The Axis of Weeble (Tchir)

Thursday, May 10th, 2012

by Peter Tchir, TF Market Advisors

Weebles wobble, but they don’t fall down. Europe, and the Euro in particular might fall, but right now they are close to the bottom of this current wobble and are about to start another upswing (seriously, as I kid, you could make a Weeble fall down, but it was hard).

Greece is a basket case. It may or may not have a government. The eventual government may or may not want to stay in the Euro. That is all true, but will take time. Greece will and should attempt to renegotiate the bailout package. Our analysis yesterday might be a good place for Greece to start. The results of the renegotiation will determine the timing and necessity of Greece leaving the Euro. Until the Greek’s have had time to attempt to renegotiate and have actually planned for an exit back to the Drachma they will not risk a hard default where they really don’t know the consequences. So look for more hard-line headlines but expect May payments to go smoothly. I think the post PSI bonds, down a touch again today, offer good risk/reward opportunities.

Spain may be less of a basket case than Greece, but it is a far bigger basket. Spain nationalized Bankia, the 4^th largest bank. So far the market is reacting positively. I think that this will turn out to be a “head fake” over time. While encouraging that Spain was willing to act a lot is left uncertain. Is this even enough to fix Bankia? Problem banks have a tendency to be bigger money pits than anyone at first realizes. Look for doubts to creep back in about the success of this recapitalization. Then there is the question of how many other banks need how much money? The figure will be staggering. That brings us to the last question, how will Spain get all the money? Spain will be back to test the lows, but with the IBEX index at 9 year lows, a lot has been priced in and these little actions should be enough to provide a decent pop. I recommended long IBEX vs short DAX into the European close yesterday.

Germany has its own set of problems. The people voted and made it clear that the bailout programs Germany is creating don’t sit well with the people. So Merkel cannot easily back down and make things easier for Greece or Spain (or Italy, or Portugal, or Ireland, for that matter). She has to talk tough, but there is no way she has gone this far and will let it fail easily. She is likely to insist on the same level of budget cuts, but may be less concerned about the timing. She has to pander to her base, so look for disruptive statements from Germany, but their bark will be worse than their bite. Behind the scenes she will be a little more conciliatory and flexible.

France has been surprisingly quiet since the elections. Mr. Hollande is not forced to embrace the policies of Merkozy and is free to carve his own role in Europe. The French elections seemed to have less to do with bailouts and more to do with a renewed focus on France and a push for growth. So while he has to spend more time on domestic issues than the previous government, he also has the ability to push the growth agenda throughout Europe. He can be a leader in a “new” European plan, one focused on “growth”. Since “growth” is just code for spending, most of the politicians will get behind him. The equity markets love growth and are always happy to drown out the screams and protests of the fixed income markets. The failure of the “growth” agenda will become apparent and markets will sell off, but that could take some time. Fortunately for the bond market and the sovereign debt crisis, the fallacy of the “growth” argument will become apparent before more debt has been issued to fund elaborate spending projects. It does continue to amaze me that “austerity” is so hated and not an option, when in spite of all the votes, and approvals, very little actual austerity has occurred.

Jobless Claims have the potential to move the markets. To me, the revision is key to how the market will respond. If we get another upward revision to last week’s data, the market will show little enthusiasm for the number unless it is below 350k. If we get 365k and even a small downward revision to last week we could see a significant pop. That’s because the market largely ignored last week’s number with so much else going on, and because after Friday, the “we have jobs” portion of the rally took a serious beating. If we get a 365k print will another upward revision, expect the market to be rather blasé about it. I like being a little long U.S. risk coming into the number, but will take my read more from the revision than the data itself.

Credit is mixed this morning, but by and large unchanged. Spanish and Italian bonds are trading much better. There is still pressure on CDS, but even there I think it is less of a warning sign than a market that is about to get squeezed badly. U.S. CDS is trading a bit better with both IG18 and HY18 trading fractionally tighter. Futures have managed to retrace back to almost session highs, and given how many people seemed to expect overnight problems in Europe, expect buying to continue, especially if jobless claims are good.

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E-mail: tchir@tfmarketadvisors.com

Twitter: @TFMkts

Tags: Axis, Bailout Package, Basket Case, Bonds, DAX, Doubts, Drachma, Last Question, Lows, Pits, Problem Banks, Psi, Recapitalization, Renegotiation, Risk Reward, Spain Money, Tendency, Tf, Upswing, Yest
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Miracle of Survival and Falling Inflation Expectations

Tuesday, November 30th, 2010

Miracle of Survival and Falling Inflation Expectations

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

In Unthinking Economic Parrots and Deflation Fighting Madness I trashed unthinking writers who parrot the Fed’s misguided beliefs about the importance of inflation expectations and why falling prices are bad.

I specifically quoted one parrot who said “Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further.”

This was my rebuttal….

The ineptitude of Japan’s policies hoping to combat deflation is staggering. Worse yet, unthinking economic parrots talking about the “economic damages of deflation” have no idea what they are even saying.

I wish economic writers had the ability to think rather than parrot ideas espoused by Keynesian clowns.

Series of Questions

• If your refrigerator conks out, will you buy a new one or wait 6 months to take advantage of lower prices?
• If the transmission on your car fails will you wait 6 months to get it fixed?
• If your pantry is bare, will you wait 1 month to buy food even if you expect food prices to drop?
• If you need a new winter coat, will you wait and if so, how long?

The answer to that last question is “Perhaps for a bit, but you will not wait 3 years even if you expect prices will be even lower 3 years from now.”

Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.

Miracle of Survival

Today I received an even better example from “Chris” who writes…

Hello Mish

The best argument in your “winter coat” deflation comparison is consumer electronics. Everyone knows that as soon as they buy something from the consumer electronics department the price next month will go down or the same product will be offered with more bells and whistles for the same price. Yet by some miracle Best Buy seems to survive!

Thanks Chris

Thus, the next time you hear the Fed or some parrot taking about the importance of inflation expectations and how people will hold off buying stuff if they expect prices to fall, please calmly ask them how the hell Best Buy stays in business, making a huge profit on hundreds of stores, selling merchandise that will undoubtedly be lower in price in a few months.

According to the incredibly silly “inflation expectations” model, Best Buy cannot possibly exist, so it must be a miracle that it not only exists, but thrives.

Are Falling Prices a Bad Thing?

Ask anyone on fixed income if falling prices are a bad thing. Ask students or those on minimum wage if falling prices are a bad thing. Ask anyone but the Fed, the Banks, or Government if Falling Prices are a Bad Thing. Look in a mirror and ask yourself.

Parrots trumpeting nonsense about inflation expectations and why lower prices are bad, are nothing but pawns for the wealthy, for central bankers, and for government officials all of whom benefit from inflation because of rising taxes and/or because they have first access to money.

Government in particular benefits from a bigger piece of your paycheck via rising sales taxes, rising property taxes, and rising income taxes.

In reality, inflation is theft from the middle and lower classes for the benefit of government, the wealthy, and also public union workers who have inflation adjusted benefits written into many of their contracts.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Bells And Whistles, Best Buy, Conks, Delay Purchases, Economic Damages, Electronics Department, Food prices, Global Economic Trends, Hyperinflation, Ineptitude, Inflation Expectations, Last Question, Michael Mish, Mish Shedlock, New Winter, Parrot, Parrots, Rebuttal, Stocks Bonds, Winter Coat
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