Note 76 percent of the price for a gallon of gas is driven by crude oil.   Only 6 percent by refining and 6% distribution and marketing.  Though these components do vary over time, but not by much.

So when you start to crack at paying $100 to fill your tank,  remember it’s really not the crack spread.  Blame the crude or Brent!

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The Markit Eurozone PMI® Composite Output Index fell from 50.4 in January to 49.7 in February, according to the preliminary ‘flash’ reading based on around 85% of usual monthly replies. The latest figure signalled a slight contraction in business activity following the marginal expansion seen in January, which had been the first month in which the Index had risen above the 50.0 no-change level since last August.

The latest reading was nevertheless the second-highest of the past six months, and suggests that the Eurozone economy has stabilised over the first two months of the year having contracted in the final quarter of 2011.

Click chart to enlarge and for better resolution.

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The Council of Economic Advisers (CEA) do note,

…during the Great Depression, the only other instance of nationwide price declines since WWI, much of the comparably-sized decline in nominal home prices was offset by a concurrent drop in general price levels, so the decline in real housing values was only about one-quarter as large as the one we recently experienced.

Thus the current collapse in housing prices is a relative price shift whereas the housing bust of the Great Depression was more a symptom of general price deflation in the economy.

If not for the decisive action of Paulson, Bernanke, Geithner and Co.  we all may have become farmers living under the freeway.    Can’t prove counterfactuals,  but that is what we  believe.   So we give them an A+ for stabilization.   Structural adjustment and long-term reform is an entirely different story, however.

We heard Meredith Whitney say this morning that 95 percent of current mortgages are backed, effectively, by the taxpayer,

…95-plus percent of mortgages today are being backed by Fannie and Freddie.  Fannie and Freddie are effectively subsidizing unprofitable mortgages that the banks wouldn’t put on their balance sheet. That’s not sustainable and ultimately the taxpayer is paying the bill for it.  The banks used to price profitable loans and you know, they’re a myriad of loan products that they’re still not pricing for profits.

Basic microeconomics tells us that government repression of prices creates supply shortages.   Think back to the rent control supply and demand graphs in Econ 101, which we have modified in the chart below.

This is one of the reason why we believe housing is so slow to recover.  Who in their right mind x/ the Govie would lend long-term money at a rate lower or close to the current inflation rate?   Rational lenders also take into account the massive monetization that is currently taking place globally and its impact on future inflation in calculating their expected real returns.

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Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:
“Growth remains on track of slowdown, despite the marginal improvement in the headline flash PMI led by quickened production after the Chinese New Year. With a meaningful rebound of domestic demand not in sight, external weakness is starting to bite, adding more downside risks to growth. The PBoC, after delivering this year’s first RRR cut, should step up

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We’ll leave history to judge this deal and it doesn’t surprise us nobody likes it,  thinks it’s enough or that it will ever close.   They didn’t when Mexico announced the terms of their Brady Plan Debt Restructuring and they probably won’t for any future resturcturings, for that matter.

But it’s debt destruction, nonetheless, and that is what highly indebted borrowers need, no?   No bailout of “fat cat” bankers, investors, traders, and hedge funds unless they bought bonds at a price below the present value of the deal. *     And to that we say bravo and bully for the EU and IMF! 

They both do need to distinguish and make the case to the markets that the official sector has and will continue to support Greece with new money and positive net capital flows whereas the private creditors,  even after their haircut, will still extract net transfers (principal plus interest payments) from the country.   It’s important that burden sharing is perceived as fair and egalitarian.

Finally,  we are baffled by the journalists who report that now the deal is done it will unleash the funds to make the $14 billion March 20th bond payment.    Unless we’re really missing something,  and we may be,  but won’t that bond payment be part of the restructuring?    No doubt the vultures are all over this one.

The more important question for investors and traders is Greece, an economy of less than 0.5 percent of world GDP,  a one-off aberration or a small symptom of a greater global problem?  You know where we stand.

* We’ll try to calculate the deal value when more information is available.  

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The Bank increases the total size of the Asset Purchase Program by about 10 trillion yen, from about 55 trillion yen to about 65 trillion yen. The increase in the Program is earmarked for the purchase of Japanese government bonds.  By fully implementing the Program including the additional expansion decided today, by the end of 2012, the amount outstanding of the Program will be increased by about 22 trillion yen from the current level of around 43 trillion yen.

We posted last month that long dollar/yen was one our favorite macro trades of the year.  Still do and think the move is just getting started, but always with a stop as we could be wrong.

The generational low is in on dollar/yen, in our opinion,  and yen weakness has helped the Nikkei recapture its 200-day moving average and put in its best February since 1991.  We will be back to you with more analysis.

Stay tuned.

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