The Weekly Bull/Bear Debate: January 23-27, 2012


+ The ECB’s Long-Term Refinancing Operation (LTRO) has clearly quelled fears of an imminent liquidity crisis; Spanish and Italian 10-yr yields have plunged.  The operation will provide time for policymakers to forge ahead with structural reforms.  Germany is opening the door for pro-growth policies in the periphery.  Furthermore, Greece is an isolated case.  A Greek default is already priced in and a climax would actually lift the air of uncertainty.  Says billionaire investor George Soros, “I think we are on the verge of putting the acute phase of the crisis behind us,” adding that he believed Italian sovereign bonds represent a “very attractive” speculative investment.  Finally, business confidence in Germany increases for the 3rd month in a row, while record low unemployment boosts consumer confidence.  The bloc’s largest economy will avert recession and support investor confidence in the Eurozone region.

+ U.S. economic data continues to shine.  The Richmond Fed’s manufacturing survey increases from 3 to 12, lead by New Orders and expectations of improved business conditions (we have the same bullish result from the Kansas City Fed); note that all regional surveys have improved in January.  Moreover, the ATA Truck Tonnage Index spikes the most in over a decade in December.  Chief Economist Bob Costello hints that a wave of inventory restocking has begun.  Core Durable Goods Orders reestablish their bullish trend, which bodes well for Q1 manufacturing performance.  On the jobs front, state unemployment rates continue their trek lower.  Finally, consumer confidence improves to 75.0 and is the highest in almost a year

+ The global economy has clearly stabilised after a brief air pocket in the prior quarter.  According to the Markit PMI, economic activity in the Eurozone unexpectedly grew in January, led by Germany and France.  Meanwhile, monetary easing; such as India’s unexpected decision to cut their Reserve RatioThailand’s interest rate cut, and Brazil’s upcoming rate cut, will further support economic growth.  Copper and comments from Caterpillar support the global re-acceleration thesis.  Even Japan had some good news on the consumer front.  

+ The Fed announces that interest rates will be held low throughout 2014 and state that they will step in with QE III should the global economy deteriorate further.  Risk assets spike as investors are reassured that the Fed will maintain vigilance for any economic slowdown.  Criticism of the program won’t be nearly as intense as QE II due to slowing economic growth in Emerging Markets.  

+ Obama clears the way for an economy that’s “built to last,” by explicitly stating in his State of the Union address that domestic companies will receive government assistance to create jobs.  Leaders understand the grand opportunities that lie ahead. The U.S.  manufacturing renaissance is in its infancy.     


– Global growth is slowing to a stall.  Japan’s central bank cuts its 2011 and 2012 economic growth forecasts, citing strains from balance-sheet repair in the U.S. and weaker growth due to the European debt crisis.  On a grander scale, the IMF slashes its global growth forecasts and expects the Eurozone to enter a recession.  Meanwhile, Australia and the UK are teetering on the brink of recession, while South Korea reports its slowest economic growth in 2 years.  In China, officials want to see a 30% decline in residential real estate to reach a “reasonable” level —(and in the process cause an uprising of the middle-class).  Meanwhile, protests in Tibet are spiraling out of control.  Finally, Obama ups the ante on protectionism with his State of the Union address.

–  The Eurozone crisis is worsening.  There is still no agreement on the Greek Private Sector Involvement (PSI) negotiations, raising the specter of a credit event and uncontrolled default (how many times have we heard that a deal is close?).  Making matters worse, EU leaders and banks are demanding further austerity on the depression-racked country due to missed targets.  How long before peripheral citizen’s say “The hell with this” or creditor governments say “This isn’t working“?   Meanwhile, Portugal is fast coming down the pipe with 10-yr bond yields hitting record highs, as Antonio Saraiva, the head of the country’s industry confederation, confesses that the nation will need a bailout.  In Spain, recession is knocking at the door, while unemployment is far worse than expectations.  In Italy, Monti’s government is set to face its first real test as truckers have blocked the flow of essential goods into Rome and other large cities.  In France, S&P downgrades 3 banks and the country’s president acknowledges that he’s likely to lose the presidency in 3 months, unleashing a wave of uncertainty in regards to Eurozone economic policy.  Finally, “Trade unions plan (a) pan-EU action against (the) fiscal compact.”     

– Despite all the hoopla in the past month, the U.S. remains vulnerable to an exogenous shock.  4th Quarter GDP disappoints, growing 2.8% vs. expectations of 3.0%; note that the economy hasn’t grown over 3% since the Q2 2010.  Final demand registers a paltry 0.8% and Personal Consumption underperform expectations.  Meanwhile, Fed President Dudley sees “significant impediments” to economic growth this year.  Finally, weekly consumer metrics continue to flag a significant slowdown in January versus an already weak December.

– The probability of an oil price spike, likely upending the global recovery, grows.  The EU imposes an embargo of Iranian oil (to begin July 1st), despite Iranian threats of a blockade of the Straits of Hormuz or just cutting off supply immediately.  Meanwhile, oil producers are now content with $100 oil, saying that it won’t affect global growth; we’ve heard this before, but the threshold price keeps rising.  Azerbaijan police foil another Iran plot to assassinate the country’s Israeli ambassador.  

– Japan reports a trade deficit for the first time since 1980.  While sporting a debt to GDP ratio of over 200%, any consistent trade outflow from the country would conjure anxiousness towards its real paying ability (not printed Yen, which implies a loss of real value of interest payments).    


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