This Could Get Interesting

Capital Markets

Friday April 26, 2013
 By Lou Barnes

A lot of movement under the covers. Although few sounds, nobody talking, most of the lumps are recognizable.

Long-term rates have fallen here and everywhere since late March, and have taken a new leg down today, US10s to 1.67% for the first time since December. Some of today’s move may be “event risk” bond-buying to protect against Syria. If they’ve really used Sarin, in a region vastly more dangerous than, say, North Korea….

More likely: wrestling under the sheets is economic action. Starting with today’s GDP report, Q1’13 at 2.5% versus expectations of 3.1%, and dreams of 4% and even 5% before March data turned down. March data have been so poor that odds favor a downward revision from the 2.5%. The Chicago Fed’s index whipped to minus .23 in March from plus .76 in February, and new orders for durable goods tanked 5.7% versus expectations for a decline half that size — even stripped of volatile orders for transportation, durables were down 1.4% versus hopes for plus 0.5%.

China’s purchasing-managers’ equivalent in April slid by surprise (why is anyone surprised?) to breakeven 50.5 from 51.5 in March. Global commodity prices continue to follow China’s track.

The Bank of Japan’s ultimate stimulus is thus far leaking yen out of Japan, aiding the global drop in long-term rates but not appearing to do anything for Japan itself.

Europe has found new cans to kick, but only after concluding a new deal with Mephistopheles. It is now painfully clear that non-German economies cannot recover under current policies (tied to the over-strong German-euro), nor can they continue current austerity. Spain bolted today, announcing 3% budget deficit target in 2016, which might as well be 2061. The deal with the Devil: just keep on borrowing past the point of no return, Italian and Spanish 10-year sovereign yields falling from the 7% tops in 2011-2012 now to 4% under the protection of the ECB. Which is expected to cut its overnight rate next week from 0.75%, a band-aid on a traumatic amputation.

Footnote on “point of no return.” Rogoff and Rinehart, the great researchers of past financial crises, were caught in an error two weeks ago which questioned their sovereign debt tipping point at 90% of GDP. Global Krugmanites leapt on the flaw: “Hah! See! We can borrow forever.” No, you can’t. You can get away with it for a long time if your central bank helps, and far beyond 90% of GDP, but if you pass the hazy horizon in which your economy will never be able to generate enough tax revenue to pay the interest due… one day, someday, you will default. The Devil smiles.

To move eyes from overseas to here is a great relief. Our own austerity is probably responsible for our spring slowdown, but interest rates are falling accordingly, the Fed has no inflation fear except too low, and can and should continue QE. Most amazing, budget deficits are falling at all levels of government, especially Federal, which may make it below 3% of GDP within a year. If the economy does not plotz, just mashes forward, we could stumble into a Clinton-accidental balanced budget.

Housing is central here and badly misunderstood. Everyone in healthy markets (land-scarce, inbound-migrating, global-plugged economies) sees auction conditions, and thinks the economy will surge immediately.

It’s a big country. March sales of existing homes actually slid slightly, and sales of new ones are consistently below forecast. The usually reliable FHFA has home prices up 7% year-over-year, and that overstatement is testimony to everyone’s struggle to measure prices during the transition from high levels of distressed sales to low.

MGIC, the mortgage insurer, just released its April run-down on 73 metro areas: 15 are “weak,” 26 are “soft,” and 32 “stable” (which in MGIC terms means “moderate” price appreciation, “balanced between buyers and sellers”), and still not one, single “strong” market. 26 of the 73 are rated as “improving” (in the process of moving to a better category), but given wildly overtight credit and little growth in incomes even among those with jobs, housing-led recovery is going to take time. But will come.

This Is Wait And See

Capital Markets

By Lou Barnes  | April 19th, 2013

We have since the Great Recession began in 2007 been buttonholed by commentators of all kinds arguing about what is happening to us, and debating risks and remedies in a situation without precedent.

Perhaps the dominant thread has been those insisting that inflation will be the inevitable consequence of central banks’ efforts to save the global economy from implosion. The inflationistas have also hijacked the language, describing central banks working to prevent collapse of stocks and housing and bank portfolios as creating “asset inflation.” Joining the inflators, always: the gold bugs.

By this week’s end, the sky is black with buzzards circling the remains of these arguments and their progenitors, not just here in the US but everywhere.

In the US too much attention is paid to CPI; the Fed watches dozens of price indicators, led by “personal consumption expenditures.” PCE peaked in 2011, briefly almost 3% annualized and has fallen ever since, now barely 1%. The “core” PCE, stripped of energy and food costs, since Lehman in 2008 has never made it above 2%, and is today synchronized with nominal PCE at 1%. Both falling.

When inflation falls below 1%, some components of the economy are already in deflation, a very bad thing if carrying debt which must be paid back in dollars more valuable than those borrowed in the first place. And the world today is more debt-soaked than ever in history.

The investment darlings of the inflationistas have cratered. The immediate impetus is a matter of debate among vultures and victims alike, but this combination did the deed: new US job weakness, Japan in last-ditch printing, China slowing fast while trying to convert from an excessive-investment economy to consumer-based, and confiscation in Cyprus.

TIPS — Treasury Inflation Protected Securities — have fallen as never in their history. Gold peaked at $1800/oz last October, stumbled slowly to $1600 by April Fool’s Day and now trades — sort of — at $1400. NYMEX crude has topped at $100/bbl repeatedly in the last year ($150 in 2008), now $87. 10-year T-notes are 1.70% and looking more likely to fall than to rebound.

Major crises often change course because of last-straws in odd places. Little Austrian banks in 1930. Archdukes in Serbia. Cyprus.

On Wednesday Jens Weidemann of the ECB and Bundesbank gave an interview in which he confirmed the German reputation for flexibility, diplomacy, and sensitivity to others. The European crisis will “remain a challenge over the next decade,” which means he has no idea. Then, “The Cypriot case shows that it is possible to wind down banks… taxpayers don’t always have to step in to bail out.”

The plan imposed by Germany on Cyprus involves confiscating about a quarter of its bank deposits. Some are Russian (as everywhere in the euro zone), but the rest belong to taxpayers. Used to. The Cypriot economy will collapse by a like percentage, or more. Sparing harm to “taxpayers”? Hardly. Adding heat to the gold meltdown: the forced sale of Cyprus’ central bank’s gold reserves. (If you buy gold to protect against the end of the world, in the moment do you really think you’ll be able to get to your hoard — or if you begin to spend it no one will notice?).

The NYT reported this week, confirmed by Unicef, that across the Aegean from Cyprus, Greek children now go hungry in large numbers.

The greatest bank run of all time began in July 2007, and still we argue about “letting banks go” versus “taxpayer bailouts.” Charlatans have pretended there is someone else available to take the loss, but in a bank collapse taxpayers always will take the hit one way or another. The same phony-theorists claim that preventing financial collapse will inevitably bring inflation.

I hope that the deep losses taken in the last few weeks, afflicting both the guilty and innocent, will help us to move off dead center. Here and a lot of other places.

“Ask Me About The Gap Down”

Capital Markets

Friday April 12th
By Lou Barnes

More soggy data have confirmed the poor jobs report for March, and so we’ve held on to the interest rate improvement set last week. However, some good news is on the way, one of the few kinds that will tend to hold rates down, legitimate good news.
The NFIB survey of small business fell in March, breaking a three-month up-trend, but overall the same, going-nowhere pattern since 2009. Big business thrives in global trade, but small fry are undercut by the same trade, especially wages. Today’s word of flat retail sales in March (down .4% ex-autos), had even the stock market drunks closing the bar for a while this morning.
The good news is in two odd pieces, first the US budget and debt projections. President Obama has at last delivered a budget. The miracle is not so much the mouse birthing an elephant as how little there is to argue about. In 2023 the President would spend $5.66 trillion versus revenue of $5.22, and the Republican alternative in Congress today would achieve balance at $5 trillion.
Perhaps the most important lesson of Bowles-Simpson’s report in December 2010: the mathematics of Federal spending and revenue leave little room for wiggling. Both parties have wrestled in the net ever since, but reality wraps them ever-tighter. Of course the Democrats want a perpetual deficit, and the President’s proposal has back-loaded the discipline (Do bears conduct some bodily functions in the woods?), but $400 billion apart in 2023? That’s an accounting error. Cut a deal and move on.
If the economy out-performs, we’ll be in surplus again, just like the Clinton accident. If it under-performs we’ll be back in austerity irons. So, might you all think of ways to grow the show? NoooOOOooo. Bi-partisan snarling is too much fun. For voters, above all. Thus in grand, traditional American form, our economy will repair, adjust, and progress by accident, gridlock a greater benefit than if — saints preserve us — either party got enough control to have its way.
The second batch of good news is a bit backhanded, but take it. I don’t know who started this line, but it’s a good one: “The US economy is the cleanest dirty shirt in the laundry basket.”
The WSJ reported this week that Sanofi, the Paris-headquartered pharma giant, has tried to lay off and/or reassign workers at its Toulouse research facility. The 2,300 workers there have not come up with a new drug in 20 years. The French government is outraged, now considering a ban on any layoff by any profitable company.
In another report, Chilean mining of copper has gradually become uneconomic versus US production, despite the US 10-year environmental approval process. A Chilean miner driving a truck makes well over $70,000 per year; in the US $60,000. Here we have endured a grinding, 20-year wage freeze, undercut by global competition. We may now reap the benefit of that sacrifice, competitive once again.
China has for almost 30 years tried to out-do Japan’s bridges to nowhere (and the central tenets of Krugmanism) by forcing investment into its economy. China’s approach may be more destructive, as continuous excessive investment in production capacity has created ruinous oversupply which harms itself and the economies and wages of its trading partners. As it nears a conclusion (see www.mpettis.com) its fibbing about actual conditions has reached the Baghdad-Bob stage.
This week China’s authorities released new and soaring export figures, a pattern suspect for years. Analysts were ready this time, crossfooting China’s numbers with the import numbers at corresponding nations, and exposed the sham so painfully that the chief customs statistician, Zheng Yueshing had to apologize.
Here in our rumpled and egg-stained shirts, we chew on each other, we spin and fume about what to do, but government statisticians do not lie about the facts. While our leaders focus on zero-sum grabbing from each other, the rest of us in the most disorderly and undirected ways adapt and compete. Not bad at all. But imagine if we actually tried to compete, top down, as government’s central purpose?

"Big Rally"!!!