A little disclaimer before I get nailed by readers

Ladies,

Below is the disclaimer that will be added to the end of every post in our cozy blog.
Just like the almighty investment banks, PhDs, Masters of Science, etc do to their reports.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader@gmail.com

 

So we get uber-expansionary Paul Krugman (supporter of a much larger QE1 back in 2009) talking about US inflation:

The Inflation Monster under the bed

I’m glad to see Greg Mankiw agreeing with me on the absence of any inflation risk in the current environment. Maybe he should have a word with everyone else in his party.

Here’s another way to think about the issue. As you can see above, wages have gone nowhere. Commodity prices, on the other hand, have gone up a lot lately (although they crashed last week).

So here are a couple of questions.

First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?

Second, do you any sign that employers are getting ready to make more generous wage offers?

Third, have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?

The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation.

If you want to insist otherwise, you have to tell me how this is supposed to work. And I haven’t heard any coherent explanations to that effect.

And here is the market agreeing with Paul and average hourly wage growth.
US 1-year Treasury Bills now yielding powerful 0.16% per year.
That means that if you are a young man with a liquid networth of 1 million american lettuce-like dollars parked in US Bills, after one year, you can pay 1-month rent (1.6k USD * 1.62 BRL/USD = 2,592 BRL) for a one-bedroom (no garage spot) apartment in the classy neighborhood of Leblon in Rio de Janeiro/Brazil.

 

To wit:

This yield is lower than 0.26bps priced in markets in December 2008, right after Lehman went belly up.

Is the US Treasury market sending us signals?

Experts say Japanese shaking issues wouldn't hurt global growth. Right!

So we had japanese vehicle production numbers out a while ago and they were as follows:

Considering how important the japanese industrial base is to auto-parts, for example, check out these charts from Mexico. Data was released this morning.

Together with the Mexican production data, Exports and Domestic Sales also came out:

So... Mexican Exports are back to the recent lows and their domestic sales are still running solid, but close to 1 year lows. The scale of the axis are a bit tricky as the swings were massive.

I like to watch Mexico a bit closer than other countries because they might serve as a proxy to the US economy.

Their inflation data has been below expectations for months, their Central Bank has been dovish. Remittances growth from the US to Mexico (Western Union, etc) have been solid, but 12-month rolling accum levels are still dramatically worse than 2007's highs and very little higher from 2010's lows.

Smoke signals?

So we got a new round of data today.

The almighty Non-Farm Payrolls were released today, survey for the April 12th week.
And the Household survey was also out.

NFP numbers were great: +244k gain
Household survey: -190k jobs.

David Rosembearish was on Bloomberg TV saying that Household survey is a better turning-point indicator. I'm not sure, but I like the guy, you know?

So the strong NFP didn't diverged from the huge increase in Initial Jobless Claims. When the NFP was surveyed IJC 4wk moving average was at 396k. Yesterday this metric was @ 431k. A sizable increase.

The markets reacted positively to the NFP news until rumors of Alpha-Beta-Gamma Debt-Mogul Greece leaving the Eurozone hit the market.
EURUSD crashed.
Deutsche Bank stocks got nailed... down 3.5%.. Puts volumes were 11-12x the regular volume or something like that.
E-Minis were around 1350.. then closed negative @ 1334ish.

The Commodities slump continued and the rally in bonds also (up to 10yr US Treasury).
Rogers Commodity Index: -1%
GSCI: -1.44%
WTI -2.6%

Even our friend Bill Gross came out of the woods to defend his 'I hate US Treasuries' call! I guess Jeff Gundlach from Double Line is going to have a great weekend! To wit, Jeff said Billy was wrong. He expected the US economy to slow down, therefore bringing with it these juicy UST yields. Spot. On.

BUT... a bit of that kind of data no ones talks about. Perhaps because it has no predictive power.
Association of American Railroads released the weekly Freight Carloads.

The 4-week moving average data SEAG looks as below. I am no expert at all, but I like to look at some different data... I'm not a big fan of boring sell-side reports and their opinions.

ECRI Leading Indicator, YoY:

ECRI Leading Indicator, 3m x 3m:

So... QE2 is ending and I believe the U.S. Activity will slow down considerably and the risk-markets will suffer... a lot.

From JP Morgan:

April saw growth of the global economy ease sharply for the second successive month to its weakest pace since the recovery began in August 2009. The weaker rate of expansion mainly reflected a significant cooling of business activity growth in the US non-manufacturing sector and further steep contractions in output at both Japanese manufacturers and service providers.

The JPMorgan Global All-Industry Output Index plunged to 51.8, well below February's near five-year peak of 59.1. Growth eased in both the global manufacturing and service sectors. The extent of the slowdown in services was especially marked, with the rate of expansion the lowest during the current 21-month period
of increase. Growth of manufacturing output fared better, but still slipped to its weakest pace since last September. 

All-industry output in the US rose at the slowest rate in seven months. Growth eased in China, the UK and Brazil, but picked up slightly in the Eurozone and India. The rate of contraction in Japan was the sharpest since March 2009.

2011 05 06 JPMorgan - Global Growth Slow Down

Lots of jobs for those missing Claims

So a few days ago I mentioned about the recently bad trend in Jobless Claims (SA), an indicator I like to look at to get an idea of job growth in the US. The NFP is very volatile and all the economists miss by a wide-margin and past revisions are always ridiculously volatile. As volatile as the number itself!

So.. back fo IJC.

I was wrong. They're even worse now and the magnitude and marginal change are surprinsingly bad.

Facts:

Despite the horrendous charts on its trend and level I'd like to mention that today's 4-week change was higher than 99% of the preceding moves since Jan95.

If you consider the 4-week moving average data, which a lot of people like to look at in order to remove unnecessary noise, it came in a tad better: higher than 97% of all 840+ data points since Jan95.

 

A lot of people spoke that there are some special factors built-in this number... such as the Spring Break that people are just finding out happens at this time of the year (like winter in December-February in the Northern Hemisphere) and car-makers stopping production due to supply-issues exported by Japanese seismic waves. Right.

So... bullshit aside, unemployment benefits are being issued and incomes will come in lower despite the reason. In December-Feb it was too cold for people to leave their houses to collect employment benefits. Now perhaps the equity market might be high enough that these people without jobs simply don't need to work anymore. And they're going to Cancun for Spring Break instead!

Now if you consider the great {SEAG} for the NSA Inital Claims ticker from Bloomberg we get a chart that tells us that, hey!, we're still looking pretty damn bad!

Mid February: NSA Claims were 88k lower than 2010. Good.

Mid March: NSA Claims were 84k lower than 2010. Still good.

End March: NSA Claims were 54k lower than 2010. Hey!

Early April: NSA Claims were higher than 2010. Whoa.. easy there, man!

Now: 17k below 2010.. What an upgrade!

Fact: From 90-100k claims below 2010 levels to -20k claims x 2010 in 2 months.
Let's wait for the upcoming numbers.
This is getting exciting!

Eclectica Fund - 2011 03 Letter

Find below Hugh Hendry's Eclectica Fund's March Letter.

I like Mr. Hendry's style very much:
1. He's a 'no bullshit' guy.
2. His fund offers uncorrelated returns and have outperformed the HF Index since 2003 by a wide margin
3. He seems to use a lot of options and, despite their premium costs, give the fund a lot of asymmetry and leverage
4. He seems to dig deep into structural fundamentals
5. He's also betting against Japan, a nation that, in my humble opinion, will go bust soon.

There are many videos of him around. He's funny as hell when debating with other important figures out there.

Eclectica Fund 2011 03

Are you still sure the US will grow robustly in 2011?

So it has been a few more days and some are still confident that the U.S. economy is in 'escape-velocity'.

That is why 10yr USTreasuries have rallied 50bps from its recent highs.

Job growth was good, right?
That's quite a sudden change in Initial Jobless Claims, no? 4wk average up 20k in a few weeks. Headline number 53k higher in 9-10 weeks. This is the single number that I pay attention to instead of trading my life away on the monthly volatile and unreliable NFP.

Since the U.S. doesn't have a lot of manufacturing and its economy is based on services and consumption we should take a look at the american services PMI, the ISM Non-Manufacturing:

First chart: what a miss! Market expectations targeting 57 or so... the number came out way lower. Its components were simply horrible.

New Orders: back to 2009 levels, largest drop ever recorded.
Employment, slight drop, back to Oct2010 levels, barely expansionary.
New Orders - Inventories, NSA, seen in the seasonally adjusted chart: This baby is below 2007, 2008, 2009, 2010 levels.

It is tough to believe the economy will keep its growth pace, especially when QE2 ends, when I expect the equity markets to drop after a few misses in earnings and lower guidances from companies.

In the mean time... the US Dollar, the Euro and the GBP should keep its path lower against robust currencies from countries with low debt, hard assets in storage...

Will Bear-non-QE come to the rescue again?
I am sure the U.S. cannot afford eternal fiscal deficits.