“Such policies, known as financial repression, usually involve a strong connection between the government, central bank, and financial sector.”
-Carmen M. Reinhart
While Keynesian central planners continue to hope that they can suspend economic gravity, hope is not a risk management process. This morning’s economic data out of Europe continues to show you what Financial Repression looks like. Not good. Not going away.
The good news on this front is that it’s not different this time. Co-author of one of the most empirically damning books against Policies To Inflate through currency devaluation and/or sovereign debt pile-ups (This Time Is Different), Carmen Reinhart, wrote an excellent paper on March 11th that was, shockingly, not highlighted by The Ben Bernank in any of his daily Dollar Debauchery speeches last week.
Reinhart’s thesis, “Financial Repression Has Come Back To Stay”, is very similar to what we have called The Bernank Tax: “In the US, as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.”
Back to the Global Macro Grind…
While the Fed Chairman remains laser-like focused on “laws” that are nothing more than social science stories (Okun’s Law), the rest of the world doesn’t seem so interested in his career risk management. People with real money in the game continue to search for the truth.
The truth is that the pace of Global Growth Slowing has picked up, sequentially, in the last month. While plenty a perma-bull was anchoring on 1 of the 2 China PMI prints released this weekend (1 beat, 1 missed – they were both probably made up), here’s the truth about PMI reports around the world in March versus February:
- USA 62 MAR vs 64 FEB
- China 53 MAR vs 51 FEB (or 48 MAR vs 50 FEB)
- India 54 MAR vs 56 FEB
- Germany 48 MAR vs 50 FEB
- France 47 MAR vs 50 FEB
- Spain 44.5 MAR vs 45 FEB
In other words, if you look at 47% of Global GDP (these 6 countries combined = approximately $29.5T in GDP), it’s slowing.
Now if you want to be the bull instead of being the perma Risk Manager on this top line matter, you might say ‘well hey, the UK PMI print for MAR was 52 versus 51.5 in FEB.’ And I’ll be the first to agree with you – it’s just a fact - as is Italy missing their PMI and printing a 10-year high in its unemployment rate of 9.3%.
Taking a step back, since Growth Slowing around this time last year didn’t wake up a lot of people until it was way too late, it’s important to reconcile why perma-bull pundits don’t get paid to see the obvious. It’s called anchoring – “a cognitive bias that describes the common human tendency to rely heavily, or “anchor”, on one piece of information when making decisions.” (Wikipedia)
Anchored: Washington and Old Wall Street based “economists” still think, for example, that US GDP is tracking “around 3%.” Why? Well, because the US GDP report for Q4 of 2011 was, uh, 3%!
You’ll find the complexion of the Q4 2011 US GDP report (C + I + G + (EX-IM)) interesting:
- GDP = +2.97% (up from 1.81% SAAR in Q311)
- Consumer Goods = +1.29% (up from +0.33% in Q311)
- Consumer Services = +0.19% (down from +0.9% in Q311)
- Fixed Investment = +0.78% (down from +1.52% in Q311)
- Inventories = +1.81% (up from 1.35% from Q311)
- Government = -0.84% (down from -0.02% in Q311)
- Exports = 0.37% (down from +0.64% in Q311)
- *Deflator = 0.84%
In other words, if the US Government uses a low enough “Deflator” (you subtract inflation from GDP to get the real (inflation adjusted) GDP number), it can pretty much tell you that US Economic Growth is whatever it wants it to be. In an election year, that’s just great.
But is this economy great? I think anyone who drives their own vehicle in it knows that inflation in cost of goods is running at least +300-500% higher than the GDP Deflator of 0.84% (so is the composite of US CPI and PPI).
Q: So, what happens to GDP when:
- The Nominal GDP growth rate declines sequentially like it just did (Q4 to Q1)
- The inflation rate rises sequentially like it just did (Q4 to Q1)
A: Real (inflation adjusted) Growth Slows.
Notwithstanding that Consumer Services slowing and Inventories rising in Q4 wasn’t a bad signal in and of itself in terms of Q4 “growth” mix, what you are seeing in Q1/Q2 of 2012 is the other side of Bernank’s War –it’s called Financial Repression.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), and the SP500 are now $1, $121.94-124.13, $78.74-79.30, $82.44-84.03, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
* Italian and Spanish sovereign swaps widened along with European Bank swaps over the week, underscoring increasing risk in the Eurozone.
* American Bank default swaps were a mixed batch, with 16 reference entities seeing swaps tighten and 11 seeing widening. MS is back over 300 bps.
* The Euribor-OIS spread continued to move lower, falling 2 bps last week to 41bps. Over the same period, the TED spread was flat.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged
• Intermediate-term(WoW): Positive / 4 of 12 improved / 2 out of 12 worsened / 6 of 12 unchanged
• Long-term(WoW): Neutral / 4 of 12 improved / 4 out of 12 worsened / 4 of 12 unchanged
1. US Financials CDS Monitor – Swaps tightened for 16 of 27 major domestic financial company reference entities last week.
Tightened the most WoW: AXP, WFC, MTG
Widened the most WoW: ALL, TRV, BAC
Tightened the most MoM: AXP, JPM, BAC
Widened the most MoM: MBI, MMC, ACE
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 35 of the 40 reference entities. The average widening was 3.4% and the median widening was 7.8%.
3. European Sovereign CDS – European Sovereign Swaps mostly tightened over last week. Portuguese sovereign swaps tightened by 9.5% (-113 bps to 1076 ) and Italian sovereign swaps widened by 6.8% (25 bps to 397).
4. High Yield (YTM) Monitor – High Yield rates rose 0.9 bps last week, ending the week at 7.14 versus 7.13 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 4.5 points last week, ending at 1652.
6. TED Spread Monitor – The TED spread remained flat over last week, ending the week at 40 bps.
7. Journal of Commerce Commodity Price Index – The JOC index fell -0.6 points, ending the week at -9.5 versus -8.9 the prior week.
8. Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 41 bps.
9. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
10. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened, ending the week at 112 bps versus 110 bps the prior week.
11. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index rose 26 points, ending the week at 934 versus 908 the prior week.
12. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened by 1 bp to 189 bps.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.3% downside to TRADE support.
Margin Debt - February: +0.85 standard deviations
We publish NYSE Margin Debt every month when it’s released. NYSE Margin debt hit its post-2007 peak in April of 2011 at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did last April, it has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May 2011. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. We would need to see it approach -0.5 to -1.0 standard deviations before the trend runs its course. There’s plenty of room for short/intermediate term reversals within this broader secular move. Overall, however, this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through February.
Joshua Steiner, CFA
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2012 off to a slow start
M&A and Other Trends for Q1 2012
- Q1 2012 US hotel transaction volume was roughly unchanged quarter-over-quarter at ~$1 billion, down significantly from Q1 2011's ~$5 billion. This has been a much weaker start than expected.
- The number of US hotel transactions in Q1 2012 was similar to Q4 2011
- US average price per key in the Upper Upscale segment rose 14% QoQ
- The European market was also unusually quiet this quarter
- Apart from some scheduled sales from Accor, the majority of the transactions involved REITs/JVs
- According to Fitch, February hotel delinquency rate dropped to 10.75% from 12.21% in January 2012.
- The decline was largely attributed to the two loans of the Innkeepers portfolio being converted to current. Hotel delinquency rates have steadily declined from 14% in Q3 2011.
Lately we have been seeing some good opportunities on the short side but PFCB remains one of our favorite longs. Keith bought PFCB today in the Hedgeye Virtual Portfolio.
P.F. Chang’s is a turnaround story that is, we believe, slowly turning the tide of bearishness that has weighed down the stock during the last few years. We are confident that the company – for the first time in a while – has a credible plan to turn the Bistro around. The stock languishes near the bottom of our sentiment scorecard so there are still plenty of analysts and investors to be converted.
In terms of catalysts, April 2nd is an important day for the Bistro as the Triple Dragon initiative is launched. The initiative blends “a number of the key initiatives including our new lunch menu, some of the best items from our innovation Bistro menu; new music and a new look for our service teams. All of these are designed to elevate our guest experience and energize our employee team”.
As the chart below shows, the stock is nearing the trade-line support line at $39.35.