Renaissance

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.

The great American manufacturing renaissance? Maybe not. But China is losing the low-wage edge.

While every other hedge fund manager is bashing Bernanke, we finally found one who loves the Chairman, unabashedly. The last time the outspoken hedge fund manager appeared on CNBC it was to pump financials into his asset sale in Europe (and here). Today he could not have been more upbeat about the US economy, US banks, and US manufacturing as he is "overwhelmingly bullish," adding that "the numbers are truly amazing". Sure enough the 'Tepper rally' market responded with its ubiquitous lemming like surge as the Appaloosa manager (with $17.9bn AUM) says: The Economy is getting better; he is bullish On Japan; does not worry about Fed tapering - but does not like bonds (adding that the end of QE2 was bullish (though if you care about facts, it wasn't); his biggest holding is Citigroup; sees a great US manufacturing renaissance; and while the Middle East is a concern, expects only a 5% drop if there is war. If that's not enough for you to back up the truck, he believes the US budget deficit will shrink "massively' and housing will rise. The only thing he is not buying with both hands and feet - Apple. As he said - the numbers are truly amazing, though we suspect we are looking at different numbers.

The Federal Reserve's extreme monetary policy has done nothing but repress 'safe' assets to the point of making 'risky' assets relatively cheap. This is of course not the case were you to isolate each risky or safe asset and consider its value standalone. Choosing stocks over bonds because "well, what is the alternative?" is akin to the red-pill/blue-pill choice from The Matrix and the reflationary 'normal' that we are supposed to believe in is what 'apparently' justifies a 1.7x rise (12%!) in multiples since QE4EVA was announced. During that same period, consensus earnings expectations have plunged (merely pushed out one more year for the renaissance) and global trade and growth has collapsed. However, while we have shown many divergences from reality in the past, it is the manic/depressive difference between inflation expectations and stock valuations (implicitly supported by reflation) that is the clearest example of the short-term triumph of hope over reality.

Mission Accomplished it would seem. Initial claims printed at its lowest since January 2008 at 324k. This is well below expectations of 345k - the biggest beat since September 2011. California and New York dominated the data with over 70,000 claims between them (though both dropped from last week). Michigan added the most from last month's rolls with 'educational service indutrsy' job losses affecting MA, CT, and RI. Emergency Unemployment Claims appears to have shaken off its statistical aberration of 2013 and is down a modest 12k this week.

The money printing of the Federal Reserve with no anchor to gold has allowed the welfare state to grow to immense proportions. It has allowed politicians to buy votes by spending taxpayer dollars on multi-million dollar Keynesian zero return albatrosses. It has allowed politicians to enslave black people on a welfare plantation of entitlements. Bernanke and his cronies reward mal-investment through their policies. They reward bad behavior (borrowing & spending), while punishing good behavior (saving and investing). West Philly is a testament to failed economic policies, government waste, lack of personal responsibility, corrupt politicians, excessive union costs, and the delusional belief that government can create economic growth. The 30 Blocks of Squalor is descending further into squalor and it will accelerate as Bernanke’s policies further destroy what remains of capitalism in this country.

Now is the time to think about how you would live your life if your real value was appreciated and fairly compensated.

With every modestly positive datapoint being desperately clung to, now that even Goldman's Hatzius has once more thrown in the economic towel after proclaiming an economic renaissance in late 2012 just like he did in late 2010 only to issue a mea culpa a few months later (and just as we predicted - post coming up shortly), the key prerogative is to ignore the elephant in the room. That, of course, is that the JPY 1 quadrillion bond market had to be halted for the second day in a row as the Japanese capital markets are fast becoming a very big and sad joke. The resulting flight to safety from Japanese investors, who sense that their own bond market is on the verge of breaking down completely, has managed to send French and Belgian bonds to record lows, the Spanish 2 Year to sub 2%, the German 6 month bill negative in the primary market, the US 10/30 year constantly bid and so on. The immediate result is that the bond-equity disconnect continues to diverge until one day we may get negative 10 Year rates coupled with an all time high stock market. Gotta love the fake New Normal market, in which the Japanese penny stock market was up another 2.8% to well over 13,000 even as the Shanghai Composite plumbs ever redder territory for 2013 on fears the birdflu contagion will hurt the already struggling economy even more.

Jobs; it is all about jobs; and yesterday's dismal payrolls print suggests that despite the orgasmic flourish of monetary policy (and fiscal deficits), things are not going so well. However, the clarion call for a pending manufacturing renaissance continues; the hope remains high that with just a little more time and little more money, we will revert to some pre-crisis utopia and the re-industrialization of America will begin. Be careful what you hope for is the message from Morgan Stanley's Gerard Minack who warns that this 'reindustrialization' is bearish for stocks. The biggest medium-term issue for equity investors is whether current high profits can be sustained. One factor boosting margins was the Asian-led surge in global labour supply, which squeezed returns to labor and boosted returns to capital. This was particularly pronounced in America. Reindustrialisation implies that this process has run its course, suggesting that returns to capital will revert to normal over the medium term. Most see the prospect of America reindustrialising as bullish, but reindustrialisation may reverse the current mix: Economic growth may improve, but margins worsen.

Housing is recovering. The Fed has your back. The consumer is healthy. All things that would suggest the commercial-mortgage bond business should be on the cusp of a renaissance. So the question is - what did Brett Ersoff and John Herman see, seven short days after being promoted to run the UBS real-estate finance division, that made them depart the venerable Swiss firm with the paintball sized Stamford trading floor?

Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe's profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that 'stabilitee' based on one nation's shoulders, the following chart suggests Europe's Atlas is about to shrug. For the last six months, non-German Europe has seen its economies collapse with PMI New Orders pushing new lows now - after some brief episode of hope at the start of the year. Germany, in the meantime has been surging back as expectations of recovery have led sentiment higher and hopes for a European green shoot renaissance. That is until recently. In the last month, Germany's economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the 'financial' economy), Europe is back in the crosshairs.

Europe's Dow-equivalent - the EuroStoxx 50 - closed today negative year-to-date. The divergence between the exuberance in the US and dysphoria in Europe reminds us of 2012 - when exactly the same thing happened. Of course, the fact that stocks are red should come as no surprise since credit markets have been markedly wider on the year for a week or two. Today started off on a bright spot (as there was no blood on the streets of Nicosia) which spurred some buying in European stocks - but into the close that faded quickly with Spain and Italy pushing back into the red (and the rest of the markets following suit). EURUSD surged all day but as Europe closed it retraced a little of the gains - unable to snag 1.2850 (but 100 pips off the lows). German bunds remain bid (2Y at -2.6bps vs Swiss at -0.02bps) as die neue safe haven remains. So Europe ends Q1 in the red; China ends Q1 in the red; and US credit is unchanged in Q1; but US stocks +11% - sustainable?

Today, the very orders that make HFT a beneficial trading strategy and one worth the massive capex, are controlled by the exchanges.  That's the difference between this form of "technological advancement" and those of the past, the direct ownership of the critical intersection between information processing and order execution.

While last month's durable goods was a huge headline miss of -5.2% due to a collapse in Boeing aircraft orders (just 2), the internals were strong with the core capex spending for nondefense capital goods ex-aircraft soaring 6.3%. Today, the situation is flipped with the headline number soaring by 5.7%, trouncing expectations of a 3.9% print. However, this was due entirely to the unbearably volatile transportation series, which in February saw a 95% surge in Nondefense aircraft and parts and a just as massive 68% surge in defense capital good new orders, driven once again by Boeing which reported nearly 200 airplane orders. As a result durables ex-transportation dipped by 0.5%, on expectations of a 0.6% increase, while the true core capex: non-defense capital goods orders excluding aircraft tumbled by -2.7% on expectations of a modest -1.1% decline. And with that last month's rise in Year-over-Year core Capex is over and the trendline continues into negative comps territory once more. So much for the great capex renaissance.

As FedEx rained on the market's parade modestly today (with its biggest drop in 18 months and heaviest volume since Jun 2010), it is the 'crash' in Caterpillar's sales that should be more worrisome. Just as the economies of the world are supposed to be getting ready to re-surge and expectations are set for a second half renaissance, it seems that in reality, corporations that build stuff, mine stuff, and move stuff are not buying in anticipation. As the following chart suggests, perhaps CAT is yet another canary in the global economic decline coalmine?