Since the financial crisis hit and exposed the reality of a credit-fueled economic growth strategy, Americans have tried to maintain any kind of quality of life. With the HELOC ATM empty, they switched to Credit Cards and once limits were full, there was only one place left - their retirement plans. As the LA Times reports today, Americans are borrowing huge amounts of money from their 401(k) retirement plans - and then having big trouble paying off their debt. Stunningly, in recent years 20% to 28% of people eligible to borrow from their 401(k) accounts have an outstanding loan at any given time, the Navigant Economics study said, having borrowed a collective $105 billion from their 401(k) accounts as of 2009 - and likely considerably more since. Estimating the 'leakage' from these retirement funds, they see loan-loss rates typically double that of the average unemployment and estimate up to $37 billion of loan defaults per year. In the 12 months through May 2012, they estimate the 401(k) default rate hit 17.4% - more than double its pre-crisis average and only marginally lower than its peak in 2009. As they note, many people use the money to pay off other debt or to meet day-to-day expenses, and "Of course, participants are not deliberately defaulting," the study said. "They only do so when they have no other option." As unemployment rates look set to rise, one can only imagine that these 401(k) loan losses, based on their study, are set to rise significantly.
Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under SocialismSubmitted by Tyler Durden on 07/17/2012 - 13:41
With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past 4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.
In a follow-up to Liesman's earlier rebuttal, CNBC's Rick Santelli just reiterated his earlier sentiment that the comments that Mr. Bernanke made earlier were indeed the "Libor Smoking Gun". While Bernanke tried to eschew the matter by claiming the low-level Fed employee was clueless (which from the transcript she was seemingly clued in enough to understand the rate was not 'accurate'). As Rick notes in Bernanke's own words: "the manipulation of rates was a little bit low by certain banks but they just wanted to show they were healthy during the crisis" - unbelievable! "What are regulators for?", Santelli exclaims: "manipulation is manipulation!" Indeed, Rick, indeed.
Today's market movement was/is remarkable in its clarity. One glance at this chart and it will become brutally clear that once 1340 was hit, the 'tickle-algo' was triggered and a de minimus volume press on the bid-offer stack limped us all the way back to the day's highs - considerably above VWAP. Whether we see the institutional selling blocks hit now is still undecided but if there was ever any doubt about who is selling and who is buying this chart should clarify...
There are a number of cultural and governmental impediments to prosecuting WCCs. One of which is the corrupting influence of money to neuter regulations and to co-opt politically appointed regulators and prosecutors. Another is perception. Wealth in our country is equated with royalty or a high station in society, so people have a hard time seeing the white collar criminal as the deviant that he is. People have a hard time wanting to punish someone who looks nice, has nice clothes, drives a nice car, lives in a good neighborhood, went to a prestigious school, belongs to exclusive clubs, etc. vs. someone who does not have those things. If you're poor in this country, that's almost a crime in and of itself to some people. Conversely, rich people have all sorts of credibility, whether its deserved or not. Why should I listen to an actor about a topic that's not related to acting? Sure, he may have some interesting things to say, but he shouldn't be given automatic credibility on the subject and yet many people do just that. Romney became rich bankrupting companies and selling their assets and yet people look to him to "run our economy"? What politician can ever say that they can run an economy? The Soviets tried to do just that and look what happened to them.
Another reason WCCs may not be prosecuted is that individuals, organizations, governments, and even society at large may be vested in the criminal activity either wittingly or unwittingly.
As S&P 500 e-mini futures (ES) slumped this morning as Bernanke appeared to disappoint (and the rest of the risk-on asset classes all tumbled with it), we saw heavy volume and relatively large average trade size. Once the edge of glory from Friday at 1340 was hit, it seemed the magic Potter-esque fairy was back at play. Immediately, VIX was hammered from 17.5% to 16.1% - its lowest in almost 3 months as the bottomless pit of capital that feels comfortable selling vol (or perhaps using a levered approach to ramping stocks) drive ES back up an impressive 14 points on low volume and low average trade size. Yes, we crossed VWAP, yes we crossed unch, and now we are testing highs back above the 50DMA. It seems VIX once again is the ramping tool - and now is significantly dislocated from any equity or credit sense of reality. We presume that OPEX will clean up some of this exuberance but for now, it is the tail wagging everything's dog.
Sicily Is San Bernardino: With First Italian Region On Verge Of Default, Montius Pilate Washes His HandsSubmitted by Tyler Durden on 07/17/2012 - 11:43
Buried deep in the newsflow from Ben Bernanke is the following piece of very critical news for anyone who is still long Italian bonds: namely that Italy may not be Spain, or Uganda, but Sicily is about to become San Bernardino. From Reuters: "Italian Prime Minister Mario Monti said on Tuesday he expected the governor of Sicily to resign following a growing financial crisis that has pushed the autonomous region close to default." Because 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.
Quickly following up on Rick Santelli's epic rant (which CNBC decided not to publish) on the 'smoking gun' reality of Bernanke's testimony this morning: that they knew that rates were being manipulated but it was for the good of the people - and asking rhetorically, we assume, "Why Do We Have Regulators? Manipulation Is Manipulation!"; Steve Liesman has been brought out to relay the party line to the citizenry - that there is no smoking gun. Furthermore, Liesman sees a 1-2bps compression in Treasury yields as signalling the market's belief that NEW QE is indeed still on and the drop in stocks is merely a lack of instant gratification. It seems to us that Santelli's perspective that Bernanke knows he is at his limit with regard to efficacy of measures seems much more realistic than Liesman's re-iteration of the Fed-Watcher's desires and his own incredible cognitive dissonance - just what happens if the Fed is not omnipotent?
Yes, Chuck Schumer just said "Get to work, Mr. Chairman" right after saying that "The Fed is the only game in town... You have to take whatever actions are necessary to ensure a strong recovery." What he really meant is that my biggest donors demand a solid bonus for 2012. Who are these donors you may ask? Here they are.
Treasuries seemed to shrug off the QE-on trade from yesterday in the lead up to this morning's big disappointment from Bernanke. Gold lost it first and then as the statement came - with no mention of hyperinflation, helicopters, or new printers - so equities dumped - gapping down to converge with the rest of risk assets. The USD rallied as its cloests relative neighbor in disaster the EUR legged lower and the USD strength exaggerated commodity weakness further (Silver and Copper worst but all falling). ES is back to the post-ramp open on cliff on Friday at the magic 1340 level but momentum is not in its favor now and Treasury yields are reverting lower now also. Financials were the early laggards and have extended losses with GS back in the red and JPM down notably.
We said to expect nothing from the Chairman today. We were right (and those "strategists" who said to look for a negative IOER announcement were dead wrong). And now, here is Goldman with its Humphrey Hawkins post-mortem.
It appears that The Bernank has followed his central banking peers around the world and passed the torch on to someone else (since perhaps he has realized his own lack of omnipotence - or more simply he knows the market has become self-aware of QE and needs to reset expectations to have any hope of a QE impact). It's not the first time he has vociferously noted the impact of the fiscal cliff but this time, based on the following word-cloud prominence of the word 'fiscal', it is front-and-center as while he did leave the door open for further policy action - he clearly checked to his congressional co-conspirators.
Ben Bernanke will deliver the semiannual report on monetary policy to the Senate Banking Committee Tuesday. The market is hoping and praying that the Chairsatan will make it rain. He won't. In fact, as explained earlier, it is likely that Ben will say absolutely nothing of significance today and in a world in which only the H.4.1 matters, this is not going to be taken well by the market. Of course, if Benny does crack and promises to push the S&P to 1450 just in time for the re-election, all bets are off.
Animal Farm rears its European head, where we learn that some bailout agreements are more subordinated than others. Bloomberg brings us the details of the just completed collateral deal between Finland and Spain, which has terms identical to that of Greece, where there was absolutely no debate about whether bailout loans were senior to public and private sector debt. Following this deal the semantics of the ESM subordination, implied or explicit, should also end.
- Collateral deal bilateral between Finland, Spain, Finnish Finance Minister Jutta Urpilainen spoke to reporters.
- Deal structured as Greek collateral was
- Other countries not asking for collateral - YET!
- Collateral to come from deposit guarantee fund
- Negative pledges mean deal can’t be directly with state
The can has been kicked. The austerity has been implemented. The revenues have fallen. And as we see in the chart below, the pace of local government distress is accelerating. As has been made so clear in the past, defaults cluster; and sure enough it is starting, as tensions between unions and city managers become irreconcilable.