- China turns it up another notch… now “concerned about the security” of U.S. investments
- Chris Mayer tells the “story of today’s economy”
- Mainstream celebrates latest home price index… our perceptive on the housing “recovery”
- Three market sectors currently detached from reality
- The truth emerges… why Ben Bernanke really bailed out Wall Street
Here it comes, slowly but surely: “We sincerely hope the U.S. fiscal deficit will be reduced, year after year,” China’s Assistant Finance Minister Zhu Guangyao said overnight after talks with Treasury Secretary Geithner. Could he lay it out any more clearly than this? “The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets."
The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.
"We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” We have no idea what he might mean by that… the CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.”
The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.
“Debt is the story of today’s economy,” says Chris Mayer, echoing a theme of this year’s Investment Symposium. “There is still too much of it. Yet the mainstream view seems to be that more of same is the elixir to see us out of this bust. In fact, debt issuances by governments are hitting new records.
“The U.S. government is spending money hand over fist. That’s not new. The U.S. is hoping more foolish foreign central banks will line up and absorb the deluge for pitiful interest rates. The 2-year note sells for a yield of 1.1%.
“Maybe Washington will pull it off. But one day, people are going to demand a better rate to take the government’s paper. At some point, the market’s appetite for puny yields will go away. When that happens, interest rates will rise significantly and debt prices will crash. It’s not a matter of if, only when. To continue at this pace is clearly unsustainable.
“The crazy thing is that the U.S. government is not alone. Emerging markets are also issuing record levels of bonds. The Financial Times reports this morning that ‘the surge in issuance this year [hit] its highest point since records began in 1962.’ The biggest issuers include China, Brazil, Russia, South Korea and some of the Gulf states.
“Incredibly, most seem to look at these debt issuances as positives for the global economy. The FT, for instance, opined (in the middle of its news story) that the debt sales were ‘an encouraging sign for the world economy.’
“It’s a weird paradigm that thinks growing debt levels are a good thing for the global economy, but it is a mainstream view. Economists, lost in their models and abstract curves, preach the benefits of stimulus -- printing money and spending and borrowing. And people seem to eat this up.”
Quick perspective: China’s Internet population grew 13.4% in the first half, to 338 million, says government-run China Internet Network Information Center. That’s more than the whole population of the U.S. Yet penetration rates there are just over 25%, compared with 75% in the U.S.
Here’s a headline we can’t resist: “Home Prices Rose in May,” trumpets The New York Times this morning. We understand… they’ve got papers to sell and a hell of a mortgage. But in reality, the U.S. housing market is only decaying at a slower pace. Today’s S&P/Case-Shiller home price index reading is par for the course for the last quarter… home prices and sales are still falling, just no longer accelerating into the abyss.
May registered a 16.8% annual decline in S&P’s 10-City Composite, with its 20-City just a bit worse. Even though that’s still a far cry from home price appreciation, May marks the fourth month in a row in annual return improvement. So raise your glass for a toast… here’s to four months of, ummm, home prices not registering record annual declines. (Better make it a double.)
“To put it in perspective,” says David Blitzer, steward of the index, “this is the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing.
“While many indicators are showing signs of life in the U.S. housing market, we should remember that on a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”
Stocks managed to eke out a small gain yesterday, even though blue chip earnings were a bust. Traders clung to the new home sales jump and shrugged off bad numbers from Honeywell, Aetna and Verizon. The S&P 500 inched up 0.3%.
“The stock market has abandoned rationality,” declares Dan Amoss. “Sure, it usually rallies ahead of evidence of measurable progress in the economy, but the rally from March to May had already priced in a strong ‘V-shaped’ recovery, which will, obviously, not happen. At best, we’re in for years of stagnation and lower living standards as society inflates away, pays down or writes off bad debts.
“The recent rally, starting on July 13, has raised the bar for corporate earnings over the next few quarters even higher, setting market participants up for another round of disappointment.
“In the financial, REIT and consumer discretionary sectors, the market completely detached from reality. Part of this can be explained by the growth of program trading based on backward-looking statistical inputs, part by the triumph of technical analysis over critical analysis, and part by the herd behavior of fund managers.
“Regarding the triumph of technical analysis over critical analysis, ridiculous notions like the following are clearly driving the market higher: ‘We just broke through ‘resistance’ at 950 on the S&P 500, so therefore, it’s a mathematical certainty that we’ll go to 1,050 or 1,100.’ This kind of ‘analysis’ is dangerous. When we all start watching and reacting to charts and stop thinking critically about what stocks are intrinsically worth based on reasonable assumptions about the future, the adjustment process back to reality can be violent and painful. The 1987 crash is a case in point.”
We’re putting the final touches on a new special report from Dan on the next big-name company to blow up. We’ve got to keep the details under our hat for a little while longer, but for now, let’s just say it’s a very significant and influential bank. More to come…
The SEC added more restrictions to short selling today. The process of naked shorting -- selling stocks short without locating shares to borrow -- is now officially illegal. It’s a reasonable rule, but we doubt it will make much of a difference… remember that the SEC has enforced a temporary ban on naked short selling since September 2008. Ironically, the worst of the credit crisis sell-offs came right after the ban.
But here’s one that gets us a little nervous: The SEC said it is “increasing transparency around short sales.” Essentially, the commission is going to require institutional-size shorters to provide daily trading reports, which it will make public one month in arrears (without the names of the investors or institutions). From a reporter’s perspective, it’ll certainly be interesting. But why are we keeping tabs on something that’s supposed to be legal? Will rabid buyers get the same treatment?
Speaking of short plays, the U.S. dollar is still in hot water. The dollar index briefly made a new 2009 low this morning of 78.3. Having found support there in the past, the index was quick to bounce back to a still-low 78.7.
The dollar’s spring back put the hurt on gold. After holding steady for the last week or so around $955 an ounce, the spot price is down to $944 as we write.
Crude oil is declining too. The light sweet variety is down a buck and change today, to $66 a barrel.
Sugar is the commodity du jour. At 18.45 cents a pound, sugar’s up 56% in 2009, to a three-year high. There’s a shortfall of the stuff in India, interestingly the world’s largest sugar consumer. And recent dollar weakness/energy price appreciation has added fuel to the fire.
Finally, the truth comes out: “I was not going to be the Federal Reserve chairman who presided over the second Great Depression,” Ben Bernanke told PBS at a recent town hall-style interview. We imagine the appearance was designed to boost his public image and cement his coming reappointment… looks like that might have backfired.
“Did he really think that comment through?” asks Byron King. “It's so reminiscent of President Nixon, many years past... ‘I'm not going to be the first American president to lose a war,’ said Milhous of the police action in Vietnam. Goes to show you... just wait awhile and these public officials will give you grist for the mill.”
A few more quotes from the interview that we’ll be keeping on file:
“I have a lot of confidence that within a few years that we will be not only back on track but that we will be growing strongly again.
For the next couple of years, “inflation will be quite low.
And just for the mental image: “I had to hold my nose and stop those firms from failing.”
In the mailbox today, the sarcasm floweth:
“C'mon, admit it, you’re wrong,” writes a reader responding to yesterday’s 5. “Just ask Cramer: The bottom was in March. The housing bottom was hit a month ago… green shoots poppin’ up everywhere… Look at all them positive bottom lines. Soon we will be living in a carbon-free world with inexpensive health care for all, while maidens paid for by the government with our grandchildren’s bucks slowly drop grapes into our mouths.
“We can live in housing paid for by the government on land owned by the government. I wonder if we get a choice of color for our tents. Will they furnish chemical toilets or will we even have a pot to piss in? The recession is over... cause the depression starts and the Chinese take possession of Amerika in lieu of payment for what is owed.”
“You guys are so far off base!” claims another. “The ‘cash for clunkers’ program is another cash cow for Goldman Sachs: Securitize buying up thousands of '85 Chevys from Grandma, who has never heard about the program; sell them to Uncle Sam (aka GM/Chrysler); and give away the purchased upgrades for a charitable deduction. Everybody wins.”
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