While Europe is once again back on the radar, having recently disappeared therefrom following the uneventful Greek CDS auction (which in itself was never an issue - the bigger question is any funding shortfall to fund non variation margined payments, as well as the cash to make whole UK and Swiss law bonds) following Buiter's earlier announcement that Spain is now in greater risk of default than ever, coupled with Geithner and Bernanke discussing how Europe is 'fine' in real time, here are three quick charts which will remind everyone that nothing in Europe has been fixed. In fact, it is now worse than ever. As a reminder, when thinking of Europe, the shorthand rule is: assets. And specifically, the lack thereof. Why is the ECB scrambling to collateralize every imaginable piece of trash that European banks can procure at only some valuation it knows about? Simple - quality, encumbrance and scarcity. When one understands that the heart of Europe's problem is the rapid "vaporization" of all money good assets, everything falls into place: from the ECB's response, to Europe's propensity for infinite rehypothecation, to the rapidly deteriorating financial system. It also explains why America will be increasingly on the hook, either via the Fed indirectly (via FX swaps), or indirectly via the IMF (such as two days ago when US taxpayers for the first time funded the first bailout check to the ECB using Greece as an intermediary).
After a disappointing home sales print in the US (as the shadow overhang remains heavy), some perspective on just how bad it is in Europe is worthwhile. With Spanish yields starting to blow out again, it likely comes as no surprise that, as Goldman notes, the Spanish housing market (and for that matter the periphery in general) is bad and getting worse. However, Ireland remains the worst of the worst and Goldman sees yet another growing divide between the haves and have-nots of Europe as the residential property price performance can essentially be split into four groups: Strong, Recovering, Weak, and Ireland/Spain; with the latter perceived as considerably worse than the 'reported' data would suggest. Is it any wonder that Spain trades wide of Italy again now and as Citi's Buiter noted earlier, Spain is now the fulcrum market (Spanish 10Y spreads +30bps from Friday's tights).
As usual, Oaktree's Howard Marks cuts to the chase in his latest memo. Much as we just discussed the seeming complacency and drop in risk perception that currently exists, Marks scoffs at the 'It's Different This Time'-argument noting "there’s sure to be another cycle, another bubble and another crisis. There’ll be another time when people overpay for exciting investment ideas because their future appears limitless, and then a time of disillusionment and price collapse. There’ll be another period when leverage is embraced to excess, and then, consequently, a period when it gets people killed. And there’ll certainly be another time when people can only imagine the possibility of gain, and then one when – after huge sums have been lost – they can think only of further declines." Touching on the extremes of dysphoria and complacency that summarize the herd of global investors, he nails the reality of the crowd: "common sense isn’t common. The crowd is invariably wrong at the extremes. In the investing world, everything that’s intuitively obvious is questionable and everything that’s important is counter-intuitive."
The concept of government power is a strange and complex cipher. The existence of governments has always been predicated on assumptions of necessity, but few societies have ever truly considered what those necessities might be. What is government actually good for? What do they do that is so important? And, what happens when a government fails in the roles and duties that a culture deems vital? We tend to view government as an inevitability of life, but the fact is, government is NOT a force of nature, it is a creation of man, and it can be dismantled by men just as easily as it can be established. In America, many people see government as an extension of the Republic, or even the source, and an animal that feeds at the behest of the common citizen. An often heard argument against the idea of drastic change or even rebellion within the establishment system is the assertion that the government “is us”. That it is made of Americans, by Americans, and for Americans. That there is no separation between the public, and the base of power. This is, of course, a childish and fantastical delusion drawn from a complete lack of understanding as to how our system really operates today. How many people out there who make this argument really believe at their very core that they have any legitimate influence over the actions of the state? I wager not many… At bottom, to cling to the lie that the government as it stands is a construct of the people is an act of pure denial designed to help the lost masses cope with underlying feelings of utter powerlessness.
As Central Banker 'risk-asset' implied-puts are perceived as having higher and higher strike prices (i.e. allowed to fall to a lesser and lesser extent), this chart from Sean Corrigan, shows that markets are pricing risk with lower and lower concerns. Today's VIX opening near the recent five-year lows further reinforces the market's apparent complacency that there is nothing to fear but fear itself (even as Bernanke keeps his eagle-eye on data). But, just as everyone learned with CDOs and CMOs, risk doesn't just disappear. It is transformed or transferred or spread out and as is clear in the lower pane of the chart - risky-asset 'risk' has seemingly been transferred to safe-asset 'risk' as there is no drop in volatility among the 'safe-haven' assets of the world such as Gold and US Treasuries. It truly is the best of times and the worst of times as global risk takers embrace the anti-risk-reward trade with lower risk perceived as providing higher returns - we can only imagine how asset allocators and Modern Portfolio Theorists are coping with their spreadsheets as correlations regime-shift and risk and reward get flipped. Of course, we have seen this picture before and it doesn't end well as vols flaring nature always re-appears just when you don't expect it - but of course we will all be out before the next risk-flare erupts.
What is more amusing than the pathological liars that are Tim Geithner or Ben Bernanke testifying to congress? Both of them testifying at the same time. Such as now. From C-Span: Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke go before the House Oversight and Government Reform Committee Wednesday to discuss lessons learned from Europe’s sovereign debt crisis. In a hearing titled, “Europe’s Sovereign Debt Crisis: Causes, Consequences for the United States and Lessons Learned,” both financial chiefs will share their personal experiences. Since the crisis, the Federal Reserve has assisted foreign counterparts by provide monetary support. In November, the Fed and it's worldwide counterparts announced a cut in the interest rate premium charged to over seas banks which borrow in dollars. The monetary policy targeted struggling European banks. In a Senate hearing earlier this year, leading economists also testified on the European debt crisis and the outlook for the eurozone. They said that the U.S. should treat the crisis as a wake-up call and urged lawmakers to bring down debt and spending to sustainable levels.
Earlier today, Goldman's Peter Oppenheimer made the news following publication of his report "The Long Good Buy" posted here. In itself, that would be nothing spectacular - just one man's opinion. However, when taken in the entirety of Goldman's views on the world, it bears some criticism, because while on one hand we have a key Goldman strategist telling the world it is all clear in stocks, virtually at the same time Goldman's chief economic strategist, Jan Hatzius, who is German, gave the following interview to Handelsblatt, in which he lays out his "doubts about an early recovery of the U.S. economy. In this interview he explains why positive unemployment figures are deceptive, and why the real estate crisis will have lasting effect." Perhaps his most important observation, when asked if Americans have learned anything from the crisis: "I do not think there has been a big change in behavior. During the crisis, Americans simply responded to the realities. They could no longer borrow as much money. Now again a little more credit is available, and you can borrow some more money again. But I do not think there has been a fundamental change." Alas he is correct, and incidentally the reason why Goldman has such a massive credibility problem is that while on one hand one part of the firm goes ahead and pitches equities, on the other, a respected economist says that the economy is so sluggish that he gives a greater than 50% chance of more QE. Perhaps at this point it is bear reminding what a third Goldman strategist said back in October 2010: "Goldman Sachs Admits The Truth: "The Economy Is Not The Market And QE2 Is Not A Panacea." Then again, with career risk once again paramount for every money manager out there, as the bulk of hedge funds once again underperform the market, perhaps not.
The EURUSD, Treasuries, and European sovereign spreads had been leaking in a risk-off direction from around 530amET this morning but European risk assets (followed quickly by US) accelerated shortly after comments by Citi's Willem Buiter, in a scathing Bloomberg Radio interview that pulled no punches with regard to US and European fiscal and monetary policy, noted Spain is 'at greater risk than ever before' of debt restructuring. The EUR reacted quickly and started to drop - now lower on the day - and sovereign spreads (which had been leaking gently wider) accelerated. "Spain is the key country about which I'm most worried", Buiter added, "and it has moved to the wrong wide of the spectrum". Simultaneously the DAX dropped (after stabilizing at slightly positive levels from a higher open) shifting into the red, US Treasuries went bid with the 10Y yields dropping almost 5bps from its overnight highs, and US equity futures fell 4pts back to unch. European corporate credit is still digesting the technicals of the roll and is less reactive so far though broadly speaking equities are underperforming.
Mark Grant's Wake Up Call: Italy Has $211 Billion In Notional Exposure To Derivatives, And Other TriviaSubmitted by Tyler Durden on 03/21/2012 - 07:28
It was nothing more than a footnote in the Morgan Stanley financials; a $3.4 billion pay-out by Italy to settle a derivatives contract made in 1994. Say goodbye to 50% of the tax hikes imposed by the Monti government because that is what was wiped out by this payment. It is also interesting to note that that Mario Draghi, currently President of the European Central Bank, was the Director-General of the Italian Treasury when this derivative was formulated. Then comes the bomb, only mentioned in a brief article yesterday on Bloomberg, and not noted anywhere in the Press this morning. Marco Rossi Doria, an undersecretary in Monti’s administration, tasked with responding to a parliamentary interrogation on derivatives, admitted that the Italian Treasury had $211 billion in "notional" exposure to derivatives, which is around eleven percent (11%) of Italy’s total GDP. This new exposure, coupled with the work I did a few days ago and noted in my commentary of March 17, now brings Italy’s actual debt to GDP ratio to a whopping 144.3%.
Goldman Actively Engaging In "Debt-For-Equity" Swap With Clients After Publishing "Long Good Buy, The Case For Equities"Submitted by Tyler Durden on 03/21/2012 - 07:08
Roughly at the same time Francesco Garzarelli fired the first warning shot against Treasurys on January 23, 2012, telling 'clients' that "We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00" a trade which has largely worked which means that the Goldman counter-axe is hurting big (although following the trade snap yesterday this may be over for now), the firm's Peter Oppenheimer started drafting a magnum opus, making a 40 page case, chock full of graphs, charts, bullet points, and footnotes, iPad optimized and likely coming to a Kindle near you, desperate to convince clients to sell their bonds to Goldman, and to buy all of Goldman's inventory of stocks from the firm because "After more than a decade of de-rating, equities are implying unrealistically large declines in growth and returns into the future." As a reminder, this is a deja vu repeat of precisely the same trade that Goldman enacted back in 2011... and then back in 2010... and each of those times was accompanied by lots of pretty charts and fancy bullets. Will this time be different, and is the proper call, as usual, to trade alongside Goldman (sell equities, buy bonds), or to do what Goldman tells the muppets to do? You decide.
Going into the US open, most major European bourses are trading in modest positive territory this follows the publication of a Goldman Sachs research note titled “The Long Good Buy” in which the bank outlines its thoughts that equities will embark on an upward trend over the next few years, recommending dropping fixed-income securities. We have also seen the publication of the Bank of England’s minutes from March’s rate-setting meeting in which board members voted unanimously to keep the base rate unchanged at 0.50%; however there was some indecision concerning the total QE, with members Miles and Posen voting for a further increase to GBP 350bln, however the other seven members voted against the increase. Following the release, GBP/USD spiked lower 35 pips but has regained in recent trade and is now in positive territory. Looking elsewhere in the session, UK Chancellor Osborne will present his budget for this financial year at 1230GMT. We will also be looking out for US existing home sales and the weekly DOE inventories.
- So much for that: Obama to fast track southern portion of Keystone XL Pipeline (1600 Report)
- French Police Say They Have Cornered Suspect in School Shooting (NYT); French shooting suspect had been arrested in Afghanistan (Reuters); Suspect in French shootings says he’ll surrender to end standoff (Globe & Mail), Toulouse suspect escaped from Kandahar jail in mass Taliban jailbreak in 2008 (BBC)
- Bernanke Says Europe Must Aid Banks Even as Strains Ease (Bloomberg)
- Monti faces clash with unions over reform (FT)
- UK budget to balance tax breaks with austerity (Reuters)
- Romney scores big win over Santorum in Illinois (Reuters)
- U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions (Bloomberg)
- Bernanke Says Fed Failed to Meet Goals During Great Depression (Bloomberg)
- Revised tax deal reached on Swiss accounts (FT)
There are those who, not illogically, thought that the second interest rates start creeping up, that there would be a rush of mortgage activity to lock in rates as low as possible before 30 year mortgages roll ever higher. Of course, for that plan to work, one Benjamin Shalom Bernanke would need to have broad credibility among the general population, as he would need to be perceived as one who would not rush to purchase bonds in the future, should rates jump far too high, in the process impairing banks and PDs which still hold massive amounts of paper. If, however, that plan were to not work, then the latest recent attempt to force a rotation out of stocks and into bonds would have abysmal consequences on housing, as the entire mortgage issuance machinery would grind to a halt. Alas, it appears the latter has happened. Minutes ago we got the latest MBA Mortgage Application data and it was ugly. The broad Mortgage Application index collapsed by 7.4% in the week ending March 16, when rates experienced the bulk of the move downward, which was the 6th consecutive week of declines, following last week's 2.4% drop. And while refis have been down for 5 weeks in a row, with the index slamming 9.3% lower as higher rates have now obviously killed any interest in mortgages, so have purchase applications. MBA Purchasing index was down 4.4%, breaking a trend of 3 weeks of gains. Some other hard statistics: the Average 30 year fixed rate soared to 4.19% from 4.06% last week, while the refi % of number of loans dropped to 73.4% - the lowest since July 2011.
Bernanke's splendiferous defense of all things holy and Central-Bank-like this afternoon has a little for everyone - if you spent the time to listen/read his entire lecture. For those who did not, perhaps the following word-cloud sums up his perspective - and its odd subliminal messaging. The words Gold and Standard appear more times than Central and Bank; the words Policy and Economy are almost equal in number and very close together in this 'randomized' word-cloud; Collateral and Essential appear infrequently but oddly proximate when the random hand of Worldle is applied; the Dollar got its rightful tiny mention; and the Inflation-Deflation debate will rage on - as Inflation slightly outnumbered Deflation but the randomizer did its job and strangely placed Inflation next to Bad and Deflation next to Great. There was no mention of Oz, Unicorns, Beard-Trimmer, Ron Paul, or Those-Bloody-Bears-On-YouTube.