In the aftermath of yesterday's SNAFU in which the GOP presidential candidate made it clear just why "he is not concerned about poor people", Andy Borowitz has intercepted the follow up explanation of what Romney really wanted to say...
With the world ever more lethargic daily, as if in silent expectation of something big about to happen (quite visible in daily trading volumes), it is easy to forget that just about a year ago the Mediterranean region was rife with violent revolutions in virtually every country along the North African coast. That these have passed their acute phase does not mean that anything has been resolved. And unfortunately, as BMO's Don Coxe reminds us, it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix. As Coxe says: "Today, the Mediterranean is two civilizations in simultaneous, rapidly unfolding crises. To date, those crises have been largely unrelated. That may well be about to change." Coxe bases part of his argument on the same Thermidorian reaction which we have warned about since early 2011, namely the power, social and economic vacuum that is unleashed in the aftermath of great social change. But there is much more to his argument, which looks much more intently at the feedback loops formed by the divergent collapsing economies that once were the cradle of civilization, and this time could eventually serve as the opposite. To wit: "The eurocrisis has been front and center for nearly two years, during which time the economic and financial fundamentals have continued to deteriorate. “The Arab Spring” came suddenly, in a series of outbursts of optimism. It may have come at the worst possible time for the beleaguered nations of the North Shore. The Mediterranean has entered one of the stormiest periods in recorded history. It is the major contributor to risk in global equity markets. It is too soon to predict how these crises will end. The Cradle of Civilization is rocking amid an array of winds and storms. “The Arab Spring” ...may have come at the worst possible time for the beleaguered nations of the North Shore."
Equity and credit markets eked out small gains on the day as Treasuries limped a few bps lower in yield (with 30Y the notable underperformer) and the EUR lost some ground to the USD. ES (the e-mini S&P futures contract) saw its lowest volume of the year today at 1.35mm contracts (30% below its 50DMA) as NYSE volumes -10% from yesterday but average for the month. Another small range day in almost every market aside from commodities which saw significant divergence with Silver (best today) and Gold surging (up around 1.15% on the week) while Oil and Copper dived (down 2.6-3% or so on the week) with the former managing to scramble back above $96 into the close. ES and the broad risk proxy CONTEXT maintained their very high correlation as Oil and 2s10s30s compression dragged on ES but AUDJPY and TSYs post-Europe inching higher in yields helped ES. HYG underperformed all day (often a canary but we have killed so many canaries recently). Energy names outperformed on the day (as Brent and WTI diverged notably) but financials did well with the majors now back up to the late October (Greek PSI deal) highs. All-in-all, eerily quiet ahead of NFP but it feels like something is stirring under the covers as European exuberance didn't carry through over here (except in ZNGA and FFN!).
Presented with little comment but we thought, given the exuberance surrounding Facebook, ZNGA's rally, and FFN's double, that we would point out that the four-week average volume on the NYSE has dropped to levels not seen since, yes you guessed it, 1999.
A few days after Germany proposed the stripping of Greek fiscal authority from the insolvent country, in exchange for providing funding for what German FinMin Schauble called today a "bottomless pit" (and Brüderle chimed in saying that "a default of the Greek government would be bitter but manageable), Sarkozy decided to demonstrate his "muscle" if not so much stature, and openly denied Germany, saying "There can be no question of putting any country under tutelage." Sure enough, it was now Germany's turn to reciprocate the favor. According to Bloomberg, "Finance ministers from the four euro- area countries with AAA ratings -- Germany, Finland, Luxembourg and the Netherlands -- will meet in Berlin tomorrow afternoon, a German Finance Ministry spokesman said." And as is well known, FrAAnce no longer a member of this, however meaningless, club. "The gathering is part of a a series of meetings convened by officials from the highest-rated euro states, the spokesman said, speaking on the customary condition of anonymity. Ministers will discuss current issues without briefing reporters after the meeting." And so the gauntlet of public humiliation is now once again back in Sarkozy's court. The good news: if the de minimis Frenchman does not get his act in order, and overturn the massive lead that his challenger in the April presidential elections has garnered, he will need to endure the humiliation for at most 3 more months. In other news, it appears that when it comes to saving political face, the rating agencies are actually quite useful.
Mike Krieger submits: "I’ve always loved history. Even all the way back to grade school I remember it being my favorite subject. Very early on I noticed certain patterns in history and I wondered why they occurred. When I was first exposed to European history, I recall being absolutely floored by how certain countries could become so rich and powerful and then subsequently collapse so stunningly and rapidly. The one that really boggled my mind was Spain - the homeland of my maternal grandfather who I never met. Here was a country that conquered and viciously looted essentially all South America other than Brazil (thanks to the pope being magnanimous enough to grant that part of the world to Portugal in the Treaty of Tordesillas), Mexico, Central America and parts of the United States. The gold and especially silver that was taken back to Spain was the stuff of legend, yet almost at the same time they had defeated the native peoples overseas their kingdom at home was crumbling. Not to bore anyone with too much history, but by the mid 1500s the Spanish had essentially conquered the Aztecs (Mexico) and the Incas (Peru). At the time, the Aztec capital, Tenochtitlan was estimated to be larger than any city in Europe. Despite these tremendous “successes” and the riches that came with them, the battle of Rocroi in Northern France in 1643 less than one hundred years later marked the end of Spanish dominance in Europe. What is so fascinating to me is that while the conquistadors were out raping and pillaging halfway around the world the domestic economy was experiencing economic crisis. There were episodes of major currency debasements in the homeland as the crown was forced to fight wars on their borders as well as fund the excursions abroad. It is important to note that the collapse came pretty quickly as it was only in 1627 when things were still looking pretty good for the empire that The Count-Duke Olivares famously stated: “God is Spanish and fights for our nation these days.” Does this story sound familiar?"
Yesterday we noted how a CBO analyst may have been terminated for her conflicting views on model assumptions, especially when they veered away from the Wall Street-defined norm. Today, we find that the same approach to dissent may have been the reason why MF Global ended up taking inordinate risk, and ultimately blowing up, leaving over a billion in client money transitioning from liquid to gas phase overnight. According to Reuters, "The former chief risk officer at MF Global who raised red flags about the firm's aggressive trading bets told lawmakers that his warnings contributed to the firm's decision to let him go in early 2011. Michael Roseman, who was ousted in January 2011 from the now-bankrupt futures brokerage, said he rang alarm bells about the firm's exposure to European sovereign debt a year before the firm collapsed in late October of 2011." Roseman's statement on whether his skepticism to Corzine's get rich quick scheme was the reason for his termination? ""My views on risk certainly played a factor in that decision," Roseman told a House Financial Services subcommittee, about why he was asked to leave the firm." And so the status quo continues: any time anyone ever dares to disagree with broad misconceptions, whether it is regarding infinitely rising home prices, broad global compression trades, or the ability of European banks to onboard toxic CDOs in perpetuity is always promptly shown the door. The flipside to this complete lack of checks and balances? Why the bailout culture of course, in which finding one company responsible for gross complacency would mean all are guilty. Which is nobody will ever go to prison as it would set the "worst" possible precedent ever: that one is ultimately responsible for their own stupidity. Said otherwise: the best qualification one can hope to add to one's resume: "distinguished yes man with honors."
With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).
Courtesy of Bloomberg, we have our first impression of what advertisers' "efficiency" is for Facebook ads, and whether or not they will decide to use Facebook as an ad medium as opposed to a legacy wholesale advertising channel's like Google AdSense. Frankly, it does not look too hot: as the attached chart shows, the CTR on an ad campaign is a paltry 0.014%, or said otherwise 182,901 page views leading to... 26 clicks. Now of course, the amount paid for this exposure will be modest (although at $2.80 CPC this is astronomical compared to the likes of adsense), however the real question is what advertiser, for whom reader engagement, i.e., click thrus are important, will wish to subject themselves to this abysmal level of "interaction." it is probably no secret that for Google adsense, CTR is at least one order of magnitude higher. This also explains why anyone betting on the advertising model as being the primary driver of revenue growth will likely be disappointed. Naturally, there is the possible offset that the ad campaign was merely not engaging, or not that exciting, or not proper user targeted, but that is what Face Book is doing after all - it is trying to replicate adsense interest matching. So if Facebook is about ten times worse than adsense, just who will use it? We agree with Mark Gimein's conclusion, "Whether you’re a giant advertiser or a tiny one, you know exactly how much value you get from a Google placement. For us, it was just really hard to know what we were getting from our Facebook ads."
One of the salient questions asked of Bernanke by Congress relates to a Kevin Warsh oped in the WSJ, in which he said the following: "Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs." This is arguably the question that dominates Fed policy making under the Operation Twist doctrine, in which the Fed buys up long-dated paper and sells Short dated (under 3 years), the second leg of which however is completely irrelevant, as the Fed has already guaranteed ZIRP until 2014, in essence confirming that Twist was nothing but a stealth QE3 as we have claimed all along, as the Fed's ZIRP4EVA policy effectively offsets any and all short-dated sales. Needless to say Bernanke's response was irrelevant. However, here is the most jarring statistic. As Barclays showed a few days back, under Twist, the Fed has monetized virtually all, and specifically 91% of all gross issuance in the 20-30 year maturity bucket. In other words, Warsh is absolutely spot on, and once again we are left with an artificial market in which it is only the Fed that defines the UST curve shape by molding the long end. What happens when Twist ends? Will the 30 Year collapse? What happens when there is no explicit back stop to the long end? Is this the reason why Bill Gross yesterday said that he fully expects much more check writing by the Fed for the next '12, 24, 36 months." And how can it not: we don't have a market of rational players any more - the entire market is merely one irrational player, whose biggest counterparty incidentally, the ECB, is beyond broke. Finally, what happens to the Fed's balance sheet when interest rates start rising? Holding a portfolio with a duration greater than it has ever been, the DV01 is currently well over $2 billion (i.e. a $2 billion loss on every basis point increase in rates). And rising.
Let's compare three financial criminals. The first is an old-fashioned counterfeiter who doctors up paper and runs a printing press to produce fake currency. The second criminal borrows money based on a fraudulent asset and phantom future income. For example, the criminal might obtain a credit card based on false assets and income, or borrow money against a property that is worth far less than he claims and base his credit on an inflated fantasy income he does not actually receive. The third criminal borrows money from the Federal Reserve at zero interest and extends a loan to a fraudulent borrower because a government agency has guaranteed the loan. Whatever income the lender receives is pure gravy, and whatever losses are incurred when the fraud is uncovered are made good by the taxpayer. Since our banking system is based on money being borrowed into existence (i.e. fractional reserve), then how is creating money unsecured by either assets or income any different from actually counterfeiting bills? The outcome is identical: money created out of thin air.
While we first presented Bill Dudley's financial disclosure two days ago, we did so to present the New York Fed's president, and former Goldman managing director's, implicit need to perpetuate the status quo from even purely personal wealth reasons (AIG and GE waiver issues aside). Yet that a Fed member, especially a Goldman alum, is deeply enmeshed within the fabric of the existing, and failing, monetary system is not all that surprising. What is far more surprising, is that the Fed's FOMC may well have a gold bug within its midst, because we were rather surprised to find that none other than the Dallas Fed's Dick Fisher, who however is no longer a voting Fed president in the 2012 year, is a proud owner of at least $1 million worth of Gold in the form of the GLD ETF....and another up to $250K in physical (not paper) platinum. Which begs the question: is Fisher the only Fed president to have seen the light and to put a substantial portion of his wealth in the only asset class that benefits in real terms, from the perpetuation of the Fed's dollar, and fiat broadly, debasement strategy?
A week ago, we asked (rhetorically), whether "Bernanke Has Become A Gold Bug's Best Friend?" While we knew the answer, today's reponse by the market confirms it. Beginning just before 10 am, or the moment Ben's prepared remarks went off embargo, gold and silver have been on a relentless tear (chart 1), with Gold passing $1760/ounce and now just $150 from its all time nominal highs. And while risk is on elsewhere, stocks priced in gold are down 0.9% since their highs yesterday and at their lows in real terms (chart 2), even as they hit new nominal highs, confirming that fear of the coming monetary tsunami will benefit precious metals. So while the lemmings focus on meaningless nominal gains, their real purchasing power just lost another 1%. Thank you Chairsatan - you are a good man.