This note was originally published
at 8am on July 24, 2012.
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“It occurs at first very slowly, then all at once.”
That’s what Hemingway said about going broke. That’s also what I said in response to my research team’s questions in the morning meeting yesterday about levered sovereign nations and their banks. From a time and price, this entire thing becomes Too Big To Bail. If it wasn’t, why are the Spaniards banning short selling?
But do people really believe they won’t be bailed out? Listening to the sad whisper of Qe Begging each and every market day, I’m not so sure. While the likes of Timmy Geithner may believe “deeply” that it would be “irresponsible” to not raise taxes, this economy is digging into a deepening hole that some of these banks may not be able to exit without the government’s hand.
But how many hands does the US government have? How many Spanish and Italian banks is Geithner going to have to attempt to bailout via the US tax payer backstopped IMF? How much time does the government have in a stagflating economy to bailout a domestic bank like Morgan Stanley? If it’s happening All At Once, neither you nor I know.
Back to the Global Macro Grind…
As Keynesian central planners around the world continue to spin their wheels looking for the next “growth policy”, they continue to perpetuate #GrowthSlowing by piling more debt-upon-debt.
As Growth Slowing’s Slope accelerates on the downside, some of the few remaining leading indicators that were relatively stable for the last 6 weeks are now showing signs of the same economic gravity that has gripped them since March:
- Hong Kong’s Hang Seng Index – down -3.8% in the last 2-days has once again snapped intermediate-term TREND support
- Italy’s MIB Index – down -13% from its July high has snapped its YTD closing lows established at the end of May
- USA’s Russell 2000 – down -5% from its early July high has snapped both its TRADE and TREND lines of support
All the while, some investors are obviously getting whipped around, buying high and shorting low. But that institutional performance chasing problem isn’t nearly as problematic as the causality driving the whip.
The worse the global economic data gets, the more Qe begging for bailouts the market hears. The more they beg, the more the government creates an expectation that they’ll be there to bail them out. These expectations are now in and of themselves becoming the market’s biggest risk.
Now, you could say that “growth expectations are low and stocks are cheap.” If I hear that a dozen times a day, I see it tweeted 100x over. So that’s consensus. It’s also what consensus has been saying since March. Growth continues to surprise on the downside and “cheap” stocks keep getting cheaper.
Looking at the Big Macro Data this morning, you can say whatever you want to say – but the data is the data:
- German PMI (manufacturing index) tanked in July at 43.3 versus 45.0 in June
- Chinese “flash” PMI rose in July from 48.2 to 49.5
- Brazilian inflation rose “surprisingly” on the mid-July reading back up to 5.2%
Hedgeye Playbook: get the slopes of Growth and Inflation right (sequentially) and you’ll get a lot of other things right:
1. GROWTH: given that any PMI reading below 50 is just plain bad, you can call the growth data better than awful in China – but, at the same time, agree with Moody’s that Germany’s economic growth picture is, well, awful.
2. INFLATION: that’s the most important Global Macro inflation data point we’ve had so far in July (primarily because it’s one of the few July numbers that have been reported!). This is the first sequential uptick in Brazilian inflation since September.
Does anyone remember September 2011? Ooh-lah-lah. Lots of bad stuff started happening to markets All At Once. In a #GrowthSlowing global economy, marginal food/energy price inflations also slow growth further.
Whether you go back to the July 2011 highs in stocks or commodities (and trace a draw-down line to the October lows), you’ll see the same thing. The world’s growth slowed, All At Once, after the Qe2 sponsored commodity price inflation shocks of July-August.
Now, I’ll be the first to agree, this is not 2011. This isn’t 2008 either. This Time Is Different! This is 2012. And, oh my, does the entire world have more sovereign and bank liquidity issues today than Lehman or Greece did in either of those periods. In 2012-2013, this globally interconnected web of debt, banks, and broken political promises might just be Too Big To Bail.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Hang Seng, and the SP500 are now $1559-1580, $98.39-108.37, $83.22-83.98, $1.20-1.22, 18829-19364, and 1331-1356, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer