Frontrunning: August 6

  • So that's what Obama meant by "costs" - Italy Recession, German Orders Signal Euro-Area Struggle (BBG)
  • Russia worries, weak German data weigh on Europe (Reuters)
  • Hedge Funds Betting Against Banco Espírito Santo in Line for Big Gains (WSJ)
  • Bankers Called Up for Ukraine War as Rolls-Royce for Sale (BBG)
  • Double Punch for 'Inversion' Deals (WSJ)
  • Statist Strongmen Putin-Xi See History’s Capitalism Clash (BBG)
  • China bans beards, veils from Xinjiang city's buses (Reuters)
  • BATS to Settle High-Speed Trading Case (WSJ)
  • Second Ebola patient wheeled into Atlanta hospital for treatment (Reuters)

Futures Tumble On Abysmal European Data, Euro Stocks Turn Red For 2014; German 2Y Bunds Negative

With everyone focused on China as the source of next systemic risk, most forgot or simply chose to ignore Europe, which through Draghi's verbal  magic was said to be "fixed." Or at least everyone hoped that the rigged European bond market would preserve the "recovery" illusion a little longer giving the world some more time to reform pretend it is doing something to fix it. Turns out that was a mistake, confirmed earlier not only by the plunge in German Factory Orders which cratered -4.3%, down from 7.7% and below the 1.1% revised, and UK Industrial production which missed expectations of a 0.6% boost, rising only 0.3%, but most importantly Italy's Q2 GDP shocker, which as we reported earlier, dropped for the second consecutive quarter sending the country officially into recession. As a result, European stock markets, Stoxx600, has joined the DJIA in the red for the year while Germany's 2 Year Bund just went negative on aggressive risk aversion, the first time since 2012.

The European "Recovery" Is Over: Italy "Unexpectedly" Enters Triple-Dip Recession

Goodbye European recovery, we hardly knew you. It must have come as a huge shock to all hypnotized lemmings aka "sophisticated investors" who have been following the manipulated, artificial yields in the Italian 10Y relentlessly declining and thus suggesting at least some economic stability, when an hour ago instead of reporting a 0.1% increase for its Q2 GDP as widely expected, Italy "unexpectedly" reported a sequential contraction of -0.2% down from a -0.1% drop in Q1, and officially the start of yet another, its third since Lehman, recession. Then again, considering Italy's youth unemployment of over 40% just hit a record high, we use the term "unexpectedly" rather loosely.

U.S. Government Caught Using Humanitarian HIV Program As Front To Foster Cuban Dissent

Regular readers will recall that earlier this year we highlighted how the U.S. government covertly created a “Cuban Twitter” called ZunZuneo in a failed attempt to overthrow the island nation’s regime. The elaborate plot was implemented under the umbrella of the U.S. Agency for International Development (USAID), which is responsible for overseeing billions of dollars in U.S. humanitarian aid. Well we now know that USAID went a lot further than that. Another scheme to unseat the Cuban government has now been revealed. This time with even more immoral foundations, and which could disrupt genuine humanitarian relief efforts the world over. Incredibly, the U.S. government used an HIV program as a front to foster dissent amongst Cuba’s youth. The HIV-prevention workshop was even referred to as the “perfect excuse to recruit political activists.” Despicable.

Indian Temple Deposits Record 1,800 Kilos In Gold "Offerings"

The Indian people are known for their generosity (and love of gold) which makes the following news even more intriguing. For the first time in two years, The Economic Times reports, a record-breaking 1,800 kg of gold offerings - made by devotees of deity Lord Venkateswara at the famous hill shrine at Tirumala - was deposited this week with the State Bank of India. This donation takes the total deposits made by the well-known temple (Tirumala Tirupati Devasthanams (TTD)) to more than 5,000 kg. What is even more fascinating, under the SBI Gold Scheme, IB Times reports, TTD will earn one percent of gold as interest.

Why Student Loans Are Crushing The Housing Recovery In 1 Chart

As The WSJ reports, loan-application data show clear signs of growing student-debt burdens. A key metric that mortgage underwriters use to evaluate a borrowers' ability to repay a loan is their total debt-to-income ratio. It’s this metric that can make student loans a big negative in the loan approval process since new rules that took effect this year place greater legal liability on lenders to properly verify 'affordability' (or debt-to-income ratio). As the following chart shows, "between the approved universe and the denied universe, a few hundred dollars in student loan debt can push the debt-to-income above the approved threshold." Simply put, homeownership rates will face pressure until student borrowing slows or until mortgage investors and lenders come up with either more flexible underwriting tools or new loan products (and that never ends well).

The Rise Of The Petroyuan And The Slow Erosion Of Dollar Hegemony

For seventy years, one of the critical foundations of American power has been the dollar’s standing as the world’s most important currency. For the last forty years, a pillar of dollar primacy has been the greenback’s dominant role in international energy markets. Today, China is leveraging its rise as an economic power - and as the most important incremental market for hydrocarbon exporters in the Persian Gulf and the former Soviet Union - to circumscribe dollar dominance in global energy, with potentially profound ramifications for America’s strategic position.

The Other Border Dispute Russia Is Involved In (That No One Is Talking About Yet)

With all eyes focused on Ukraine's border with Russia, it is hardly surprising that the 'other' dispute has fallen off the front pages. However, as Stratfor notes, there has been a burst of diplomatic activity in recent months over the territory of Nagorno-Karabakh, which Armenia and Azerbaijan have disputed for decades. Russia, the strongest power in the Caucasus, has become more engaged in the issue as Azerbaijan's leverage in the region grows. Russia's involvement could herald a change in this longstanding conflict.

Xi Jinping's Destruction Of China's Most Feared & Corrupt (In Under 7 Seconds)

As Sun Tzu once said (or was it Bud Fox?), "The supreme art of war is to subdue the enemy without fighting," and so it is that we suspect President Xi Jinping's marauding destruction of Zhou Yongkang, among the most powerful and feared officials in China, and his army of corrupt politicians, businessmen, family, and military personnel has won Xi's war before the real fight begins. What fight are we talking about? Why have we been so focused on Zhou and Xi recently? One glance at last night's non-manufacturing PMI for China, or the jobs component of manufacturing PMI, or any of the hard data... in the face of a record-breaking credit impulse (and subsequent hangover) leaves Xi wide open for rebellion and revolt among the ruling powers of China should his non-reform create social unrest. By removing Zhou - the most powerful of contenders - Xi has won without fighting, no matter how hard the economic landing becomes.

Here Comes Snowden 2.0... And How The Government Determines If You Are A "Terrorist Threat"

Moments ago CNN blasted a headline stating that the US believes there is a new, post-Snowden leaker exposing national security. Why? The reason is the following article that was released a few hours ago by the Intercept, and which is an expose on yet another classified system called Terrorist Identities Datamart Environment (TIDE), in which we read: "The documents, obtained from a source in the intelligence community, also reveal that the Obama Administration has presided over an unprecedented expansion of the terrorist screening system. Since taking office, Obama has boosted the number of people on the no fly list more than ten-fold, to an all-time high of 47,000—surpassing the number of people barred from flying under George W. Bush." And there is Snowden 2.0.

Must Read: Fear And Loathing On The Marketing Trail

Today, everyone believes that market price levels are largely driven by monetary policy and that we are all being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that market price levels are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.... There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass... It’s the public markets where faith has been lost, and that’s why the Golden Age of the Central Banker poses existential risks for firms and business strategies based on trading activity within those public markets.

Troops Deployed In West Africa Ebola Clinics As 2 More Nigeria Cases Revealed; Saudi Blocks Travelers

Hundreds of troops are being deployed across West Africa in an effort to maintain peace and quarantine. As Liberian health officials warned, "The situation will probably get worse before it gets better." Following Monday's announcement that it will not issue pilgrimage visas to pilgrims from Sierra Leone, Guinea and Liberia due to concerns regarding the spread of the Ebola virus, Saudi Arabian officials have admitted they are testing samples from a man who had returned recently from a business trip to Sierra Leone for suspected Ebola infection. But it gets worse. As The Nigerian Tribune reports, Nigerian officials  has revealed that two people have Ebola-like symptoms after contact with the dead Liberian Ebola victim, Patrick Sawyer. The CDC Director is "deeply concerned" about spread of Ebola in Lagos (4th most populous city in the world).

Goldman's "Early Warning Signals"

Fed officials have repeatedly emphasized the importance of financial stability for monetary policy. But, as Goldman Sachs points out, knowing which financial and macroeconomic imbalances to monitor is challenging, not least because of the limited number of past crisis episodes in the US. To help The Fed, Goldman surveys a large economic literature that studies the effectiveness of "Early Warning Systems" (EWS) in detecting banking crises, costly asset price busts, and currency crises across a broad range of countries. While they suggest subtlely that the Fed is clueless with regard what to look for, they note that credit markets and asset-price run-ups (especially when they occur together) provide a statistically clear warning signal... and as we know, both are flashing red currently.

Forget CYNK, Here's The Newest Scam From The Pump-And-Dumpers

Roughly a month ago, we exposed CYNK Technology Corp. The CYNK bubble was, of course, the result of carefully planned deceit and clever promotion by a handful of people who stood to make a lot of money on the trade. But when you think about it, CYNK’s stock wasn’t really any dumber than owning US Treasuries. In the case of CYNK, it only took about a month for the bubble to inflate and burst. The Treasury bubble, on the other hand, was built on credibility earned over decades; but while previous generations earned the world’s trust, modern day politicians have blown through it. Now all they have left is their snake oil sales pitch. And a mountain of obligations that closed July 2014 at a record high $17.69 trillion.

Fed Finally Finds The 230 Trillion Number: Blasts Banks' "Living Wills", Says Taxpayers Still On The Hook

Having torched Janet Yellen over the weakness of the so-called "living wills" of the Too-Big-To-Fail banks, it appears Elizabeth Warren's tirade struck home. As WSJ reports, in a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation's biggest banks haven't demonstrated they can collapse without causing broad, damaging economic repercussions and ordered them to show "significant" progress by July 2015. Of course, the whole 'living will' concept is a self-referential joke, but we leave it to Thomas Hoenig to sum it up: "the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support." In other words, taxpayers are still on the hook.

Terrible Tuesday - Dow Unchanged Since Christmas Eve

Today was the Dow's worst Tuesday in 3 months as yesterday's exuberant gains in stocks evaporated on heavy volume. While Polish officials may have been the catalyst, technical levels and AUDJPY weakness were the essential ingredients for today's equity weakness. It appears the pre-payrolls level was key for stocks. Treasury yields plunged back to unch on the week after the Polish Foreign Minister said the "i" world (invasion). The USD sold off but remains +0.25% on the week as gold and silver popped modestly on the headlines. VIX jumped back over 17 (but closed with a 16 handle). Credit markets leaked wider with equity weakness. So good news (macro) was bad news early and then bad news (geopolitics) was bad news later - Fed needs to print some more world peace. The Dow has not gained anything since Christmas Eve.