“My mother said to me, 'If you are a soldier, you will become a general. If you are a monk, you will become the Pope.' Instead, I was a painter, and became Picasso.”
The Spanish painter Pablo Picasso had no shortage of belief in his intrinsic talent as a painter. His point in the quote above was to basically say that if you are going to do something well, you should endeavor to do it better than anyone. Something his nation is not currently doing well, let alone better than any other nation, is managing their sovereign debt load.
As we wake up this morning to another week of managing risk in the global macro markets, Spain, as we highlighted in a detailed note last week, is once again front and center. The leading indicator of an acceleration of sovereign debt woes in Europe is the Euro, which has dropped just below $1.30 versus the U.S. dollar for the first time in two months.
The Euro is moving in anticipation that there are a series of Spanish debt auctions this week that may not go quite as planned. Specifically, tomorrow Spain will sell 12 and 18-month notes. This will be followed on Thursday by longer term debt due in October 2014 and January 2022. Watching these auctions will be critical in determining whether the European Union has the wherewithal to contain the once again accelerating crisis in confidence in the European sovereign debt markets.
To that point, if the debt and CDS markets for Spain are any indication, the Spanish sovereign debt issues are far from contained. Spanish 10-year yields are now at 6.16% and at levels not seen since December 2010. Meanwhile, Spanish credit default swaps are, literally, at all-time highs.
As we’ve previously written, Spain is a bigger concern than Greece for many reasons, but most specifically because its economy is almost 5x that of its Hellenic neighbor and is the 12th largest economy in the world. Clearly, Spain is not an insignificant player on the world stage.
To be fair, Spain’s sovereign debt load is not elevated to a level that would suggest as much stress as we are currently seeing in its debt markets. In fact, according to Euro Stat, Spain’s federal debt balance as a percentage of GDP was only 69% at the end of 2011. Many sovereign analysts believe the number is a bit of a misnomer though and when regional debts are included, which are in effect a recourse to the federal government, the total amount of debt is closer to 90%.
Regardless, the more pertinent issue in Spain is the acceleration of debt. By Spain’s own projections, the nation will add more than 10% to its debt-to-GDP ratio this year, taking that ratio closer to 80% on Euro Stat’s numbers. This will lead the industrialized world in growth in debt-to-GDP.
Spanish unemployment hit 23.6% at the end of February and the unemployment rate for the youngest demographic in Spain is literally at 50%. Given the structural unemployment issue, Spain is literally unable to grow out of its debt issues. This lack of growth potential is clearly what the markets are starting to bake in to Spanish yields. That is, if there is a way out, it is not going to be easy and certainly won’t occur before the nation becomes substantially more indebted.
This weekend Paul Krugman of the New York Times, in typical fashion, suggested adding more Keynesian stimulus to the mix. Or, at the very least, Krugman suggests dispensing with the “insane” austerity. If the United States is any case study, accelerating government spending does not appear to be the path to sustained economic prosperity.
Krugman may actually get his way in France, where Socialist Francoise Hollande is extending his lead over Nicolas Sarkozy. Currently, Hollande is expecting to win both the first round (April 22nd) and the second round (May 6th) of French elections. Sadly, we actually know how Socialism ends as well.
The other rumor out of Europe this morning is that Spain may re-instate a short selling ban. That is a little counter intuitive to us. Even if the markets are not giving you much in the way of confidence votes, changing the rules mid game is not going to increase confidence.
In other global macro news this morning, we are also seeing increased evidence of growth slowing and inflation accelerating. On the growth front, Sweden cut its 2012 growth outlook from +1.3% to +0.4% and the Bank of Korea cut its 2012 growth forecast from +3.7% to +3.5%. Meanwhile, inflationary data from India continued to come in hot as wholesale prices “beat” consensus estimates coming in at +6.9% versus the +6.7% estimate.
Switching gears, and while we wouldn’t normally flag Barron’s as a leading indicator for tail risk, the weekly publication did do a nice job this weekend discussing the next impending debt disaster in the United States, student loans. In terms of scale, the almost $1 trillion in outstanding student debt is larger than both the auto loan market and credit card market. The most interesting statistic quoted in the article is that college tuition is up 300% since 1990, which far outstrips the increase in more traditional measures of inflation by a factor of 4x.
At the end of the day, though, the vast majority of the student debt is guaranteed by the federal government, so on some level it has much more security than the typical sub-prime mortgage. Just make sure you add the $1 trillion asterisk when calculating the debt-to-GDP of the United States. Fiscal Picassos, we are not.
The immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $118.63-122.36, $79.64-80.27, $80.12-82.34, $1.29-1.31, and 1, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on April 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“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 $1636-1679, $121.94-124.13, $78.74-79.30, $82.44-84.03, and 1404-1416, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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* Spanish sovereign swaps continue to climb. At 502 bps this morning, they are up 102 bps from a month earlier and are up 38 bps vs. the prior week. Italian swaps stand at 435 bps, up 17 bps week over week and up 80 bps vs. a month earlier. For reference, Spanish swaps just hit an all time high as of this morning, narrowly eclipsing their highs of November last year (497 bps). Italian swaps are still a good bit below their prior highs.
* Both American and European Bank CDS were wider WoW. Bank swaps are reflecting the deterioration in creditworthiness in Spain, an economy roughly 5x as large as that of Greece. Get ready for 2011 all over again as we watch Spanish swaps climb and climb and concerns surrounding that rise escalate.
* Euribor-OIS has ceased tightening. After steadily falling since the start of the year, the risk measure has essentially flattened out at the 40-41 bps level. This had been a key measure we were using to gauge the perceived risk in the counterparty system.
* High yield rates rose 4 bps last week underscoring increasing risk in the market.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 4 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
• Long-term(WoW): Neutral / 3 of 12 improved / 3 out of 12 worsened / 6 of 12 unchanged
1. US Financials CDS Monitor – Swaps widened for 26 of 27 major domestic financial company reference entities last week.
Widened the most WoW: GNW, RDN, MTG
Tightened the most/widened the least WoW: MBI, AON, COF
Widened the most MoM: C, BAC, MS
Tightened the most/ widened the least MoM: MTG, MBI, AXP
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 37 of the 40 reference entities. The average widening was 5.6% and the median widening was 4.8%.
3. European Sovereign CDS – European Sovereign Swaps mostly widened over last week. Spanish sovereign swaps widened by 8.1% (38 bps to 502).
4. High Yield (YTM) Monitor – High Yield rates rose 4 bps last week, ending the week at 7.37 versus 7.33 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 1.75 points last week, ending at 1650.
6. TED Spread Monitor – The TED spread fell 1.6 basis points last week, ending the week at 38.2 bps this week versus last week’s print of 39.8.
7. Journal of Commerce Commodity Price Index – The JOC index was roughly flat WoW, ending the week at -8.7.
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 was flat ending the week at 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 119 bps versus 118 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 44 points, ending the week at 972 versus 928 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 tightened to 172 bps, 12 bps tighter than a week ago.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.9% 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
Having trouble viewing the charts in this email? Please click the link below to view in your browser.
TODAY’S S&P 500 SET-UP – April 16, 2012
As we look at today’s set up for the S&P 500, the range is 39 points or -1.55% downside to 1349 and 1.29% upside to 1388.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 4/13 NYSE -1577
- Down from the prior day’s trading of 1933
- VOLUME: on 4/13 NYSE 770.99
- Increase versus prior day’s trading of 1.89%
- VIX: as of 4/13 was at 19.55
- Increase versus most recent day’s trading of 13.66%
- Year-to-date decrease of -16.45%
- SPX PUT/CALL RATIO: as of 04/13 closed at 1.98
- Decrease from the day prior at 2.11
CREDIT/ECONOMIC MARKET LOOK:
BOND YIELDS – 10yr UST yields snapping our intermediate-term TREND line of 2.03% last week is very bullish for Treasuries until it isn’t. This happened in conjunction with a spike in weekly jobless claims (380,000) = Growth Slowing.
- TED SPREAD: as of this morning 38
- 3-MONTH T-BILL YIELD: as of this morning 0.08%
- 10-Year: as of this morning 1.98
- Unchanged from prior day’s trading of 1.98
- YIELD CURVE: as of this morning 1.71
- Decrease from prior day’s trading at 1.72
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: NOPA Monthly Oil, Soybean capacity
- 8:30am: Empire Manufacturing, April, est. 18.00 (prior 20.21)
- 8:30am, Retail Sales, March, est. 0.3% (prior 1.1%)
- 9am: TIC Flows, Feb., est. total net $30b (prior $18.8b)
- 10am: Business Inventories, Feb., est. 0.6% (prior 0.7%)
- 10am: NAHB Housing Market Index, April, est. 28 (prior 28)
- 11:30am: Treasury selling $30b 3-mo., $28b 6-mo.
- 12:30pm: Fed’s Pianalto speaks in Lexington, Kentucky on banking, economy
- 3:30pm: Fed’s Bullard speaks at Utah State University on the economy and monetary policy
- President Obama says accusations against Secret Service agents need thorough investigation
- Senate holds test vote on “Buffett Rule” tax proposal
- Arizona primary for Gabrielle Giffords’s congressional seat
- U.S. House Oversight Committee Chairman Darrell Issa, R- Calif., holds hearing about “wasteful spending” by GSA, 1:30pm
- U.S. Congress returns from two-week Easter recess
- Supreme Court in session
WHAT TO WATCH:
- Retail sales may have gained 0.3% in March, economists est., indicating gasoline prices may have limited impact on spending
- World Bank may select next president; U.S. nominee Jim Yong Kim favored after rival candidate Jose Antonio Ocampo withdrew
- Goldman Sachs said to raise $2.5b selling ICBC shrs
- Carlyle Group said seeking to raise up to $762.5m in IPO; prospectus may be filed as soon as today
- China’s decision to double the scope of daily yuan moves may spur demand for renminbi bonds in Hong Kong
- FCC seeks $25,000 fine from Google for not cooperating with probe into collection of personal data over wireless networks
- Oracle, Google patent trial scheduled to begin today with jury selection; opening statements tomorrow
- Hon Hai, Pegatron Get Apple iPad Mini Order, Commercial Times reports
- Vestas Wind Systems jumped after a Danish newspaper reported two Chinese competitors are considering a possible bid
- Anheuser-Busch InBev said to be nearing an agreement to gain control of Cerveceria Nacional Dominicana
- GDF Suez agreed to buy 30% of International Power it doesn’t already own for $10b
- Citigroup, JP Morgan, other banks release monthly credit- card data; Discover announced last week
- IRS filing deadline for individual tax returns is Tuesday
- Mattel (MAT) 6 a.m., $0.07
- M&T Bank (MTB) 7:51 a.m., $1.49
- Citigroup (C) 8 a.m., $1.02
- Gannett (GCI) 8:15 a.m., $0.31
- Charles Schwab (SCHW) 8:45 a.m., $0.15
- Lincare Holdings (LNCR) 4:30 p.m., $0.53
- Brown & Brown (BRO) 4:54 p.m., $0.33
- Equity Lifestyle Properties (ELS) 8 p.m., no est.
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
COMMODITIES – getting blasted ever since the US Dollar stopped going down (2wks ago); got interconnectedness? We call this Deflating The Inflation, or unwinding Bernanke’s Bubbles (commodity bubble – see our slide deck). Gold and Copper down hard this morning after failing at $1675 and $3.73 levels of support last week – both are in Bearish Formations (bearish on all 3 of our risk management durations).
- Speculators Cut Wagers Most in 2012 as Growth Slows: Commodities
- Commodity ‘Super Cycle’ May Be Coming to End, Citigroup Says
- Corn, Wheat Drop on Slower China Growth, European Debt Concerns
- Oil Declines a Second Day in New York After Iran Nuclear Talks
- Gold Declines in London as Stronger Dollar Cuts Investor Demand
- Sugar Falls to Three-Month Low on Brazil’s Crop; Coffee Declines
- Copper Trades Little Changed at $7,980 a Ton; Aluminum Climbs
- Mongolia Starts Share Sale Process for State-Owned Coal Company
- Copper May Gain 20% on China Industrial Demand: Chart of the Day
- Funds Cut Bullish Gasoline Bets as Prices Slide: Energy Markets
- Conoco Fattest U.S. Dividend Offers 4% Income Not Growth: Energy
- U.S. Auto Rebound Fuels 14% Great Lakes Cargo Increase: Freight
- Japanese Utilities Use Record LNG Last Year on Idle Reactors
- Speculators Cut Bets Most in 2012 on China
- Commodities Extend Drop on European Crisis, Slower Asian Growth
- Copper May Fall to $7,448 a Ton on Fibonacci: Technical Analysis
- China to Overtake U.S. as Biggest Tanker User: Chart of the Day
EUROPE – the DAX is testing an intermediate-term TREND line breakdown of the 6614, so I’ll be watching that line closely as a barometer for what the correction in US stocks could look like (Germany’s jobs and fiscal situation is stronger than in the US); Spain and Italy look awful; we re-shorted France on Thursday as we think mean reversion there is to the downside.
The Hedgeye Macro Team
The Macau Metro Monitor, April 16, 2012
NUMBER OF GAMING TABLES AND SLOT MACHINES IN 2007-2012 DICJ
Macau Q1 gaming tables ended at 5,242, down 60 tables QoQ, while slot machines increased by 46 machines QoQ to 16,102.
NEW HOME SALES REMAIN STRONG IN MARCH Channel News Asia
New home sales in Singapore remained strong in March. A total of 3,032 units of new homes were sold in March, of which 2,393 were private homes while the rest were made up of executive condominiums. The 2,393 units of private homes sold last month were marginally lower than the 2,413 units transacted in February.
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