economic news has turned decidedly negative globally and a sense of
‘quiet before the storm’ permeates the financial headlines. Arcane
subjects such as a Hindenburg Omen now make mainline news. The retail
investor continues to flee the equity markets and in concert with the
institutional players relentlessly pile into the perceived safety of
yield instruments, though they are outrageously expensive by any
proven measure. Like trying to buy a pump during a storm flood, people
are apparently willing to pay any price. As a sailor it feels
like the ominous period where the crew is fastening down the hatches
and preparing for the squall that is clearly on the horizon. Few crew
mates are talking as everyone is checking preparations for any
eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane?
Unlike sailors the financial markets do not have the forecasting
technology to protect it from such a possibility. Good sailors before
today’s technology advancements avoided this possibility through the use
of almanacs, shrewd observation of the climate and common sense. It
appears to this old salt that all three are missing in today’s financial
Looking through the misty haze though, I can see the following clearly
looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971 the
increase in global fiat currency has been nothing short of breath taking.
It has grown unchecked and inevitably became unhinged from world
industrial production and the historical creators of real tangible wealth.
Do you believe trees grow to the sky?
Or, is it you believe you are smart enough to get out before this graph
What made America great was her unsurpassed ability to innovate.
Equally important was also her ability to rapidly adapt to the change that
this innovation fostered. For decades the combination has been a self
reinforcing growth dynamic with innovation offering a continuously
improving standard of living and higher corporate productivity levels,
which the US quickly embraced and adapted to.
This in turn financed further innovation. No country in the world could
match the American culture that flourished on technology advancements in
all areas of human endeavor. However, something serious and major has
changed across America. Daily, more and more are becoming acutely
aware of this, but few grasp exactly what it is. It is called Creative
It turns out that what made America great is now killing her!
Our political leaders are presently addressing what they perceive as an
intractable cyclical recovery problem when in fact it is a structural
problem that is secular in nature. Like generals fighting the last war
with outdated perceptions, we face a new and daunting challenge. A
challenge that needs to be addressed with the urgency and scope of a
Marshall plan that saved Europe from the ravages of a different type of
destruction. We need a modern US centric Marshall plan focused on growth,
but orders of magnitude larger than the one in the 1940’s. A plan even
more brash than Kennedy’s plan in the 60’s to put a man of the moon by the
end of the decade. America needs to again think and act boldly. First
however, we need to see the enemy. As the great philosopher Pogo said:
“I saw the enemy and it was I”.
Complete Legend to the Right, Top Items below. Articles with
highlights, graphics and any pertinent analysis found below. (Note: Latest re-rankings
reflecting "Mapping the Tipping Points" will be reflected tomorrow)
Greece's fabled culture of honouring the dead has reached new heights with
the discovery that the debt-choked country paid hundreds of deceased pensioners
retirement payments for decades.Under unprecedented pressure to cut spending and replenish empty state coffers,
the socialist government announced it would be putting a stop to the seemingly
impossible: dead centenarians receiving handouts .
"We are obliged to
announce that some people in this country have been
drawing pensions, though they may have died years
Deputy Labour Minister George Koutroumanis.
Hundreds of millions of euros are thought to have been unwittingly wasted in
payments that were dutifully deposited into bank accounts every month. Of the
500 recipients, aged over 110, more than 300 had died in the past seven years."One pension, for example, was paid to someone who had died in 1999," said
Prime Minister George Papandreou's government, which recently completed the
first ever census of civil servants, admits it has no idea of the real number of
In addition to:
1- bogus pensions, 2- billions of euros are believed to have been lost
within a leaky state system riddled with scams such as fake jobs, 3- forged health
prescriptions and 4- fraudulent government spending in the form of supplies to
hospitals and state organisations.
Spanish bank CDS has started to widen in the past few days as concerns over the
sovereign's stability have increased.These concerns kicked off with all the recent problems in Ireland, but rose to
be Spain specific yesterday after it emerged the Spanish government
may have to
return $6 billion in sales taxes to consumers.The government has denied they will have to return said funds, even though a
court ruling said the $6 billion would have to be returned over a three year
period.Now Spanish banks are widening as a result of this news and ongoing worries
about the European recovery. From CMA Datavision
Roubini recently came out and said it will be
closer to 0% than 1%. 2-
David Rosenberg believes we'll actually get a
negative print. 3-
JPMorgan also doubts the number will hit 1%.
4- Deutsche Bank, which has been on the very bullish
end of the street recently lowered its estimate to 2%.
Ed McKelvey, Goldman Sachs economist, notes that
“troubling” signs are ahead for the third quarter,
pointing to plunging residential real estate investment
and risks that business spending will stall. Meanwhile,
the housing sector and local government spending, which
helped to support second-quarter growth, appear set to
decline in the second half of the year.
Imports were also propelled by an unusually large
shipments from China, which reflected a change in Chinese
export duties. That was a temporary boost, argued Stuart
Hoffman, chief economist at PNC, who said the shift in
Chinese policy encouraged exporters there to “clear the
docks” and that in the third quarter trade could end up
boosting America’s GDP rather than being a drag.
Still, stiff headwinds remain for the US economy and a
string of grim indicators during the summer suggest
spending by consumers and businesses is softening as
labour market woes persist and confidence wavers. “There’s
no way the US is going to sustain this type of import
surge because the demand is not there,” said Nigel Gault,
chief US economist at IHS Global Insight.
Yesterday we highlighted how over half of Q2's 1.6% GDP growth could be explained
by government spending. The government contributed +0.86% to the Q2 figure based
on data from the Bureau of Economic Analysis (BEA). You can see how Q2 GDP
unusually reliant on government spending here. As a follow up to that post, we've now broken out the different types of
government contributions to Q2 GDP, and it turns out that defense spending was a
massive component, accounting for +0.39% of the total 0.86% government GDP
contribution. Meanwhile, state consumption actually fell, sub tracing 0.10% from US GDP
growth. You can see the breakdown below. Note that the numbers don't add up to
precisely 0.86% due to rounding. All data is from the BEA.
So a large part of Q2 GDP performance,
+0.39% compared to the 1.6% total GDP growth for the
U.S., was thanks to wars and general defense.
Fresh from the presses by JPM's Michael Feroli: "The
July durable goods report was a major disappointment and
raises the risk that third quarter GDP growth prints below
1%...The downshift in the pace of capital
spending is particularly worrying as this was the
strongest, most reliable sector of the economy over the
past year...Inventories at manufacturers of durable goods
increased $1.8 billion in July, well below the $3.3
billion average increase in stocks over the prior three
months--another factor which lends downside risk to Q3 GDP
More than 50,000 people are expected to attend the five-day, around-the-clock
event, said Bruce Marks, the CEO of the Boston-based NACA. Considering many
people come in pairs, that could mean as many as 25,000 home loans will be
worked on by the army of NACA counselors, who wear yellow T-shirts bearing the
NACA slogan: "Loan Sharks Beware." During the group's visit to West Palm Beach in February, NACA reviewed 24,000
loans, modifying, at least temporarily, 16,097.NACA brings hundreds of bank
representatives to its "Save the Dream Tour" events. Borrowers first meet with a
NACA counselor to settle on an affordable mortgage payment, typically something
that is 31 percent or less than their gross salary. NACA also gets a $500
payment for every permanent modification that results in three
successful mortgage payments, Marks said.
Some 3.51% of borrowers were 30 days late in their loan
payments in the second quarter, up from 3.31% at the end of last
year, according to new data from the Mortgage Bankers Association.
The shift is a stark reversal from the steady decline in
short-term delinquencies during 2009.
We've seen a burst of M&A activity lately, with high-profile potential deals
such as Intel and Mcafee, BHP and Potash, or Dell (HP?) and 3PAR. Once M&A heats up, investors' knee-jerk reaction is to speculate on further
potential deals, and to determine whether or not a wave of further M&A activity
is ahead, it helps to consider why companies might be keen to each other out
Citi's Tobias Levkovich raises some key points on this in a new
note. Essentially, he highlights that:
A) Shell-shocked companies have progressively de-leveraged their balance sheets
lately, thus have more capacity to make deals than in a long time. B) Thanks to low interest rates, companies are earning very little off of their
cash balances, which provides an incentive to put money to work.
And we'll add
C) In a sluggish economy, business expansion is a risky and
difficult proposition, thus buying established companies can
be a easier path to growth.
Thus, the idea of an upcoming M&A wave isn't that crazy
considering companies' alternatives right now -- Earning
nothing on a growing and historically under-leveraged balance
sheet (we're talking non-financial companies here) or
investing in uncharted businesses opportunities while the
economic outlook is uncertain.
(Chart via Tobias Levkovich, Citi, Hey There's M&A, 23
Intel now expects third-quarter revenue to be $11.0 billion, plus or minus $200
million, compared to the previous expectation of between $11.2 and $12.0
billion. In a statement, the company says "Revenue is being affected by weaker than
expected demand for consumer PCs in mature markets." Just a few weeks ago, Intel said things were looking good. Clearly, the turndown
has been since then.
In a similar sign of macroeconomic distress, tech giant
posted a Q2 miss earlier this August
I believe that additional
purchases of longer-term securities, should the FOMC
choose to undertake them, would be effective in further
easing financial conditions. However, the expected
benefits of additional stimulus from further expanding the
Fed’s balance sheet would have to be weighed against
potential risks and costs. One risk of further balance
sheet expansion arises from the fact that, lacking much
experience with this option, we do not have very precise
knowledge of the quantitative effect of changes in our
holdings on financial conditions. In particular, the
impact of securities purchases may depend to some extent
on the state of financial markets and the economy; for
example, such purchases seem likely to have their largest
effects during periods of economic and financial stress,
when markets are less liquid and term premiums are
unusually high. The possibility that securities purchases
would be most effective at times when they are most needed
can be viewed as a positive feature of this tool. However,
uncertainty about the quantitative effect of securities
purchases increases the difficulty of calibrating and
communicating policy responses.
Another concern associated with
additional securities purchases is that substantial
further expansions of the balance sheet could reduce
public confidence in the Fed’s ability to execute a smooth
exit from its accommodative policies at the appropriate
time. Even if unjustified, such a reduction in confidence
might lead to an undesired increase in inflation
Summary: I think Bernanke is paving the way for
QE2, although he probably feels he needs more evidence of
a slowing economy or further disinflation to persuade
other members of the FOMC. A warning from a large tecWSJh
company is probably significant at this point, like from
Intel cuts sales forecast citing weaker consumer PC market
"Revenue is being affected by weaker than expected
demand for consumer PCs in mature markets," the
company said in a statement.
Or perhaps the unemployment rate ticking up in the August
employment report next Friday might be enough. There will
be plenty of data released before the September 21 FOMC
meeting (and if the data is weaker, the meeting might be
expanded to two days). Or perhaps the FOMC will wait until
November, but it does appears Bernanke is preparing
everyone for QE2.
Mr. Hayek's 1944 classic, "The Road to Serfdom," became the
top-selling book in June on Amazon.com. The Austrian think tank
Foundation for Economic Education had to turn students away this
summer from its overflowing seminars.
Retail investors are resisting the siren call of bullish Wall Street equity
analysts and high dividend paying stocks as they keep pumping money into bonds,
contributing to the lowest stock trading volumes for August in more than a
decade. “The amount of money being pulled from equities is very disturbing and without
question retail has given up on the market,” says Anthony Conroy, head of
trading at BNY ConvergEx.
This year, investors have withdrawn about $22bn from equity funds globally, EPFR
says. There has been a stampede out of US stock funds where outflows total
$51bn. That has been counterbalanced by purchases of emerging market equities
where inflows have totalled about $37bn. Money pulled from shares is being pumped into bonds
The erosion of support for US equities from retail investors
threatens the business of trading on Wall Street. This month,
average trading volume for S&P 500 stocks has been the lowest
since August 1999, according to Bespoke Investment Group.
“The investing public is sceptical and rightly so,” says William Strazzullo,
chief market strategist at Bell Curve Trading. “It’s no surprise that people are
staying away from stocks. There has been an accumulation of blows from
Bernie Madoff, the financial crisis, bail-out of Wall St and flash crash
that feeds into a perception, rightly or wrongly, that the game is rigged.”
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important