The Big Picture

Treaty Threatens Global Government … Run by Giant Corporations
Succinct Summation of Week’s Events (6.15.12)
Counting on an Inheritance? Count Again.
Confidence the weakest of the year
Spanish Assets Wildly Overweighted with Housing
Economic data
10 Friday AM Reads
What Is A “Household” And Why Are They Buying Treasuries?
Friday!
New York City Party: Hip-Hop Map of NYC

Treaty Threatens Global Government … Run by Giant Corporations

Posted: 15 Jun 2012 10:30 PM PDT

International Treaty Negotiated In Secret – Hidden Even from Congressmen Who Oversee Treaties – Threatens to Destroy National Sovereignty

The normally-reserved Yves Smith asks whether Obama should be impeached over it.

Democratic Senator Wyden – the head of the committee which is supposed to oversee it – is so furious about the lack of access that he has introduced legislation to force disclosure.

Republican House Oversight Committee Chairman Darrell Issa is so upset by it that he has leaked a document on his website to show what's going on.

What is everyone so furious about?

An international treaty being negotiated in secret which would not only crack down on Internet privacy much more than SOPA or ACTA, but would actually destroy the sovereignty of the U.S. and all other signatories.

It is called the Trans-Pacific Partnership (TPP).

Wyden is the chairman of the trade committee in the Senate … the committee which is supposed to have jurisdiction over the TPP. Wyden is also on the Senate Intelligence Committee, and so he and his staff have high security clearances and are normally able to look at classified documents.

And yet Wyden and his staff have been denied access to the TPP's text.

This is similar to other recent incidences showing that we've gone from a nation of laws to a nation of powerful men making laws in secret.

For example, in the summer 2007, Congressman Peter DeFazio – who is on the Homeland Security Committee (and so has proper security access to be briefed on so-called "Continuity of Government" issues) – inquired about continuity of government plans, and was refused access. Indeed, DeFazio told Congress that the entire Homeland Security Committee of the U.S. Congress has been denied access to the plans by the White House (video; or here is the transcript). The Homeland Security Committee has full clearance to view all information about COG plans. DeFazio concluded: "Maybe the people who think there's a conspiracy out there are right".

As University of California Berkeley Professor Emeritus Peter Dale Scott warned:

If members of the Homeland Security Committee cannot enforce their right to read secret plans of the Executive Branch, then the systems of checks and balances established by the U.S. Constitution would seem to be failing.

To put it another way, if the White House is successful in frustrating DeFazio, then Continuity of Government planning has arguably already superseded the Constitution as a higher authority.

Watch this interview from today explaining why TPP is so dangerous to America … and the rest of the world:

Succinct Summation of Week’s Events (6.15.12)

Posted: 15 Jun 2012 12:00 PM PDT

Succinct summation of week’s events:

Positives:

1) Athens stock market rallies almost 14% on week on hopes New Democracy party squeezes out win.
2) Unconfirmed story but likely central banks stand ready for coordinated action to deal with potential bank runs depending on election outcome.
3) Historically low mortgage rates finally get many off their arse as refi apps jump 19.2% to most since April ’09 and purchase apps rise 1.28% to 6 month high.
4) Headline US CPI slows to 1.7% y/o/y, slowest since Jan ’11 and PPI up just .7% y/o/y due mostly to drop in energy prices.
5) CPI and PPI in China moderate further, loan growth, exports and imports gain more than expected.
6) April machinery orders in Japan rise more than forecasted.

Negatives:

1) Spanish bond yields spike on heels of 100b euro of extra borrowing to finance bank bailout. Italian yields also get dragged up.
2) US retail sales in May soft as drop in gasoline prices offset by iffy labor market and modest income growth.
3) Initial Jobless Claims total 386k, 11k more than expected and the 9th week in a row above 370k.
4) UoM confidence in June falls to lowest of the yr as both current conditions and the outlook fall.
5) IP unexpectedly falls .1% m/o/m.
6) June NY mfr’g survey falls 14.8 pts to weakest since Nov ’11..
7) Core CPI growth remains sticky at 2.3% y/o/y, matching the fastest pace since Sept ’08, PPI core up 2.7% y/o/y
8) Chinese retail sales and IP grow less than expected in May.
9) India’s wholesale inflation up 7.55% y/o/y, more than estimated ahead of RBI rate meeting Monday. IP up just .1%. Will slowest growth in 10 yrs offset still high inflation?

Counting on an Inheritance? Count Again.

Posted: 15 Jun 2012 10:00 AM PDT

WSJ:

The bad news? Many baby boomers are likely to get less money from Mom and Dad than they thought.

The worse news: They may have to help their parents financially instead.

click for ginormous graphic

Source: WSJ

Confidence the weakest of the year

Posted: 15 Jun 2012 09:30 AM PDT

The 1st look at June UoM confidence at 74.1 was light relative to expectations of 77.5, down from 79.3 in May and the lowest of the year. The decline was about equally spread between the two components as Current Conditions fell by 5.1 pts and the Outlook was down by 5.4 pts. One year inflation expectations were unchanged at 3.0%, matching the lowest since Dec ’10 primarily due to the recent drop in gasoline prices. As confidence is a coincident indicator and tells us nothing about the economic goings on in the future, the June decline likely reflects the lackluster labor market as seen in the data over the past few months and maybe the euro debt mess as the UoM survey is done over the phone just within the last few days thus capturing the nervousness many of us are feeling.

Spanish Assets Wildly Overweighted with Housing

Posted: 15 Jun 2012 08:45 AM PDT

click for larger graphic

Source: The Pain in Spain

>
Real Estate comprised 79% of Spanish household assets, according to Jon Carmel at Carmel Asset Management (he credits the chart above to Oliver Wymann). That is 50% more than many other European countries, double the UK and triple the US.

I would expect mean reversion to be rather discomforting.

With all eyes on Greece, Carmel sees Spain as “worse than the market anticipates.” He points out these 5 bullet points as to why Spain’s RE market has much further to fall:

1. Spain's national debt is 50% greater than the headline numbers
Spain's debt-to-GDP balloons from 60% to 90% of GDP with regional and other debts

2. Spain's housing prices will fall by an additional 35%
Spain built one house for every additional person added to the population during the
past two decades; the fall will decrease GDP by ~2% each of the next two years

3. Spain has "zombie" banks with massive loans to developers and to homeowners
Banks have not begun to realize losses and are vastly undercapitalized

4. Spain's economy has not stabilized and will continue to deteriorate
Spain has the highest unemployment in the developed world, one of the highest overall
debt loads, and the most uncompetitive labor market in Europe

5. The EU will not have the firepower or political will to bail out Spain
Rescue fund headline numbers are misleading and count capital that is not yet
committed

Fascinating stuff . . .

Economic data

Posted: 15 Jun 2012 08:37 AM PDT

Industrial Production in May fell by .1%, the 2nd month in the past three that saw a decline. The consensus was for a slight rise of .1% and the weakness was broad based specifically within manufacturing as declines were seen in motor vehicle/parts, machinery and computer/electronics. Mining production rose .9% and utility output was up .8% after a 5.3% rise in April where weather normalized after the bizarre winter. Capacity Utilization was 79%, slightly less than expected, but down from 79.2% in April which was the highest since April ’08. With respect to market movements, IP is a grade B figure but notwithstanding the miss, the y/o/y gain of 4.7% is still the 3rd best over the past year. Looking forward however, the environment is obviously getting more challenging.

The 1st reported June industrial number, the NY mfr’g survey, was well below expectations at 2.3 vs the est of 12.5. It’s down from 17.1 in May and 6.6 in April and is the weakest since Nov ’11. New Orders fell 6 pts to 2.2. Backlogs fell only slightly but remained negative for the 12th straight month. The Employment component fell 7 pts to 12.4, a 4 month low and the Avg Workweek fell 9 pts to 3.1. Inventories went from +4.8 to -8.3. Prices Paid dropped almost in half to 19.6 and Prices Received fell to 1 from 12.1. The overall 6 month outlook at 23.1 is down from 29.3 in May and is the slowest since Oct ’11. Bottom line, this survey is very volatile month to month so we can’t extrapolate the state of the entire country’s mfr’g base from this one region but NY was one of the standout’s in May that is now showing its vulnerability. I’m sure we’ll see more weakness in other region’s as the global economy continues to slow.

10 Friday AM Reads

Posted: 15 Jun 2012 06:30 AM PDT

My early morning reads:

• Banks Get Mauled by Bears’ Bets (WSJ)
• As Europe's Currency Union Frays, Conspiracy Theories Fly (NYT)
• The U.S. Reaps Benefits as a Scarce Berth in the Safe Harbor (Barron’s) see also Foreign Investment Surges (WSJ)
• Rosie! A Noted Market Bear Gets (a Little) Bullish (WSJ)
• What Facebook Knows (Technology Review)
• Counting on an Inheritance? Count Again. (WSJ)
• The EU Smiled While Spain's Banks Cooked the Books (Bloomberg) see also Greek Dilemma: Buy, Sell, or Hide (WSJ)
• WHY SMART PEOPLE ARE STUPID (New Yorker)
• Pelosi Joins Cantor Among Wealthiest U.S. House Leaders (Bloomberg) see also Congress reveals lawmakers' personal mortgages for first time (Washington Post)
• Older, Mellower, but Still Woody (WSJ)

What are you reading?

More countries are saying that China is world’s leading economic power

Source: Economist

What Is A “Household” And Why Are They Buying Treasuries?

Posted: 15 Jun 2012 05:45 AM PDT

CNBC – Guess Who's Buying All the Bonds? (It's Not the Fed)
Mom-and-pop investors, and not the Federal Reserve, have been the ones most responsible for driving the mad dash to government debt, according to newly released data. The Fed's ambitious Treasury-buying program has pushed the central bank's balance sheet to $2.83 trillion and, by many accounts, the benchmark 10-year Treasury yield to record lows, most recently to 1.56 percent. But despite the low yields, it's been retail investors most responsible for the recent move plunge. "The conventional view is that 10-year Treasury yields have been pushed down to 1.5 percent and 10-year (Treasury Inflation Protected Securities) yields to -0.5% by the actions of the Federal Reserve and the safe haven demand from foreign investors," Capital Economics said in a research note. "The reality, however, is slightly different." The demand among average investors has swelled so much, in fact, that they bought more Treasurys in the first quarter than foreigners and the Fed combined. Households picked up about $170 billion in the low-yielding government debt during the quarter, while foreigners increased their holdings by $110 billion. The Fed, meanwhile, actually slightly decreased its net holdings, not a surprise since its latest quantitative easing endeavor begun in September — nicknamed Operation Twist — was designed to be balance sheet-neutral. The central bank is selling short-dated notes and buying an equal number of longer-duration issues in an effort to drive down borrowing rates and boost risk. For Capital, the more meaningful aspect of Treasury demand from households is that should the Fed opt not to do more easing when Twist concludes at the end of June, there still will be demand for government debt that could keep yields from surging as some expect. Retail investors have continued to draw down their money market funds but direct the cash instead to bonds, while equity mutual funds continue to lose flows. The move is seen in large part because of fears over the European debt crisis and U.S. economic slowdown.

Comment

With U.S. Treasury issuance skyrocketing over the past couple years, yields at new all-time lows and talk of a bond bubble rife, we are often asked, "Who is buying all this Treasury debt?" While the story above correctly points to households as a major purchaser in recent quarters, it incorrectly describes this group as "mom and pop." Below is an updated description of households as categorized in the Federal Reserve's flow of funds report

Domestic Investors – Households

As the charts below show, households' holdings of Treasuries have grown more than threefold since December 2008 despite net sales of $173 billion in Q2 2011. While it may seem to make sense to attribute these flows to "mom and pop" given the category's name, this would be inaccurate. As we explained last year:

We must first lay out the definition of households from the flow of funds report (page 12):

For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector. For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government, and the balance is assigned to the household sector.

To be clear, the "household sector" is misnamed. It is the residual account with a fancy name. So given this, what does it mean when the residual account soars? We would suggest that it means there is a measurement problem. In this case, the Federal Reserve cannot "find" the buyers of Treasuries thanks to the exploding deficit. They correctly assume that the buyer exists (otherwise the market would not exist) and therefore place the "missing" buying in the residual account. Since this account is called the "household sector", we all assume that "mom and pop" bought this sum.

If "mom and pop" were really the end buyers we would expect to see similarly booming numbers from the mutual fund industry. However, as we will detail in part 2 of this post tomorrow, mutual fund purchases are a somewhat insignificant portion of domestic buying.

Our guess is the domestic buyer is a leveraged carry trader, a mutual fund, a brokerage subsidiary or other group that does not have its own category so it gets "dumped" into the default category of "households."

Click to enlarge:

Conclusion

While the default category of "households" chipped in with almost $200 billion of Treasury purchases during Q1 2012, do not assume this means "mom and pop" are soaking up the Treasury's increased issuance. According to the flow of funds categorization, households are simply a residual category for all the net purchases which do not fit into one of the Federal Reserve's other pre-defined categories. Tomorrow we will detail the net purchases of many of these other categories, from foreigners to mutual funds and the Federal Reserve.

Source: Bianco Research

Friday!

Posted: 15 Jun 2012 05:34 AM PDT

I am trying to reorient myself after a manic week of markets, mayhem and news flow.

The market up and downs have been sloppy. I find myself unconvinced of any short term move in either direction. We are bouncing around on rumors of possible future interventions and collapses in over there. None of these moves have much in the way of conviction.

Be back shortly . . .

New York City Party: Hip-Hop Map of NYC

Posted: 15 Jun 2012 05:00 AM PDT

click for giant map