“This country is insanely great.”
That’s what Steve Jobs told President Obama at a fundraising dinner in California in February of 2011. He went on to add that what he was worried about “is that we don’t talk enough about solutions.”
I disagree with Jobs on the 2nd part of that statement. America’s academic and political elite talk plenty about solutions. What worries me is that they’re always talking about government solutions.
Jobs’ aforementioned quote comes at the end of the Introduction in The 4% Solution where James Glassman writes “that government needs to get out of the way of enterprise for growth to take off.” I like that. What I don’t like is that the rest of the book goes on and on about more ways the government can help.
Back to the Global Macro Grind…
To review last week’s US Economic data: Big Government Intervention continues to A) shorten economic cycles and B) amplify market volatility. The stock market isn’t the economy.
If you think the stock market is the economy, we’ll that didn’t look very healthy last week either. It was the biggest down week for stocks since June and, since Bernanke’s most recent Policy To Inflate top, US stocks are down for 8 of the last 10 days.
Why? Economic Gravity can’t be “smoothed” away by government solutions:
- US GDP Growth for Q2 of 2012 was reported last week 69.27% lower than where it was 6 months ago
- Chicago’s Purchasing Managers Index (PMI) report for SEP dropped -6.2% mth-over-mth in SEP to 49.7
- Within the PMI report, New Orders and Employment dropped from 54.8 and 57.1, to 47.4 and 52, respectively
Whether you want to talk to me about Q2 or the last month of Q3, from a US growth perspective, that’s just nasty. On the inflation front, the news wasn’t much better. Prices Paid (within the same PMI report for September) ripped higher from 57 to 63.2!
Repeat after me: Policies To Inflate Slow Growth. Period.
Plenty a Keynesian academic advisor to Obama will continue to hide from that 1970s like conclusion, until they can’t. Maybe that’s why Romney is finally distancing himself from Harvard Keynesian Economist (and advisor) Greg Mankiw this morning.
The #2 Most Read story on the Economy tab of Bloomberg.com this morning: “Romney Bashing Bernanke Rejects Mankiw’s Monetary Views.” That doesn’t mean Romney is going to be President. It just means he just found a way to land a punch.
Back to the US Economic Data. Here’s how US GDP Growth fell -69.27% in the last 6 months:
- Headline quarterly GDP fell from 4.10% in Q411 to 1.26% in Q212
- Consumer Goods fell from 1.29% in Q411 to 0.08% in Q212
- Fixed Investment fell from 1.19% in Q411 to 0.56% in Q212
- Inventories fell from +2.53% in Q411 to down -0.46% in Q212
- Exports minus Imports didn’t do a darn thing to move the needle
The Obama/Bernanke money printing theory suggests that if A) you devalue your currency, B) you’ll see “exports” rise. Whereas, in the real world, when you print money A) input + consumer costs rise, and B) real-inflation-adjusted growth slows.
Adjusting for inflation is annoying to government guys who take car service to work because they don’t have to pay for gas or that pastry spread awaiting them at their next Washington meeting. That must be why the aforementioned Real GDP print only implies a +1.52% “Deflator.”
What’s shocking (and sad) is that the US Government’s “Deflator” (the number they subtract from the nominal, inflated, growth in order to print the “real” number) has been marked down by more than 27% since Q4 of 2011 AS PRICES INFLATED!
If Housing was really “back”, shouldn’t we be seeing that in the rental component of US Government reported “inflation”? How about Prices Paid rising +11% in last month’s PMI report alone? Or how about oil prices +30% off the YTD lows, +160% since 2009?
Nope. On the margin, Bernanke sees none of it impacting consumption or costs. No inflation. Touchdown Seahawks!
In a country that used to be considered Insanely Great, I don’t have to wonder how America’s next innovator likes them Apples. We can do a lot better than lying to people. Progress starts with telling people the truth. It’s only from there that we can move forward.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $110.61-112.98, $79.41-80.31, $1.27-1.29, 1.59-1.70%, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on September 17, 2012 for Hedgeye subscribers.
“I wouldn’t give much for a man who warms himself with the comfort of vain hopes.”
Hope is a lot of things, but it’s not a risk management process. The higher commodity and stock market inflations go, the less likely it is that the global economy recovers.
With a 0% asset allocation to commodities and a time stamped short position in the SP500 (SPY), I obviously lost last week’s battle with Ben Bernanke. That doesn’t make this war with Keynesian Academics over. It means it has just begun.
If Bernanke thinks that compressing the next 3 years of Equity returns into the last 3 months before a US Election is “price stability”, that probably means things are just about to get volatile, again.
Back to the Global Macro Grind…
I get things wrong. But when I do, I don’t put the country’s long standing liberties and structural employment at risk. Bernanke does. If I have one sincere hope for this country, it’s that this un-elected man thinks about that before he goes to bed at night.
To obfuscate the truth about currency debasement and real-time inflation expectations is one thing. To not be held accountable to these economic realities by the President of the United States is entirely another. Both Bush and Obama own this legacy of Bernanke’s economic storytelling.
Immediate and intermediate-term facts about Inflation Expectations:
- 10-yr breakevens (Inflation Expectations) moved right back to record highs last week (not YTD highs, record highs)
- CRB Commodities Index Inflation just crashed to the upside, +2.9% wk-over-wk, and +20% since June
- Oil price inflation (Brent) was up over +2.7% last week, +33% since June; US gas prices are now pushing back to $4
Sure, US and Russian stocks were up +1.9% and +7.4%, respectively, last week on that – but that’s nothing compared to the +153% YTD move in Venezuelan stocks post a Chavez currency devaluation! What did that do for the economic health of the Venezuelan people again?
With Bernanke Burning The Buck (see Chart of The Day), the US Dollar Index was down for the 5th consecutive week. In the face of its -1.7% wk-over-wk inverse “to infinity and beyond” money printing move, here’s what other things priced in Dollars did:
- Coffee +11.1%
- Natural Gas +10.4%
- Rubber +6.7%
I know, I know. Instead of picking Copper, Gold, and Oil that inflated +2-6% last week, I’m cherry-picking some stuff you might need as you take tax-payer funded car service to your office in Washington D.C. every day.
Heck, maybe there’s going to be what Keynesian students of economic theories-failed call “substitution” and “multiplier” effects… and you’re going to start drinking Red Bull instead of coffee in the morning – right pumped to chase the market even higher!
Another way to look at Inflation Expectations Rising is, of course, the futures and options markets (CFTC data):
- Last week’s CFTC options contracts were up another +0.3% at all-time highs (1.33 million contracts outstanding)
- Gold contracts = up another +14% wk-over-wk (after being up +35% and +10% in the 2 wks prior) to their February highs
- Oil contracts shot north of 203,000, their highest level since Oil topped in February-March 7% higher than Friday’s close
People who trade market expectations, run long-term money, and/or do math obviously get this. That’s why the biggest macro call I missed in the last 6 months was probably issued during a super special deflationary dinner in Jackson Hole in August.
Do you think Bernanke and his boys told anyone he was going to do this? That’s just a question, not an answer – and one, looking back, that you should have asked yourself during the Hank Paulson TARP. Does it help people trust our markets more or less?
Sadly, this is how the Old Wall still works - but where it counts for The People (cost of living, jobs, etc.), it’s not working. If this man thinks his Vain Hope of a +2.5-3% US GDP recovery in 2013 is kidding this accurate GDP Growth forecasting firm, he’s going to be in for a long battle with some fact-based Tweet-heat. If anything, the probability of a US Recession in 2013 just went up.
*2007-2012 Federal Reserve Money Printing Fact: Policies To Inflate via currency devaluation slow real-inflation adjusted economic global growth. China’s stock market fell -2.1% last night (down -15.5% since May) after Singapore reported a nasty -10.6% export growth report for August as commodity price margin pressures continued to rise, dampening demand.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, UST 10yr Yield, and the SP500 are now $1731-1784, $114.83-116.94, $78.57-80.31, $1.28-1.31, 1.70-1.87%, and 1433-1473, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Takeaway: A deteriorating Europe and weakening China are fueling the 1-2 punch that is global growth slowing.
* The big divergence occurring presently is the credit outperformance of global US banks relative to the fear that normally accompanies rising risk in Europe.
* Bank swaps in China were significantly wider WoW.
*Sovereign CDS - Sovereign swaps moved in tandem with bank swaps around the world, widening across the board.
* Chinese steel prices fell 0.5% (18 yuan) to 3647 yuan/ton, breaking its two week streak.
* The 2-10 Spread compressed 9 bps WoW, its second consecutive week of tightening.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 2 of 12 improved / 8 out of 12 worsened / 3 of 12 unchanged
• Intermediate-term(WoW): Positive / 10 of 12 improved / 1 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
1. American Financial CDS - The big divergence occurring presently is the credit outperformance of global US banks relative to the fear that normally accompanies rising risk in Europe. The question remains whether this means that they are now less risky, or is there a catch-up trade to be made.
Widened the least/ tightened the most WoW: HIG, JPM, MMC
Widened the most WoW: MBI, GNW, LNC
Tightened the most WoW: HIG, MS, AIG
Widened the most MoM: WFC, JPM, MBI
2. European Financial CDS - There was widening across the board in European financials last week, with Spanish and Italian banks leading the charge higher. France saw 3 of of 4 French bank swaps widen.
3. Asian Financial CDS - Chinese banks saw significant swap widening in the latest week. Japanese and Indian banks were also wider, though by a smaller margin.
4. Sovereign CDS – European sovereign swaps widened last week. Interestingly, Germany saw the largest percentage deterioration at 15% followed by Ireland at 14.8%. Spanish and Italian sovereign swaps were wider by 19 and 27 bps, respectively.
5. High Yield (YTM) Monitor – High Yield rates rose 21.6 bps last week, ending the week at 6.81% versus 6.59% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.0 points last week, ending at 1728.59.
7. TED Spread Monitor – The TED spread was flat last week, ending the week at 26.5 bps.
8. Journal of Commerce Commodity Price Index – The JOC index fell 0.4 points, ending the week at 5.16 versus 5.5 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 bps. 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.
10. 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.
11. Markit MCDX Index Monitor – Last week spreads widened 4 bps, leaving the MCDX at an index level of 136 bps versus 132 bps the prior week. 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 16-V1.
12. Chinese Steel – Steel prices in China fell 0.5% last week, or 18 yuan/ton, to 3647 yuan/ton. Since the end of June, Chinese construction steel prices have fallen ~11%. This index is reflecting significant weakness in China's construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread tightened to 140 bps, 9 bps tighter than a week ago.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.2% upside to TRADE resistance and 1.1% downside to TREND support.
Margin Debt - August: +0.73 standard deviations
NYSE Margin debt rose to $287 billion in August from $278 billion in July. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall 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 August.
Joshua Steiner, CFA
Having trouble viewing the charts in this email? Please click the link at the bottom of the note to view in your browser.
The Macau Metro Monitor, October 1, 2012
3 MILLION VISITORS EXPECTED DURING GOLDEN WEEK Macau Daily Times
Macau is expected to receive over 3 million visitors in the coming week when the mainland begins its Golden Week holiday. The figure is a 10% increase YoY. According to the Border Gate police station’s press briefing, two thirds of visitors, or about 2 million people, are entering the city through the Border Gate, while the others are mainly arriving thorough the ferry terminals.
S'PORE PRIVATE HOME PRICES UP 0.5% IN Q3 Channel News Asia
Prices of private residential properties in Singapore rose 0.5% to a new record high in the third quarter of 2012, according to flash estimates released by the Urban Redevelopment Authority. This was the highest rate of increase this year compared to the 0.1% drop in 1Q and the 0.4% increase in 2Q.
MACAU, RUSSIA SCRAP SHORT TRIP VISAS Voice of Russia
Macau has scrapped visas for 30-day visits by Russian nationals. Likewise, Macau residents will be able to visit Russia for the same amount of time without a visa. A pertinent agreement was signed in June. According to Russian consular staff in Hong Kong, visas will be waived for Russian who are not going to work, study or live in Macau. The waiver of the visa regime is meant to bring more Russian tourists to Macau.
TODAY’S S&P 500 SET-UP – October 1, 2012
As we look at today’s set up for the S&P 500, the range is 19 points or -0.60% downside to 1432 and 0.72% upside to 1451.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: on 09/28 NYSE -658
- Decrease versus the prior day’s trading of 1479
- VOLUME: on 09/28 NYSE 832.31
- Increase versus prior day’s trading of 31.27%
- VIX: as of 09/28 was at 15.73
- Increase versus most recent day’s trading of 6.00%
- Year-to-date decrease of -32.78%
- SPX PUT/CALL RATIO: as of 09/28 closed at 2.01
- Up from the day prior at 1.82
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: as of this morning 26.72
- 3-MONTH T-BILL YIELD: as of this morning 0.09%
- 10-Year: as of this morning 1.62%
- Decrease from prior day’s trading of 1.63%
- YIELD CURVE: as of this morning 1.39
- Down from prior day’s trading at 1.40
MACRO DATA POINTS (Bloomberg Estimates)
- 8:58am: Markit US PMI Final, Sept. est. 51.5 (prior 51.5)
- 10am: ISM Manufacturing, Sept. est. 49.8 (prior 49.6)
- 10am: Construction Spending M/m, Aug. est. 0.5% (prior -0.9%)
- 11am: Fed to buy $4.5b-$5.5b Treasury debt due 11/15/2020-8/15/2022
- 11:30am: U.S. to sell $32b 3-mo, bills, $28b 6-mo. bills
- 12pm: Fed’s Williams speaks in San Francisco
- 12:30pm: Bernanke speaks on monetary policy in Indianapolis
- 4pm: USDA crop-condition reports
- U.S. government’s fiscal year, Supreme Court term begin
- FDA Center for Drug Evaluation and Research Director Janet Woodcock speaks on agency’s future, 8am
- FAA advisory panel meets to review air-traffic control procedures for standardization, revision, clarification and upgrading of terminology, 8:30am
- WTO Director-General Pascal Lamy speaks on future of international trade at Brookings, 4:45pm
WHAT TO WATCH:
- U.S. manufacturing probably shrank in Sept. as global economy
- Xstrata backs Glencore bid after winning board assurance
- Kraft Foods Inc. becomes Mondelez; Kraft Foods Group spun off
- Greek government resumes talks with international creditors
- U.S. jobs outlook seen weak as companies see need to cut costs
- Nokia, Oracle to unveil mapping software pact: WSJ
- KKR said to buy stake in oil services company Acteon Group
- Euro-area unemployment at record 11.4% in Aug., matching est.
- Sony’s ‘Hotel Transylvania’ posts $43m in weekend N.A. sales
- Yahoo to hold “all-hands” meeting on process, goals: AllThingsD
- Japan Tankan sentiment worsens as slowdown hurts exports
- Chinese markets are closed all week
- LightSquared bankruptcy hearing over control of co.
- Cal-Maine Foods (CALM) 6:30am, $0.35
- Ferrellgas Partners (FGP) 7am, $(0.43)
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
OIL – the most bullish break-down in all of Global Macro in the last 10 days is the one associated with the USD having 2 consecutive up wks; Brent’s long-term TAIL line = $112.98, so we’ll be watching that line closely this week into and out of the Oct 3rd debate.
- Oil Declines From One-Week High as China Manufacturing Weakens
- Bull Wagers Tumble Most in 16 Weeks as Prices Slump: Commodities
- Xstrata Recommends Glencore’s Revised Offer to Its Shareholders
- Corn Reaches Two-Week High as Stocks Fall More Than Estimated
- Raw Sugar Climbs for Third Day Before Delivery; Cocoa Declines
- Gold Seen Falling in London as Some Investors Sell After Rally
- Copper Seen Falling as East Asian Economies Struggle for Growth
- Iron-Ore Price Forecast Cut by ANZ to $110/MT for Fourth Quarter
- Hedge Funds Cut Bullish Oil Bets as Output Soars: Energy Markets
- U.S. Beating Russia in Diesel Shipments Boosts Tankers: Freight
- Sumitomo Sees ‘Solar Bubble’ as Japan Rejects Nuclear: Energy
- Timah to Assess Work of Bangka Miners to Ensure Tin-Ore Supplies
- Silver Tops Commodities First Time Since 1997: Chart of the Day
- Iron-Ore Swaps Slide 0.5% in London, Clarkson Data Show
FRANCE – the Hollande election seems to be having some economic issues; France reported an absolute bomb of a PMI print for SEP of 42.7 this morning (vs 46 in AUG); still trying to figure out how USA becoming more like France in 2013 is a good thing…
JAPAN – if countries with Keynesian policy makers would just ban reporting of economic data, everything would be fine; after closing down -2.6% last wk, Nikkei continues its bearish divergence, down another -0.8% overnight (-14.2% since the global #GrowthSlowing top in March); Top3 economy in the world; not inconsequential.
The Hedgeye Macro Team
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