While everyone is focusing on what empty words and promises will come out of Europe this week which continues to valiantly, yet with utter futility, fight simple math, our friends at Religare Research remind us that there is a whole another theater of operations (pardon the phrase) that many are so far forgetting about located in the middle east which is far closer to what at the end of the day really matters: oil. As Emad Mostaque notes: 'While North Africa is busily transitioning to a set of neo-Islamist, GCC-sponsored Sunni democracies (we are positive on this trend), Shia groups in the Middle East have started to stir. In this monthly we focus on some of the key elements of the Shia tradition that may have a significant impact on global markets in the near future." Below are the key takeaways.
Let the banks implode in bankruptcy, clear the worthless "assets" of debt from the books, and let the market price currencies and everything else. The only other choice is debt-serfdom. All the other schemes and proposals are simply variations of one single fantasy: that the feckless leadership can fool the repricing genie with parlor tricks. They can't. Everybody with any understanding of the situation knows that the debt bubble has already burst, an risk and debt cannot be repriced back to fantasy levels. That repricing has already occurred, and cannot be revoked or shoved back in the bottle. The Great European Debt Bubble has already burst, and so now it boils down to a simple choice: debt serfom or open rebellion against the banks that profited so handsomely from the euro-fantasy. There is no middle ground, as the debt cannot be repaid, not now and not in the future. It cannot be reshuffled, masked, or hidden; it can only be renounced. It's your choice, Europe; choose wisely. If you want a model for sanity and growth, look to Iceland. They renounced their unpayable debts and debt-serfdom, and let the market reprice their currency, debt and risk. The nightmare is past for them; they chose wisely. Now it's your turn to choose. The debt-serfdom will fall to you, not the banks or your Elites.
Iran and the United States broke diplomatic ties following the 1979 Islamic revolution and the storming of the U.S. embassy in Tehran 32 years ago. Here are details of ups and downs in their relations since the 1950's.
Lately, the Egan-Jones credit ratings agency has experienced a lot of bad publicity from the co-opted and conflicted media, especially those in which GE has a minority stake, for no other reason than being the only organization that is in some way a part of the status quo yet dares to constantly lash out at the lies behind the scenes and expose the fraud and corruption that permeates the modern Ponzi system. Frankly, we have had it with this propaganda. Confirming that when it comes to honesty and integrity, EJ may or may not be at the front of the pack, but they sure tried to warn other about the impending systemic collapse. Presented below is an interview conducted by Kate Welling with Sean Egan back on June 30, 2006, or the absolute peak of the credit bubble frenzy, in which everything Egan said: down to the most dire prediction, has occurred. Somehow we are confident people slighted, mocked and ridiculed him then as well. He was right then. He will be right again.
Perhaps it is time to point out the "trade of the day", which for some reason has seen no action yet since the Iran news has broken. Presenting the InTrade "USA and/or Israel to execute an overt Air Strike against Iran before midnight ET 30 Jun 2012" contract, which at last trade yesterday (no trades today yet), was seen trading at $24.3, or at about 24.3% implied probability. Following today's news, we would venture to guess that the upside/downside here is attractive to quite attractive.
That Commerzbank, effectively Germany most insolvent lender (after the bank that shall not be named because if it falls, so goes Europe) and the first international bank scrambling to demand Discount Window cash from the Fed not in 2008 but all the way back in 2007, is broke is no secret. The only question was when will the bank which is a pseudo-TBTF, be nationalized. According to Der Spiegel the time is rapidly approaching. Specifically, "Germany's government is preparing plans for a potential nationalization of Commerzbank AG, in case the Frankfurt-based lender isn't able to raise additionally needed capital, German magazine Der Spiegel reports Sunday, citing government sources. Germany will reactivate its bank bailout fund, SoFFin, to acquire additional shares in Commerzbank if the bank hasn't raised necessary capital by next summer, according to the report. Germany already took around a 25% stake in Commerzbank to keep it afloat during the financial crisis following its acquisition of Dresdner Bank. According to the report, it is assumed that the majority of new shares would fall to the government in the event of a capital increase for Commerzbank. Germany has ruled out taking over Commerzbank's Eurohypo public finance unit, which it is required to sell to fulfill a European Union restructuring mandate tied to its use of state aid, according to the report." And so the world's most undercapitalized banks as so often demonstrated by Zero Hedge continue dropping like domino. Below we recreate the most recent list of Tier 1 casualties (seen most recently when exposing Credit Agricole as one of Europe's most dire casualties of a USD funding shortage), or banks that have the lowest capitalization, and thus highest leverage ratios in the world. If we were betting people, we would say that Deutsche Bank (and Postbank), Credit Suisses and BNP may well be next...
Here we go:
IRAN MILITARY DOWNS U.S. DRONE IN EASTERN PROVINCE -TV
IRAN SAYS ITS RESPONSE TO U.S. DRONE VIOLATION OF ITS AIRSPACE WILL BE CARRIED OUT OUTSIDE IRAN'S BORDERS- FARS AGENCY
In the following video Chris Martenson - economic analyst at chrismartenson.com and regular guest contributor to Zero Hedge, and James Turk, Director of the GoldMoney Foundation talk about the problems facing the eurozone as well as the global economy. Chris Martenson points out that the whole world simply has too much debt. This is why he believes that there won’t be a real solution to the euro crisis. The big question will rather be who will take losses on the debt, which can’t possibly be repaid. The lack of political leadership and unwillingness to accept reality is contributing to this crisis. Additionally, the monetary tools central banks have traditionally used to revive economies are starting to show less and less effect. In Martenson’s view, the financial sector has become way too large and interlinked across borders, so that a default by one country could bring down the whole financial systems, because credit default swaps would get triggered and could bring down the writers of those derivatives.
In the latest note from the masters of the arcane at ConvergEx, Nick Colas' team looks at the historically very strong correlation between home prices (which recently hit an 8 year low: here and here) and unemployment, a foundation stone in every single QE episode as to the Chairman the only controlled variable to set the unemployment rate are average home prices, and flips it. In other words, in their Friday analysis ConvergEx try to extrapolate just by how much home prices need to rise to hit the Fed's projected unemployment rates of 8.7% in 2012 (absent the now generic labor participation rate fudge of course), 8.2% in 2013 and 7.7% in 2014. The answer is disturbing: "In order for unemployment to reach 8.7% in the Composite-10 next year (2012), home prices will have to rise by an average of 3.5%. To reach 8.2% in 2013, they will have to climb 9.4% from their current prices. For a 7.7% unemployment rate in 2014, the necessary rate of increase is 15.4%." It is disturbing because while Case Shiller predicts a 2.7% rise in 2012, we have now seen the 5th consecutive drop in home prices, and the largest sequential decline since March 2011. In other words, not only are home prices not rising, or even stabilizing, they are suddenly deteriorating at an alarming pace yet again. ConvergEx continues: "we have no doubt that the Fed knows these numbers... If it costs a QE III to get the 3.5% bump in real estate prices, or even a QE IV, then markets should not doubt that the current Federal Reserve will seriously consider it." At the end of the day, the only thing the Fed thinks it can control are asset prices for that most critical of assets: housing. And if rising home prices means diluting a few hundred billion more dollars, so be it. After all, we are now less than 12 months from the presidential election, and all bets are off. As SocGen predicted, expect to see massive monetary easing resume as soon as January when Obama realizes he needs something to go right or else he can kiss that second term good bye. Ironically, the lower the president's interim rating, the higher the price of gold will ultimately rise when all is said and done. Who would have thought that the worst president since Carter would be a gold bug's biggest friend.
Even as Joe Sixpack was maxing out that last credit card on useless gadgets (but not flat screen TVs as Corning was so nice to warn), he was making sure to have enough in store for that one final Plan Z purchase. Guns. As KNDU reports, "Gun dealers flooded the FBI with background check requests from shoppers, smashing the single day record with a 32% increase from last year." USA Today has more: "Deputy Assistant FBI Director Jerry Pender said the checks, required by federal law, surged to 129,166 during the day, far surpassing the previous high of 97,848 on Black Friday of 2008." And in reality, the number is likely far greater: "The actual number of firearms sold last Friday is likely higher because multiple firearms can be included in a transaction by a single buyer. And the FBI does not track actual gun sales." And while Saudi Arabia is warning that women driving leads to the end of the world, in America women are now the marginal guy buyer: "Some gun industry analysts attributed the unusual surge to a convergence of factors, including an increasing number of first-time buyers seeking firearms for protection and women who are being drawn to sport shooting and hunting. Larry Keane, a spokesman for the National Shooting Sports Foundation, said 25% of the purchases typically involve first-time buyers, many of them women. "I think there also is a burgeoning awakening of the American public that they do have a constitutional right to own guns," Keane said. Yet Keane said last Friday's number appeared to defy complete explanation. "It's really pretty amazing," he said." Indeed it is, and unlike Europe, where with the exception of Switzerland the best the local rioters can do is some imported (from the US) tear gas, when the Arab Spring finally makes landfall, it will be time to use up those one way international frequent flier miles (assuming of course that American and soon others don't cancel them).
During his recent lengthy discussion on the broad topic of global central bankers, optical backstops, and our coordinated cognitive dissonance, Kyle Bass, of Hayman Advisors, suggested everyone read "The Black Swan Of Cairo" penned by no less a tail-risk philosopher than Nassim Taleb (and Mark Blyth). The Foreign Affairs article from June 2011 brings into clear prose the fascinating dichotomy between the centrally planned smoothing efforts of world bankers and politicians and the inevitable (and much larger) instabilities that spring from this suppression.
It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability “tail risks” to disappear from policymakers’ fields of observation.
With freedom comes some unpredictable fluctuation. This is one of life's packages: there is no freedom without noise - and no stability without volatility.
After hours last night, when all but the most dedicated of market savants (or late stumblers home from a night out checking the Bloomberg one more time) are sleeping, China released its Non-manufacturing PMI data and it was a howler. The series is very cyclical but we note that the November print fell dramatically to its lowest level since the middle of 2008's global economic meltdown. Dropping below the 50 (deteriorating) line for the first time since Feb2011 and combined with the dismal manufacturing PMI print from earlier in the week, we are reminded of David Rosenberg's critical insight 'Don't confuse resilience with lags' when we hear further chatter about the US apparent miracle decoupling. It seems that this 'lag' is already impacting US firms, as we noted earlier, and with EM nations increasingly starved of credit via European bank deleveraging, it seems a game-of-chicken between the Fed and the PBOC may begin on who prints/QEs first to save the world from reality once again.
Even with the growth in rest of the world slowly grinding to a halt and in many places contracting (more on the in an upcoming post), the US continues to be spared from what increasingly appears as a perfect worldwide economic storm due to one thing and one thing only: resilient US corporate revenues and earnings. So now that Q3 is officially in the books, and we are starting to look for Year End numbers, we decided to do the quarterly Capital IQ analysis looking at S&P 500 companies (ex financials), which amounts to the 420 companies supposed to keep America "decoupled" from the rest of the world, and look at trends in revenue and gross profit. We found something troubling: while topline numbers continue to grow, and rose 2.6% in Q3 over Q2 (a substantial slow down from the 4.3% rise in Q2 compared to Q1), profits as represented by gross margins, fared far less well as total Gross Profit margins declined by 1.9% from 42.6% in Q2, almost on par with the recent historic record high of 42.8% from December 2009, to a two year low of 41.8%: a number seen last in Q1 2011 when commodity input costs soared and crushed both margins and bottom lines. Aside from the 1.9% drop in March 2010, the next worst drop in margins was back in March 2009. This time however there was no surge in commodity prices: in fact in the three months between June and August, input costs on the margin were declining substantially, or so the US government would like us to believe. And while corporate EPS did not broadly surprise to the downside, this was a function of top line pull through still going strong. So how much longer until the revenue potential of these 420 workhorse companies plateaus and start dropping? What happens to record corporate EPS if margin pressures are coupled with top line weakness? We already have one of the components: how long until the stresses in Europe and now China materialize into top line misses? We will find out in just over a month when companies begin reporting their full year numbers. Or worse, look for disappointing revenue preannouncements: while so far avoided, this time around it will be far more difficult to kick the revenue can into the future with Europe now officially entering a recession.
No circuit breaker was triggered as yet another unborn political career was dumped on the trash heap of history. And this even without a Muddy Water Strong Sell report, or Whitney Tilson going activist Cain nomination odds.