Clearly all "bad" ideas are good again. Enron perfected the Special Purpose Vehicle (SPV) and was a master of off balance sheet guarantees. Guarantees with their own equity as collateral in many cases. SIV's are SPV's with leverage. The kind of "asset" that got Citi in huge trouble and almost took down the bank. SIV's had a special place in CDO hell, but I guess you can't keep a good idea down. Detachable insurance. So the EFSF would sell insurance that would come with a new issue bond but could be detached and sold separately? If that doesn't sound a lot like the evil enemy "CDS" than I don't know what does. The biggest detractors of CDS always seem to say it is like buying fire insurance on your neighbor's house. U never agreed with that analogy but this is definitely like buying fire insurance on a house that doesn't cover you in event of fire. The details will be interesting but they had better do as much with cash up front as possible because and ability to require cash in times of stress creates the contagion death spiral they are allegedly trying to prevent. Clearly everyone "gets it" now. What "it" is and how much damage "getting it" will cause remains to be seen.
Commodity prices have certainly been volatile in the last few days with near-record-breaking upside shifts in some. Copper's extravaganza in the last two days was discussed earlier but it is the huge shift in the whole WTI crude complex that is perhaps more fascinating. For the first time since May 2011, Dec 11 WTI is more expensive than Dec 12 and in the last three trading days alone, the entire curve has shifted to backwardation very aggressively. This inflation-prone signal, and much chatter among Fed talking heads on 'helping' the Europeans, could perhaps help explain the strange 'strength' in the EUR as it and the USD circle the drain of fiat currencies. Gold has obviously yet to get going, but today has broken $1660 (up over $50 in the last few days).
Trichet Interrupts Speech Calling For Formation Of European Finance Ministry, Booed Off By German StudentsSubmitted by Tyler Durden on 10/24/2011 - 12:53
Earlier today we transcribed the speech by outgoing ECB president Trichet in which he called for the formation of a European Ministry of Finance coupled with what is essentially a requirement for the abdication of national sovereignty of those less than worthy countries, together with some less than flattering commentary. It appears a few people at least were not too happy with the call for the formation of the United Empire of Europe, at Humboldt University where the speech was delivered. Bloomberg reports that the "ECB president interrupted during speech in Berlin. Banners held up by students in audience reading “no more money for banks,” and “say no to debt tyranny.” We hope to bring readers a video as soon as one is available.
Head Of China Sovereign Wealth Fund Voices Displeasure With China's Debt Slaves, Calls Europeans "Lazy" And "Entitled"Submitted by Tyler Durden on 10/24/2011 - 12:29
Two weeks ago, Marc Faber provoked the fury of a broad segment of the population by daring to tell America that it is lazy, needs to work more, and is overly-reliant on a welfare government which is an eager parasite of the welfare system cocoon in which it has wrapped the majority of the population knowing full well it can get away with anything due to threats it can pull the (otherwise insolvent) social safety net at any given moment if the status quo is threatened. Needless to say, European readers were delighted and amused by Faber's statements. We wonder, then, what the US (and correspondingly, European) response will be to the news that last week it was the turn of Jin Liqun, chairman of the China Investment Corporation (CIC), the sovereign wealth fund all too often (by the overeager European media) tasked with bailing out, to channel Faber: "Europe is not really short of money. Europe needs to give a clear picture to the Europeans themselves and to the rest of the world that their problems could be worked out. The root cause of the trouble is the over-burdened welfare system, built up since the Second World War in Europe - the sloth-inducing, indolence-inducing labour laws. People need to work a bit harder, they need to work a bit longer, and they should be more innovative. We (the Chinese) work like crazy." Translation: China is finally announcing that it is unhappy with the work output of its debt slaves. And since China, courtesy of its trade surplus or something, will sooner or later also have to apply the same bailout hypermathematics which indicate that despite having to bail out its own banking system it can bail out the world, expect comparable announcements about its latest shipment of debt slaves situated conveniently between the Atlantic and Pacific oceans.
Remember: when in doubt, baffle with bullshit. From Dow Jones:
- EU Paper Confirms Looking At 2 EFSF Options, May Combine Them -Senior EU Source
- EU Paper Says EFSF Option To Set Up Special Purpose Investment Vehicle -Senior EU Source
- EU Paper Says EFSF Bond Insurance and Special Vehicle Options Could Be Combined - Senior EU Source
- EU Paper Says Neither EFSF Leverage Option Requires Change To EFSF Rules -Senior EU Source
- EU Paper Says EFSF SPIV Would Combine Public, Private Capital - Senior EU Source
- EU Paper Says EFSF Could Set Up One Central Euro Zone SPIV - Senior EU Source
- EU Paper Says EFSF SPIVs Could Be Set Up In Several Euro Zone Countries - Senior EU Source
- EU Paper Says EFSF SPIVs Would Be Used For Bond Purchases, Bank Recapitalization - Senior EU Source
- EU Paper Says EFSF Bond Insurance To Be Tradable Independently Of Bonds - Senior EU Source
It also has a Phillips-head screwdriver, opens cans, serves as a flashlight, dispenses crazy pills can be used as a garrote. And if you act now, you can get get a second one free for the low, low price of €1 trillion, leveraged infinitely courtesy of the world's most complex structured credit product ever conceived.
Who are we to argue with the impressive numbers that CAT delivered today - nothing jumps out as obviously dragging forward demand (though we suspect CATFI is very busy with vendor-financing and we know how well that worked out for GMAC) or forced purchases via fuel/emissions standards. Perhaps copper demand today is forced buy-ins on letters-of-credit for heavy equipment sales in China? But for some context, every talking head is noting the earnings beat and outlook changes and we thought it may be useful to consider the 'adjustments' that earnings expectations have seen over the past few months. It turns out that Q3 2011 earnings expectations (chart below) have dropped over 10% in the last three months to their lowest level since Jan11 - and Q4 expectations remain at Jan2011 lows and are also down almost 6.5% in the last three months.
The outgoing ECB president has just released an extremely long-winded speech titled "Tomorrow and the day after tomorrow: a vision for Europe" in which he once again makes the simple case that without someone paying for the European experiment (ahem Germany), and without a Finance Ministry being created (read fiscal union), there is not much future to the creature known as the EMU (and parodied earlier). To wit: "This European finance ministry would, first, oversee the surveillance of both fiscal policies and competitiveness policies, and when necessary, have responsibility for imposing the “second stage” I just described. Second, the ministry would perform the typical responsibilities of the executive branches regarding the supervision and regulation of the EU financial sector. And third, the ministry would represent the euro area in international financial institutions. Since my Karlspreis address, it seems to me that the case for such an approach has strengthened." He reiterates his call for the United Empire of Europe: "Increasingly, it seems that it is not too bold to consider a European finance ministry, but rather too bold not to consider creating such an institution." Naturally he concludes: "Exactly how these new institutions would eventually evolve one cannot say." So don't worry about the details (typical Europe) just promptly sign off your independence to those who know better than you what to do (and can afford to pay for what is best for you). Wonderful. Now have fun selling the proposal of abdicating sovereignty to those European countries which are not Germany, with a particular focus on France and Italy.
Stocks are not the only thing to surge since the October 3 lows. As the chart below shows, yields (and spreads to Bunds) of all Eurozone bonds, both in the core and the periphery, have followed the equity Risk On sentiment diligently (if inversely), and are now at the widest they have been in the past 3 weeks. In other words, contrary to expectations of a mitigation in sovereign risk exhibited by a drop in spreads or yields, or both, following the CDS ban, we have seen precisely the opposite as sovereign risk has soared. But at least it has been accompanied by what continues to be an epic short squeeze, and has thus been masked by the overall market noise. In fact, one can make the argument that in many ways we are seeing the same response that we saw back in the US in advance of various monetization episodes, as it is becoming increasingly clear that it is the sovereigns themselves that are the risky assets, while corporates across the board must be saved at all costs by the ECB, the Fed or both. To purists wondering how it is possible to have a risk transfer of this magnitude in a continent in which the central bank does not have the same market levitation capabilities as the Fed (the ECB essentially needs a Bundestag approval for all its decisions going forward) we wish we had some insight.
I am not sure how high stocks can go on the basis of more debt being piled on more debt by the same people who have too much debt. Maybe this round of "all-in" fiscal and monetary irresponsibility will take us to new highs. In any case I don't think we will have fond memories of the "Miracle in Cannes" since no proposals so far do anything to fix the cause of the problem. In fact as those people in society without stocks and without assets realize the government is doing everything it can to push those prices ever further out of their reach, and doing nothing to punish those who were wrong, the disillusionment may give rise to stronger emotions. The "occupy" movement may not know what it wants, it may even disappear after the first snow fall, but more people do have to question a financial system that claims to be managed properly, but is never tested. I heard one great line with the market cap of Hermes passed that of SocGen earlier this year. And that was the fact that SocGen might have a smaller market cap than Hermes, but their employees don't need a discount to shop there.
Uh, what is going on? Are French banks selling everything USD-denominated, promptly dumping the USD proceeds, and converting everything into Euros? Someone clearly knows something and is not happy with France, and hence EFSF spreads, as both the OAT-Bund and EFSF spreads have just surged to new records... but it sure isn't the ES which, oblivious as always, just trades with 1.000 correlation to the EURUSD which continues to telegraph precisely the opposite of what most believe. Oh well.
Around here we like to track things from the outside in, as the initial movements at the periphery tend to give us an early warning of when things might go wrong at the center. It is always the marginal country, weakest stock in a sector, or fringe population that gives us the early warning that trouble is afoot. For example, rising food stamp utilization and poverty levels in the US indicate that economic hardship is progressing from the lower socioeconomic levels up towards the center -- that is, from the outside in. That exact pattern is now playing out in Europe, although arguably the earliest trouble was detected with the severe weakness seen in the eastern European countries nearly two years ago. Because of this tendency for trouble to begin at the periphery before spreading to the center, here at ChrisMartenson.com headquarters we spend a disproportionate amount of our time watching junk bonds instead of Treasurys, looking at weak sectors instead of strong ones, and generally spending our time at the edges trying to scout out where there are early signs of trouble that can give us a sense of what's coming next. In this report, we explore the idea that Europe is the canary in the coal mine that tells us it is time to begin preparing for how the world might change if the contagion spreads all the way to US Treasurys (which is mathematically inevitable, in our view).
Presented with little comment - aside from a snark nod to Trichet's much-heralded price-stability platform - Copper (at current levels) looks set to make its largest two-day rally since MAR09 with a shift well over three standard deviations from long-run means. Its hard to comprehend a higher USD and still falling SHCOMP along with the perspective that China is a little hot and may need more tightening with this ramp-fest, but then again applying sense to these markets is now nonsense anyway.
Earlier today, the FHFA announced yet another expansion to its attempt to make near-record low mortgage payments a pervasive concept (via the Home Affordable Refinance Program or HARP), and pad retailers' bottom lines courtesy of subsidy bailouts of the GSE capital shortfall payments. The core of the announced transitions to HARP revolve around allowing borrowers to refinance mortgages regardless of how underwater homes are. Of note is the "enhancement" which removes "the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac." In other words, one can have negative equity equal to the full amount of the loan or more, and still be able to refinance into current record low mortgage rates (something which last week's near record drop in MBA refi rates of -17% may not be too optimistic on). That said, considering HARP's abysmal success record to date, with just 894,000 borrowers having refinanced using this subsidy program (considering anywhere between a third and half of all US mortgages are underwater), and since it is far more economic to be delinquent on one's loans than to refinance and actually have to pay something out of pocket in these here USS of A, we expect even this latest revision to be a massive failure. In fact, the only data that matters is the public announcement on November 3 and 4th of how many tens of billions in retail "top line" the GSEs will need to be funded for by the US Treasury, because at this point one thing is all too clear: the nationalized US mortgage industry, in which ever fewer people actually make any cash payments, is nothing but a massive subsidy pass thru vehicle for domestic retailer operations.
As usual, JPMorgan's Michael Cembalest cuts to the wick of the problems facing European leaders. This time with a rather sad analogy to that head-in-the-sand abomination of a bird called the emu. The Economic & Monetary Union (EMU) and its plethora of finance ministers, leaders, and bankers appears more and more similar to its aviary analogy. Cembalest notes, Europe’s long-awaited sovereign and bank bailout package will soon attempt liftoff; we will know more after yet another summit on Wednesday. There are flaws that may weigh this emu down, as annotated in the picture below. Why is this so important? Bank recaps in Sweden (‘92), the US (’92, ‘08), Japan (’99) and Asia (’98) were close to marking the bottom of the equity market cycle….but were not designed using the equivalent of the “Goal Seek” function in Microsoft Excel.