discarded immediately, Barclays simply CANNOT have manipulated the Libor rate alone. Period. At best this is a cartel, at worst it’s outright fraud on a scale that is completely unprecedented. In Grant Williams' humble opinion, the Libor scandal will mark a fundamental change in the treatment of financial conspiracy theories in the media. The sheer amount of coverage it will undoubtedly receive will signal a shift in attitude towards the exposing of such scandals rather than the blind-eyes that have been regularly turned in recent years. Prime amongst conspiracy theories that may soon be finally proven to be either valid or the figments of overactive imaginations, are those alleged in the gold and silver markets. If the long-stated claims about government-sanctioned, bank-led manipulation of precious metals markets are eventually proven to have any validity whatsoever, the fallout from the Libor scandal will prove to be (to use the words of Jamie Dimon) just another “tempest in a tea pot” as the precious metals are the very underpinnings of the entire global financial system.

By now we can only hope (pun intended) that everyone has seen the David Einhorn chart showing the circularity of the European "summit-based" decisionmaking process - somewhat relevant since we have had 21 summits since 2008 and Europe has never been in a condition quite as bad as last week when a historic move by the ECB to lower the deposit rate to zero and the refi rate below the critical threshold of 1.00%... and nothing happened. (that's not quite true: JPM, Goldman and Blackrock all made it quite clear European money markets are now officially dead). However, as the following empirical analysis from Credit Suisse shows, the "Einhorn" chart is not just a conversation piece at cocktail parties: there is an actual trade pattern which has made traders lots of money, and which makes Eurocrats the best friends of not only Belgian caterers, but short-sellers everywhere: go long into a summit when the clueless algos read headlines and send risk soaring, only to short the inevitable fizzles days if not hours later.

A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.

If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity

Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.

With the US presidential election just 4 months away, focus on tier 1 economic data will become acute, as will headlines blasting top-line data without much, if any, underlying "between the lines" analysis. Which is why we have decided to put together a template of key data series that in our opinion best capture the dramatic shift in the labor composition of the US welfare state under the Obama administration, starting with January 2009. Here are the facts...

Confused by all the amusing arguments of a housing "recovery" (because if you believe in it, it just may come true.... maybe) in the sad context of a reality in which the economy is once again turning from bad to worse missing expectations left and right (for every report surprising to the upside, two do the opposite), corporate earnings and margins have rolled over, US states and cities and European countries are filing for default or demanding bailouts at an ever faster pace, and only headlines such as "stocks rise on hopes of more central bank easing" appear in the good news columns of mainstream media? Don't be: David Rosenberg explains it all.