Next week will see a slew of key data releases across the Euro area. The week will kick off with the German Ifo for August due on Monday which Goldman expects to fall slightly, reflecting the softening in the August composite PMI. The business climate index has been signalling a further loss of momentum in the German economy, with both key dimensions - the assessment of current conditions and business expectations - deteriorating since May. The chart below shows how both components have evolved during the European debt crisis. The 'expectations' component appears to have been particularly affected by European developments. As far as the sectoral breakdown is concerned, the Ifo was still signalling rather robust domestic growth in construction, and in retail and wholesale goods, while the manufacturing sector seemed to have been adversely impacted by a weakening in external demand. The 'flash' reading of the August manufacturing PMI for Germany, however, seems to indicate that this could be changing. As the chart indicates, between the survey's mediocre perspective of the current situation and its negative expectations for the future - we have completed the circle and stand back at precarious Mid 2008 levels - and we know what came next.
Bernanke has all but admitted this recently, saying "I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies it would hurt the market."
Here come the facts!!! Warning, if you get your feelings hurt over hearing the truth, simply move on. You may have a couple of quarters lefft.
Under widespread NIRP, pensions, annuities, insurers, banks and ultimately all savers will suffer a slow but steady decline in real wealth over time. Just as ZIRP has stuck around since the early 2000’s, NIRP may be here to stay for many years to come. Looking back at how much widespread damage ZIRP has caused since its introduction back in 2002, it’s hard not to expect that negative interest rates will cause even more harm, and at a faster clip. In our view, NIRP represents the death knell for the financial system as we know it today. There are simply too many working parts of the financial industry that are directly impacted by negative rates, and as long as NIRP persists, they will be helplessly stuck suffering from its ill-effects.
Capital Markets Über Alles: What Mitt Romney's Economic Advisor, Goldman Sachs (And The NY Fed) Really ThinkSubmitted by Tyler Durden on 08/22/2012 11:09 -0400
When it comes to Glenn Hubbard, the man needs no introduction, at least to those who have watched the Charles Ferguson seminal movie 'Inside Job.' Indeed, the extensive connections of the Dean of the Columbia school of business to the financial industry is well known, a fact which served as the basis of Ferguson's question: just how corrupt is America's elite educational establishment, and just how much of a factor in the perpetuation of the status quo is Wall Street's puppet control over each generation of rising financial and economic thinkers. For those who are unaware, Hubbard also happens to be presidential candidate Mitt Romney's top economic advisor. The reason why Hubbard has suddenly made the headlines, is because of his overnight statement that contrary to what the potential future president has said, namely that Bernanke's days would be numbered under a Romney presidency, and that the Fed would be audited, Glenn has taken the other side of this argument, and told Reuters that Bernanke should "get every consideration" to stay beyond January 2014, when Ben's term expires. But why? Well, for the answer to this particular question, we have to go back to that long ago year 2004, when Glenn Hubbard together with current Fed president, and former chief Goldman chief economist Bill Dudley, authored a white paper bearing the Goldman sachs logo, titled "How Capital Markets Enhance Economic Performance and Facilitate Job Creation." In a word: for Mr. Hubbard (as well as for Mr. Dudley, Goldman Sachs, and thus, the New York Fed) it is all about the capital markets.
It is hard to find fiscal situations that are worse than Japan's. The gross government debt/GDP ratio, at more than 200%, is the worst among the major developed economies. Yet yields on Japanese government bonds (JGBs) have not only been among the lowest, they have also been stable, even during the recent deterioration during the European debt crisis. This apparent contravention of the laws of economics is both an enigma for foreign investors and the reason for them to expect fiscal collapse as a result of a sharp rise in selling pressure in the JGB market. As Goldman notes, the European debt crisis has led to an increase in market sensitivity to sovereign risk in general and questions remain on when to expect the tensions in the JGB market and the fiscal deficit to reach a breaking point in Japan. In the following 14 charts, we explore the sustainability of fiscal deficit financing in Japan and Goldman addresses the JGB puzzles.
The S&P 500 is at its 2012 highs, and rapidly approaching all time highs, even as nothing has changed over the biggest near-term challenge facing America: the fiscal cliff. Ironically, with every tick higher in the market, the probability that Congress will come to a consensus over what would be a haircut of up to 4% to next year's GDP as soon as January 1 2013 gets smaller. Why - the same reason that Spain is unlikely to demand a bailout now that its 10 Year bond is back to the mid 6% range (ironically on expectations it will demand a bailout!): complacency - both by investors, and by politicians. After all, it's is all a matter of perception, and the market is seen to be "perceiving" an all clear signal. It means that the impetus to do something constructive simply does not exist, as we explained recently in the case of Spain (and Italy). It also means that Congress has no reason to be proactive about the biggest threat facing the economy: just look at the S&P - it sure isn't worried, and the market is supposed to be far more efficient than elected politicians. At least on paper. This line of thinking is also the reason why Goldman's head of equity strategy David Kostin (not to be confused with the person he replaced: permabull A Joseph Cohen, who off the record sees the S&P rising to 1600 or more) refuses to raise his year end forecast for the S&P, which has remained firmly at 1250 for the entire year. More muppetry, more dodecatuple reverse psychology, or is Goldman telling the truth? You decide.
When real estate prices made a vertiginous ascent in the 1980s Japan the bullish refrain was that there wasn’t enough land. However, Japanese real estate prices, and even those of crowded Tokyo, have glided downwards over the subsequent two decades, accompanied by rents - interrupted by the Karate-Kid-esque 'recovery-on; recovery-off' hope that we have also started to witness in the US. Very low economic growth and a demographic headwind, despite reasonably high employment, have led to a depressed real estate market. Is this a harbinger for the West? And what defines recovery - price, volume, net equity?
What do the following have in common? LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money? The answer is that every single thing in that list is an example of market rigging, fraud, or both. How are we supposed to make decisions in today’s rigged and often fraudulent market environment? Where should you put your money if you don’t know where the risks lie? How does one control risk when control fraud runs rampant? Unfortunately, there are no perfect answers to these questions. Instead, the task is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities as they happen to be. The purpose of this report is not to stir up resentment or anger -- although those are perfectly valid responses to the abuses we are forced to live with -- but to simply acknowledge the landscape as it is so that we can make informed decisions.
In what should be the biggst non-news of the day, the NYT is reporting that not only will Jon Corzine not face any criminal prosecution for vaporizing hundreds of millions in client money (which subsequently condensed in the JPM middle office), but will in fact be launching ... wait for it... a hedge fund. "A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives. After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case." And algos... And glitches... And faulty software installs... And some junior person who has long since left the company... and, and, and, lots and lots of passive voice... Because in the Banana republic of the crave, no bundles can ever go to jail, no matter how heinous the crime, which is not to say other places are better: in Thailand you shoot your secretary in the stomach during dinner with an Uzi and you don't even pay a $600 fine. But at least it puts things in perspective. So what is next in store for this former man of power? "Mr. Corzine, in a bid to rebuild his image and engage his passion for trading, is weighing whether to start a hedge fund, according to people with knowledge of his plans. He is currently trading with his family’s wealth. If he is successful as a hedge fund manager, it would be the latest career comeback for a man who was ousted from both the top seat at Goldman Sachs and the New Jersey governor’s mansion." So will Jon will be buying Italian bonds? We don't know. Ask him yourself.
Up until now we were a lone voice in the wilderness, with our "dry-humored" Transatlantic colleagues, working for a newspaper funded with Goldman Sachs advertisements, periodically mocking our "misunderstanding" of credit and money creation. We are now delighted that none other than one of the foremost opinions on all topics "shadow" stood up this week, and admitted that indeed, it is Zero Hedge whose view on money creation is the correct one. Behold several absolutely critical observations by Citi's Matt King. The same Matt King who a week before the collapse of Lehman wrote "Are The Brokers Broken" and explained to all those who had heretofore been reading and basing their understanding of finance on the above-mentioned Transatlantic newspaper, why everything they know about the modern financial system is wrong. Lehman filed for bankruptcy 12 days later. Unless and until this $3.8 trillion 'shadow banking' hole is plugged, one thing is certain: risk is not going anywhere.
Muppets only complain when the prop jobs and skimming fail to deliver fat gains to their accounts. But being a muppet is being a mark: it's the muppets who are being milked and skimmed. Being a participant in a hopelessly compromised, rigged market makes us marks because we're ultimately providing liquidity and capital for the players to skim. When the officially sanctioned intervention finally fails and the market leaks 40% of its current value, the muppets will finally understand the "outsized returns" were just a con used to entice them into playing digital 3-card monte. The game is rigged, but the greed of the player overrides his skepticism and caution. The same can be said for pension funds and all the other institutional players. Desperate for yield, they've foolishly ponied up hundreds of billions of dollars to play 3-card monte with crooked dealers and a crooked house.
The European morning session has been fairly quiet, with European equities opening lower following over night reports from China that the People's Bank of China might buy back government debt in the secondary market making the much speculated reserve ratio requirement cut it less likely. With several market closures across the Euro-area thanks to the Assumption of Mary holiday, volumes have been particularly light, and with a distinct lack of European data, market focus was on the release of the Bank of England's minutes for the August rate decision. As expected, the MPC voted unanimously to keep the APF unchanged at GBP 375bln and the benchmark rate unchanged at 0.50%, though some MPC members noted there was a good case for further expansion of QE. The better than expected UK jobs report also helped strength GBP.
One of the most vocal advocates of a NEW QE announcement next month, at either the FOMC meeting or Jackson Hole - Goldman Sachs - has just pulled the plug. From Jan Hatzius: "The US economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3%. The recent news also has implications for Fed policy. While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion." Just as we have been saying. Which means the Fed is now out of the picture until the end of 2012. And with corn prices where they are, so is the PBOC. As for the ECB - talk to Rajoy, who will do nothing as long as 10 Year yields are under 8%. Which means that, as explained previously, Spain and Italy, and in fact the entire world, must all be destroyed first, before they are saved.
Republican Presidential candidate Mitt Romney's selection of Rep. Paul Ryan (R-WI) as his running mate has generated renewed interest in the House-passed budget resolution that Ryan authored. Ryan's budget outline would reduce the deficit more quickly and impose more fiscal restraint than the President's budget proposal. However, as Goldman notes. while both proposals would increase revenues due to the scheduled expiration of the payroll tax cut at year end, the President's would raise income taxes as well. Rep. Ryan's plan, on the other hand, would cut spending sharply in 2013 and 2014, even though it assumes a one-year delay in the spending cuts under the "sequester" set to take effect at year-end. If the President wins reelection and/or Democrats hold their majority in the Senate, a bipartisan compromise would be necessary to enact fiscal reforms. This has been difficult to achieve over the last year or so and we expect compromise to be even tougher. We continue to believe that the economic effects of allowing the fiscal cliff to take effect in full will be the greatest motivation for members of Congress to reach an agreement.