Stocks, Reality Disconnect

What doesn't match in these headlines? Both were on the website of the WSJ on the same day. Something is truly broken when Wall St is so disconnected from reality that constant central bank interventions become a necessity, and they still don't bring prosperity!

Stocks Collapse As Economy Degrades

Dow was down as much as 200 points.

Richmond Fed Disappoints

ZH:
And another epic miss in the slow motion trainwreck that is the US plowhorse economy now to its neck in quicksand. The latest B-grade economic indicator: the Richmond Fed, which was expected to rise modestly from -3 to -1. Instead it faceplanted to -17, the biggest miss since August 2010 and the lowest print since Apirl 2009

World Economy Slides Toward Recession

Bearish Bernanke

IMF Lowers Growth

More Reaction to Fed Minutes

Fed Meeting Minutes -- Reaction

It appears that the Fed seem little disposed to additional monetary stimulus. But Bernanke has promised!

More Doubts About the Eurozone

Economic World Woes

China's trade surplus widened in June as export and import growth both weakened.

Fed's Bullard has doubts that Europe's latest summits and proposed fixes will work.

But stocks are marginally higher.

Hussman: How QE Works

July 9, 2012 What if the Fed Throws a QE3 and Nobody Comes?

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

The financial markets were largely unresponsive to news of further easing by the European Central Bank, the Bank of England, and the People’s Bank of China last week. Notably, Spanish bonds plunged, while German short-term government bonds now yield -0.17%, indicating growing concern about sovereign default risk in the Euro area. Every few days will undoubtedly bring word of new “agreements” and “mechanisms” – arcane enough to mask their futility – that promise to solve the European crisis. The headwinds remain very strong. The key distinction here remains liquidity versus solvency. There is little doubt that liquidity will be provided at every opportunity, though the continual degrading of collateral standards by the ECB suggests that all the good collateral has been pledged already. More importantly, with a global recession visibly unfolding, solvency risk will only increase.

The odds remain against European countries agreeing to the surrender their national sovereignty to the extent needed to create a “fiscal union” and enable massive and endless transfers of public resources from stronger to weaker European countries. Barring a catastrophe severe enough to either prompt European countries to hand fiscal control to a central administrator, or to prompt Germany to agree to unconditional bailouts, the least disruptive move would be for Germany and a handful of stronger countries to leave the Euro first, and allow the remaining members to inflate as they wish.

With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders. Mike Shedlock reviews the litany of awful figures we’ve seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan.

Recall that the NBER often looks for “a well-defined peak or trough in real sales or industrial production” to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we’re seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession.

On the employment front, Friday’s disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision. Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.”

What if the Fed throws a QE3 and nobody comes?

To date, the stock market has largely shrugged off the evidence of oncoming recession, in the confidence that the Federal Reserve will easily prevent that outcome and defend the market from any material losses. On that point, it is helpful to remember that the real economic effects of Fed actions in recent years have been limited to short-lived bursts of pent-up demand over a quarter or two. Not surprisingly, as interest rates are already low, and risk-premiums on more aggressive assets are already remarkably thin, the impact of quantitative easing around the globe continues to show evidence of diminishing returns.

With the help of some preliminary work from Nautilus Capital, the following charts present the market gains, in percent, that followed versions of quantitative easing by the Federal Reserve, the European Central Bank, and the Bank of England on their respective stock markets (measured by the S&P 500, the Dow Jones EuroStoxx Index, and the FTSE Composite, respectively). In order to give QE the greatest benefit of the doubt and account for any “announcement effects,” the advances in each chart are based on the 3-month, 6-month, 1-year and 2-year gains in each index following the initiation of the intervention, plus any amount of gain enjoyed by the market from its lowest point in the 2 months preceding the actual intervention. The effects of most interventions would look weaker without that boost.

Remember that quantitative easing “works” through central bank hoarding of long-duration government bonds, paid for by flooding the financial markets with currency and reserves that essentially bear no interest. As a result, investors in aggregate have more zero-interest cash, and feel forced to reach for yield and speculative gains in more aggressive assets. Of course, in equilibrium, somebody has to hold the cash until it is actually retired (in aggregate, “sideline” cash can’t and doesn’t “go” anywhere). Increasing the quantity simply forces yield discomfort on more and more individuals. The process of bidding up speculative assets ends when holders of zero-interest cash are indifferent between continuing to hold that cash versus holding some other security. In short, the objective of QE is to force risky assets to be priced so richly that they closely compete with zero-interest cash.

Understanding this dynamic, it follows that QE will have its greatest impact on financial markets when interest rates and risk-premiums have spiked higher. If interest rates are low already, and risky assets are already priced to achieve weak long-term returns (we estimate that the S&P 500 is likely to achieve total returns of less than 4.8% over the coming decade), there is not nearly as much room for QE to produce a speculative run. Leave aside the question of why this is considered an appropriate policy objective in the first place, given the extraordinarily weak sensitivity of GDP growth to market fluctuations. The key point is this – QE is effective in supporting stock prices and driving risk-premiums down, but only once they are already elevated. As a result, when we look around the globe, we find that the impact of QE is rarely much greater than the market decline that preceded it.

To illustrate, each of the Fed, ECB and BOE quantitative easing interventions since 2008 are presented below as a timeline. The shaded area shows the amount of market gain that would be required to recover the peak-to-trough drawdown experienced by the corresponding stock index (S&P for Fed interventions, EuroStoxx for ECB interventions, FTSE for BOE interventions) in the 6-month period preceding the quantitative easing operation. The lines plot the 3-month, 6-month, 1-year and 2-year market gain following each intervention, adding any gain from the low of the preceding 2 months, to account for any "announcement effects." Technically, the lines should not be connected, since they represent the gains following distinct actions of different central banks, but connecting the points shows the clear trend toward less and less effective interventions, with the most recent interventions being flops. Notice also that central banks have typically initiated QE interventions only when the market had somewhere in the area of 18% or more of ground to make up.

Of all the experiments with QE, the round of QE2 from late-2010 to mid-2011 was most effective, in that stocks recovered their prior 6-month peak, and even some additional ground. Yet even with QE2, the Twist and its recent extension, as well as liquidity operations such as dollar swaps and so forth, the S&P 500 is again below its April 2011 peak, and was within 5% of its April 2010 peak just a month ago (April 2010 is a particularly important reference for us, since that is that last point that the ensemble methods we presently use would have had a significantly constructive market exposure). The largely sideways churn since April 2010 reflects repeated interventions to pull a fundamentally fragile economy from the brink of recession, and recessionary pressures are stronger today than they were in either 2010 or 2011. Investors seem to be putting an enormous amount of faith in a policy that does little but help stocks recover the losses of the prior 6 month period, with scant evidence of any durable effects on the real economy.

In short, the effect of quantitative easing has diminished substantially since 2009, when risk-premiums were elevated and amenable to being pressed significantly lower. At present, risk-premiums are thin, and the S&P 500 has retreated very little from its April 2012 peak. My impression is that QE3 would (will) be unable to pluck the U.S. out of an unfolding global recession, and that even the ability to provoke a speculative advance in risky assets will be dependent on those assets first declining substantially in value.

OECD Slowdown Seen

Kudlow: Obama's Goose Is Cooked

Obama needed a filet mignon in the June employment report. Instead he got a rubber chicken.

Only 80,000 new jobs were created last month, way below Wall Street expectations. It’s the fourth consecutive monthly disappointment. For a few months last winter, jobs were rising at an average of 225,000 a month. But that has sloped way down to only 75,000. The unemployment rate continues at 8.2 percent, which is the forty-first straight month above 8 percent. The U6 unemployment rate, which includes discouraged workers, is just under 15 percent.
As voters finalize their election impressions this summer, all of this is bad news for the Chicago incumbent.
At a campaign stop in Ohio on Friday, Obama actually said we’re still “heading in the right direction.” Is he kidding? As a stagnant GDP drops below 2 percent, employment falters, retail sales decline, and the ISM index for manufacturing drops below 50 (signaling contraction)? No objective observer can deny that the economy is headed in the wrong direction.
I don’t like playing the pessimist, but the numbers are the numbers. This is exactly what former Clinton advisers James Carville, Doug Schoen, and Stanley Greenberg have been warning Obama about. People just don’t believe the economy is getting better. So he’s gotta change his message.

But what change? Taxing rich people won’t create jobs. Neither will bashing Bain Capital. Obama is surrounded by leftist campaign advisers. And it’s hard to see them shifting gears to something constructive like making a summer deal to extend the Bush tax cuts for a year, or heaven forbid backing off the 20-some-odd tax hikes embodied in Obamacare. In other words, Obama’s goose may already be cooked.
The Joint Economic Committee (JEC), spearheaded by Texas congressman Kevin Brady, put out a report saying that the Obama recovery now ranks dead last in modern times. That’s a real milestone in the post-WWII era. It’s ten out of ten for both jobs and economic growth. According to the Bureau of Economic Analysis, real GDP has expanded only 6.7 percent over the eleven-quarter recovery since the recession ended. The Reagan recovery at the same stage had increased by 17.6 percent. The Clinton recovery by 8.7 percent.
As for jobs, the Bureau of Labor Statistics reports that the number of private-sector jobs has grown by only 4.1 percent since the cyclical low point. Reagan’s record was 10.7 percent.
So much for Obamanomics. Didn’t work. Still isn’t working. As the JEC put it, spending stimulus, housing bailouts, auto bailouts, financial bailouts, cash for clunkers, cash for caulkers, and $5 trillion in deficit spending left the Obama recovery dead last in modern times.
Whatever happened to the great boom of the ’80s and ’90s, when the animal spirits were strong and the American economy wasn’t held hostage by Europe or China? In an odd twist, both Obama and his top economist Alan Krueger blame “problems built up over decades.” Does that mean they blame Clinton? Reagan?
For nearly 25 years — during those bad old decades — the economy increased 3.3 percent annually. Unemployment dropped from 11 percent to 6 percent to 5 percent to below 4 percent. Obama would swoon for numbers like that. But those statistics come from the era when big government was over, when pro-market forces stopped the expansion of Leviathan, and when marginal tax rates were slashed to grow the economy.
Now the question is, with Obama’s economic goose cooked, does Mitt Romney have what it takes to win the election and provide a pro-growth economic model that will restore prosperity at home and America’s number-one position around the world?
Some powerful figures — including Rupert Murdoch, Jack Welch, and even my brothers and sisters at the Wall Street Journal editorial page — have taken shots at Romney in recent days. But I am more optimistic. In response to his critics on the day of the bad June jobs report, Romney talked about expanding energy resources, approving the Keystone pipeline, cutting taxes, and increasing trade with Latin America. He reaffirmed his intention to cut federal spending and eliminate programs.
Basically, Romney is promising a return to free-market, supply-side policies on taxes, trade, regulation, and spending. Hopefully he will embrace a sound and stable dollar as well. I still believe Romney is the most underrated politician in America today, and that he’s the most conservative Republican standard-bearer since Ronald Reagan.
In other words, he’s some real filet mignon.
– Larry Kudlow, NRO’s economics editor, is host of CNBC’s The Kudlow Report and author of the daily web log, Kudlow’s Money Politic$.

Was There Ever Any Doubt...

...that this wouldn't "fix" anything?

The Obama Derecho

from the Washington Free Beacon

Column: The damage from Obama will be lasting

BY: Matthew Continetti - July 6, 2012 5:00 am

Safe to say most Washingtonians had never heard of a “derecho” before June 29, when one of these speedy and destructive windstorms ploughed through the capital, leaving behind dead bodies and battered homes and more than a million households without power. Now the storm is over, and one can expect this obscure meteorological term to pass just as swiftly into everyday speech. Exotic, vaguely menacing, and evoking senseless, abrupt calamity, “derecho” is an especially apt description of America in the age of Obama.
Like the homeowners in Fairfax County, Va., picking up felled tree branches and putting in insurance claims, Americans across the country are still recovering from the Obama derecho that struck the nation from 2009 to 2010. The damage from that whirlwind has been ugly. The cost has been enormous. And another one may form at any moment.
A spectacular confluence of events swept Obama into office. Seven years of war, almost a year of recession, and seven weeks of financial crisis pulled down the incumbent president’s approval rating on Election Day 2008 to an atrocious 25 percent. Obama’s opponent was a war hero and a courageous statesman who nevertheless seemed rather anachronistic, not to mention confused at the bewildering and frightening economic situation.
Obama, on the other hand, had a smooth and graceful and likeable character that appealed to America’s best hopes and dreams of racial and partisan conciliation. His running mate was a dolt, but a familiar one. They promised a new tone in Washington, sound economic management, lower health care premiums, cutting the federal deficit in half, and an end to the war in Iraq. This was the winning ticket, 53 percent to 46 percent.
The economy worsened after Obama’s election. Unemployment spiked. The government took over the financial system, nationalized mortgage giants Fannie Mae and Freddie Mac, consumed AIG, drew closer to buying GM and Chrysler, and drastically expanded the monetary base to prevent credit from dissolving further.
The economic and legal and political arrangements that had led to two decades of expansion were being re-written hastily and unthinkingly. A deluge of taxes and spending and regulations was let loose, with the stated aim of transforming the base of a system that had produced the most prosperous civilization in history. It turned out that when Obama spoke of putting America on “a new foundation,” he meant it.

AP

Unemployment was at 7.8 percent when Obama became president. It would rise to 10 percent in October 2009 and would not fall below 8 percent in over 30 months. Long-term unemployment became endemic. Participation in the work force fell to lows not seen in decades. Foreclosures mounted. Mortgages sank underwater. Obama’s response was to maintain the policies of the Paulson-Geithner-Bernanke troika: bail out financials and autos while engaging in massive fiscal and monetary stimulus, and hope for the best. Publicize every “green shoot.” Say, “Welcome to the recovery.”
The change in governing style that the president had promised never seemed to materialize. Relations with the domestic opposition was an area in which the administration seemed eager to adopt a “with us or against us” mentality. The White House targeted dissenting individuals and organizations for public rebuke and media-enforced shame: Rush Limbaugh, Dick Cheney, Fox News Channel, the Chamber of Commerce, Charles and David Koch, Paul Ryan, Sheldon Adelson. The list grows with each day.
Even as Obama said he would listen to the Republicans, he let archliberals Nancy Pelosi, Henry Waxman, and David Obey write the stimulus bill, ironically called “the Recovery Act.” They larded this legislation with handouts to public sector unions, the social services lobby, and green energy companies managed by Democratic contributors. They included tax rebates that history had shown to be ineffective at stimulating demand, and emergency aid to states that would delay but not resolve the governors’ budget issues. The cost: $862 billion. Read the papers, and then try to say the stimulus “worked” while keeping a straight face.
It was with glassy-eyed seriousness that the president and his allies in Congress turned from the economic crisis to the ambitious spending and regulatory agenda that they had waited years to enact. Having passed the stimulus, Pelosi, Waxman, and Ed Markey brought to the floor of the House a monstrosity of an energy bill that would have imposed a cap-and-trade system of carbon regulation on the nation in the middle of the worst economy since the Great Depression. It cleared the House by seven votes before coal-state Democrats and Republicans in the Senate spared us, in this instance, from the greens.
Then in July 2009 Congress authorized Obama’s first budget of $3.4 trillion, hilariously titled “A New Era of Responsibility.” Like all of the president’s budgets, this one was easy to summarize: Taxes and spending and debt went up.
Obama and Congress carefully designed their “crown jewel,” a health care overhaul that mandates insurance coverage for every American while turning health insurers into quasi-public utilities, raising taxes, and establishing manifold regulatory boards and bodies that will encroach ever more on institutional and personal liberties. The months spent debating Obamacare revealed the character of this president in an unforgettable way. He pushed for the legislation despite its unpopularity, despite his party losing elections in Virginia and New Jersey and Massachusetts, despite public protests and marches and threats to challenge the law’s constitutionality. What could be seen in these glimpses of the real Obama was a single-mindedness of intent. Obamacare became law in March 2010.
The final surge was the Dodd-Frank “Wall Street Reform and Consumer Protection Act,” which required more than 2,300 pages to delegate authority to new or established regulatory bodies that will issue more than 400 rulings on every sort of financial transaction. The president signed it into law in July 2010. The most obscure and arcane piece of legislation passed during the Obama derecho, Dodd-Frank may also come to be seen as the most harmful. It enshrines the Too Big To Fail bailout model that led to excessive leverage and risk-taking, and incentivizes consolidation in a banking sector already beset by cronyism and insider relationships between Wall Street and Washington.
This is the legislative horror-show that birthed the Xenomorph-like Consumer Financial Protection Bureau, an already politicized agency that is shielded from democratic accountability even as it runs amok in credit markets. The regulatory capture and other perverse consequences of Dodd-Frank will become clear only in hindsight. However, we already do know that it did nothing to reform Fannie and Freddie or housing in general, and that it won’t prevent the next financial crisis, which may soon be on us.
The clouds finally broke in November 2010 when Republicans had their best electoral performance in decades, and took the House of Representatives while gaining seats in the Senate and in governors’ mansions and in statehouses. The worst seemed to be over. Obama was forced to maintain the tax rates that have been operative since 2001. The congressional Republicans have checked his additional plans.
The economy still suffers, however. The legacy of the derecho years remains. We will be picking up after Obama’s debt and regulations and taxes for a long time to come. Even the current respite may turn out to be brief, for there are dark clouds on the horizon. Massive tax hikes on all levels of income, combined with crippling defense cuts, are set to take place on January 1, 2013. The health care mandate goes into effect the next year. The wind is picking up, and one can feel the first drops of rain. My advice: Take shelter.

Jobs Report Hits Stocks

Even Obama's Apologists Say Economy Is "Grim"

from CNBC:

"A slew of weak U.S. economic data is casting doubts over expectations of a pick-up in growth in the second half of the year.
From manufacturing to job growth to consumer spending, the numbers have been grim, and economists are wondering whether they need to dial down forecasts for the remainder of the year.

"Our sense was that of a gradual improvement. Now the sense is of muddling along at a low level of activity," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago. "We went from seeing progress, though gradual and very uneven, to not seeing progress at all."

 The economy grew at a 1.9 percent annual pace in the first quarter and estimates for the April-June period are increasingly coming in around 1.5 percent.

A high level of uncertainty as Europe struggles with a debt crisis and as the United States stares at the prospect of a sharp budgetary tightening at the start of next year seem to have led businesses and ordinary Americans to watch their dollars carefully.

Drought, Heat Destroying Food Crops

Fired by fresh worries about drought, corn powered up 34 cents per bushel on the Chicago Board of Trade to $7.08, above $7 per bushel for the first time in a year.
Soybeans climbed 53 cents per bushel to an all-time high of $15.27.
The gains in Iowa’s mainstay crops have been breathtaking as farmers and traders factor in their fears that the heat and drought in Iowa and elsewhere in the corn belt will take yields down far below expectations.
As recently as June 1, corn traded for $5.20 per bushel and soybean at $12.50 per bushel on expectations of big crops that would increase U.S. domestic stocks and also moderate what has been a two-year record run of corn and soybean prices.
The U.S. Department of Agriculture has forecast a national corn yield of 166 bushels per acre and a soybean yield of 44 bushels per acre. Iowa’s yields historically are about ten percent above the national averages.
But private forecasters have cut their yield predictions for corn to as low as 148 bushels per acre and soybeans below the USDA projections.
Corn

 Soybeans -- new all-time record high

 Wheat

US Manufacturing Contracts

First contraction in three years!

But following early losses, stocks closed mixed, with the S&P closing higher!

Global Economic Outlook Worsens

But the S&P 500 closed up today!

from Zero Hedge:
Three weeks ago we noted that Goldman Sach's Global Leading Indicator (GLI) and its Swirlogram had entered a rather worrying contraction phase. Today's update to the June GLI data suggests things got worse and not better as momentum is now also dropping as well as the absolute level.

This continued deterioration in momentum suggests further softening in the global cyclical picture. Of particular concern is the broad-based deterioration in the GLI’s constituent components in June. 

Nine of ten components weakened last month, only the second time this has occurred since the depths of the recession in 2008Q4. The June Final GLI confirms the pronounced weakening in global activity in recent months. Goldman has found elsewhere (as we noted here) that this stage of the cycle, when momentum is negative and decelerating, is typically accompanied by deteriorating data and market weakness.