Opportunity

Critics abound; there’s always noise from the cheap seats when things get tough in the arena. Thus, one must be careful to judge.  We’re not sure we could handle things any better than Barroso and the other EU types.  But from the comfort of the keyboard, one thing is clear – they’re deer-in-the-headlights, every one.

We noted much earlier, and refreshed the other day that it is either fiscal union or the end. And the end may be a good deal more frightening than most expect.  This is because extremists, especially leftists, are revolting at the mere hint of austerity. Already Greek types are casting the Germans as Nazis (as they beg for even more German money).

For many, lurking just backstage, this is the opportunity of a lifetime.

We will see, are seeing in fact a lead up to WWI all over again - the blame game so typical of European politics. It is time to invent an enemy, just as the Muslim troglodytes know exactly how to invent a diversion, a camouflage for their blunders. For these thugs, it is the West; for failed E-Z states, it is Germany.  Right now, the weak and incoherent - most of Europe, are damning the unified and solvent - Germany; they, who have done almost everything wrong and Germany who has done almost everything right.

The final step in this choreography - to be interrupted only if the German culture suddenly remakes itself to accept flip flops at work, 3 hour naps, and chronic tax cheating as a national pastime, and abandons its meritocracy and the rule of law for self indulgence and cynicism - will be the appearance of another Mussolini, or Franco, or a Metaxas, just this time in a pin stripe suit.


Robert Craven

Fear

Kaiser Wilhelm II failed; so did Hitler.  Not Merkel.  She took Europe without firing a shot.

It is a new era for this region, something which all but the willfully blind must recognize.  And certainly every trading desk must recognize.

So there is angst among those nations of lesser merit; actually, there is fear. Hollande shouts (while trembling) that the Mediterranean notion of “growth” should trump Germanic notions of austerity. All over Europe the gospel is that prudent Germans are at the root of the E-Z meltdown. But in bashing thrift and industry, debtors run the risk of a backlash from a nation which is called upon to deliver even more capital to salvage the reckless. And past “backlashes” were not pleasant for those involved.

WWI, WWII – Anytime Germany was 1) unified and 2) isolated, armed conflict followed. And nowadays, there are better ways than the tank and the Messerschmitt.

Our neighbor Vic Hansen wrote the other day that, “History is quietly whispering to us in our age of amnesia: ‘I would not keep poking the Germans unless you are able to deal with them when they wake up.’”

Indeed, the old WWII constraints are eroding, if not gone. The allies had a solution – split Germany. Germany recently paid $2 trillion to become whole again.

Germany played by the rules while the EU has turned into a Ponzi racket – poorer southern members cooked their books to get German cash. Once caught, they blame their plight on German mercantilism and export-driven profit mongering.  This is as stupid as it is dangerous.

Where is America? America leads from behind, if at all. A rag-tag NATO is confused and afraid, abandoned to face a united and very rich German state.

It is this reality which is the overlay to all the rest – the noise, the phony solutions, all of it; they mean nothing.

It is the fear of German retribution, of a smothering out of what little is left of E-Z member national  identity, that is the common denominator driving every debate.


Robert Craven.

The Anointed

Whenever an individual or group of individuals set about to direct economic affairs, disaster is the result.  This has been everywhere and always true; along with death (we omit “taxes” as the Greeks have demonstrated this exercise is voluntary) it is a guaranteed outcome. 

Just a bit of knowledge of history, a tiny serving of economics is all that is needed to understand this reality.  But lessons are never learned. Round and round we go.

We have witnessed this result in the US as an interventionist administration, gifted with great insight passed down directly from the gods has thwarted what otherwise would have been considerable economic progress. 

And now we have witnessed the same result but many times expanded as European elitists, the anointed, “their minds dulled by generations of inherited wealth,” as Liam Halligan of the Telegraph put it, set about to create their own commune (just as so many of the similarly afflicted did in Taos New Mexico in the 60’s; trust babies, nursing on the milk of Marx). Or that was the plan - one big happy E-Z family. Their motto, as borrowed from N.L. – “From each according to his ability; to each according to his needs.” 

Scornful of those of us who warned it could not work, we were dismissed as cranks at worst, as the simple working folk at best.

The books of Hayek and Freidman were thrown to the bonfire, those of Engels, Schumpeter and Veblen enshrined.  Lessons unlearned.

And now? And now most expect we are to live with this mess for years. Not likely. As we highlighted many weeks back, it is either fiscal union or the end. And it will come faster than most expect.


Robert Craven

Unarmed

Although earlier insight re the E-Z proved to be satisfactory, we cannot at this time predict events in the E-Z, especially those of a political nature and so cannot isolate the impact on inter-credit spreads, and impact on the US by the way of flight to sanctuary.

Similarly, we have lost a sense of economic reality ahead for the UK; that is, pockets of opportunity created by forecast flaw.

Finally, after several quarters of satisfactory results, our insight regarding real sector activity for Q2 lost its luster; US activity has slowed more than we expected.

Our product is not designed for investors; it is designed for traders who can expect a trading window of from 2 – 5 weeks.  Thus, we need to deliver a more accurate picture of the economic landscape just ahead than the Street, which releases will “surprise” and why.

We’ve lost the sweet spot for the moment and so have had little to print; there is enough noise out there as it is.

Robert Craven

Insight Provided on the UK Disappoints

Insight delivered for this credit has been less than satisfactory.  We recently advised clients that observers would under-shoot, especially regarding the consumer. And on Apr/26 we recommended that clients look to own (L-S) the UK term structure in preparation for this event.

In fact, Tuesday’s Apr BRC chain sales print (-3.3% vs +0.5%, consensus, +1.3%, last) made a mockery of that advice.  And the 2 – 30 spread, 289 upon entry, is now 282.

Naturally fight to sanctuary (Greece) had something to do with the poor performance, but key was misjudgment on our part.

Robert Craven

US Anchor

There is plenty of noise from the E-Z but best for us remain anchored, centered regarding the US.

Developments in Europe will not provide serious impediments to US growth; in fact, they may provide a bit of a spark. Developments there have however provided impediments to strategy making as the US curve remains artificially impacted. Given E-Z events are of a wild card nature, at least to us, we have been out of this and similar illustrative trades for several weeks.

It is not of course only flight to sanctuary that is billowing US debt prices. After the last two NFP results, observers have the US in a repeat of the previous two years – a spring faint.

Not this time. We all know now, after the fact, that some jobs which are usually created in spring were created earlier given the weather, thus the dip. No doubt. But that is also history.

Our task is to identify the economic landscape just ahead. In fact there has been very little change applied to the US throttle – she will accelerate moderately into, and through H2.

We all know the consumer is key. But the consumer has been underrated. Because earned income has been flat, most economists figured spending would too. Early on we explained why they would be wrong, that consumers would go to savings and credit cards to take up the slack.  That was the result.  That pattern will continue over the intermediate term, until private sector jobs catch up.

Early Q1 we had crude prices as the piano overhead for the consumer. Gasoline peaked Apr/2. Iran is still capable of mischief but for the moment, cheaper gasoline naturally provides further spark to the consumer.

Much was made of the so-called “labor participation” rate, last Payroll print (Apr/4). It was a feast for the media and street economists. The low rate - 63.6% - is tied to demographics they said, and we’re all in trouble if this continues; malaise for years to come.

Instead, the primary driver of plummeting participation resides in Washington. For example, Obama’s policy of making the food stamp program more generous and more easily available, thus enabling more to qualify in the act of remaining unemployed is a prime culprit. Also, policies were invented to reduce mortgage debt for certain families, thus reducing the incentive at the margin, to work.

As we have highlighted for several years, Obama’s policies have both worried employers due to smothering regulations (and the threat of more of the same), and, discouraged job seeking through the creation of greater incentives to remain unemployed; that is, to stay out of the labor force. Not launching a satellite now folks. It is not a coincidence that the participation rate plummeted upon Obama’s election. He inherited a difficult situation, one in which he had a hand in creating, and then proceeded to make it much worse.

Robert Craven

The Week in Review

From what we learned this week, we may simply repeat from our last Review – relative dynamics, US / UK / E-Z remain in place: the US will continue to distance these two, the UK to nudge ahead of the E-Z, and the E-Z to continue to “disappoint.”  If there are “surprises” to UK numbers, these will be to the side of more, not less.  If there are “surprises” to E-Z numbers, these will be to the side of less, not more. 

This then represents the most general plan in capturing relative price change just ahead.

US - The US consumer may pause a tad, but will remain resilient; in fact, consumer activity will accelerate into H2, and this despite the less-than-buoyant trend in earned income (flat hourly earnings / flat workweek). Savings and credit cards will take up the slack, until… private sector employment comes to the rescue. This is the best kind of jobs creation, and is averaging 163M per month after 26 straight months of gain. This is pretty impressive given headwinds, those retardants pressed by the current administration (rampant Fed spending / rampant debt growth / huge tax hike due Jan/2013 / failed energy policy).

E-Z – Recent events have fit our earlier predictions – observers continue to over-estimate activity, this region, especially official observers (Mr. Draghi comes to mind).  We included Germany in this initial observation and still do.  Events will bear us out over the near term.

UK – The last Retail Sales result (Apr/20) fit our guideline to clients for this credit, along with the recent Construction PMI but of course Q1 GDP, and the Manuf PMI did not and we were confident that they would. We’re not especially happy with these results, although we are almost certain that the GDP will be revised to a +0.2 or 0.3%.  The recent CBI (Apr26) on the face did not fit either, but the outlook component was encouraging. 

All in, the odds continue to favor our approach, for the balance of Q2. That is, any major surprises to be to the side of relative vigor.  Crowd behavior applies equally well to economists as it does to the investment crowd. This bunch are still caught up in the malaise of the moment.

Robert Craven

What to Make of the US?

There has been the suspicion that we would replay the “Spring slowdown,” and now some releases would support that notion, including Mar NFP, Mar Durables, and recent Claims prints.  It’s easy to look for a repeat, and a mistake.

We came into March with 5, maybe 6 of 8 cylinders firing. Jobs creation, consumer activity and manufacturing activity had on the whole flattened estimates from mid Q4.  Clients were prepared for that reality and were able to capture price change as a result.

So suddenly this horsepower is gone, a dose of sodium pentothal in the main vein (having just put down a horse and a mule, the analogy comes to mind)?  Nope. Simply a pause.

This post is brief, as may be the next few as we are remodeling, and installing a new computer system.  No telling what might go haywire.

We intend to be on hand however to prep clients on the best way to trade Friday’s Apr Payroll print.


Robert Craven