Week in Review

The collective market view is that we are experiencing a moderate slowing: in China, due to Bk of China braking; in Japan, as expected, due to the tragedy; in the UK, sideways but with the threat of a lift over its head; in the EU, the reality of the periphery disassembling, only Germany and France packing the load; and finally, in the US, with manufacturing slowing, with signs of employment doing the same and with the reality of gasoline and Fed policy (lower $) smacking the consumer where it hurts.

We are not in a sweet spot at the moment; we cannot detect just where there may be a major flaw in consensus, just where resides the next opportunity for our clients. We’ve got a long weekend ahead, so plenty of time for thought.


Robert Craven

Problems at the EU - Should You Worry?

Financial media - "EU problems cause Dow to dive." These writers couldn’t find their way out of a wet paper bag.

Are the EU’s problems your concern, a threat to your 401K? No. They simply make great headlines. We have little exposure there. The troubled countries buy few of our goods. There is no linkage of major contagion to the US.

Will the EU fail? Yes, of course, but gradually so all can adjust.


Robert Craven

A Recap - The Week in Review

We saw this week that the US factory sector took a breather in April, from the explosive pace of Feb and March, meaning new orders and shipments grew more slowly. We’re not sure how to explain this yet, or if it is trend.

We saw this week that US housing remains in the tank, and to no one’s surprise.

We saw this week through the Claims release some further improvement in the US employment market.

We saw this week that price pressures are building in the EU and UK and that both central banks are now more likely brake. The EU can handle it (German, French vigor) but the prospect represents a nightmare for the UK.

We saw that the EU continues to experience problems with the periphery, an old story. Today there is speculation of Greece defaulting on their debt. We recall when Russia defaulted on their debt. That was a game changer for markets in the US.  This is not.

Finally, we saw today that the Bk of Japan is pleased with the pace of resuscitation and so plans no special support plan. Japan’s Q1 GDP was off 0.9% vs Q4, to no one’s surprise (it captured two weeks of tsunami impact). Days after the crisis we predicted a positive Q3. The Bk of Japan, and now most world observers agree.


Robert Craven

Poor UK - A Heck of a Fix

UK inflation (CPI) for April blew through expectations, + 4.5% Y / Y, Core + 3.7% (when the official target is 2%). Part was due to Easter distortions, but the trend is higher and worrisome to authorities. This puts pressure on the Bank of England to lift rates, the risk noted in our Layman’s Guide to the Week Ahead. But the UK real sector is going sideways; it can’t afford higher official rates. Poor UK - a heck of a fix.


Robert Craven

Media Warp

Bloomberg headline this pm - "Japanese and Australian stock futures dropped as Greece sought more bailout funds and slower-than- expected manufacturing growth in the NY region fueled concerns about the global economic recovery."

This is kids at the keyboard grasping for straws. But it sells. And, it’s worthless.

In fact, Greece was long ago priced in. And in fact, the NY survey indicated that factory managers were more upbeat about the future than earlier. The headline was down due to New Orders but that didn’t bother the folks in the trenches because employment grew to its fastest pace in 12 months.

Dismiss this stuff. Use this site as an anchor. We've got a track record. They don't.


Robert Craven

EU April Core CPI - An Alert

EU April Core CPI blew through expectations (+1.8%Y/Y vs +1.5%, consensus, and +1.5%, last), increasing at the fastest pace in over 2 years. The ECB will be obliged to accelerate their planned lift, with the intent of braking activity in this region. This will place upward pressure on the Euro, while the current emergency regarding survival of Greece, and contagion, has pressured it lower recent days.

Robert Craven

Greece, the EU and the US

We recently reported that the EU put in a strong performance for Q1 GDP. Impressive, yet the Euro continues to nosedive vs the $. Why? Fear of periphery contagion.

One need only return to Karl Marx - "From each according to his ability; to each according to his needs." All of us, school kids on up know this to be a recipe for failure. Just as this applies to relationships between individuals within a government, so it equally applies to relationships between 17 sovereigns.

This then underpins the ultimate demise of the EU. This also explains the implosion of Greece, Portugal and Ireland. At a meeting tomorrow in Brussels, panicked EU leaders will try to hold it all together (thank you Strauss-Kahn for your contribution).

Germany is not about to go along with the "From each," bit no matter how much Greece believes in the "to each."

So what’s it mean for us, for our markets? As it will be death of a thousand cuts, almost nothing. A headline in Tokyo just now (Monday monring) reads, "U.S. stocks fell broadly as worries over Greece's finances ramped up ahead of the weekend." 

The truth is we have very little exposure in that region. And a stronger $ vs the Euro (as long as the Euro exists) is not a big deal as these folk don’t buy so much from us anyway.


Robert Craven

A Layman’s Guide - The Week Ahead

(Bear with us folks, we’re a tad wordy with this installment, joining the rest of the media. My son tells me - keep it brief Dad. OK, OK, just this once!)

Background: The financial media delivers mostly filler and fluff; it’s good business for them apparently but serves no other purpose, leaving a void. This provides opportunity for a service like ours.

Most of us are not wired to screens all day long; most of us have other jobs but still don’t enjoy being ambushed by economic events. This includes small business owners who wonder just when to hire or fire, just when, if ever, that parking lot will fill; it includes active investors, those with a job but who manage their own funds. Our exercise at this firm is providing to these individuals by distilling the impact of economic events just ahead. Past years, through other vehicles, we’ve done a good job at that.


The Week Ahead

Every week we face a stream of US economic releases; they’re all featured in the media but they’re not all important. Some carry market-moving horsepower, some do not. That role changes with time, some shedding power, others acquiring it. It’s better to have a leg up, better to anticipate reaction, than react.

This week’s releases are focused on Manufacturing and Housing. We know manufacturing led the recovery; and we know with a weaker dollar and booming exports this sector continues to show vigor. Of the three releases dedicated to manufacturing we do not anticipate a surprise; they will cooperate. The two dedicated to housing will show some improvement, but this sector is in such sad shape, the markets will not be impressed.

With the world as tightly wound as it is, we also must monitor key offshore releases when we feel they will have an impact on our markets. The EU April CPI to be released May/16 is key. A print much through consensus will spark the view for an ECB lift, and sooner rather than later as especially Germany and France are booming. This will worry the US equity markets. The UK April CPI is to be released Tuesday, May/17. The UK will have a real problem with a print through expectations as the Bk of England will be more likely to lift, but this in the face of a struggling real sector (not the case with Germany or France). Won’t be pretty. With both these banks inclined to lift official rates, the Fed will be cornered, blamed even further with reckless policy at home.

Finally - the US debt ceiling. Most, including the Fed and Treasury are in hysterics and predict an end of the world if we don’t raise the ceiling. This is nonsense. Geithner prediction of a "double-dip recession" is simply dishonest. He knows better. Some clear thinkers, including the famed money manager Stanley Druckenmiller, hope for the benefit of all that we leave the ceiling well enough alone. From the WSJ report on an interview with Druckenmiller, "...he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs." And this is the way institutional markets will view such an event, past the first 10 minutes of panic.

Robert Craven

Violence - The Week In Review

It was more world focus this week than US focus. That is, US debt and equity prices were to a large extent driven by offshore events.

S&P was unkind to Greece on Monday, but then nobody cares about the periphery, except the periphery (and of course California).

Not a problem; later in the week here comes the EU with its Q1 GDP print far through expectations, due to strength in Germany and France (the rest in the trough). It’s ancient history but everybody got excited anyway; until that is they all recalled that central banks are just no fun.

China worried world markets when its Industrial Output, although vigorous, was just less vigorous than expected. That didn’t stop the Bank of China from lifting reserve requirements another 50 basis points a day later. This really worried the world’s markets, those of the US especially.

Commodity prices gyrated wildly but ending lower, partly on some corny view of a world slowing. So much for our February prediction that WTI would print 120 tagged to Middle Eastern violence. Of course in the time-tested way of economists, once our prediction comes true, even if a decade later, we’ll be sure to brag about it.


Robert Craven

Offshore

Japan? What problem? China? A tad less prone to protectionism and wary of inflation, this a positive for US exporters (stronger Yuan). The EU - from each according to his ability, to each according to his needs. It can’t work. It will unravel gradually however, nothing sudden. Little impact as we have limited exposure, that region. Germany - a buoyant consumer. Best economic expansion in two decades, tied to exports. UK - a modest recovery yet a trigger-happy Bk of England caps anything more.


Robert Craven

The CPI, Fashion in Central Banking and the Fast Draw

We all recall Abe’s story - just because you call a calf’s tail a leg doesn’t make it so. And so it goes with today’s inflation report. The Federal Reserve is excused because one of them, Art Burns, snowed the BLS and Congress, Alan Greenspan style, to ex out any dangerous stuff.

Today’s CPI headline was as expected, up 0.5% yet because core was up only 0.1% the Federal Reserve by calling the tail a leg can sit tight for a bit.



In the old days folks we just plain had more fun. Politics played more of a role in worldwide central banking - no politician in his right mind wants their central bank to stomp on growth - and a lot of the central bankers went along, Burns style. That’s no longer in fashion.

It’s the fashion nowadays among central bankers to be tough hombres. We know some of them personally. It’s good for their career. Like Wyatt and Morgan Earp, they practice their fast draw at every opportunity.

Bernanke has just forced those at the ECB and Bank of China to clear leather.

Bernanke’s Federal Reserve through the policy of supplying liquidity in great excess, liquidity we in the US never needed, liquidity which like rain on saturated ground flows elsewhere, is the key culprit in triggering commodity inflation offshore (see our post of Feb/16 for background).

Now it’s understood that certain excesses are no longer appropriate. Thus, the ECB and Bank of China have already lifted their key interest rates because it’s in fashion to do so. After today’s news - higher core numbers for the EU and China, these guys will move again in the near term.

These developments cannot help our recovery, one which others have now come to understand is already being hampered by events in the Middle East.

Robert Craven

The European Union and Killing Time at the Press Desk - A Special

What with a wild card event every day or two nowadays the kids at the US press desks have been busy. But there’s days of slack too. Like this week. Here’s where the European Union comes in. It’s bad news if you’re over there. For here, it amounts to filler.

Most now understand that shenanigans in the EU club seem detached somehow, claiming little power of impact on the US economy. They may not know why, but that’s ok; they’re right anyhow.

Short of a failure of the currency itself we don’t care very much what happens over there. Our banks are not very exposed. We don’t greatly depend on Europe as a market for US goods.

The whole bunch combined barely belly up to the bar as a US equal.

Niall Ferguson puts it perfectly: “Workers in the periphery took monetary union to mean they should be paid as well as workers in the German core. But their productivity didn’t rise to German levels. At the same time, people in countries like Ireland took the post-1999 reduction in interest rates—one of the most obvious benefits to the periphery of euro membership—as a signal to go on a borrowing binge. The result: Ireland and Spain behaved a lot like Florida and Nevada. House prices bubbled, then burst”

Now what? The European Union with Germany running the show has cobbled a package together. This will provide short term relief. There is no long-term relief. The EU won’t work. It defies human nature.

Margaret Thatcher was right.


Robert Craven

Those Pesky Offshore Events - The Week in Review

The US economic engine - just when she’s on the way to sparking on 6 of 8, one of those dog gone pesky offshore events threatens to throw a wrench into her works. Let’s take a look.

But first, let’s review the US economy. Our clients received a major heads up Q4. Forecasters were looking in the wrong direction. We predicted that when they sobered up, they would suddenly revise their US GDP estimates, much higher. This was the result. That pattern is closed.

Now to the present. This week was packed with key releases. We predicted strength in jobs, factory activity and vehicle sales. Factory activity was little changed, jobs cooperated nicely; Mar vehicles sales have yet to come in, this writing. We also predicted on Mar/24 after that day’s better than expected Claims print that the number of unemployment claimants would head even lower. Thursday’s number did just that.

Looking ahead , vigor will continue (aside from pesky offshore events) but key for our clients - most forecasters have finally caught on, depriving us of that major leg up which comes with early discovery.

Developments in the European Union appear to many to be a threat to the US economy but are not. A Special edition on this topic is in the works.

Developments in Japan have cooperated nicely with our anchor. Past a day or two of panic, markets there and in neighboring countries have recovered. There have been pipeline stoppages, delivery delays, but nothing not now priced in. A rescue package is near completion. Repatriation has so far been limited; Japan will instead issue bonds and although the Bank of Japan denies it, we expect them to at least partially finance this effort.

The yen is now at pre-quake levels vs the $. The horse is long gone from the barn. Even Warren Buffet agrees with us. It counted a great deal to understand this reality on Mar/14; it’s not worth much now. This pattern is closed.

Events tied to the tragedy will not throw a wrench in the works, will not act as a retardant on US GDP but will act as either a wash or modest spark. Eventually, observers will come to understand this reality.

Finally, we borrow copy from our Mar/4 post on the Mid East: During the weeks ahead we suggest investors and planners adhere to our anchor and acknowledge the glaring risk associated with this region. Course of least resistance for crude prices to remain higher over the intermediate term. It is foolish to believe otherwise.

Higher crude is not so much an inflation threat as a retardant and a powerful one if maintained through Q2. Clients can expect forecasters to begin to shave their US GDP forecasts, linked to this event. They just don’t know that yet.


Robert Craven

Home Sales Tank / Mid Eastern Craziness - The Week In Review

We do not recommend trades in this report, not equity, fixed income nor foreign exchange. Our job is to identify near - to- intermediate term change in the economy, those events which are not yet priced in. We isolate these for our clients and they take it from there.

All of us know now that the US economic engine is accelerating. This was not as obvious months ago when we highlighted this prospect for clients. Sure, it has not all fed down quite yet, we haven’t all felt it, but it’s there and on the way (short of the potential Mid East retardant). This, in spite of the administration’s bungling. So this is a good thing.

Yet how can we say this when this very week we saw figures related to housing which were in the tank? Well, it is known this sector is going nowhere; it’s priced in. That is why New Home sales Wed at a record low did not stir the markets. And one reason for that it that banks are more immune to this reality, having raised $300 bln in new equity in the last two years.

Of course homeowners are not immune, which is why forecasters figured last year that massive imbalances in housing would dampen spending ahead. This, along with their lack of appreciation of traction to be secured by Nov/2, led to their forecasting mega miss. We advised our clients that homeowners would spend anyway, which they did.

Let us move to offshore.

Fiscal events in Japan have concluded quickly this week. A rescue package is gaining critical mass, the currency has stabilized.

US firms have very little equity exposure to Japanese companies, a good thing. Next, there will be disruptions in supply lines for sure, but these are already priced in. There will be internal argument over funding for resuscitation also. We predict the Bank of Japan will support the effort but they adamantly deny it at the moment. For the US the event will amount to either a wash or modest spark.

Finally, we know the Mid East, not EU considerations provides the primary potential retardant to US growth. To restate the obvious, it is foolish at the moment to be constructive on energy prices. Events this week simply support our view for an expanding transformation, one painful and destructive in its youth yet constructive for all of us as it approaches middle age.

Robert Craven

Security - Hard to Come by These Days - Weekly Review

The last two day’s mkt violence blamed first on Spain’s unfortunate encounter with Moodys, then EU contagion as spreads for the likes of Ireland, Portugal and Greece jumped. Next to blame, China’s less-than-thrilling trade result; then it was the US claims result. Finally it was the Saudi cops shooting their own folk. No, none of that; it’s the charts said the techies. Now it’s the tsunami and shock treatment for a country - Japan - just emerging from slumber.

It’s been a great week for selling headlines, each tagging price change to a single event. None were accurate, and then again, perhaps they all were. That is, no mortal or any collection of mortals can gather up every single factor affecting price change in the world auction market. Factors impacting price discovery are too complex and too numerous to isolate.


What can we do? It is our practice to establish anchors along the way, counting on these to provide some shelter from the storm .

The first of these is that notwithstanding perceived or real weakness in China, notwithstanding EU contagion or the soon-to-be applied ECB brake, notwithstanding the upcoming end to Fed generosity, the trend in improvement, US economy, will remain with us. Particularly, we can expect employment and spending to exceed forecasts, near term. This week’s releases pretty much support out view with the exception of claims which were a tad higher. This is not trend, our view, and we follow up on that The rest - imports surging, better domestic spending, even for discretionary items, fit nicely. We also saw today that Jan inventories are lean in relation to sales, this to fire factory production in the coming months.


Robert Craven

Perspective

Things have been a tad hectic, past days. Let’s step back.

The US economy is performing much better than most expected it would. We know now that manufacturing is especially vibrant by the way of new orders, order backlogs, jobs, exports, production; manuf’s have longer delivery times and their input prices are at the highest level since Jul/08 (when oil was surging).

Employment continues to lag a tad. Obama’s statist agenda has meant every new employee carries a larger liability than before. This means that employers have either permanently eliminated positions (productivity up) or put off that decision. Still, employment will gather strength in the months ahead as more of Obama’s policy is rejected.

Consumer activity (about 70% of GDP), after blowing off the charts has slowed at tad, Q1. We predicted more, so it would be easy to blame this all on weather. Some is weather but some is a deliberate pause on the part of the consumer. Nothing unhealthy about this. We have seen this pattern the many years we have followed this sector. Sure enough, pause over, we learn today that Feb vehicle sales rose to their highest level in more than 2 years.

If we were considering a longer-term prospective we would be compelled to examine Obama’s budget, which Newsweek’s Evan Thomas (whose past fawning towards Obama was better seen before dinner) described as a “profile in cowardice.”



The UK economy is hitting on 5 of 8; housing prices are better, construction activity has bounced back and manuf has shown a record start to the year. Germany? Germany is vibrant. And the entire Euro zone has seen manuf grow at the fastest pace in 10 years. Only some of the periphery credits are making little to no contribution. The whole 17-member Euro Zone may grow near 1.7% this year, with the likes of German, twice that.

China is braking a tad, still healthy. Japan, in a slumber for a decade, is showing signs of life with better exports and better industrial production.

Everybody is seeing price pressures. But then we knew that, didn’t we?



Eclipsing all of this is renewal in the Middle East. To appreciate this situation is to know that it’s not just about a despot here, a tyrant there. It is about a people who want what we have and have collectively gathered the courage to get there.

This presents a down side risk for the US economy over the intermediate term because of higher crude prices. We put that gain earlier at 30% which means about 120 +/- on WTI.

Hopefully we won’t get there at all but any investor or planner would be plain nuts to listen to authority figures who assure us that what we see is merely a blip.

Robert Craven

Conspiratorial? Certainly Not!

We’ll see quite a little data this week folks. Some carries no mkt-moving potential. Some does, beginning with Jan Retail Sales tomorrow, then on to the Jan PPI, Housing Starts and Ind Production data, all on Wed., then finally to Jan CPI and the Phil Fed’s Regional Manuf’s Outlook survey on Thur.

By Friday we will have seen that core price pressures remain contained (because that which in not “contained” is ex’d out). We will see that consumer activity continues to grow, that manuf is booming. If longer-term interest rates where only impacted by this data, in isolation then they would be just a tad higher at the end of the week, and only a tad as the mkt crowd is told there is no inflation; they take that home with them.

We can peer offshore for just a moment however to see what would happen to US rates if the mkt view grew for inflationary pressures. The UK Gilt (10 yr UK obligation) is now 50 or so basis points (each “basis point” is .01 of 1%) higher that beginning year levels, last at 3.85%. The US 10 yr is only 30 bps higher for the same time period, last 3.66%. Measured inflation in the UK is almost double that in the US and the Fed-fueled spike in global commodity prices has had a heck of a lot to do with it (along with a weak currency). But Bk of Eng gov King won’t budge, won’t brake with a hike, parroting Benanke that inflation is near zero if one ex’s food and energy.

Well folks, we are not of a conspiratorial bent. However, if we were we might say that the Fed is going to extremes, looking for any excuse to keep rates in the cellar, because of its incestuous relationship with major St firms - the two are linked at the waist. We know from personal experience this to be a fact. Unusually and unnaturally low rates make a ton of $ for St firms; they can finance practically any inventory at a profit. There is a good part of your answer why the Fed, and maybe even the Bank of England are looking the other way.

Oh, but then we’re not conspiratorial. Forgot that.

Robert Craven

Update

Let’s take a look at the balance of the week.

We’ll see the Fed’s Beige Book tomorrow (1/12). This will reflect Bernanke’s recent commentary that improvement is noted here and there.

Thur (1/13) we’ll see the PPI for Dec, then CPI on Fri (1/14). Both of these numbers have acquired market-moving potential because of the Fed’s aggressive expansion of the money supply. If either or both are to print numbers say double expectations, the world mkt will assume the Fed’s got itself in a tight spot and yields will spike. The odds for such a print are low, but this does accurately reflect the tension in the marketplace.

Also Fri (1/14) we will have Dec Retail Sales. Estimates have been shaved a tad due to extreme weather, the end of the reporting period. Still, past few months we have predicted that consumer activity would surprise to the side of vigor. This has been the result, especially for discretionary purchases. We look for more of the same, ongoing.

Finally, the media is saturated with news of distress, EU credits. What’s this mean for the US? Not much.

There will be a nick in US exports given the recent weakness of the Euro to the $(a Euro buys fewer $’s). But major contagion? No. Our banks have very little exposure to the EU periphery credits. The real wild card as we noted earlier is a collapse of the currency. That’s something else.

Background: Nothing good can come from paranoia. But that is just what birthed the EU - the dread of US competitiveness. Sovereignty was ditched throughout Europe. There was a great leveling. Terrified, all rushed together, the weak and the strong, to row one boat. Weaker members inevitably slack on the oars. The ship is now off course and perhaps, bound to run aground.

Solutions to the current crisis were being delivered piecemeal, without recognition for example that Greece, Ireland and Portugal are insolvent. The stubborn ECB had refused to do much. But today Japan eclipsed the ECB and offered to buy a good hunk of the bonds being readied to support EU periphery credits. That helped. So did China’s promise to buy Spanish debt. And so did rumors today of increased ECB purchases of Portugese debt.

The lesser credits of Europe the poor devils got themselves in a trap - borrowing heavily, pre-crisis, in hopes of a continuum. US Democrats, always made out to be darlings in the European press were trusted by this bunch - those same Democrats who sowed the seeds to tank the world markets. Now we’re alright, or getting there, but these credits never recovered. Investors are selling their bonds as they can’t seem to pay their bills. And as investors do that, these credits’ debt bills soar even more as interest rates climb.

World creditors now demand 7% to loan the Portugese 10 year money (actually 7.24% at one point yesterday, triggering ECB purchases which put the rate back down closer to 7%), vs the already high 5.5% that Greece and Ireland are paying the EU emergency fund, vs 3.51% for the UK Gilt 10yr and 3.35% for the US. And if Portugal goes, and she may as she’s not growing fast enough to service her debt, then Spain is right behind, or such is the perception. Makes sense - Spanish banks are one of the largest holders of Portugese debt.

These folks should have listened to Thatcher.

Robert Craven

Review

A quick review is in order. Let’s not get lost for the trees.

Without central bank cooperation late Q4 ‘08 we would have witnessed a meltdown in world commercial activity. This is too scary to even contemplate yet we were within a whisker.

Why the crisis? World investment banks fed lamprey-style on the leavings of Fannie and Freddie. Whiz kids screwed up in structuring products around this lousy mortgage paper. These products imploded. But the feast was presented by Sen Obama, Sen Clinton, Rep Frank, Sen Dodd and other Dem’s who, in order to buy black votes protected the twins from repeated efforts by Bush to reform their shoddy practices.

Enter president Obama. Having inherited a bad situation (in which he played a central role) BO made it much worse by throwing up impediments to corporate risk taking; he thus personally hindered the recovery. From our blog of Dec/09: Dan DiMicco, CEO of steelmaker Nucor Corp, told the WSJ that, "‘Companies large and small are saying, ‘I am not going to do anything until these things - health care, climate legislation - go away or are resolved.’" We also hear from Porta-King CEO Steve Schulte who told USA Today that his company is not investing because, "proposals in Congress to tackle climate change and overhaul health care would raise costs." We have dozens of such testimonials. These guys naturally put hiring on hold.

Consumers were discouraged and shocked most of ‘09 then began a slow recovery in spending H1, ‘10. Slow because job insecurity was still high, exacerbated by the press. And even those with money looked forward to higher taxes beginning Jan/11.

That takes us through ‘09 and half of ‘10. From our blog of Aug/10: Not only are private-sector employers worried about new burdens, they are worried about anemic growth in general, looming deficits and tax hikes never ending. In the larger sense, private enterprise does no relish a future for the US as a social democracy, in the fashion of an economically stagnant Europe. Yet the perception by private enterprise is that this is where Obama is taking us.

Then, Nov/2 changed everything. We all know the details. Voters 1) stopped the damage and 2) ordered repairs to be made. Employers have taken note; consumers have been greatly cheered. Foreign investors will once again discover the US to be a place of safe and sound investment.

Finally, let’s return to our anchor. The last two payroll reports have been less-than-thrilling. We have had slippage on this front, yet expect this to be more pause then trend. Why? Exactly because of Nov/2 and employers’ reaction to that result. Levelers are no longer planning our economy and will no longer be allowed to kill us with debt and regulation. Burdens both perceived and real have been lifted.

Consumer activity has adhered well, blasting through Street estimates (with the exception of the most recent Chain Store sales results, dampened by extreme weather).

Stay tuned.

Robert Craven

Wild Cards

We remain optimistic re US growth, believing that it will exceed expectations, especially employment numbers. But we noted earlier the existence of “wild cards,” events presently off radar.

The business of the future is to be dangerous. So let’s take a look at the odds of significant damage; that is, the odds of an event that has not been priced in and which would retard US growth.

A strike on Iranian nuclear facilities is such a wild card. This event would spike crude prices, at least by 50%. That’s a retardant folks. The Iranians would strike both Saudi oil fields and the Israelis, and attempt to blockade the Straits. Odds for such an event - 40%.

Another wild card is related to the present crisis of peripheral European credits. At the moment Ireland may soon loose her sovereignty; Portugal is in miserable shape, Spain not far behind. This turmoil has been partially priced in. The EU has an emergency fund but more prosperous credits like Germany aren’t anxious to contribute (attesting to the stupidity of the EU in the first place and the accuracy of Thatcher’s prediction). The wild card here is not that Ireland or Portugal become EU protectorates, like Greece, but is for contagion on a grander scale - an EU/Euro collapse and then the bank pandemonium that may follow. From Jeremy Warner in today’s Telegraph, “There must come a point where bailing out the fringe threatens the creditworthiness of the core. We are not there yet, but it's plainly not beyond the bounds of possibility.” Odds - 35%.

Another wild card is a sudden strike by the Chinese on US debt. Odds - 25%.

Another, with the same result, is a rapid blow back of inflation/weak $ tied to recent Fed antics, requiring a sharp contraction by the Fed and/or a full blown currency/trade war. We put this one at 25%. (This is not to say that the Fed’s recent actions are constructive in any way; they aren’t and they’re damaging to the integrity of the Fed to boot.)

Another, contributed to this piece by our friend Christian de Ryss, is traction by the way of muslim thuggery, perhaps a lucky strike at major infrastructure in the UK or Germany; perhaps even in the US and the paralysis that follows. We don’t dare print the odds, even if we had a clue.

No doubt THE key wild card is there, right now, beyond our grasp, waiting in the sidelines for a trigger.

Cross the fingers.

Robert Craven