GMO's James Montier On The Rise Of The Aust(e)rians: "Any Deflationist Victory Would Result In The Rapid Arrival Of QE2"Submitted by Tyler Durden on 07/26/2010 - 15:54
The ever insightful James Montier of GMO presents a short, sweet, certainly controversial (he espouses stimulus over austerity) and to the point essay on what everyone at Zero Hedge realizes (or should by now) all too well: "If the Austerians and their ilk win the day, we may see some short-term deflationary pressures and, as noted above, they will be even more dangerous than they were previously because we are starting with no margin of safety in terms of the inflation rate. However, the U.S. at least has a central banker who seems to understand the risk. Despite his complicity in getting us into this mess in the first place, Ben Bernanke has shown he understands the risks that deflation poses, especially in a debt-laden economy, and believes that he has sufficient tools to prevent deflation from gaining traction in the economy (even with rates at zero). Indeed, he has given speeches where he has laid out a menu of policy options in the event of deflation risk. First on the menu was aggressive currency depreciation; second was the introduction of an inflation target; third was money-financed transfers (effectively, tax cuts financed by printing money); and, finally, quantitative and qualitative easing. Ergo, the “good news” arising from an Austerian victory would be the rapid arrival of QE II. Thus any short-term deflation will ultimately lead to long-term inflation pressures." Montier once again brings up the ever more critical Current Account equation. By now it is more than clear that deleveraging by both private and public sectors will not end well, however throw in the inability to fund the Current Account, and you can see where our concerns about the $1.3 trillion collapse in shadow banking lending in Q1 2010, and the ramifications on our CA as foreign banks null and void their shadow exposure, will soon be the most discussed topic by pundits. So aside from the obvious investment choices, how does a professional
money manager (it is kinda tough to tell your LPs "all your 2 and 20
generating assets are tied up in zero cash yielding gold" unless one's
last name ends in -aulson, -horn or -rott), how does one plan for "A
flight path that contains short-term deflation and long-term
inflation?" Read on to find out (and no, it's not US Treasurys).
Headline From The (Immediate) Future: 10 Share Block Moves Market By 50% (And Obama Praises Own Economic Policies) As 10 Year Yields -3%Submitted by Tyler Durden on 07/26/2010 - 15:12
Today's ES price volume presented without commentary. Well one: the 10 Year closed below 3%. Stocks closed at highs. The takeover of the market by the administration as we head into the midterms is now complete.
Next time your broker calls you and tells you you have a margin call on your short in stock XYZ, tell them you refuse to comply as you have it "marked to maturity", and on a long enough timeline, every stock will go to zero. This is precisely what (technically the inverse) German banks DG and WGZ, which had previously refused to post the details of their stress test "passage" did in order to pass the "Stress BS." Dow Jones reports: "WGZ's disclosure showed that it had accounted for almost all of a EUR35 billion portfolio of sovereign bonds as "held to maturity," thus avoiding the need to subject them to the discounts required by the "sovereign risk shock" in the tests." As we had previously expected, all banks would promptly reclassify their worst debts (Greek and Spanish exposure) as their best: i.e., as part of the Held to Maturity book. This is precisely what happened, and why Europe is still as insolvent as ever. And get this: 'bonds held in the banks' trading books were subjected to theoretical markdowns of up to 23% in the case of Greece, but the regulators didn't apply that to long-term assets, as that would have implied recognition of the possibility of a sovereign default--something they said was "unthinkable."' So the test tested for everything except for the all too real six sigma events that blew up Bear Stearns, Lehman, AIG, Merrill, WaMu, RBS, Northern Rock, Hypo, and the 7 or so banks to go tits up each week in the US (what is the latest MTD tally on bank failures in the US: 100? 1,000?), not to mention every bank in the world had the US taxpayer not involuntarily bailed them all out... And since this is precisely the same stress test architecture that the one and only tax cheat #1 created in the US a year ago, one can only imagine the level of scammery involved domestically, which had even less testing disclosure than in Europe.
Excitement has been growing about a long out-of-print book Dying of Money: Lessons of the Great German and American Inflations by Jens Parsson and currently costing $234 at Amazon. The author vividly and thoroughly recounts the influence of inflation
throughout history with special emphasis on the U.S. economy and the hyperinflationary events of the 1920s in the Weimar Republic, Germany.
From 70% To 35% To 75% Net Long In Under A Month: Ultra High Frequency Day Trader Extraordinaire Barton Biggs Flip Flops... Again... And AgainSubmitted by Tyler Durden on 07/26/2010 - 13:45
The only thing worse than HFT algos that buy and sell the same stock 1 million times a day, are highly overrated "hedge fund managers" who pretend to have a long-term view on the market, yet flip their mind 180 degrees not once, not twice, but three times in the span of less than 30 days. At least HFTs are merely programs: their stupidity is endowed in their decision making process by their 19 year old math Ph.D. creators, who incidentally have long proven that correlation is in fact causation (until the market plunges by 90%... at that point it is always time to reevaluate one's stupidity for about 2 minutes, and then jump on the latest Fed reflation attempt with no changes). The question is: what excuse can Barton Biggs use?
Nothing much to be said here. Stocks are broken for yet another day, as correlation 101 fails as expected due to the most recent attempt to ramp stocks regardless of anything and everything. Oh, guess where volume is... Laughable. At this point nobody, absolutely nobody in stock land dares to take on the Fed, even as the bond vigilantes rumble in their sleep.
Warren Pollock reports on a rather troubling development which we can only attribute to various cost cutting measures by near-bankrupt states, as anything beyond that would be far too macabre even for us. It appears that "several drugs are in severe shortfall, drugs used to treat emergency patients that might be transported by ambulance to emergency rooms, the drugs include heart attack drugs, epinephrine, lidocain, as well as drugs used to treat shock and other conditions. These emergency care drugs are now in shortfall with alternate protocols going out to emergency services in various parts of the nation. This means that if you need emergency services, the drugs you rely upon to save your life may not be there." As WEP asks, "where have these drugs gone? It isunrealistic to suggest that a whole variety of emergency treatment drugs would go missing from the inventory all at the same time, and areas around the country all at the same time." Pollock highlights the states of TN, PA and CA may have already seen the incorporation of the "alternative protocol." Once again, we hope this is merely an interim shortage and not a widespread effort to impair the traditional operation of emergency technicians across the country.
Applying A Basel III Tier 1 Stress Test Threshold Implies E2.6 Trillion Of Assets In 39 Banks Impaired By Equity UndercapitalizationSubmitted by Tyler Durden on 07/26/2010 - 11:07
With the assumptions and conditions for the stress test pulled straight out of CEBS' collective bottom, it is no surprise that a mere 7 banks for a total $246 billion in affected assets end up being defined as undercapitalized. But what happens when instead of using a 6% Tier 1 capital threshold, a Basel III 8% Tier 1 is used? Something log scale worse. As Austrian Der Standart journalist Lukas Sustala points out, and as demonstrated on his chart below, the failure rate goes up exponentially: instead of 7 banks failing, 39 of Europe's biggest banks would be undercapitalized, and the impaired assets would amount to a whopping E2.6 trillion, requiring at least E30 billion in incremental equity capital, on top of the hundreds of billions already infused by European governments. In Lukas' words: "The stress tests were a farce (taking no account of counterparty risk or a sovereign default), but at least they provide some good data points (I currently look into all the sovereign holdings of the individual banks, so there is more to come). 39 banks fail the 8% criteria."
As usual, some terrific points from the man who was far too smart for Merrill Lynch. We are also glad that Rosie caught our observation over the weekend that securitized loans have plummeted by trillions recently: easily the single biggest argument for QE2.
After Expectations A Modest Improvement, Dallas Fed Manufacturing Index Crashes To -21, From -4 Prior, Exp. Of -2.5Submitted by Tyler Durden on 07/26/2010 - 09:42
If you thought volatility in stocks was beyond ridiculous, we hope you have been keeping an eye out on what happens to the US economy when the central planning bureau takes over. Case in point: the Dallas Fed Manufacturing index of General Business Activity was just released, and it is a stunner: after coming in at -4 in June, and expectations were for a gradual improvement in July to -2.5, the actual released number was -21! And of course after the usual downward revisions as per page 1 of the Chinese data presentation manual, in which superfluous zeros for negative numbers are strongly encouraged to be eliminated , this will likely end up being something like -210 when it is revised next month. But the market does not care: after all it can pretend Americans are buying homes until next month's revision indicates that new homes sales in June were actually a negative (is it possible? who cares - not Cisco routers).
So June new home sales come in at 330,000 on expectations of 310,000: a decent beat by 20k or so, and a "record" increase from the May revised 267k. However, this "beat", and massive 23.6% MoM surge only occurred due to prior downward (of course) revision which took away 57k from the past two months! The May number was revised down from 300k, or by 33k, to the lowest sales number on record of 267k. And April, not to be undone, two months after the initial release, has received its second downward adjustment, this time down by 24k from 446k to 422k. So let's get this straight: this was the worst June on record, following the worst month on record in new home sales ever, the beat was completely drowned out by 57k worth of prior revisions, the average new home price slid another 1.4% to $213,400, yet just because the new home supply is down to "just" 7.6 month from 9.6 in May it is enough to push stocks to the moon (of course this completely ignores that existing homes sales are back to 9 months, and shadow inventory is more than double that. Who cares - machine language does not add, it only multiples). Another day, another insane day in stocks, which are now programmed toignore reality, and just focus on the propaganda headline spin.
- The secrets of the Afghan war released (WSJ)
- BP set to announce Hayward departure (FT)
- Must read: The death of paper money (Telegraph)
- European Banking's Next Focus Is Funding (WSJ)
- U.K. Growth Forecast Cut on Budget Curbs, Ernst & Young to Say (BusinessWeek)
- Taleb: Government Deficits Could Be the Next 'Black Swan' (BusinessWeek)
- Deficits Don't Matter as Geithner Growth Gets Lowest Yield (Bloomberg)
- When will the US go the way of Rome (RCM)
- More CMBS Defaults Coming this Fall as Special Servicers Try to Keep Up (Houseing Wire)
- Asian stocks rise to one-month high on European stress tests.
- EU to adopt new sanctions package against Iran's nuclear program.
- European Union stress tests found banks need to raise €3.5B ($4.5B) of capital.
- Japan's stocks rise after Europe stress tests end, Yen slides.
- Global economy slowing to 3.25% from 4.7% recent average.
- IMF, EU inspectors in Greece for fiscal checkup required by rescue loans.
- Oil hover near $79 in Asia as strong US corporate earnings boost investor optimism.
- BP resumes efforts to drill relief well in Gulf of Mexico.
- Clorox expects to receive $750M for STP and Armor All.
- Deutsche Bank may report lower Q2 profit as Europe’s sovereign debt crisis led to a decline in trading revenue.
- Dubai Financial Market Co. Q2 profit tumbled 80% to 25.9 million U.A.E. dirhams ($7M).
- Embattled BP Chief Hayward to depart, Robert Dudley to succeed.
European Interbank Lending Market Worst Since August 2009: 3 Month EUR Libor Spikes In Post Stress Test DisappointmentSubmitted by Tyler Durden on 07/26/2010 - 07:13
Earlier, we reported the Euribor jumped in response to a stress test than now is perceived as fraud by virtually everyone. We also expected some moderate reconfirmation in the Libor market. Sure enough, the last nail in the coffin of Eurozone credibility came from the 3 month Libor, which spike by 0.2 basis points to 0.82313%, the highest since August 21, 2009. Interbank lending in Europe just give JC Trichet and the rest of the propaganda goon squad the middle finger. All else is smoke and mirrors. And since the overnight index swap (OIS) rate dropped marginally, the LIBOR-OIS spread jumped by 0.538 bps to 26 basis points.
Morgan's Huw van Steenis shares his team's view on the "stress test" catalyst that is supposed to finally put ever-bullish MS in the money, and diffuse the pent up rage of its client base for losing it billions with all those short bond recommendations. The MS report has some quite objective observations: "Given the size of the fiscal and banking sector problems in Europe and elsewhere, a quick and easy solution is unlikely. However, we think a circuit breaker, such as a restructuring and recapitalisation of the banking system, is needed because unlimited liquidity provision by the ECB does not get to the root of the problem. In our view, for the recovery to get onto solid ground both financial and fiscal stability need to be restored equally. The sovereign debt crisis has shown how closely intertwined financial and fiscal stability are. In our view, Europe has been making good progress in mapping out how it intends to restore sustainable budget positions. But there are still concerns amongst investors about financial stability. In this context the stress test is key." Yet unfortunately, as expected, the conclusions are that all is well, despite the test obtaining largely different and far stronger conclusions than even MS' internal pre-testing setup. Nonetheless, a good one document summary of all the findings of the test together with some in depth commentary for those who just need that upside catalyst.