The conventional view looks at the domestic credit bubble, the trillions in derivatives and the phantom assets propping the whole mess up and concludes that the only way out is to print the U.S. dollar into oblivion, i.e. create enough dollars that the debts can be paid but in doing so, depreciate the dollar's purchasing power to near-zero. This process of extravagant creation of paper money is also called hyper-inflation. While it is compelling to see hyper-inflation as the only way out in terms of the domestic credit/leverage bubble, the dollar has an entirely different dynamic if we look at foreign exchange (FX) and foreign trade. Many analysts fixate on monetary policy as if it and the relationship of gold to the dollar are the foundation of our problems. These analysts often pinpoint the 1971 decision by President Nixon to abandon the gold standard as the start of our troubles. That decision certainly had a number of consequences, but 80% the dollar's loss of purchasing power occurred before the abandonment of dollar convertibility to gold.
The New York Fed has a few words to say about gold: "A PHENOMENAL ASSET. For centuries, gold had a profound impact on history, as a symbol and a storehouse of wealth accepted universally around the world. Gold functions as a medium of exchange, particularly in areas where currencies are distrusted. Yet gold has not been without controversy. The influential economist, John Maynard Keynes, referred to gold as a “barbarous relic.” Later in the 20th century, former Chairman of the Federal Reserve’s Board of Governors, William McChesney Martin, praised gold as "a beautiful and noble metal. What is barbarous," Martin said, "is man’s enslavement to gold for monetary purposes." Clearly, this precious metal has aroused great passion. It undoubtedly will continue to do so long into the future."
VIX is trading back above 20%, up over 4 vols this morning as its jump is the largest in over 8 months. This instant response to the ultra complacency we discussed last week, as 'they' take their totally dislocated foot off the neck of implied vol, has shifted the short-term volatility expectation from its calmest in almost four months to its most terrified in a month. Perhaps, just perhaps, the talking-heads who espouse this 'fear' index will finally realize its contemporaneous nature and treat it with the disdain it deserves. For now, it appears expectations of market turbulence - now that OPEX is out of the way - are reverting to more realistic levels of un-complacency.
The avuncular Art Cashin is sounding a lot less sangune than many of his market-watching peers. UBS' main man notes that traders are particularly struck by the continued weakness in the transports group (with FedEx and UPS down 8 of the last 11 sessions - and the Dow Transports down the equivalent of 300 points for the Industrials on Friday alone). "The sharp contraction in the Transport area and recent sharp drops in several trucking statistics add to growing fears that the economy may have stalled over the last four weeks," is how he puts it, but it is his cocktail-napkin charting that concerns the most. Historically, even in years that don't have multiple "end of the world as we know it" headlines in the news, the equity markets decline in the week after July option expiration. Twice in the last five years the S&P lost more than 4% in the week after July expiration. So, does that mean we should tether the elephants? No, but we should be alert and nimble on a week with a somewhat spotty history - with 1332/1335 as his key line in the sand for more downside in cash S&P.
A few hours ago, the IBEX hit a level of 5905, the lowest since April 2003. The irony is that as recently as weeks ago, various momentum chasing self-professed stock "experts" saw some technical formation or another, making them believe that the bottom is finally in for the IBEX, which is "fixed." Turns out it wasn't; it also turns out the market was completely wrong and the result is a 12% slide in the Spanish stock market in two days as reality's return is fast and furious. If this happened in the US, it would be the equivalent of 1500 DJIA point collapse in 48 hours, and unleash mass panic and civil disobedience as people realized their 201(k) is really a +/- 001(k).
While repeating the same thing and expecting a different result is the definition of insanity, the Italian and now Spanish regulators, in their wisdom, have banned short-selling once again (supposedly not just on stocks but OTC derivatives also) - because, of course, this is all speculation and not just real money exiting the increasingly encumbered 'bail-in-able' worst banks in the world. When will the long-selling ban begin and what does this S-S ban mean? Very little in reality - within a few days of the last ban, following a very short-term squeeze - European banks were back below the pre-short-sale-ban level as we noted here and here. The trouble with the ban is that managers will look to hedge the implicit stress that this means those banks are under (that may otherwise be manipulated out of the price). How to do this? Well, last time, it was Morgan Stanley that was the most correlated on the way down and was the worst performer immediately after the ban began - and this time seems like it should be no different. Already in the pre-market, MS is -4%, notably underperforming its peers.
Moments after we reported the announcement of the Italian short-selling ban we had a simple question:
Where is the Spanish short selling ban? They are slacking
— zerohedge (@zerohedge) July 23, 2012
We now have our answer, as Spain has jumped on the banwagonTM
- SPAIN STOCK MARKET REGULATOR BANS SHORT SELLING
- SPAIN'S SHORT SELLING BAN INCLUDES DERIVATIVES, OTC INSTRUMENTS
- SPAIN'S SHORT SELLING BAN COULD BE EXTENDED BEYOND 3 MONTHS
And just because in Europe one has to constantly outdo everyone else, the Spanish short selling ban is on all stocks, not just financials.
Plow Horse Enters Quicksand - America's Abysmal June Economic Report Card: 7 Positive Surprises; 23 NegativeSubmitted by Tyler Durden on 07/23/2012 - 08:25
There was a time when we mocked all those who said the US economy can sustain some sort of organic, Fed-free recovery on its own, and perhaps, just perhaps, regain the virtuous cycle. We now just feel sad for them. The latest confirmation why those perpetual optimists will likely never again get it correct in their lifetimes, except for the 1-2 month (and increasingly shorter) period just after a new LSAP program is introduced by the Fed, is the June US economic report card. Courtesy of Bank of America we see that 22 of the 30 most important economic indicators in June missed expectations. And since this includes the seasonally adjusted July 7 claims beat, which was discovered to have been merely a seasonal auto-channel stuffing gimmick, the real number of misses is 23 out of 30, or a whopping 76% fail rate.
While it seemed somewhat inevitable given the trend, the dismal reality from Europe has sent investors scurrying for the 'safety' of the US Treasuries overnight. The entire yield curve has fallen to all-time record lows with 10Y trading below 1.40% and 30Y below 2.48%. 7Y - the seeming cusp of Twist - is below 90bps now and 2Y below 20bps. The shortest-dated T-Bills still trade around 4-6bps (as opposed to the deeply negative rates in Switzerland and Germany this morning with FX risk premia expectations, and Twist+, affecting this differential). Not a good sign at all - and definitely not yield curve movements on the basis of renewed QE as we see stock futures plunging to the old new reality (as those pushing dividend yields as the 'obvious move here may note that since Friday's highs, you've lost half a year's dividend as equity capital has depreciated 2%). Perhaps the sub-1% 10Y we noted yesterday is not such a crazy idea after all...
Risk-off trade is firmly dominating price action this morning in Europe, as weekend reports regarding Spanish regions garner focus, shaking investor sentiment towards the Mediterranean. The attitudes towards Spain are reflected in their 10yr government bond yield, printing Euro-era record highs of 7.565% earlier this morning and, interestingly, Spanish 2yr bill yields are approaching the levels seen in the bailed-out Portuguese equivalent. As such, the peripheral Spanish and Italian bourses are being heavily weighed upon, both lower by around 5% at the North American crossover.
Here we go again: just like the summer of 2011, when it achieved absolutely nothing but succeeded in increasing the panic to a fever pitch, Italian regulator Consob has just reintroduced a selling ban for financial stocks. Supposedly, it will last only a week. Last year it was also supposed to be short-term but was only removed after the LTRO fooled everyone (well, not everyone) into believing Europe was fixed. It wasn't. Expect a modest blip higher, followed by the inevitable flush lower as every other European country follows suit, starting first with Spain.
Last week when we wrote about the imminent default of Sicily which Mario Monti tried to sweep under the rug by demanding the local governor resign for not masking the situation with lies, and doing all he can to prevent the advent of reality, we noted, rather sarcastically, that the "resignation of Sicily Governor Lombardo will somehow allow all those who care about the fundamentals of Italy to stick their heads in the sand... at least until Sicily is followed by Calabria, Campania, Lazio, Abruzzo, Tuscany, Lombardy, Umbria, Liguria, Veneto and so on. At least the governors of those respective provinces now have an advance warning what the endgame is." Sure enough, now that this particular floodgate has also been opened, it is only fitting that in the aftermath of this weekend's main news that a total of 6 Spanish regions will demand bailouts, that Italy follow suit with its own blacklist, and as La Stampa has reported, there are now ten major Italian cities at risk of an imminent financial collapse, yet another factor pushing Italian yields well on their way to the country's own 7% rubicon, now at 6.34%.
Gold edged down on Monday due to the pressure from a stronger dollar, as worries about the Eurozone debt crisis grew after Spain looked like the next candidate for a sovereign bailout. Spain has two regions seeking aid from the central government and El Pais reported that six Spanish regions may ask for aid from the central government while Spanish bonds yields continue to rise. As the 4th largest economy in the Eurozone Spain looks likely to follow Greece, Portugal and Ireland seeking an international bailout. Greece’s creditors meet this week as many doubt they will meet their bailout commitments. German Vice Chancellor Philipp Roesler said he’s “very skeptical” that European leaders will be able to rescue Greece. China’s economic expansion may fall for a 7th straight quarter to 7.4% in the three months to September, said Song Guoqing, a member of the People’s Bank of China monetary policy committee.
- Greece should pay wages in drachmas - German MP (Reuters)
- Greece Seeks More Cuts as Deadlines Loom (WSJ)
- Greece Back at Center of Euro Crisis as Exit Talk Resurfaces (Bloomberg)
- Berlusconi seeks return to liberal roots (FT)
- For brokers like Peregrine, from bad times to worse (Reuters)
- Japan Sees More ‘Widespread’ Global Slowdown With China Cooling (Bloomberg)
- China Central Bank Adviser Forecasts Growth Slowdown to 7.4% (Bloomberg)
- London Out to Prove It's Still in the Game (WSJ)
- Stockton Reveals Bondholder Offers From Mediation (Bloomberg)
- US lawmakers propose greater SEC powers (FT)