by ilene - September 2nd, 2015 11:11 am
Courtesy of David Stockman at Contra Corner
When the bubble vision stock peddlers get desperate, they talk decoupling. So by the end of yesterday’s bloodbath you would have thought China was on another planet, and that “commodities” were some trinket-like collectibles gathered by people who don’t wear long pants, drink coca cola or jabber on their cell phones.
On these fine shores, of course, its all awesome from sea to shinning sea. So don’t be troubled. Buy the dip.
Never mind that we are in month 74 of this so-called recovery and that after year upon year of promised “escape velocity” the reliable signs of said event are still few and far between. But the “recovery” narrative stays alive because there is always some stray factoids of seasonally maladjusted, yet-to-be-revised “incoming data” that can excite the MSM headline writers and bubble vision talking heads.
Today the data on construction spending and housing took their turn in the awesome circle. Thank heavens that the headline writing software used by the financial press doesn’t yet read graphical data. Otherwise they might have reported that private residential construction soared in July—–well, all the way back to January 2002 levels!
And those are the nominal dollars that the Fed has done its level best to depreciate in the 13 years since then. In fact, on an inflation-adjusted basis the housing construction spend is still at 1992 levels.
What had the headline software giddy, of course, was the year over year comps, which were in double digits. Yet did the talking heads bother to note the deep hook in last summer’s data?
No they didn’t. Otherwise they might have seen that the two-year stack in July came in at a hardly fulsome 3.7% annual rate and that nominal private housing spending is still 7% below December 2007 and 43% below the early 2006 peak.
More importantly, they might have noticed that this is no longer your grandfather’s housing market. The US housing stock got way over-built during the Greenspan bubble and the incoming generation of home-buyers has gotten buried in $1.2 trillion of student debt.
So notwithstanding the mini-boom in multi-family apartment construction, the $380 billion annual rate of spending in July amounted to only 2.1% of GDP. That’s the same rock bottom ratio registered in July 2013, and is clear evidence that the housing needle has not really moved at all.
by ilene - September 2nd, 2015 10:46 am
Courtesy of Pam Martens
The Dow Jones Industrial Average plunged 469.6 points yesterday for a loss of 2.84 percent but Wall Street banks and trading firms took a far heavier bruising. Business media have been placing the blame for global stock market convulsions on China’s slowing economy, devaluation of its currency and seemingly unstoppable selloffs in its wildly inflated stock market. There would seem to be much more to this story than we know so far to explain the outsized fall in Wall Street bank stocks.
Yesterday, with the Dow losing 2.84 percent, the major names on Wall Street fared as follows: Citigroup, down 4.75 percent; Bank of America, down 4.65 percent; Wells Fargo, down 4.39 percent; JPMorgan Chase, down 4.13 percent; Morgan Stanley, down 3.86 percent; and Goldman Sachs, down 3.44 percent. The Blackstone Group, a private equity firm with significant involvement in China, lost 5.26 percent.
These outsized losses versus the Dow’s performance are becoming the norm among the Wall Street banks. In just three trading sessions on Thursday, August 20, Friday, August 21 and Monday, August 24, JPMorgan Chase lost 10.87 percent of its market cap or $27.18 billion. Despite JPMorgan CEO Jamie Dimon’s serial reminders of the bank’s “fortress balance sheet,” the market is unconvinced. One has to ask why.
One explanation making the rounds on Wall Street is that even if some of these Wall Street mega banks don’t have a lot of direct exposure to China, they do have a lot of direct exposure to loans they have made to countries and corporate customers who depend on China for earnings. China is the largest buyer of industrial commodities in the world and its economic slowdown and attendant collapse in commodity prices – from oils to metals to agricultural products – is making repayment of loans to banks look riskier.
The major Wall Street banks also have Prime Brokerage relationships with the major hedge funds, a fancy way of saying they provide margin and loans of securities for risky trading. A growing number of hedge funds have been taking a pounding as trading becomes more erratic.
by ilene - September 2nd, 2015 10:20 am
Brazil’s economy is incredible.
Just when you’re sure – and we mean sure – that it can’t possibly get any worse, or at least not materially worse in the very short-term, something else happens to further underscore the deep, dark economic malaise plaguing one of the world’s most important emerging markets.
So after last Friday’s GDP print which confirmed that the country slid into recession during Q2 – a quarter in which Brazilians suffered through the worst inflation-growth outcome in at least a decade – and after July’s budget data which confirmed that the country’s fiscal situation is, as Citi put it, “a bloody terror film,” we got a look at industrial production today and boy, oh boy, was it bad. So bad in fact, that it missed even the lowest analyst expectations.
Here are some key excerpts from Goldman's breakdown:
Sharp Decline in Industrial Production in July
IP contracted by a much larger than expected -1.5% mom sa (-8.9% yoy) in July (vs. the -0.1% mom sa market consensus). Furthermore, the June print was revised down to -0.9% mom sa from the original -0.3% mom sa. During the last nine months industrial production declined at an average monthly rate of -0.9% mom sa. Of the 24 main industrial segments, 14 recorded a contraction of output in July.
IP declined 8.9% yoy in July, with the largest decline recorded in capital goods -27.8%. Overall, IP declined 6.6% yoy during January-July 2015.
IP has now contracted for eight consecutive quarters and is likely to decline again during 3Q2015.
In July, IP was 14.1% below the peak level registered in June 2013 and was at the same level as March-April 2006.
The industrial sector (which has been reducing headcount) contracted 1.1% in 2014 and we expect it to contract at a much higher rate in 2015 as it continues to face strong headwinds from high levels of inventories, record low confidence indicators, a high and rising tax burden, rising energy costs, and weak external demand (particularly from Argentina for durable goods).
Meanwhile, exports cratered 24% and critically, it wasn't all because of lower commodity prices.
CDS now at six-year wides…
by ilene - September 2nd, 2015 8:35 am
Unit Labor Costs dropped 1.4% in Q2, missing expectations of a 1.2% drop and falling to the lowest since Q2 2014. Despite all the sound and fury and wage growth looming any minute now… it is not! This is the first consecutive drop in unit labor costs since Q4 2008.
by ilene - September 2nd, 2015 2:53 am
Courtesy of Dana Lyons' Tumblr
August 6-month lows have had a tendency to be broken in the coming months, prior to a year-end bounce.
After getting kicked in the teeth in August, the stock market is starting out September by getting stomped on the head. Following the historic rebound to end last week, investors were hoping that the worst was behind them. As we noted regarding such rebounds yesterday, however, perhaps we should not be surprised by renewed weakness. And adding further evidence to support the “retest” scenario versus the “V-bottom” scenario, today’s post looks at 6-month lows in the S&P 500 occurring in August and the resultant performance through the end of the year.
Going back to 1950, this is the 13th year in which the S&P 500 has reached a 6-month low (on an intraday-basis), the most of any month besides July and October. Here are the 13 years:
How did the S&P 500 react to these August lows? Here is a chart showing the performance of the index from September 1 through year-end in each of the years listed above (FYI, the chart indicates performance based on the % above or below the August low).
First of all, apologies for the busy chart. Second of all, are there any patterns consistent enough to take into consideration when navigating the next 4 months? Well, that’s up to you, but there are a few notable tendencies among the sample of 12 prior instances.
- 10 of the 12 years saw the S&P 500 drop below the August at some point before the end of the year.
- Only 1982 and 2004 saw the S&P 500 hold above the August low through year-end.
- The median low-point among the entire sample was -3.7% below the August
by ilene - September 2nd, 2015 1:17 am
Courtesy of Mish.
Bloomberg columnist Barry Ritholtz interviewed Paul McCulley, former chief economist at PIMCO, and often mentioned FOMC candidate on the Fed’s performance.
The Podcast is over two hours long, so let’s just go with Ritholtz’s brief summary: McCulley Demands Apology on Behalf of the Fed.
McCulley noted those who claimed QE and ZIRP were going to cause inflation and the collapse of the dollar were totally wrong, and he demanded these critics of the Federal Reserve owe former Ben Bernanke an apology. Had the Fed Chief listened to them, we would have found ourselves in a modern day depression.
He is leery of those who believe the Government and Federal Reserve should have let the crisis run its course on its own, with zero interventions. He is especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus.
The full podcast is available on iTunes, SoundCloud and on Bloomberg.
In a blend of a monetarist and Keynesian thinking, McCulley supports Fed policies of QE and is “especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus.”
For starters, I dispute the notion that without QE and intervention that “we would have found ourselves in a modern day depression” as Ritholtz maintains. Ritholtz’s claim is a poorly-formed hypothesis presented as fact.
Yes, it’s true that many in the Austrian camp predicted a dollar crash and high inflation. But I am in the Austrian camp camp and debt deflation has been my model, and still is my model.
As for an apology, what about an apology from the Fed for blowing serial bubble after bubble of increasing amplitude?
It’s inane to demand an apology from those who warned in advance, and correctly so, of the housing bubble and subsequent crash.
In a twist of irony, McCulley gloats over the alleged lack of inflation, but it’s pretty clear he has his blinders on as to what inflation is and ways it can be spotted. In the case of Fed policy, inflation did not manifest itself in the CPI, but rather in asset bubbles, again and again.
Challenge to Keynesians…
by ilene - September 1st, 2015 6:33 pm
Courtesy of Sober Look
The majority of economists still expect the Federal Reserve to begin the long-awaited liftoff next month.
However is this dovish FOMC truly prepared to "pull the trigger" this time? Here are some reasons the central bank is likely to delay the first hike.
1. While the Fed officially talks about not being focused on the currency markets, the recent dollar rally should give them some food for thought. The global "currency wars" have sent the trade-weighted US dollar to the highest levels in over a decade. This will continue to put pressure on US manufacturing (and even some services sectors) as US labor and other costs of production rise relative to other nations.
2. Commodity prices, led by crude oil and industrial metals, hit new multi-year lows, reigniting disinflationary pressures. Note that the Bloomberg Commodity Index is at the lowest level since 2002. Some at the Fed continue to view this as "transient", but the full impact of such a move is yet to be fully felt in the economy. Here is a broad commodities index.
In fact as of Sunday night in NY, WTI futures are trading below $40/bbl.
3. Driven to a large extent by commodity prices as well as economic weakness in China, US breakeven inflation expectations are declining sharply as well. Does this look like a great environment to begin raising rates?
4. Some point to the recent stability in "core inflation", with CPI ex food and energy remaining around 1.8% and providing support for a less accommodative policy. However the main driver of this stability is the rising cost of shelter. Core CPI excluding shelter is below 1% (YoY).
by ilene - September 1st, 2015 5:49 pm
By John Mauldin
“Measurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis.
“In ‘pure’ science, we can form a better, more coherent, and objective picture of the world, based on the information measurement provides. The information allows us to create models of (parts of) the world and formulate laws and theorems. We must then determine (again) by measuring whether these models, hypotheses, theorems, and laws are a valid representation of the world.”
“In science, the term observer effect refers to changes that the act of observation will make on a phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.
“It was, perhaps, the most unusual episode in the long running duel between the two giants of twentieth century economic thought. During World War Two, John Maynard Keynes and Friedrich Hayek spent all night together, alone, on the roof of the chapel of King’s College, Cambridge. Their task was to gaze at the skies and watch for German bombers aiming to pour incendiary bombs upon the picturesque small cities of England….
“Night after night the faculty and students of King’s, armed with shovels, took it in turns to man the roof of the ornate Gothic chapel, whose foundation stone was laid by Henry VI in 1441. The fire watchmen of St. Paul’s Cathedral in London had discovered that there was no recourse against an exploding bomb, but if an incendiary could be tipped over the edge of the parapet before it set fire to the roof, damage could be kept to a minimum. And so Keynes, just short of sixty years old, and Hayek, aged forty-one, sat and waited for the impending German onslaught, their shovels propped against the limestone balustrade. They were joined by a common fear that they would not emerge brave nor nimble enough to save their venerable stone charge.”
– Nicholas Wapshot in Keynes Hayek: The
by ilene - September 1st, 2015 3:35 pm
Courtesy of Lance Roberts at STA Wealth Management
In this past weekend's missive "Market Bounces, Now Execute Sells," the long consolidation process that began early this year finally resolved itself. Unfortunately, the resolution was to the downside as market stresses from China, the threat of rising interest rates and ongoing economic weakness finally overwhelmed the seemingly impervious bullish sentiment.
While the now "official correction" was not a surprise, and is something I warned of repeatedly over the last several months, it is possible that this is more than just a "buy the dip" opportunity. As I stated last Tuesday:
"Is this something more than just a simple correction? The honest answer is that no one really knows. The bulls are "hoping" that the worst is over and that the current bull market will resume its upward trend. However, there is ample evidence suggesting that something else may be afoot from slowing domestic and international growth, collapsing commodities and falling inflationary pressures."
But the underlying fundamental and economic data have been weak for some time, yet the market continued its unabated rise. The Bulls have remained firmly in charge of the markets as the reach for returns exceeded the grasp of the underlying risk. It now seems that has changed. For the first time since 2007, as we see initial markings of a potential bear market cycle.
The first chart below shows the long-term trend of the market.
The bottom part of the chart is the most important. For the first time since 2000 or 2007, the market has now registered a momentum based "sell" signal. Importantly, this is a very different reading that what was seen during the 2010 and 2011 "corrections" and suggests the current correction may be more significant.
The chart above is also confirmed by numerous other indications that also support the "mark of the bear."
Importantly, notice that during the 2010 and 2011 corrections, which were ultimately halted by rapid interventions by the Federal Reserve, "sell signals" were never triggered. Currently, those signals have been triggered at levels that have only been witnessed during more severe bear market corrections.
Fed To The Rescue?
by ilene - September 1st, 2015 2:30 pm
Courtesy of David Stockman of Contra Corner
Call it the rigor mortis of the robo-machines. About 430 days ago the S&P 500 crossed the 1973 mark for the first time – the same point where it settled today.
In between there has been endless reflexive thrashing in the trading range highlighted below. As is evident, the stock averages have not “climbed” the proverbial wall of worry; they have jerked and twitched to a series of short-lived new highs, which have now been abandoned.
Surely most thinking investors have left the casino by now. So what remains is chart driven trading programs, racing madly up, then down, then back up again – rinsing and repeating with ever more furious intensity.
Accordingly, it goes without saying that the central bank driven casinos which now pass for financial markets are no place for savers, investors, rational speculators or any other known type of carbon unit. More than 80 months of ZIRP and nearly two decades of central bank financial repression have destroyed free market price discovery and eviscerated all of the normal mechanisms of stability and discipline that govern functioning markets.
Long ago short sellers were destroyed by the Greenspan/Bernanke/Yellen “put” and the endless cycle of buy-on-the-dip upswings that took the market averages to ever more lunatic levels. At the same time, speculators came to realize that their free money carry trades were not at risk because the Keynesian statists who have usurped control of the central banks promised to give them months and months of warning before tampering with their guaranteed cost of carry by even so much as 25 basis points.
Needless to say, this kind of “forward guidance” is endlessly praised by the talking heads of bubble vision as some kind of enlightened form of central bank honesty and transparency. No surprises and all that.
Please! Transparency in manipulating and pegging the price of money is not constructive monetary statesmanship; it is a front runner’s dream and as anti-market as it gets.
For crying out loud, if you tell speculators that their overnight carry cost is pinned to the second decimal place for months into the future, they will bid anything in sight that has a yield or appreciation potential, fund it in the money market directly or indirectly, and roll the carry night…