Venice video link here.

Also, Trichet Friday, the German elections, and G8 reports seem to be setting the tone for the euro zone to do something about the solvency issue. This is very good for equities and the rest of the credit stack.

At the same time it does not seem likely that any growth proposals will include fiscal relaxation, so the euro zone will have to get by the best it can with the deficits it has, which I’d guess should mean flat GDP, +/- 1% or so.

The US should also continue to muddle through with modest top line growth, and inflation low enough and the output gap wide enough to keep this Fed from hiking any time soon.

US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

They have certainly had their ups and downs:

Click here for larger version

>   
>   (email exchange)
>   
>   Warren, what do u think stocks do here?
>   

Been bearish all along from mid March and still thinking same.

Euro zone still melting down.

US coming off Q4 rebuild of Japan’s pipeline.

And now unemployment benefits expiring in 9 states with more to come?

State and local cutbacks are ‘high multiple’ and actual state and local deficit spending coming down as well?

Housing not picking up enough to add meaningfully to aggregate demand/GDP.

With ‘real productivity’/technology and management advances’ continually reducing labor needed per unit of output, recent declines in productivity in line with softer employment?

Global austerity = global slow motion train wreck?

• Austerity everywhere keeps domestic demand in check and export channels muted
• Non govt credit expansion pretty much stone cold dead in the US and Europe
• Rising oil energy prices subduing global aggregate demand
• US federal deficit just about enough to muddle through with modest GDP growth
• Rest of world public deficits also insufficient to close output gaps, including China which has calmed down considerably
• Zero rate policies/QE/etc. in the US, Japan, and Europe doing their thing to keep aggregate demand down and inflation low as monetary authorities continue to get that causation backwards
• All good for stocks and shareholders, not good for most people trying to work for a living
• Europe still in slow motion train wreck mode, with psi bond tax risk keeping investors at bay and ECB waiting for things to get bad enough before intervening

So still looking to me like a case of

‘Because we fear becoming the next Greece, we continue to turn ourselves into the next Japan’

The only way out at this point is a private sector credit expansion, which, in the US, traditionally comes from housing, but doesn’t seem to be happening this time. Past cycles have seen it come from the sub prime expansion phase, the .com/y2k boom, the S&L expansion phase, and the emerging market lending boom.

But this time we’re being more careful of ‘bubbles’ (just like Japan has done for the last two decades). So I don’t see much hope there.

Still watching for the euro bond tax idea to surface, which I see as the immediate possibility of systemic risk, but no real sign yet.

Click here for larger version

The issues I’ve been discussing over the last year or two while now crystallizing, remain highly problematic.

The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question: ‘If Greece doesn’t have to pay, why do I?’- threatening a far more disruptive outcome that is yet to be fully discounted.

That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.

And note, also as previously discussed, that there has yet to be an actual Greek default, and that all Greek bonds have continued to mature at par, as there has yet to be an acceptable alternative.

So what are the alternatives?

1. Continue to fund Greece with terms and conditions.
2. Don’t fund Greece which forces:
  a. Greece is forced to limit spending to actual tax revenues
  b. Greece moves back to the drachma

And what are the ‘terms and conditions’?

Austerity is always the lead demand, which slows both the Greek economy and to some extent the euro zone in general.

Additional demands currently include discounting Greek bonds to bring down their debt to GDP ratio to ‘sustainable’ levels. However, after 8 months of negotiations, this has proven highly problematic, probably for reasons yet to be fully disclosed. And, as just discussed, there may be a growing awareness that discounting opens Pandora’s box with the politically attractive question ‘if Greece doesn’t have to pay, why do we?’

So what actually happens?

My best guess, and not with a lot of conviction, is that nothing is concluded before the coming maturity dates, and the ECB winds up writing the check to support short term Greek funding to buy more time for more inconclusive discussion. So, again as previously discussed, seems like this is the solution- death by 1,000 cuts and reluctant ECB bond buying when push comes to shove to keep it all going.

And, currently, the catastrophic risk I’d highly recommend immediately hedging is the risk that Greek bonds are formally discounted, rapidly followed by a global discussion of ‘so why should we have to pay?’ Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.

Once again, management is quick to sell the shareholders down the river with a fat coupon, low strike, dilutive preferred.

This is one of the inherent risks of being a common shareholder under current law.

It keeps stocks cheaper than otherwise, which makes them more attractive as takeover candidates, as
when you own the whole thing you don’t have this risk.

BUS 08/25 13:10 Berkshire Hathaway to Invest $5 Billion in Bank of America
BN 08/25 13:12 *BERKSHIRE WARRANTS FOR 700M SHRS EXERCISE PRICE $7.142857/SHR
BN 08/25 13:10 *BOFA TO SELL 50,000 SHRS PFD, LIQUIDATION VALUE $100K/SHR
BN 08/25 13:10 *BERKSHIRE HATHAWAY TO GET WARRANTS TO BUY 700M SHRS :BAC US
BN 08/25 13:10 *BERKSHIRE HATHAWAY TO INVEST $5B IN BANK OF AMERICA :BAC US
BN 08/25 13:10 *BOFA TO SELL 50,000 SHRS PFD :BAC US
BN 08/25 13:10 *BOFA TO SELL 50,000 SHRS :BAC US
BN 08/25 13:10 *BERKSHIRE HATHAWAY TO INVEST $5B IN BANK OF AMERICA

Berkshire Hathaway to Invest $5 Billion in Bank of America

By JoAnne Norton

August 25 (Bloomberg) — Berkshire Hathaway Inc. agreed to
buy 50,000 preferred shares of Bank of America Corp. for $5
billion, the bank said today in a statement.

From Goldman:

Published August 8, 2011

* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

Below are various commodity indices.
If China was in fact melting down in the second half of this year due to cut backs in state spending and lending, and that front loaded into the first quarter, it would look something like that before breaking further.

The Australian dollar is likewise falling, indicating shifting circumstances at China’s coal mine as well.

While good for the US consumer and US domestic demand, it’s not good for the earnings of quite a few
major corporations.

It’s also good for the dollar, which is also not good for corporate foreign earnings translations.

It also brings down headline inflation and could help moderate core CPI as well.

And if China doesn’t like US Fed style QE, ECB style QE- buying member nation debt- has to be all the more distasteful,
and could shift their reserve preference away from the euro.

Especially as the ECB check writing escalates much like it did when it supported the banking system’s liquidity. In theory the ECB’s check writing for the national govts could approach the size of the US budget deficit. Somewhat as ECB liquidity support for the euro member banks is analogous to FDIC insurance for the US banking system.

With the US budget deficit chugging along at about 9% of GDP, domestic demand and earnings should be no worse than they were in the first half of this year, as previously discussed, which means equities should be ok in general, though with some names benefiting as others get hurt.

I tend to agree with this update from Art.
The global equity sell off seems beyond anything related to the S&P downgrade
and more likely China and commodity related. Note the recent fall in the $A for example.

There’s a new post on our site discussing the terrible performance of Asian stock markets this morning, on the first major trading day following Standard & Poor’s downgrade of the U.S. government’s credit rating. The media is widely assuming the selloff in Asia is all related to the downgrade, but I think that’s a pretty flimsy argument. Seems more likely to be related to China and/or Europe. We’ll have a better idea once European markets open. The post is linked and excerpted below. If you have any questions or concerns, let me know. Have a great week!

Asia Down Big: US Downgrade or China Cracking?

Market chatter has been focused on the impact that Standard & Poor’s downgrade of U.S. government’s credit rating on Friday afternoon would have on markets this week. If you follow our blog, you already know where we stand on S&P’s decision—it’s an utter joke. And while other markets have shown some volatility since Friday, it didn’t seem to have much of a negative impact. That’s as we expected.

However, Asian markets sold off brutally at the start of this week’s trading. The knee-jerk media interpretation is that it’s S&P-driven, but that’s not a satisfying explanation in my view. Given how the sell-offs are unfolding, it looks like it could be China-related. The Shanghai stock market is now officially in bear market territory, and smart market watchers have been predicting that China could soon experience a financial crisis, as its system is reportedly quite levered-up and fragile.

If so, this is NOT good for the global economic and risky asset outlooks. Throw one more nut on the bear claw. And China is a big nut—a lot of companies around the world depend on demand out of China, either directly or indirectly, to support current operating performance. Take that down significantly and stock market valuations suddenly look a lot richer.

Of course, it could be Europe too. And we’ve recently seen short-term interest rates go negative, an occurrence that presaged the last global financial crisis. We’re keeping a close eye on things as they unfold.

+++

In other news, Friday saw what appeared to be rather healthy payrolls and consumer credit reports. However, digging below the headlines, temporary hirings (along with measures of temp help demand from other sources) are still falling, and they tend to lead payrolls higher or lower. And underlying trends in consumer confidence indicate that the notable jump in consumer credit, though it could run for another few quarters, should be short-lived.

Work that I did with some of our strategy models over the weekend indicates that recession is going to be almost a sure thing as July and August data is fed in, and we’re currently predicting a start date between February 2012 and January 2013. Also looks, based on NYSE margin data, like the S&P 500 could fall another 10% to 30% from here, with a bear market running from May 2011 (some would date it back to 2007) through as late as mid-2013. A bear market starting roughly half a year before recession would fit historical patterns rather well, unfortunately.

One piece that is arguing emphatically against recession is the Treasury curve, which is still historically steep after last week’s flattening. However, (1) Japan’s first follow-on recession started with the term spread at around 200 basis points (unheard of up until then) and it has had two additional recessions without its yield curve ever inverting, and (2) we simply don’t expect term spreads to have much predictive power in a zero interest rate environment. Interbank funding in the U.S. is still at safe levels, but there are definitely incipient signs of stress. Everything else is on the verge of triggering a recession warning.

Depending upon what unfolds in China, Europe, and the upcoming U.S. austerity negotiations (and the ever-present unknown unknowns), recession could unfold far sooner and faster than almost anyone thinks. Forceful policy actions could do a great deal to stem the tide, but there seems to be almost no political will to do anything, probably due to the mistaken belief that governments everywhere are ‘out of bullets’.

At levels below 900 on the S&P500, we would probably start to lean heavily toward equities—unless a balanced budget amendment to the U.S. Constitution makes significant progress, in which case we’ll recommend cash and long-term Treasuries across all or most of our clients’ accounts.

Best regards,
Art

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. The firm and some of its clients hold some positions that are expected to increase in value if stock markets decline.

It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Here’s my take:

A. They get a few trillion in long term cuts and maybe a few that kick in reasonably soon and extend the debt ceiling

This would help ensure aggregate demand stays low for long, which is bond friendly, and stocks muddle through in a range with slowing earnings growth but just enough top line growth to stay positive.

B. They don’t extend the debt ceiling

This would immediately and directly reduce aggregate demand, which is very bond friendly and very bad for stocks, as many top lines go negative until federal spending is restored.

And either way the economy remains vulnerable to looming external shocks, including a China slowdown, euro zone default and/or slowdown, UK slowdown, and a strong dollar.

China is traditionally a first half/second half story, with h2 notably slower than h1 as fiscal and lending initiatives have generally been front loaded.

So watch for a very weak h2:

China Stocks Drop for 6th Day on Slowing Growth, Tighter Credit

May 26 (Bloomberg) — China’s stocks slid for a sixth day, driving the benchmark index to the longest stretch of losses in 11 months, on concern tightening measures are slowing the economy and making it harder for small companies to borrow money.

Huaxin Cement Co., an affiliate of Holcim Ltd., dropped 2.9 percent after Shanghai Securities News reported China’s industrial output may slow. A gauge of small-capitalization stocks fell to the lowest close in four months as Citigroup Inc. said smaller companies are being squeezed by tighter credit. Kangmei Pharmaceutical Co. led declines for drugmakers on speculation the government will further lower drug prices.

“Sentiment is weak and we haven’t seen anything positive that can support stocks,” said Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co. “Slowing growth, high inflation and tight lending will continue to weigh on the market in the near future.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, fell 5.23 points, or 0.2 percent, to 2,736.53 at the 3 p.m. close, erasing a gain in the last half hour of trading. The six-day decline is the longest since July 1. The CSI 300 Index lost 0.4 percent to 2,978.38, while the CSI Smallcap 500 Index retreated 1 percent.

The Shanghai gauge has slumped 2.5 percent this year as the central bank raised the reserve-requirement ratio for banks 11 times and boosted interest rates four times since the start of 2010 to cool inflation, which exceeded the government target each month this year. China’s preliminary manufacturing index
fell to its lowest level in 10 months, according to a report from HSBC Holdings Plc and Markit Economics this week.

Huaxin Cement slid 2.9 percent to 22.19 yuan. Offshore Oil Engineering Co. lost 4.9 percent to 6.42 yuan, the lowest close since Aug. 27. SAIC Motor Corp., China’s largest carmaker, fell 1.4 percent to 15.96 yuan.

Slowing Industrial Output

China’s industrial output growth is expected to slow in coming months as companies continue to destock and power shortages restrain production, Xu Ce, a researcher with the State Information Center, wrote in a commentary published in Shanghai Securities News. Government efforts to cut capacity in some industries will also restrain output growth, Xu wrote.

Sanan Optoelectronics Co., China’s biggest producer of light-emitting diode chips, led declines for smaller companies, slumping 3.7 percent to 16.71 yuan. Haining China Leather Market Co. plunged 5.6 percent to 21.53 yuan.

China’s small- and medium-sized companies are being squeezed by credit rationing and rising costs, Minggao Shen, an analyst at Citigroup, said in a report after meeting clients.

Bank Funding

The seven-day repurchase rate, which measures funding availability between banks, has averaged 3.48 percent so far this month, compared with 2.83 percent in April and 2.39 percent in March. The seven-day repo rate was at 5.08 percent as of 11:31 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 5.50 percent yesterday, the highest level since Feb. 23.

Kangmei fell 8.5 percent to 11.90 yuan, the biggest decline in almost 21 months. Nanjing Pharmaceutical Co. slid 6.9 percent to 12.44 yuan. Northeast Pharmaceutical Group Co. lost 6.3 percent to 16.37 yuan.

“Institutions are selling drugmaker shares because there’s still a lot of uncertainty about the next round of drug price cuts by the government,” said Li Ying, analyst at Capital Securities Corp.

Chinese stocks are “getting close to the market bottom” after recent declines and may gain as much as 20 percent this year, according to Steven Sun, Hong Kong-based head of China equity strategy at HSBC Holdings Plc.

The nation’s equities may rally in the second half of 2011, as easing inflation from June onward allows the central bank to hold off on its policy tightening campaign, Sun said in an interview with Bloomberg Television yesterday.

“We are getting close to the market bottom,” he said. “We are talking about a 15 to 20 percent upside by the end of this year.”

China Steel Reduces Prices as Industrial Output Slows

May 25 (Bloomberg) — China Steel Corp., Taiwan’s largest producer, will cut prices for domestic customers after the island’s industrial output slowed.

Prices will fall by an average 4.2 percent for July and August contracts, the Kaohsiung-based company said in an e-mailed statement today. Hot-rolled coil, a benchmark product, will fall by an average NT$1,754 ($61) a metric ton, while cold- rolled steel will be cut by an average NT$1,419 a ton.

Steel demand may decline after industrial production increased at the slowest pace in 19 months in April. Vehicle and auto part output fell 0.35 percent last month from a year earlier, the Ministry of Economic Affairs said May 23.

China Steel dropped 0.4 percent to close at NT$34.25 in Taipei before the announcement. The stock has climbed 2.2 percent this year, compared with the 2 percent decline in the benchmark Taiex index.

Electro-galvanized sheet prices will be cut by NT$1,500 a ton, electrical sheets by NT$2,600, and hot-dipped zinc-galvanized sheets by NT$1,613, China Steel said. Prices of plates, bars and wire rods will be left unchanged, the steelmaker said, without giving specific percentage changes for the products.

From Art Patten, Symmetry Capital Management, LLC

A brief overview of our current thinking on the financial market and economic outlook—please see important disclosures at the bottom of this email:


Yesterday’s rally provided a reprieve from strong selling pressures, but was low-conviction judging by trading volumes and bond market behavior. I suspect it will prove temporary and that the current trend will remain negative. Normally we could ascribe that to seasonal dynamics—for example, the old “sell in May and go away” adage—but there are some really strange forces at work, and almost all of them are bearish. They may not cause much damage in the coming quarters, but at some point they will. Our current guess is 2012, but it could start earlier.

• Recent commodity market volatility indicates to us that the trade is highly levered on the bullish side, and thus increasingly fragile. As long as there’s real demand, the investment (speculative!?) demand from developed world investors can do OK (and then some, in recent quarters). But there are now rumors of commodity supplies being used in China in much the same way that houses were used in some western countries 2005-2007, tech stocks 1998-2000, and so on here), and monetary and credit indicators from China do not bode well for commodity prices right now.
• There are similarly fragile dynamics in Europe, where continental banks levered up on the debt of countries that now can’t pay their bills, as they surrendered monetary autonomy to join a union with no fiscal authority (and a real anti-fiscal fetish, as embodied in the Maastricht Treaty). Money and credit indicators out of Europe look absolutely horrific at the moment.
• Either of those fragile equilibria could break hard in 2011, with the usual contagion to financial markets and asset prices. If they are not managed proactively (a serious possibility given (1) the zero-bound on central banks’ interest rate targets and (2) the prevailing deficit and debt phobias around the world) it will spread to the global economy yet again, against a backdrop of already-high unemployment and painful relative price shocks from food and fuel.
• On a relative basis, the U.S. looks attractive. However, in 2011-2012, the proportion of young adults in the U.S. economy turns negative here), something that is strongly associated with recessions.
• Fiscal austerity will only worsen things. In fact, we’re not surprised by the softness in U.S. leading indicators, given announcements that federal tax receipts were better than expected. Remember—today, the federal budget deficit is what gold mines were in the 19th century. In an over-levered economy slowly recovering from recession, it would have been very hard to produce too much new gold (money) back then, and the last thing you would have done is re-bury whatever gold was produced. But ‘fiscal discipline’ today amounts to the very same thing! Granted, it’s rational to worry that larger deficits will mean higher tax rates, as few politicians—and far too few economists!—grasp the reality of our monetary system and how it interacts with fiscal policy.
• The current trajectory of the debt ceiling negotiations is depressing. The GOP believes that government spending crowds out private investment, as though money comes from somewhere ‘out there’ or is still dug out of the ground. The Dems can’t get over their beloved ‘Clinton surpluses,’ ignoring the fact that they, like every other significant federal budget surplus, were followed by a recession. For the last few weeks, a few members of the GOP have been pointing out (correctly) that the U.S. will not default. It will direct revenues to Treasury debt holders first, and be forced to make severe spending cuts elsewhere. This will further undermine an already anemic level of overall demand. In fact, fiscal authorities in most parts of the world are doing all they can to undermine global aggregate demand. The U.S. Congress is just now joining the party.
• U.S. equity markets aren’t indicating an imminent recession, but keep in mind that they were more of a coincident than a leading indicator when the last one started in December 2007. I expect a similar dynamic this time around, with a sideways trend eventually giving way to one or more financial shocks and the eventual realization that we’ve driven ourselves into the ditch yet again.
• Longer-term, we’re heading into an environment in which the relative impotence of monetary policy will become a new meme, a 180-degree turn from the last four or five decades. And it will probably take at least a decade for macro policy to adjust (Japan’s policymakers still haven’t, over 20 years later). More lost decades ahead? We’re starting to think it’s a wise bet.
• The only factors that look benign at the moment are in U.S. credit markets. They imply that the employment picture should continue to improve and that the U.S. economy is not nearing recession. If we had to guess, we’d predict one or two financial market shocks ahead, but depending on their timing, there could be something of an equity market rally after the usual summer doldrums. But it might involve significant sector rotation, and our outlook for 2012 is rather pessimistic at the moment.

Finally, here’s a chart that the NYT ran in January that makes a compelling case that a 1970s-style inflation is off the table. If time allows, I’ll pen an Idle Speculator piece this summer on why that is. In the meantime:

Symmetry Capital Management, LLC (SCM) is a Pennsylvania-registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, nor is it a recommendation to engage in any investment strategy. This material does not take into account your personal investment objectives, financial situation and needs, or personal tolerance for risk. Thus, any investment strategies or securities discussed herein may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment activity, and it is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any investment strategy or security. SCM does not guarantee any specific outcome from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.

As previously discussed on this website, the stock market continues to be stacked against investors.

Management is too often incented to sell shareholders down the river in securing it’s own fortunes.

For example, management thinks nothing of issuing highly dilutive preferred’s and convertible’s, etc.

This means the shares are worth more if you own enough for control, which bypasses ‘anti shareholder’ incentives.

In other words, market forces are continuing to work to keep most stocks at prices where they are take over targets

Altman Sees Dealmaking Recovery Surpassing $4 Trillion Record

By Serena Saitto

May 6 (Bloomberg) — Dealmaking is at the beginning of a recovery whose peak will exceed the record $4 trillion of takeovers clinched at the height of the merger boom in 2007, according to Evercore Partners Inc.’s Roger Altman.

Today is year and in Japan,
which means the last few days could be mainly quarter end and year end maneuvers,
with a high probability of ‘buy the rumor sell the news’ types of unwinds coming up.

This would include the anticipation of another 200,000 new private sector jobs to be reported tomorrow am.
And the euro strength we’ve seen in front of the announced ECB rate hike next week.

There have been lots of promotional reasons to rush to get stocks on your books for year and/quarter end reporting,
as well as a bit of gold, silver, foods, and other commodities.

But fundamentally I see what’s going on below- a world heck bent on removing aggregate demand.

More noises from Japan on how they will pay for the rebuild, which looks to be a very modest appropriation tempered by fears of being at a fiscal tipping point.

UK austerity ratchets up April 1.

China still fighting inflation with further reduced spending and lending.

The euro zone demanding and getting austerity in return for funding, with signs in some members of austerity no longer bringing down deficits as revenues fall off from economic weakness. And no fiscal safety net if it does all go bad as markets have shown extreme reluctance to fund countercyclical deficits.

And food and fuel from monopoly pricing both eating into consumer demand and driving large segments of the world population into desperation.

Talk of Q1 US GDP down to maybe only +2%, housing still bumping along the bottom, and Q2 threatened by supply shortages due to the earthquake in Japan.

And the US debt ceiling showdown now possibly happing late next week as the deficit terrorists seal their congressional victory with the promised down payment on net spending cuts that won’t end there.

In fact, their army of support is now all but universal.

Everyone in DC and the mainstream media and economics profession agrees on the problem.

The only discussion is where the cuts should be, and who should pay more.

March 31, 2011
President Barack Obama
The White House
1600 Pennsylvania Avenue, NW
Washington, DC 20500
The Honorable John Boehner
Speaker of the House
1101 Longworth House Office Building
Washington, DC 20515
The Honorable Nancy Pelosi
House Minority Leader
235 Cannon House Office Building
Washington, DC 20515
The Honorable Harry Reid
Senate Majority Leader
522 Hart Senate Office Building
Washington, DC 20510
The Honorable Mitch McConnell
Senate Minority Leader
361-A Russell Senate Office Building
Washington, DC 20510

Dear President Obama, Speaker Boehner, Minority Leader Pelosi, Majority Leader Reid, and Minority Leader McConnell:


As you continue to work on our current budget situation, we are writing to let you know that we join with the 64 Senators who recently wrote that comprehensive deficit reduction measures are imperative, and to urge you to work together in support of a broad approach to solving the nation’s fiscal problems. As they said in their letter to President Obama:

“As you know, a bipartisan group of Senators has been working to craft a comprehensive deficit reduction package based upon the recommendations of the Fiscal Commission. While we may not agree with every aspect of the Commission’s recommendations, we believe that its work represents an important foundation to achieve meaningful progress on our debt. The Commission’s work also underscored the scope and breadth of our nation’s long-term fiscal challenges.

Beyond FY2011 funding decisions, we urge you to engage in a broader discussion about a comprehensive deficit reduction package. Specifically, we hope that the discussion will include discretionary spending cuts, entitlement changes and tax reform.

By approaching these negotiations comprehensively, with a strong signal of support from you, we believe that we can achieve consensus on these important fiscal issues. This would send a powerful message to Americans that Washington can work together to tackle this critical issue. Thank you for your attention to this matter.”

We agree with this letter and hope that you will work together to agree on a comprehensive, multi-year debt stabilization package.

Sincerely,
The Honorable Roger C. Altman
Former Assistant Secretary of the U.S.
Department of the Treasury; Founder
and Chairman, Evercore Partners

Barry Anderson
Former Acting Director, Congressional
Budget Office

Joseph Antos
Wilson H. Taylor Scholar in Health Care
and Retirement Policy, American
Enterprise Institute

The Honorable Martin Baily
Former Chairman, Council of Economic
Advisers

Robert Bixby
Executive Director, Concord Coalition

Charles Blahous
Research Fellow, Hoover Institute

Erskine Bowles
Former Co-Chair, National Commission
on Fiscal Responsibility and Reform

The Honorable Charles Bowsher
Former Comptroller General of the
United States

The Honorable John E. Chapoton
Former Assistant Secretary for Tax
Policy, U.S. Department of the Treasury

David Cote
Former Member, National Commission
on Fiscal Responsibility and Reform;
Chairman and CEO, Honeywell
International

Pete Davis
President, Davis Capital Investment
Ideas

John Endean
President, American Business
Conference

The Honorable Vic Fazio
Former Member of Congress

The Honorable Martin Feldstein
Former Chairman, Council of Economic
Advisers

The Honorable William Frenzel
Former Ranking Member, House
Budget Committee; Co-Chair,
Committee for a Responsible Federal
Budget

Ann Fudge
Former Member, National Commission
on Fiscal Responsibility and Reform;
Former CEO, Young & Rubicam Brands

William G. Gale
Senior Fellow, Brookings Institution William A. Galston
Senior Fellow and Ezra K. Zilkha Chair,
Brookings Institution

The Honorable Bill Gradison
Former Ranking Member, House
Budget Committee

The Honorable Judd Gregg
Former Chairman, Senate Budget
Committee

Ron Haskins
Senior Fellow, Brookings Institution

Kevin Hassett
Senior Fellow and Director of Economic
Policy Studies, American Enterprise
Institute

G. William Hoagland
Former Staff Director, Senate Budget
Committee

The Honorable Glenn Hubbard
Former Chairman, Council of Economic
Advisers; Dean, Columbia Business
School

David B. Kendall
Senior Fellow for Health and Fiscal
Policy, Third Way

The Honorable Bob Kerrey
Former Member of Congress

Donald F. Kettl
Dean, School of Public Policy,
University of Maryland

The Honorable Charles E.M. Kolb
President, Committee for Economic
Development

The Honorable Jim Kolbe
Former Member of Congress

Lawrence B. Lindsey
President and CEO, The Lindsey Group;
Former Director, National Economic
Council

Maya MacGuineas
President, Committee for a Responsible
Federal Budget

The Honorable N. Gregory Mankiw
Former Chairman, Council of Economic
Advisers

The Honorable Donald Marron
Director, Urban-Brookings Tax Policy
Center; Former Acting Director,
Congressional Budget Office

William Marshall
President, Progressive Policy Institute

The Honorable James T. McIntyre, Jr.
Former Director, Office of Management
and Budget

Olivia S. Mitchell
Economist

The Honorable William A. Niskanen
Chairman Emeritus and Distinguished
Senior Economist, Cato Institute; Former
Acting Chairman, Council of Economic
Advisers

The Honorable Jim Nussle
Former Director, Office of Management
and Budget; Former Chairman, House
Budget Committee; Co-Chair,
Committee for a Responsible Federal
Budget Michael E. O’Hanlon
Senior Fellow and Sydney Stein Jr.
Chair, Brookings Institution

The Honorable Paul O’Neill
Former Secretary of the U.S.
Department of the Treasury

Marne Obernauer, Jr.
Chairman, Beverage Distributors
Company

Rudolph G. Penner
Former Director, Congressional Budget
Office

The Honorable Timothy Penny
Former Member of Congress; Co-Chair,
Committee for a Responsible Federal
Budget

The Honorable Alice Rivlin
Former Director, Congressional Budget
Office; Former Director, Office of
Management and Budget; Former
Member, National Commission on
Fiscal Responsibility and Reform

The Honorable Charles Robb
Former Member of Congress

Diane Lim Rogers
Chief Economist, Concord Coalition

The Honorable Christina Romer
Former Chairwoman, Council of
Economic Advisers

The Honorable Robert E. Rubin
Former Secretary of the U.S.
Department of the Treasury

The Honorable Martin Sabo
Former Chairman, House Budget
Committee

Isabel V. Sawhill
Senior Fellow, Brookings Institution

Allen Schick
Distinguished University Professor,
University of Maryland

Sylvester J. Schieber
Former Chairman, Social Security
Advisory Board

Daniel N. Shaviro
Wayne Perry Professor of Taxation,
New York University School of Law

The Honorable George P. Shultz
Former Secretary of the U.S.
Department of the Treasury; Former
Secretary of the U.S. Department of
State; Former Secretary of the U.S.
Department of Labor

The Honorable Alan K. Simpson
Former Member of Congress; Co-Chair,
National Commission on Fiscal
Responsibility and Reform

C. Eugene Steuerle
Institute Fellow and Richard B. Fisher
Chair, Urban Institute

The Honorable Charlie Stenholm
Former Member of Congress; Co-Chair,
Committee for a Responsible Federal
Budget The Honorable Phillip Swagel
Former Assistant Secretary for
Economic Policy, U.S. Department of the
Treasury

The Honorable John Tanner
Former Member of Congress

John B. Taylor
Mary and Robert Raymond Professor of
Economics, Stanford University; George
P. Shultz Senior Fellow in Economics,
Hoover Institution
The Honorable Laura D. Tyson
Former Chairwoman, Council of
Economic Advisers; Former Director,
National Economic Council
The Honorable George Voinovich
Former Member of Congress

The Honorable Paul Volcker
Former Chairman, Federal Reserve
System

Carol Cox Wait
Former President, Committee for a
Responsible Federal Budget

The Honorable David M. Walker
Former Comptroller General of the
United States


The Honorable Murray L.
Weidenbaum
Former Chairman, Council of Economic
Advisers

The Honorable Joseph R. Wright, Jr.
Former Director, Office of Management
and Budget
Mark Zandi
Chief Economist, Moody’s Analytics

Looks to me like the lack of noises out of Japan means there won’t be a sufficient fiscal response to restore demand.

If anything, the talk is about how to pay for the rebuilding, with a consumption tax at the top of the list.

That means they aren’t going to inflate.
More likely they are going to further deflate.
Yes, the yen will go down by what looks like a lot, maybe even helped by the MOF, but I doubt it will be enough to inflate.

In fact, all the evidence indicates that Japan doesn’t don’t know how to inflate, nor does anyone else.

Worse, what they all think inflates, more likely actually deflates.

0 rate policies mean deficits can be that much higher without causing ‘inflation’ due to income channels and supply side effects.
There is no such thing as a debt trap springing to life.
Debt monetization is a meaningless expression with non convertible currency and floating fx.
QE mainly serves to further remove precious income from an already income starved economy.

Only excess deficit spending can directly support prices, output, and employment from the demand side, as it directly adds to incomes, spending, and net savings of financial assets.

The international fear mongering surrounding deficits and debt issues is entirely a chicken little story that’s keeping us in this depression (unemployment over 10% the way it was measured when the term was defined) that’s now taking a turn for the worse.

The euro zone is methodically weakening it’s ‘engines of growth’- its own (weaker) members being subjected to austerity measures that are reducing their deficit spending that paid for their imports from Germany. And now China, Japan, the US and others will be cutting imports as well.

UK fiscal austerity measures are accelerating on schedule.

The US is also working to tighten fiscal policy, particularly now that both sides agree that deficit reduction is in order, beaming as they make progress towards agreeing on the cuts.

The US had 6 depressions while on the gold standard, which followed the only 6 periods of budget surpluses.
And now, even with a floating fx policy and non convertible currency that allows for immediate and unlimited fiscal adjustments,
we have allowed the deflationary forces unleashed by the Clinton budget surpluses to result in this 7th depression.

We were muddling through with modest real growth and a far too high output gap and may have continued to do so all else equal.

But all else isn’t equal.

Collective, self inflicted proactive austerity has been working against growth, including China’s ‘fight against inflation.’

And now Japan’s massive disaster will be deflationary shock that, in the absence of a proactive fiscal adjustment, is highly likely to further reduce world demand.

Hopefully, the Saudis capitulate and follow the price of crude lower, easing the burden somewhat on the world’s struggling populations.
If so, watch for a strong dollar as well.

And watch for a lot more global civil unrest as no answers emerge to the mass unemployment that will likely get even worse. Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.

And it’s all only likely to get worse until the world figures out how its monetary system actually works.

Here’s my take.

As before, all the world actually cares about is the price of oil.

And the internal struggle will wind down with someone controlling the oil.

And whoever gets control of the oil wants the oil for only one reason- to sell it.

In a land of haves and have nots (at all levels), and no understanding of fiscal balance, it’s all about having the oil to sell.

So that means prices go back to where the Saudis want them to be.

My guess, and all anyone can do is guess, is Brent at maybe 100 which puts WTI maybe just under 90 until the glut issues are sorted out.

If this happens, seems-

The long oil long trades reverse.
Food prices back off some.
The view of the economy goes from half empty to half full.
The dollar gets a lot stronger.
Energy related stocks lose, others win.
But a stronger dollar may dampen prospects for US stocks.
Bonds move with stocks.
Attention shifts back to China, Europe, UK, and US fiscal policies, which are all in tightening mode.

And happy birthday to my brother Seth who turns 60 today! He just posted some old family pictures on facebook.

Here’s what I said back a couple of years ago.

Unfortunately, not much has changed (including my suggestion at the time in an earlier post that it was all a pretty good environment for stocks which could easily double).

Review of the recession and how to end it

March 30th, 2009

The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
 

Less important what caused the drop in aggregate demand

• The end of the subprime expansion in 2006 reduced the demand for housing
   
• The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
   
• The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
   
• A shift in the propensity to spend due to the pro cyclical nature of credit worthiness

 

My proposals for restoring aggregate demand:

• A full payroll tax holiday – This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
   
• Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
   
• Caveat – Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
   
• Political options for reducing imported fuel consumption:
   
  • Regressive – utilizing allocation by price (Carbon tax, fuel taxes)
     
  • Closer to neutral – mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
     
  • Progressive – substantially reducing speed limits to discourage driving and advantage public transportation

 

Redirect banking to serve public purpose

• Ban banks from all secondary markets.
   
• Allow bank lending only to serve public purpose.
   
• Do not use the liability side of banking for market discipline.

 

Analysis of current situation

• Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
   
• Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
   
• Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
   
• All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
   
• Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
   
• The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
   
• The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
   
• Employment will not grow until real output of goods and services exceeds productivity growth.
   
• Fuel prices are already moving higher.

 

Conclusion

• Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
   
• They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:
  

  lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

• The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
   
• They are in this way over their heads, and it’s costing us dearly.