Thursday, September 29, 2011

Goldman Sachs: "Welcome To The Great Stagnation"


A little under a year ago, with much pomp and circumstance, Goldman’s economic team proclaimed its multi-year long bearish outlook on the economy over, and on December 1 of 2010, issued a report in which it noted that it was turning a new leaf in its “bleak” perception of the economy, based in big part on its expectation that the combination of an ebullient monetary environment (QE2 has just been launched) and a cornucopic (sic) fiscal stimulus (the first, of many, payroll tax cuts had just been passed) would lead the economy to a sustained growth of not less than 4% (and led Zero Hedge to officially proclaim Goldman as having jumped the shark in conjunction with our prediction that a year hence the US economy would be contracting yet again). Zero Hedge was right, and Goldman was 100% wrong. Today, we however witness something different: in what seem to be a major paradigm shift within the firm’s strategic research team (not Jan Hatzius’ group but that of Dominic Wilson), the firm appears to officially give up on “recovery” as a modal outcome for both the US and the developed world, and instead aims a little lower. Far lower. The report is titled “From the 'Great Recession' to the 'Great Stagnation'” and in an extended analysis looking at 150 years of historical data, it concludes that “those historical lessons suggest that the probability of stagnation in the current environment is much higher than usual, at about 40% for developed markets. Trends in Europe and the US are so far still following growth paths that would be typical of stagnations.” Looks like Goldman just proved us at least half right when we said in January that the keyword of 2011 would be “stagflation.” Luckily, the Fed and the world’s central banks still have 3 months in which to prove the second half of our prediction correct as well.





While Economic Data Never Lies, Consumer Comfort Reaches Second Weakest Ever And Buying Climate Collapses

As ES levitates 20-30pts off overnight lows on 'incredible' macro data and 'hope' in Europe, Bloomberg's Consumer Comfort Index just printed the second-lowest reading ever as 93% of those surveyed had a negative opinion of the economy. In almost every demographic, sentiment has fallen to near record lows (except we do note that in the last week those earnings 75k or more modestly improved their outlook though still drastically low). Perhaps the most critical sub-index, given the dependence on a consumer who is not paying his mortgage and living off food stamps, is the Buying Climate, which has only been lower during Q3 2008. We assume the congressional 'super-committee' is paying attention.





Is There Blood In The Streets?

Eric De Groot at Eric De Groot - 1 minute ago

Fear is the key element to control. Panic, induced by fear, generates selling. Bouts of intense selling keeps buyers disorganized just enough to prevent physical demand from overwhelming paper supply and maintain confidence in the old paradigm a little longer. Investors that recognize extreme through rare TA and money flows setups, or what traders often refer to as recognizing and buying "Blood... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 





New Day, Same Stuff

Once again equities are responding to events with more excitement than the credit markets. Yes, Germany approved the changes to EFSF first announced back in July.  That was fully expected and a No vote would have been a shocking disaster at this stage.  The level of cynicism has hit a new high.  I have heard a lot of chatter that now that Germany has jammed this through, they can stop pretending that they are against levering up the funds.  I am not a fan of the politicians or political process, but betting money that Schaeuble and Merkel made such bold-faced lies seems like an act of desperation.  The risks from pursuing the leveraged EFSF strategy are real and high - downgrades of all the top European countries and inability to stop any renewed selling pressure in the future.  Germany has the sense not lose their rating in a futile attempt to defend a perimeter that can no longer be defended.





Q2 GDP Revision Better But Doesn't Meaningfully Change Prospects For Q3

Stone & McCarthy just posted a brief interpretation of the better-than-expected 3rd revision to Q2 GDP noting that the magnitude of revisions do little to improve expectations for Q3. Key takeaways include: Upside Q2 GDP revisions driven in large part by PCE Services; Inventories revised downward setting stage for Q3 restocking; and Q3 GDP looks to be in the 2.5% area. Little wonder markets are hardly overwhelmed and talking heads aren't spinning this into 2012 recovery and Fed Funds futures didn't budge - though for now ES keeps pushing higher into the open - though admittedly feeling squeezed right now by the apparent slew of better-than-expected news - brought to you via Sesame Street and the letter 'J': [J]ermany, Jobs, and [Jee]DP.





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Initial Claims Beats By Multiple Standard Deviations As BLS Revisions Jump Again

We grow weary of reporting the consistent statistical anomaly that is the prior revision UP in the initial jobless claims. Headlines will read of the impressive job 'improving' situation as initial claims fell 37k on the week (a two standard deviation improvement which seems extremely unlikely given the macro/micro backdrop). Once again proving their ineptitude, the claims print was massively better than even the most optimistic economist estimate - an incredible six standard deviations better than consensus. This is the lowest initial claims print since April 1st (ironic really) and below 400k for only the second time in 25 weeks - though for a moment we must have some hope that this is a trend as ES pops 10pts.
UPDATE: Via Bloomberg (we couldn't resist) from TD Securities' Eric Green: "If its too good to believe, it probably is, and the BLS says as much"





Bernanke Out Under Perry

Ever the thoughtful wordsmith, Governor Perry just noted on CNBC that he would not reappoint Bernanke. He reiterated his inflationary expectations line-of-reasoning and added that monetary policy shouldn't "cover bad fiscal policy". Once again the topic of independence and transparency was tripping off his tongue - Ben better start printing soon as time seems to be running out.





Daily US Opening News And Market Re-Cap: September 29

  • The German lower house passed the EFSF amendment bill with a leading conservative lawmaker noting that the coalition did not need to rely on opposition votes.
  • Fed’s Bernanke said the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
  • German BDB confirms that the 90% target rate for private sector involvement in the second Greek bailout has been met adding that the ECB is well prepared to assist EU banks.
  • Greek PM will travel to Paris on Friday to discuss debt crisis with French president Sarkozy according to a source.
  • Banks and other private sector bondholders are resisting the idea of taking larger haircuts on Greek debt by lobbying countries such as Germany and the Netherlands.





Frontrunning: September 29th

  • White House Reviewing Bill on China Currency, Carney Says. (Bloomberg)
  • China Economic Growth Seen Less Than 5% by 2016 in Global Poll. (Bloomberg)
  • German MPs back euro crisis powers, Merkel support unclear. (Reuters)
  • Greece Faces Auditor Verdict, Fresh Aid at Stake. (Reuters)
  • Business Attacks Transaction Tax Plan. (FT)
  • Bernanke Tells US to Heed Emerging Economies. (FT)
  • Bernanke: Unemployment Poses ‘National Crisis’. (Bloomberg)
  • SEC Probes Banks Over Mortgage Loans. (FT)




Ugly Italian Bond Auction Which Fails To Meet Issuance Targets Follows Atrocious German 5 Year Bobl Auction

Anyone who thought that yesterday's atrocious 5 Year E5 Billion bobl auction was a one off fluke may need to reevaluate after today's even uglier Italian bond auction which was not a failure in all but name, after the Italian Treasury raised far less than was targetted. As a result, Italian bonds have slumped, extending losses from earlier this morning. That said, we expect a near-term kneejerk reaction once the German EFSF vote ratifies as is broadly expected. Specifically, per Bloomberg, the 10-yr yield hit 5.69% after auction from 5.66% pre-auction; now steady at 5.66%, +2bps from yesterday, it also sold EU1.3bln vs targeted EU2bln on bonds due August 2021; Italy sells EU2.47bln vs targeted EU2.5bln bonds due March 2022 with avg yield of 5.86% vs prev 5.22%; 2-yr yield +3bps to 4.4% vs 4.37% pre-auction. The govt sold EU3.14bln due July 2014, less than the targeted EU3.5bln bonds; avg yield of 4.68% vs prev 3.87%; 5-yr yield +6bps to 5.08% vs 5.07% pre-auction Italy sold EU926m vs targeted EU1bln bonds due December 2015.





Germany Backs EFSF Expansion With 523 Votes In Favor, 85 Against; EUR Sells On The News

The German "TARP equivalent" EFSF expansion vote has passed with a resdounding majority of 523 votes For and 85 Against. Obviously this was largely priced in judging by the rapid sell off in the EURUSd on the news. And now, back to focusing on the structural failure of the Eurozone which no vote can fix.





Market Reaction To German 'TARP' Vote

A very small initial rally has given way to more significant selling now as credit and equity markets pull back, EUR drops, and Bunds have rallied 1-2bps. Selling the news makes some sense but is hardly confidence-inspiring...especially given subordinated financials decompression.








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