When Dominos Fall
Even though G Pap got his groove back with Tuesday’s decidedly undecided vote of confidence, it has become very clear that concern is less with Greece and the balance of the periphery than it is with Italy and Spain. Wednesday we read no fewer than four articles in the FT outlining a barrage from the IMF of “concerns” it was seeing both from exploding short term funding to the wonderful world of 120% of GDP that is Silvio Berlusconi.
Don’t worry – we’re still pretty sure they’ll get the Prada IPO out the door in Hong Kong.
As we’ve written in this space in the recent past, the incremental debt differential actually creates a negative feedback loop. The best description of this has come most recently from Carmen Reinhart and her illustrations that show quite clearly that loads over 110% start that giant sucking sound.
This morning’s initial jobless claims came in higher than expected and the weekly revisions of up 6,000 suggest to us that next week’s payroll number is going to be less than impressive. Here we see the trending version with the rolling numbers.
The second domino in this worrisome picture is that second half of the year profits very much depend on kids having made a bunch of discretionary income over the summer. They use this to buy Abercrombie clothes to impress their fellow pubescent friends and so the virtuous consumer cycle they were taught by their parents lives on. Until it doesn’t…
It seems to us that mom and dad may be more than a little worried by the fact that Jenny and Johnny can’t find work this summer and they will have to supplement their Abercrombie purchases in August. The rub here is that either mom or dad may or may not have a job and if they do, they may have one that pays a great deal less than their last one.
One last screen grab today via our pals at On Trading. While they don’t use VIX in their day to day work it is worth noting where things are on a relative basis. Are we really seeing complacency? Or, are we seeing a relative value trade for the ages. Maybe stocks really are at the cheapest they’ve been in some time. Certainly on the dividend discount model they look attractive. Problem is, as of this morning they are getting cheaper.
This “relative value” trade was also echoed by Linn Group CEO Gordon Linn as he suggested that the recent selling of commodities to buy equities makes all the sense in the world. Zero interest rates for 2-3 more meetings means a firming $ and a firming $ may mean a new ceiling on the inflation trade.
We believe that stocks are overpriced by at least 5-8%.
And, of course we never rule out “The Bernank” stealthily expanding the Fed balance sheet by reinvesting interest payments…. Time will tell.
What we are watching
- AG complex off 25% in 10 days
- USD flight to safety or are rate hikes a coming?
- No interest either way – in equities
- 30s and Bunds in a race to summit the post-crisis mountain
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