Friday, August 26, 2011
Capital Markets Update
By Louis S. Barnes Friday August 26, 2011
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3.00% to 2.00% has settled near 2.20%, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air. THUMP.
Punting.
The entire financial world had waited two weeks for Perfesser Bernanke’s speech at the annual gathering of central bankers in Jackson Hole. At 8:00am MST today, THUD. As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, dim country rascals at regional Feds in open rebellion. The ball landed at the Fed’s September 20 meeting, the Chairman adding the 21st for extended argument. The game will go on, but the Fed will be entirely off the field for a month, and maybe then.
The Perfesser did give a whole paragraph to housing, noting the credit-default spiral still underway, defaults producing tighter credit which in turn produces a weaker housing market and more defaults. What to do about the obvious? FHFA home prices down 5.9% year-over-year? New mortgage delinquencies declining through 2010, but gently rising in 2011? Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll MBS purchased in QE1?
Didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, benighted Mr. Obama, depending on the track and vigor of Irene may be helicoptered away from his vacation. No matter: he already punted to an economic policy speech on September 4. The nation trembles in anticipation. Uh-huh. Might have demanded that Congress stay in town, get to work; but that would require the same from him. THWACK. Shank.
Markets live in real time, and tempus fugit no matter how much you’d like it to pause. Markets attend the Church of What’s Happenin’ NOW, whether the punter is in town or not. 2nd Quarter GDP revised down to 1.0%. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday September 1st we’ll get employment data from August, and the first of the August surveys from the ISM. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all-okay? CNBC stock-pushers said so. BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. The Cripple-Shooter from Omaha didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6% dividend. You know any safe investments paying 6% guaranteed today? He also received warrants to buy 700 million shares at $7.14 and re-sell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes. We are learning the hard way, very hard, that the standard prescriptions of the Left and Right are dead ends. Neither more spending, income redistribution, and regulation, nor do-nothing, hard-money liquidation, or nut-case imaginings are going to get us out of this.
Salvation lies in basic things. Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3.00% to 2.00% has settled near 2.20%, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air. THUMP.
Punting.
The entire financial world had waited two weeks for Perfesser Bernanke’s speech at the annual gathering of central bankers in Jackson Hole. At 8:00am MST today, THUD. As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, dim country rascals at regional Feds in open rebellion. The ball landed at the Fed’s September 20 meeting, the Chairman adding the 21st for extended argument. The game will go on, but the Fed will be entirely off the field for a month, and maybe then.
The Perfesser did give a whole paragraph to housing, noting the credit-default spiral still underway, defaults producing tighter credit which in turn produces a weaker housing market and more defaults. What to do about the obvious? FHFA home prices down 5.9% year-over-year? New mortgage delinquencies declining through 2010, but gently rising in 2011? Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll MBS purchased in QE1?
Didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, benighted Mr. Obama, depending on the track and vigor of Irene may be helicoptered away from his vacation. No matter: he already punted to an economic policy speech on September 4. The nation trembles in anticipation. Uh-huh. Might have demanded that Congress stay in town, get to work; but that would require the same from him. THWACK. Shank.
Markets live in real time, and tempus fugit no matter how much you’d like it to pause. Markets attend the Church of What’s Happenin’ NOW, whether the punter is in town or not. 2nd Quarter GDP revised down to 1.0%. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday September 1st we’ll get employment data from August, and the first of the August surveys from the ISM. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all-okay? CNBC stock-pushers said so. BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. The Cripple-Shooter from Omaha didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6% dividend. You know any safe investments paying 6% guaranteed today? He also received warrants to buy 700 million shares at $7.14 and re-sell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes. We are learning the hard way, very hard, that the standard prescriptions of the Left and Right are dead ends. Neither more spending, income redistribution, and regulation, nor do-nothing, hard-money liquidation, or nut-case imaginings are going to get us out of this.
Salvation lies in basic things. Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Friday, August 19, 2011
Capital Markets Update
By Louis S. Barnes Friday, August 19, 2011
"Volatility" is Wall Street's favorite term for losing your shirt. Volatility means down and up and down and up, a transient emotional upset.
That's not what this is.
The Dow set one of its highs since the Great Recession began, on July 21 at 12,724. That was the same day that Europe announced its newest effort to save itself. On the next day the plan was exposed as a sham, and the Dow has since unraveled not quite 2,000 points. That is not "volatility."
In the same span, the 10-year T-note has fallen almost one full percent, and almost broken 2.00% for the first time since 1950. That is not an investment. That is cash running to mattresses.
Only a minor portion of this trading traces to faltering recovery here. This is Europe.
The most immediate and fatal hazard in Europe, growing all week long: its banks and the European Central Bank itself are packed with sovereign bonds not worth face value. Exactly as the Great Freeze in July 2007, the financial system ceases to function when nobody knows what collateral is worth. We take collateral for loans in assurance that we can sell it if we have to, and make ourselves whole, or mostly so.
The sovereign debt problem inside European banks takes two forms. First is the mass of government bonds on their balance sheets as long-term holdings. In the mysterious world of bank capital, none is required to back up holdings of sovereign bonds because we all know that they will not default. (Not a joke.) Unlike any other loan on bank books, any loss on sovereign bonds is a hit to capital required to support other loans. The risk to these bonds today comes in either outright default (missed payment), or currency risk (payment in New Drachmas). Bank imploders.
The second risk is worse. Banks everywhere are linked by loans to each other, backed by collateral. The best collateral: government bonds. Today, every bank in Europe knows that every counter-party bank is impaired to one degree or another, and every one is studying the prospect of fire-selling semi-phony collateral into a market with only one buyer: the European Central Bank.
The ECB is exposed to nearly $500 billion of Greek debt alone, holdings of bonds bought to support a crashing market, and a great deal more held as collateral against cash hosed into banks, replenishing runs on each other. The ECB began two weeks ago to buy Spanish and Italian bonds when those markets began to crash, and to take French bonds with them. Jean Claude Trichet, a true believer in the European experiment, has executed these policies over the violent objections of Germany, the only country in the zone strong enough to back the ECB's central bank fiction.
The inherent, structural weakness of the ECB is the source of this week's panicked trading. Faith in all central banks rests on national capacity to pay taxes, and upon faith itself. The euro-currency zone has no taxpayers, just 17 parliaments with disparate and contradictory interests. The ECB rests on faith alone. If the zone is unable to find sound financial footing, and soon (as PIMCO's El-Erian said, "Weeks and days, not years and months"), then the world will have to deal with the bankruptcy of the ECB.
Even if it comes to that, or any number of other European disaster permutations, in the US we are likely to be okay. We are less dependent on exports than anybody. As commodity prices collapse, inflation here will disappear. It will be easy to sell Treasurys for a long time, and we have a lot to sell.
Take all of that to the mortgage markets... at any authentic European salvation, the 10-year and mortgages will run up, and fast. Even the Fed's two-year sorta-promise to stay at zero will not hold us here.
And as it is, our markets are frustrating borrowers. Only a handful of giant securitizer-wholesalers survive, and they are raising margins, not passing through all of the market gains. That situation will improve the longer we stay on Europe-watch, but see above: any European rescue, and this record-low episode will conclude.
Both of these charts are one-month "Euribor." Libor, which mortgage borrowers have seen, is the interbank cost of dollars worldwide. Euribor is the same thing, but in euros. Despite the massive funding exertions of the ECB, European interbank distress is easy to see.
"Volatility" is Wall Street's favorite term for losing your shirt. Volatility means down and up and down and up, a transient emotional upset.
That's not what this is.
The Dow set one of its highs since the Great Recession began, on July 21 at 12,724. That was the same day that Europe announced its newest effort to save itself. On the next day the plan was exposed as a sham, and the Dow has since unraveled not quite 2,000 points. That is not "volatility."
In the same span, the 10-year T-note has fallen almost one full percent, and almost broken 2.00% for the first time since 1950. That is not an investment. That is cash running to mattresses.
Only a minor portion of this trading traces to faltering recovery here. This is Europe.
The most immediate and fatal hazard in Europe, growing all week long: its banks and the European Central Bank itself are packed with sovereign bonds not worth face value. Exactly as the Great Freeze in July 2007, the financial system ceases to function when nobody knows what collateral is worth. We take collateral for loans in assurance that we can sell it if we have to, and make ourselves whole, or mostly so.
The sovereign debt problem inside European banks takes two forms. First is the mass of government bonds on their balance sheets as long-term holdings. In the mysterious world of bank capital, none is required to back up holdings of sovereign bonds because we all know that they will not default. (Not a joke.) Unlike any other loan on bank books, any loss on sovereign bonds is a hit to capital required to support other loans. The risk to these bonds today comes in either outright default (missed payment), or currency risk (payment in New Drachmas). Bank imploders.
The second risk is worse. Banks everywhere are linked by loans to each other, backed by collateral. The best collateral: government bonds. Today, every bank in Europe knows that every counter-party bank is impaired to one degree or another, and every one is studying the prospect of fire-selling semi-phony collateral into a market with only one buyer: the European Central Bank.
The ECB is exposed to nearly $500 billion of Greek debt alone, holdings of bonds bought to support a crashing market, and a great deal more held as collateral against cash hosed into banks, replenishing runs on each other. The ECB began two weeks ago to buy Spanish and Italian bonds when those markets began to crash, and to take French bonds with them. Jean Claude Trichet, a true believer in the European experiment, has executed these policies over the violent objections of Germany, the only country in the zone strong enough to back the ECB's central bank fiction.
The inherent, structural weakness of the ECB is the source of this week's panicked trading. Faith in all central banks rests on national capacity to pay taxes, and upon faith itself. The euro-currency zone has no taxpayers, just 17 parliaments with disparate and contradictory interests. The ECB rests on faith alone. If the zone is unable to find sound financial footing, and soon (as PIMCO's El-Erian said, "Weeks and days, not years and months"), then the world will have to deal with the bankruptcy of the ECB.
Even if it comes to that, or any number of other European disaster permutations, in the US we are likely to be okay. We are less dependent on exports than anybody. As commodity prices collapse, inflation here will disappear. It will be easy to sell Treasurys for a long time, and we have a lot to sell.
Take all of that to the mortgage markets... at any authentic European salvation, the 10-year and mortgages will run up, and fast. Even the Fed's two-year sorta-promise to stay at zero will not hold us here.
And as it is, our markets are frustrating borrowers. Only a handful of giant securitizer-wholesalers survive, and they are raising margins, not passing through all of the market gains. That situation will improve the longer we stay on Europe-watch, but see above: any European rescue, and this record-low episode will conclude.
Both of these charts are one-month "Euribor." Libor, which mortgage borrowers have seen, is the interbank cost of dollars worldwide. Euribor is the same thing, but in euros. Despite the massive funding exertions of the ECB, European interbank distress is easy to see.
Friday, August 12, 2011
Capital Markets Update
by Louis S. Barnes Friday 12, 2011
Wow. Catch you up, first, in case you spent the week inadvertently locked in an airliner commode. The 10-year T-note at one point traded 2.03%, down by one-third in three weeks, the largest percentage move ever.
Standard & Poors might have studied Kafka: “In a battle between you and the world, bet on the world.” Dear S&P: if you want to write a letter to the editor critical of US politics, fine. If you want respect as a credit-rater, act like it.
The Fed’s Open Market Committee made one of the three most important announcements in its history (the other two: Mr. Volcker in October 1979, to let interest rates go as high as necessary to defeat inflation; and the QE1 announcement at Thanksgiving 2008). Aside from the conditional commitment to keep the Fed funds rate at zero for two more years, Perfesser Bernanke settled hash within the Fed.
All spring and summer, the Fed said that temporary factors (gasoline and Japan) had slowed the economy, and despite uncertainty and without further Fed action the second half of 2011 would improve. This reassurance had the feel of false agnosticism, a sop to some regional-Fed presidents who want a sit-still Fed. Tuesday’s post-meeting statement contradicted (dismissed… derided…) the earlier ones, in the manner of a chairman who has lost patience with a minority. Three of those presidents — relics of the Fed’s 1913 founding — dissented, the most since 1992: Kocherlakota, loopy academic in Minneapolis; Plosser, the punishing yer-on-yer-own in Philadelphia; and Dallas’ slicked-back Fisher, yahoo urban-cowboy caricature of a central banker.
These three might have considered, given the example of S&P, one principle of managing national emergencies. If you are in the minority after a policy decision, your self-importance must not undermine concerted action. Thus: SHUT UP.
Much as I admire the Fed’s courage, and wish that monetary gyrations alone would work, we need credit. And that requires relief from regulatory hysteria at all levels.
New economic information was thin, but important: despite the Fed’s grim statement, nothing here confirms double-dip. The NFIB small-business survey was no worse in July than the two prior months, despite good reason; July retail sales rose a half-percent, the weekly measure of unemployment claims is ever-so-slightly improving, and gasoline is about to slide toward three bucks.
The primary cause of this market chaos is Europe, and the fatal virus moved to its circulatory system, its banks. Societe Generale stock has tanked from a 2011 high at 52 to 22, Deutsche Bank from 49 to 29, Banco Santander from 9 to 6, and Intesa Sanpaolo from 10 to 4. All are packed with sovereign bonds not worth face value. Next week Sarkozy will meet Merkel (both have left their vacations!!), and news that Germany has neither the will nor the power to bail out the rest of Europe will not play well. At best, frantic austerity will push all but Germany and Holland into recession.
While we are preoccupied with ourselves and Europe, China is focused on trade racketeering. Its June trade surplus was $22.3 billion, the $26.7 billion excess with us (half of our total deficit) more than covering China’s deficit with the rest of the world. China’s July surplus soared to $31.5 billion. China’s internal “non-tariff” barriers aside (subsidies to exports, exclusion of imports), and Li’l Timmy Geithner yapping at its ankles, the yuan undervalued at fifteen cents last year has yet to reach sixteen cents.
Hanging over everything is the life-trial of Barak Obama. Any CEO will testify that crisis management is an art form, some gifted, some not. All would concur: any plan executed is better than no plan. Mr. Obama said Monday, “I intend to present my own recommendations over the coming weeks”; and today, “There is nothing wrong with our country — there is something wrong with our politics.” One incredibly late, one absurd.
Since taking office, Mr. Obama has given priority to his agenda over first-class economic emergency. House Republicans now hold a veto. Given a divided Congress and people, the President must move toward the center to get anything done, no matter what he and his party’s base prefer. May he find himself as fast as possible.
Wow. Catch you up, first, in case you spent the week inadvertently locked in an airliner commode. The 10-year T-note at one point traded 2.03%, down by one-third in three weeks, the largest percentage move ever.
Standard & Poors might have studied Kafka: “In a battle between you and the world, bet on the world.” Dear S&P: if you want to write a letter to the editor critical of US politics, fine. If you want respect as a credit-rater, act like it.
The Fed’s Open Market Committee made one of the three most important announcements in its history (the other two: Mr. Volcker in October 1979, to let interest rates go as high as necessary to defeat inflation; and the QE1 announcement at Thanksgiving 2008). Aside from the conditional commitment to keep the Fed funds rate at zero for two more years, Perfesser Bernanke settled hash within the Fed.
All spring and summer, the Fed said that temporary factors (gasoline and Japan) had slowed the economy, and despite uncertainty and without further Fed action the second half of 2011 would improve. This reassurance had the feel of false agnosticism, a sop to some regional-Fed presidents who want a sit-still Fed. Tuesday’s post-meeting statement contradicted (dismissed… derided…) the earlier ones, in the manner of a chairman who has lost patience with a minority. Three of those presidents — relics of the Fed’s 1913 founding — dissented, the most since 1992: Kocherlakota, loopy academic in Minneapolis; Plosser, the punishing yer-on-yer-own in Philadelphia; and Dallas’ slicked-back Fisher, yahoo urban-cowboy caricature of a central banker.
These three might have considered, given the example of S&P, one principle of managing national emergencies. If you are in the minority after a policy decision, your self-importance must not undermine concerted action. Thus: SHUT UP.
Much as I admire the Fed’s courage, and wish that monetary gyrations alone would work, we need credit. And that requires relief from regulatory hysteria at all levels.
New economic information was thin, but important: despite the Fed’s grim statement, nothing here confirms double-dip. The NFIB small-business survey was no worse in July than the two prior months, despite good reason; July retail sales rose a half-percent, the weekly measure of unemployment claims is ever-so-slightly improving, and gasoline is about to slide toward three bucks.
The primary cause of this market chaos is Europe, and the fatal virus moved to its circulatory system, its banks. Societe Generale stock has tanked from a 2011 high at 52 to 22, Deutsche Bank from 49 to 29, Banco Santander from 9 to 6, and Intesa Sanpaolo from 10 to 4. All are packed with sovereign bonds not worth face value. Next week Sarkozy will meet Merkel (both have left their vacations!!), and news that Germany has neither the will nor the power to bail out the rest of Europe will not play well. At best, frantic austerity will push all but Germany and Holland into recession.
While we are preoccupied with ourselves and Europe, China is focused on trade racketeering. Its June trade surplus was $22.3 billion, the $26.7 billion excess with us (half of our total deficit) more than covering China’s deficit with the rest of the world. China’s July surplus soared to $31.5 billion. China’s internal “non-tariff” barriers aside (subsidies to exports, exclusion of imports), and Li’l Timmy Geithner yapping at its ankles, the yuan undervalued at fifteen cents last year has yet to reach sixteen cents.
Hanging over everything is the life-trial of Barak Obama. Any CEO will testify that crisis management is an art form, some gifted, some not. All would concur: any plan executed is better than no plan. Mr. Obama said Monday, “I intend to present my own recommendations over the coming weeks”; and today, “There is nothing wrong with our country — there is something wrong with our politics.” One incredibly late, one absurd.
Since taking office, Mr. Obama has given priority to his agenda over first-class economic emergency. House Republicans now hold a veto. Given a divided Congress and people, the President must move toward the center to get anything done, no matter what he and his party’s base prefer. May he find himself as fast as possible.
Friday, August 5, 2011
Capital Markets Update
By Louis S. Barnes Friday, August 5th, 2011
While you were watching the Debt Limit Channel, the world was tending other business. Not very well. Bottom line here, USA: we are not double-dipping, not yet. Very little forward momentum, the weakest numbers since 2009, but still moving.
The violent movements in markets are directly traceable to Europe, not to new US recession or to debt limit action. We have a workable budget deal. The opposing parties are back in their dead-end corners, where for the time being neither will do any harm: the Right in pursuit of a balanced-budget amendment, the Left searching for its cheese.
The July ISM manufacturing survey arrived at 50.9 versus 55.3 in June and 54.0 expected. The “prices-paid” sub-component has collapsed from 85.5 in April to 59.0 in July. The ISM service-sector slid also, to 52.7 from 53.7, but any value above 50 signifies growth. Consumer spending in June went negative .2%, income rising only .1%. The July payroll report this morning could have been a lot worse, up 117,000 jobs, but should not be confused with “good.”
Correlation is not cause, but… Europe’s newest debt/currency fix was announced on July 21, a Thursday. Markets traded happily that day. Before Friday was over, the modified European Financial Stability Facility was exposed as a pathetic self-deception, the weak to levitate themsleves, Germany to avoid any meaningful commitment to the others. Beginning the following Monday, July 25, and since: the spread between German 10-year bonds and Spanish and Italian ones has opened 140bps (today, GER 10s yield 2.30%, SPN 6.06%, ITL 6.16%). French bonds have begun to open, too.
Two traditional markers of European panic: gold, up another forty bucks from an already wild high to $1,663/oz; and the Swiss franc, $0.94 one year ago, $1.22 on July 25, $1.32 today. The euro itself is holding $1.42 in dynamic tension: if the zone collapses on Germany, Holland, Austria, and Finland, it will rocket toward two bucks, a new hard-currency safe-haven, a big Switzerland. If Germany concedes, the ECB to print cash to buy Club Med bonds en masse, the euro will collapse below one buck.
Since July 25, the S&P500 has departed 1,344 and a six-month trading range near there to 1,182 today. A 12% loss, straight line. The inflation yahoos have lost again, just dead wrong for five-straight years: oil is often a panic-proxy for gold, but has dumped to $85/bbl; natural gas from $4.50 to $4, copper from $4.40 to $4.10.
The US 10-year note traded at 3.00% on July 25 and touched 2.41% yesterday, despite the utterly disgraceful efforts of the Left, screeching “Default!” to protect its cheese; the brinkmanship of the Right; the meddlesome incompetence of the rating agencies; and media that won’t even try to get these stories right. Part of the drop in the 10-year is temporary short-covering (see “inflation yahoos,” above); mortgage refinancing locks under 4.50% will tend to insert a floor; and today’s levels touch strong technical resistance to further declines, set last October. Bottom here.
Looking forward, which is what matters, European chaos makes it easy for us to sell new Treasurys, and we have lots to sell. $75 billion in new long-term ones next week alone, about that every 20 days ahead for at least the next two years. A complete euro-collapse, which seems inevitable, would greatly if temporarily slow their economy, and create new global bank losses, but contagion here is hard to identify. S&P500 earnings are roughly 65% overseas, hence the stock market’s extreme reaction since July 25. However, after a euro-collapse, you’d hear a lot less about the need to diversify away from the dollar.
Somebody here may note the failure of European political and leadership, and begin a discussion here. The center of European failure, of course, is self-deception — a relentless refusal to modify hypothesis in the face of contrary evidence.
Here the failure is different: we are in a policy free-for-all and leadership vacuum. Without the prior experience of a time like this, we cannot distinguish wisdom from wise-guy, fanatic from frivolous, sensible from suicidal. Tabula rasa in terra incognito.
Europe is buying time for us.
While you were watching the Debt Limit Channel, the world was tending other business. Not very well. Bottom line here, USA: we are not double-dipping, not yet. Very little forward momentum, the weakest numbers since 2009, but still moving.
The violent movements in markets are directly traceable to Europe, not to new US recession or to debt limit action. We have a workable budget deal. The opposing parties are back in their dead-end corners, where for the time being neither will do any harm: the Right in pursuit of a balanced-budget amendment, the Left searching for its cheese.
The July ISM manufacturing survey arrived at 50.9 versus 55.3 in June and 54.0 expected. The “prices-paid” sub-component has collapsed from 85.5 in April to 59.0 in July. The ISM service-sector slid also, to 52.7 from 53.7, but any value above 50 signifies growth. Consumer spending in June went negative .2%, income rising only .1%. The July payroll report this morning could have been a lot worse, up 117,000 jobs, but should not be confused with “good.”
Correlation is not cause, but… Europe’s newest debt/currency fix was announced on July 21, a Thursday. Markets traded happily that day. Before Friday was over, the modified European Financial Stability Facility was exposed as a pathetic self-deception, the weak to levitate themsleves, Germany to avoid any meaningful commitment to the others. Beginning the following Monday, July 25, and since: the spread between German 10-year bonds and Spanish and Italian ones has opened 140bps (today, GER 10s yield 2.30%, SPN 6.06%, ITL 6.16%). French bonds have begun to open, too.
Two traditional markers of European panic: gold, up another forty bucks from an already wild high to $1,663/oz; and the Swiss franc, $0.94 one year ago, $1.22 on July 25, $1.32 today. The euro itself is holding $1.42 in dynamic tension: if the zone collapses on Germany, Holland, Austria, and Finland, it will rocket toward two bucks, a new hard-currency safe-haven, a big Switzerland. If Germany concedes, the ECB to print cash to buy Club Med bonds en masse, the euro will collapse below one buck.
Since July 25, the S&P500 has departed 1,344 and a six-month trading range near there to 1,182 today. A 12% loss, straight line. The inflation yahoos have lost again, just dead wrong for five-straight years: oil is often a panic-proxy for gold, but has dumped to $85/bbl; natural gas from $4.50 to $4, copper from $4.40 to $4.10.
The US 10-year note traded at 3.00% on July 25 and touched 2.41% yesterday, despite the utterly disgraceful efforts of the Left, screeching “Default!” to protect its cheese; the brinkmanship of the Right; the meddlesome incompetence of the rating agencies; and media that won’t even try to get these stories right. Part of the drop in the 10-year is temporary short-covering (see “inflation yahoos,” above); mortgage refinancing locks under 4.50% will tend to insert a floor; and today’s levels touch strong technical resistance to further declines, set last October. Bottom here.
Looking forward, which is what matters, European chaos makes it easy for us to sell new Treasurys, and we have lots to sell. $75 billion in new long-term ones next week alone, about that every 20 days ahead for at least the next two years. A complete euro-collapse, which seems inevitable, would greatly if temporarily slow their economy, and create new global bank losses, but contagion here is hard to identify. S&P500 earnings are roughly 65% overseas, hence the stock market’s extreme reaction since July 25. However, after a euro-collapse, you’d hear a lot less about the need to diversify away from the dollar.
Somebody here may note the failure of European political and leadership, and begin a discussion here. The center of European failure, of course, is self-deception — a relentless refusal to modify hypothesis in the face of contrary evidence.
Here the failure is different: we are in a policy free-for-all and leadership vacuum. Without the prior experience of a time like this, we cannot distinguish wisdom from wise-guy, fanatic from frivolous, sensible from suicidal. Tabula rasa in terra incognito.
Europe is buying time for us.
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