Prepare Yourself, Here's The NEXT Debate Everyone Will Have On The Economy

Thanks to the rebounding stock market, this week saw a pretty remarkable shift in sentiment, as suddenly economists left and right are hiking their GDP estimates.

To be fair, the latest data has come in fairly robust, and non-double-dippy. This is best exemplified by September retail sales, which saw growth across all categories, and lights-out car sales.

This chart tells that story: You can see how much better September was than the previous months.

If all this is giving you a bit of a case of deja-vu developing, don't worry, it's only natural.

A similar thing played out last year, pretty close to around the same time.

See then, in summer 2010, we saw a lot of the same growth scares that this year has seen, only less pronounced. Then Bernanke announced QE2, and it wasn't too long until the stock market started rallying, and everyone declared that QE2 had saved the market, as the Fed's money printing.

But what we kept pointing out at the time last year was that in addition to the Fed's QE2, the economy really was showing signs of improvement, and coming out of the summer slump.

On September 1 2010, for example, a super-strong ISM report shocked everyone, coming as it did after a series of weak regional Fed reports. The markets jumped 2% that day.

And it wasn't just that ISM report.

The chart below from December of 2010 from Nomura shows that their US Economic Surprise Index -- which basically aggregates all the data to determine whether, on net, data is beating or missing against economic forecasts -- bottomed in August of 2010, meaning that in addition to the Fed, the fundamental economic data really was improving. The rebound in the stock market in late 2010 was not just a matter of monetary stimulus.

But people like to tell stories about the economy, so even though it clearly improved after the Summer 2010 doldrums, almost everyone focused on Bernanke and QE2, and how the Fed was juicing the market.

And we're setting ourselves up, today, for basically the same thing (potentially).

Operation Twist -- which should really just be called QE3 according to Goldman -- is kicking in right as the economy is showing signs of life.

In fact, here's the brand new Citigroup Economic Surprise Index (kindly put together by Scott Barber at Reuters) showing once again a major surge off of an August-September bottom. In fact, it just went positive again.

This is real data improvement -- or at least improvement against expectations, which is ultimately what  matters to markets.

And yet you can be certain that if trends persist, all the debate will still be about the Fed, and the market enjuicing effects of Operation Twist, and whether it's all an artificial sugar high that we need to come down from.

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How JP Morgan Just Made $1.9 Billion By Everyone Betting Against Them (JPM)

Earlier this morning, JP Morgan reported Q3 earnings of $1.02 per share, which compares to analysts' expectation for $0.92 per share.

However, no one can seem to agree on whether or not JP Morgan actually beat the analysts' estimates.

In fact, CEO Jamie Dimon was the first to say that there were "several significant items" that were unusual during the quarter.

The one item everyone is raising red flags about is the $1.9 billion pretax DVA gain.  DVA is short for debt valuation adjustment.

Bloomberg explains the DVA:

[R]esults may include gains taken under a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par. The rule expanded the daily marking of banks’ trading assets to their liabilities, under the theory that a profit would be realized if the debt were bought back at a discount.

In other words, when investors and traders bet against a banks' bonds, causing credit default swap spreads to soar, the bank is allowed to book a mark-to-market gain.

Last year, Bloomberg spoke to Oppenheimer analyst Chris Kotowski who called the DVA an "abomination."  He explains, "Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota."

But Dimon doesn't act like the DVA is anything worth applauding.  "The DVA gain reflects an adjustment for the widening of the Firm’s credit spreads which could reverse in future periods and does not relate to the underlying operations of the company."

Expect more banks to report DVA gains.

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Rudy Giuliani Confirms What Everyone Already Knew — He's Not Running For President

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Former New York City Mayor Rudy Giuliani confirms the obvious — he is not running for president this year.

After a failed bid in 2008, that had him embarrassingly putting all of his chips on winning the Florida primary, Giuliani has flirted with another campaign.

He put those rumors to rest on Tuesday, quoted by POLITICO's Maggie Haberman as telling the Long Island Association that "if it's too late for Chris Christie, it's too late for me." 

He is last potential late-entrant to the Republican primary field with the name recognition to stand a chance.

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Here's The Chart Everyone Is Talking About That Says Unemployment Will Surge

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An chart published yesterday by Lance Roberts at Street Talk Live is getting a lot of attention. The chart shows the STA Composite Employment Index (an index of the employment components of the Chicago Fed National Activity Index, seven different regional Federal Reserve manufacturing indexes, and the National Federation of Independent Business survey) versus jobless claims.

Whenever the STA composite drops to 5 or less, as it just did, the economy has been in recession and unemployment soars.

By now this charts isn't even that controversial. The White House projected unemployment at 9% through 2012, while Goldman predicts a rise to 9.25% and JPMorgan sees 9.5%.

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Jon Huntsman Takes Another Swipe At GOP Rivals, Says What Everyone Else Is Thinking

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2012 GOP presidential candidate Jon Huntsman is keeping up the elbow jabs to his Republican rivals.

At a recent fundraiser in Salt Lake City, the former Utah Governor took another barely-veiled swing at his fellow presidential contenders.

“This is an interesting experience, for those of you who haven’t run for president,” Huntsman told the gathering of donors, according to the Salt Lake Tribune. “You stand up on the stage in the debate like we did the other night and look around and say, ‘Whoa, where’d these folks come from? What an interesting assortment of characters!’”

It's a fairly apt assessment of the crowded Republican field, especially coming from one of the candidates. We just hope Huntsman knows he rounds out the motley crew.

h/t Mike Allen

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ROUNDUP: Here's What Everyone Expects From Bernanke At Jackson Hole

As Ben Bernanke's big speech at Jackson Hole Wyoming approaches, everyone has weighed in on whether he will hint at a third round of quantitative easing or other forms accommodation.

On one hand the U.S. recovery is slowing and global economic sentiment has worsened, but on the other inflation is higher than it was in 2010 when Bernanke launched QE2, and recent economic data hasn't been entirely terrible. Bernanke is also in a tough spot, since three regional Fed bank presidents voted against his decision to keep interest rates ultra low.

Back in June, Bill Gross co-CIO of PIMCO had said on twitter, "next Jackson Hole in August will likely hint at QE3 / interest rate caps."

But there has been a sea change since then, and now the predominant opinion is "don't get your hopes up."

In an editorial to the Financial Times, PIMCO's other chief Mohamed El-Erian argues that Bernanke should stave off another round of easing:

"...Rather than embark on another policy initiative (“QE3”) with questionable net benefits, it would be better for Mr Bernanke to use his Jackson Hole speech to reframe the national policy debate and, in the process, set the stage for President Barack Obama’s key economic announcements on September 5.

He should do so in three steps. First, acknowledge that the considerable headwinds undermining economic growth and jobs have important and growing structural elements. Second, explain why a sustainable solution must go well beyond Fed financial engineering and, specifically, incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit. Third, and most delicate, caution that another round of unconventional Fed policies would only be effective if accompanied by these other policy initiatives.

Jim Paulsen of Wells Capital Management also argued against QE3:

"We have created a very bad precedent… The financial markets whine and policy officials jump. The Fed has become the Pavlov’s dog of the stock market, and this is a horrible precedent for policy makers."

Meanwhile John Silva chief economist at Wells Fargo said the economy needs structural changes (via Marketwatch):

“The Fed has shot the big cannons. They are now playing the game with smaller ammunition

Mick Levy chief economist at Bank of America followed in the same thread saying he hoped Bernanke would discuss that mere changes to monetary policy would be inadequate to boost the economy (via Marketwatch):

All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties… The slowdown is not the fault of not enough liquidity."

Earlier this month Nouriel Roubini said the Fed would announce QE3 (via WSJ):

He will announce at Jackson Hole even more quantitative easing… Some variant of additional monetary easing. Keeping the fed fund rate at zero is one step. Buying more treasuries is another one. Trying to target directly the long-rates is another one, price-level targeting, lengthening the maturity of treasuries there is a combination of policies. We'll have QE3, maybe QE4, maybe QE5 if we're in the long haul of near depression.

He also took to twitter to say QE3 had begun in Japan and Switzerland with their currency interventions. He added, "The Fed will eventually get to QE3 but it will be too little too late."

European Central Bank president Jean-Claude Trichet, MIT professor Esther Dufflo and Harvard University professor Dani Rodrik will also speak at Jackson Hole this weekend.

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