Q2

Making the rounds today - the weak Q2 (+1.3% vs +1.8%, consensus).

This recovery (past 8 Qt’s) is the weakest on record. Government intervention (interference) is the reason why.

We are now experiencing the pain which goes with the cure.
　

Robert Craven

Offend the Chinese?

Stephen Roach, head of Morgan Stanley in Asia, said Chinese officials are disgusted by the "astonishing recklessness" of Washington as default looms. "Coming so shortly on the heels of the sub-prime crisis, the debate over the debt ceiling and the budget deficit and is the last straw," he said.

Oh, well shoot, we wouldn’t want to offend the Chinese, Mao’s legacy and the rest. Let’s deep 6 the American republic and the (sometimes) messy way we get things done here. Then the Chinese can find someone else to ape.


Robert Craven

Gauge

Is the financial system listening to hysterical media types re the debt crisis? Apparently not. The key 90 LIBOR rate (the rate at which major banks lend to each other) is 0.25% and has been there for weeks. All is calm. On the other hand, the real crisis (the one the media types missed completely) saw that same rate spike to 4.82%, 10/10/08. The system froze to a stand still. Lending institutions trusted no one. Now, pay only 0.25% for 90 days and you’ve still got a deal.

Monitor these rates and turn off the news.

　
Robert Craven

Bellwether

The US 10 yr has moved little, past days, a tad either side of 2.97%. Fear of default and many predicted yields would spike.

Part of the explanation is flight to quality during turmoil; the US still provides sanctuary. Part is the view, reinforced by yesterday’s weak June Durable Orders - for a slowing into year end.

Anchor: In fact, we can expect a growing economy ahead, now assisted by low interest rates and associated borrowing costs.
　

Robert Craven

What If?

What if we do get downgraded by a credit agency or two (the same bunch who rated the garbage paper created through Fannie & Freddie's shenanigans, as AAA)? It will make a nice story for media types but to smart money types, it will mean almost nothing. These types make their own judgement and they don’t look to "authority figures" like Moodys and S&P for guidance.

They know the US to be the world's most stable economic power. That is enough. Sure, some securities linked contractually to a AAA rating will have to adjust. Tuition for those who pulled the wrong trigger.

Robert Craven

Celebrate

Some stateside are a tad nervous, but offshore types are almost sanguine re our debt "fix." Offshore smart money has witnessed the US under Obama move towards cradle-to-grave welfare and Euro-paternalism, while most of them, most other developed countries (Greece a fellow traveler of BO’s) have moved away from this quagmire, France included. Now they see hope for the US.

Just think! To render faculty lounge types, lawyers, union thugs and the nursery class as totally redundant!

Now that is cause for celebration. And that folks, is what this is all about.


Robert Craven

Meanwhile....

Japan continues to “surprise” observers in the quickness of its recovery. China is experiencing some slowing in a still very rapid pace of expansion; there will be no “hard landing,” as most predict. Canada is in good shape. The EU is not, with exception of German, France. But a militant ECB will shave growth, those two credits. The UK moves sideways.

And at home, many in Washington work to rid us of the legacy of the left. Once shut of that, the US engine will stir the world.


Robert Craven

Wiggle Room?

Some sources claim Treasury has "wiggle room" past 8/2 (see today’s Wash Times article), perhaps even past 8/15 when interest payments are due. But an actual interruption - technical default - is not so much key to credit types and money managers as is the final package.

A 3 day delay in US payments, followed by a package with teeth - something which prevents a drift to bankruptcy down the road - is far preferable to a ceiling increase which allows Congress to skate by.


Robert Craven

Healthy Exercise

On Aug/3 the US owes $23 bln to Soc Sec recipients. According to Politico, only $12 bln is expected to come in that day.

We know that the US will not miss an interest payment on its bonds (due 8/15). For a week or two, will Treasury allocate to the rest - prioritize payments for example to veterans? We don’t know.

Nevertheless, this is a healthy exercise. Major world institutions see it as such. If there were to be a meltdown, it would have happened weeks ago.


Robert Craven

IF

A technical default will not birth a meltdown; smart money doesn’t care, IF that is we can forge a blueprint, now, for a steady reduction of debt going forward.

From the Heritage Foundation: "Forget the McConnell, McConnell–Reid, Coburn, Gang-of-Six, Boehner, and Reid plans. Go with the American plan — cut government spending, deeply and right now, for the good of the country."

It’s the debt / GDP ratio folks, that’s what credit types are monitoring. Key - there’s a heck of a lot of entitlements nobody’s targeted yet.

If the current debate exposes and then ends for good the means and method of the left, it’s reason to celebrate, not to swoon.
　
　
Robert Craven

Criminals

US Legal.com: "A riot occurs when a defined number of people, usually a minimum of three, intentionally or recklessly causes or creates a grave risk of public terror or alarm. It is a crime to incite a riot."

Why then are not Reid, Obama, Geithner and Bernanke taking their meals through a slot?

Is it not creating the grave risk of "public terror" predicting a meltdown - one’s retirement going up in smoke if Congress does not bend to the administration’s will?


Robert Craven

BS

My, my. Where is the ARMAGEDDON the rest of us were warned was our fate as the sun rose today? The Dow was down 0.70%. 10 yr Treasuries moved .01%. The Nikkei was down 0.81%.

Holy moly, now that’s severe. My goodness, we’ll never survive this.

Turn off the TV; check in with us; make it a habit; remain anchored.

　
Robert Craven

Deceit

The media adores the US debt situation. It stands to make them a ton of $, feasting on the (transparent) scare tactics of Geithner, Obama and others.

They’ve scared the pants off the average American. A "default" they claim means not only that retirement funds vanish, but it means the end of civilization as we know it.

BO, Geithner and Bernanke know better than that.

If it happens, it will be a temporary, technical default. Good medicine.


Robert Craven

Irony

We read this am that our friends in Washington want a deal before Asia’s markets open tomorrow, thus preventing what they fear will be a huge sell off in equities and US debt if there is no deal (and the risk of a US downgrade).

So assume it happens - no deal by Aug/2. We will have a technical default. This will scare the pants off some world institutions which will run for cover. Where will they go for sanctuary? Switzerland? Germany? Switzerland can’t accommodate that many pilgrims. Germany is no America, even with the threat of US downgrade.

Yep, they will all come to the US, buying US obligations as the (still) safest place to park their funds. And this will support Treasury prices, containing then any spike in rates.


Robert Craven

What Ails US

Our point for two years now has been that meddling by the Fed and the Administration was/is counter productive. John Taylor, econ prof at Stanford and fellow at the Hoover Institution joins company with us in a WSJ op ed today.

"Since 2009, Washington has doubled down on its interventionist policy," writes Taylor. "The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we've also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including ‘cash for clunkers’ and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt."

Indeed, both consumer and employer were cheered by the results of the Nov/10 election, spurring a pick up in economic activity, Q4, Q1 that most forecasters missed. Those results held promise for less regulation. Yet administration meddling has continued; regulations are stacked as high as ever; finally, the Fed has done nothing but make things worse by throwing liquidity at an economy that is flooded with liquidity.

So, we haven’t really gotten underway.

Again from Taylor, "Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles."

Indeed. And to the extent both Bernanke and BO can learn to sit on their hands, it is to that extent that we will experience real vigor ahead.


Robert Craven

Quick World View

We predicted weeks back that Japan would recover faster than expected, that China would experience a controlled slowing, not a crash, and that US vigor would eclipse that of both the UK and the EU.

We seem to be close to target: Events in Japan are cooperating; China’s rate of growth is slowing but still vigorous; EU surveys today showed a "surprising" slowing in both services and manuf, including Germany and France. The UK - sideways.

And the US? Our view is for a moderate expansion ahead.


Robert Craven
　

JAPAN

A backwater resident for years, suddenly Japan emerges as the new world growth king.

Just three days following the tragedy we were able to predict that resuscitation would far exceed world estimates. This was the correct appraisal. From years dealing with Japanese institutions, it came easy; now others understand.

Indeed, corporate Japan is in good health; the equity market there has outperformed all developed countries since June/1.


Robert Craven

Week Ahead

We have few economic releases this week. Debt talks in Washington and EU deliberations will drive price discovery for the near term. Major world institutions, uncertain of the outcome for either, continue to seek sanctuary - meaning primarily US debt, the 10 yr last 2.88% from 2.95%, Friday.

Ex quality flight, US debt prices to erode into year end.

US vigor into year end will eclipse that of the EU. Thus a reasonable strategy remains short US debt, long Bunds (last +24). This spread was originally recommended at -4, June/9. We had recommended an exit at +21, July/4, but course of least resistance to remain wider.


Robert Craven

DEFAULT!

We experienced a real default first hand - Russia’s. Relationships, relative pricing, everything changed. That was a default folks. But is a temporary delay - technical default - in US interest payments, the equivalent of the end of civilization? Of course not.

Tax cheat Geithner claims it would be doom. So does every book on Wall St that is long US debt. But of course.

In fact, it beats becoming Greece, Portugal or Italy. And the world markets know just that, which is why all is calm.

Much worse is the risk that we go on borrowing with no conditions of control. Now that is bad news, eclipsing a technical default.



Robert Craven

Quick World View

Recent events offshore fit our anchors.

Japan and China’s Industrial Production - both positive and both through consensus. We had predicted Japan would recover faster than expected. Next, we have looked for China to defy predictions of a hard landing. China’s growth slowed a tad for Q2, but is still at a rousing 9.5% vs 9.7%, Q1. Retail Sales were also better. Thus, the Bk of China can brake further without a stall.

UK unemployment - a tad worse, fitting the view for a sideways economy there.

A reminder that we have little exposure to EU peripherals, or even Italy.
　

Robert Craven

When in a Hole, Stop Digging

The minutes for the June FOMC meeting were released today. Key to us is that some of the membership expressed reservations about the "...efficacy of monetary policy in certain circumstances," meaning we think that a few have come to the conclusion we reached months ago - QE II was a waste.

When in a liquidity trap, quit providing liquidity. When in a hole, stop digging.

Any farmer knows that, but it was apparently lost on those who occupy The Temple.


Robert Craven

Interest Rate Spreads and the Cosmo Buyer

Interest rate spreads are a great tool. These can be easily monitored by anyone, on any of several financial sites; Bloomberg or FT.com are two.

These spreads telegraph change in major world financial dynamics, and far before you’ll hear it on TV. (The media - always last to catch on.)

For example, upon monitoring your spreads this am like a good boy, you were shocked that the Italian 10 yr jumped to a 5.71%, a whole 3% over the German 10 yr. Holy moly! That means that lenders are demanding over double the Ger rate to loan the Italians money. What? Don’t need a PhD to know that’s not a good thing.

You wonder, just how bad will this EU deal get? And by watching spreads, you’ll find out.

So when next in the check out line and a Cosmo buyer’s straight ahead, strike up a discussion. I have a feeling spreads could get trendy!


Robert Craven

July 14, 2011

Back to the US. Thursday’s Jobless Claims and Retail Sales results pack major mkt-moving horsepower.

Due to the miserable Payroll result last Friday, a weaker than expected result for either of these, or especially for both and the mkt crowd will embrace a double dip.

We cannot assign a risk to either, so we’ll have to wait and see.
　
Robert Craven

EU

We have the odds of an EU meltdown at 20%. More likely will be a death by a thousand cuts, something the mkt can handle. Either way it won’t survive.

World investors put the pain to Italy last week so she now pays double for 10 yr money vs the Germans.

There may not be substance to the run on Italy but it is self fulfilling. And the current EU rescue package can’t handle Italy too.

Glance at the US 10yr, last 2.97% vs a 3.03% close Friday. Safe haven flows this am are the reason why.

　
Robert Craven

Margaret Knew It Wouldn’t Work

This Sunday pm as EU officials meet, there is the spark of fear that now Italy will be drawn in.. The ECB reportedly wants to expand the rescue fund to embrace Italy.

We don’t need to be world financiers or top diplomats to understand that Marx was wrong. Folks who’ve worked to build a bounty are not keen to share it with those who figure they're entitled to some of it.

Why belabor the point? That’s all there is to understanding the situation. And of course ultimately the EU will fail.


Robert Craven

Shock!

Mkt focus worldwide was on our June Payroll read. The print was a shock, far weaker than expected.

Our view has been for a improvement of growth into year end. On the surface, one wouldn’t believe that from today’s figure. Let’s see how the dust settles.

We will take in the balance of our spread, (S) US, (L) Ger, from -4, last +21 (US 3.07% vs Ger 2.86%). We’re unsure at the moment of relative dynamics just ahead.

Robert Craven

Quick World View

The US and China will play the role of lead locomotives, H2. We will not see the "hard landing" in China that many expect. The US will do quite fine, shut of Fed and administration meddling.

Our spread (S) US 10yr, (L) Ger bund from -4 (last +19) reflects our insight that US vigor will eclipse that of the EU. Today’s ECB brake is one reason why.

The UK will move sideways.

A full EU meltdown remains a wild card (20%), as does armed Iranian / Saudi conflict (15%).
　

Robert Craven

Just Ahead

Tomorrow’s June Payroll release is key to near-term mkt direction. A moderate increase in jobs is expected, with av earnings to be off a tad. We look for something more.

Consensus view past few weeks was/is for a slowing ahead, into year end. We noted earlier that such a view was wrong, and why.

Thus, those who own debt can look for higher rates (June/9 our cyclical low); those who own equities - to the extent real sector data drives these prices - can look for improvement.


Robert Craven

A Nifty Little Exercise

June/9 we sensed relative interest rate pressure, US side vs Germany. Thus, we recommended selling (S) the US 10 yr at 2.99% and buying (L) the Ger Bund at 3.03%. Last, 3.11% vs 2.93%.

Thus, the price of the 10 yr is now considerably lower; the price of the Bund, considerably higher. Trading desks usually exercise such a strategy with futures; it can be done with cash. Either way, the return for the 4 wk trade is very satisfactory.

We would recommend that clients take in half and let the balance remain until further notice.


Robert Craven

A Bit of a Brake

China is managing its economy quite well. Key rates were nudged higher again today, an effective shot at price pressures as a bit of a brake was applied to the locomotive.

This 9-month tightening cycle is at, or very near an end.  We can then expect this economy to move along nicely into year end. The Chinese consumer, freed from protective exchange rate policy of the past (artificially weak yuan with no buying power) will fire US exports as never before.


Robert Craven

Circle Game

Joni Mitchell - "And the seasons they go round and round. And the ponies they go up and down. We’re captive on the carousel of time."

Mitchell wrote and sang of life in the mirror, that, "..we can’t return, we can only look behind, from where we came, and go round and round and round in the circle game."

Joni knew something, of the "..child who came out to wander. Caught a dragonfly in a jar. Fearful when the sky was full of thunder. And tearful at the falling of a star."

She captured the central flaw to forecasting.

http://www.youtube.com/watch?v=X5HXT0bn7QY


Robert Craven

Keep It Simple

Complexity - an invention of the financial media (providing refuge for the scoundrel).

The US and Chinese consumer will throw a rope to the rest. We will not see a double dip as so many expect. We were in "pause" mode past couple of months, soon to once again get underway.

Recent data from China and the US supports our view.

Props invented by Obama and the Fed were disasters.

Now shut of both, we will do just fine.


Robert Craven

Tsunami Smacks US!!

Vehicle Sales in June tanked. Observers expected a small increase.

Just three days following Japan’s crisis we predicted a much quicker resuscitation than world markets - then in a state of panic - expected. That has proven to be correct. But we also predicted only modest supply constraints in the US as Japan’s competitors filled the gap. This was wrong as today’s release telegraphs. Supply disruptions were severe, May and June.

Look for a recovery in vehicle sales, Q3.
　

Robert Craven

Crowd Behavior

Mark Twain was right. Always copper a consensus.

Consensus view the past few weeks was for a major slowing ahead, into year end. We noted earlier that such a view was wrong, and why.

This week’s numbers support us, as will those just ahead

Our date of June/9 as the cyclical low on interest rates (aside from a brief period of distortion provided from ql flt) is close enough.


Robert Craven

Greenspan gets one right.

We’re no fan of Greenspan, but he sure got this one spot on in an interview yesterday. Re QE I and II, he says, "I am ill-aware of anything that really worked."

Correct. Obama’s "stimulus" and Bernanke’s money flood were both failures. We are not commenting from the cheap seats. We predicted exactly that, and for both. Others have come to understand.

So how to fix things? Throw the anointed, the planners in the clink and throw away the key.
　

Robert Craven