LTRO "Bazooka" Is Epic Disaster As Banks Scramble To Redeposit "Free Carry" Cash With ECB, Lose Money On "Inverse Carry"Submitted by Tyler Durden on 12/27/2011 - 05:54
When on Friday we penned "And This Is Where The LTRO Money Went" we said that the final nail in the "Carry Trade" theory was that instead of using the LTRO "Bazooka" cash to collect meaningless pennies in front of a steamroller, Europe's banks turned around and deposited it right back with the ECB after the bank's deposit facility soared to a 2011 record €347 billion, €82 billion more than the day before. Today, any residual doubt of where the LTRO cash proceeds went is eliminated, as the ECB has just confirmed that what goes out of one pocket comes back in the other, as the ECB's deposit facility has just exploded to not a 2011 record, but an all time record high €412 billion, a €65 billion increase overnight, and €167 billion higher in the past two days alone, which effectively accounts for practically all of the LTRO's free €210 billion... But the biggest slap in the face of Sarkozy is that instead of banks pocketing the "guaranteed" 2-3% in carry trade between the 1% LTRO rate and the soveriegn bond yield, banks are losing 75 basis point on this inverse carry trade, where they take LTRO cash and deposit it with the ECB where it yields... 0.25%!
It appears the PBoC is stepping up the monitoring and management of their gold reserves. Headlines, via Bloomberg, suggest controls tightening on the trading of gold away from official channels:
- *CHINA TO INCREASE MANAGEMENT OF GOLD TRADING, PBOC SAYS
- *CHINA GOLD TRADING RESTRICTED TO SHANGHAI EXCHANGES, PBOC SAYS
- *CHINA ORDERS UNAUTHORIZED GOLD TRADING PLATFORMS TO STOP: PBOC
- *PBOC ASKS SHANGHAI GOLD, FUTURES EXCHANGES TO BOOST MANAGEMENT
Despite more ramblings from Juncker this morning, the overnight session in Asia saw comments on downside risks from the BoJ drive risk assets modestly lower. Led by Japan, Asia-Pac equities were down around 0.3%. While EURUSD is higher by 25pips or so from Christmas Eve's close (and implicitly USD weaker), commodities are broadly underperforming with Copper worst (-1.3%), Gold (under $1600) and Silver in line -0.8%, and Oil just underwater from 12/23 close. European credit markets just started trading and are a smidge tighter - though liquidity is questionable for now - but sovereigns are leaking wider in spread with Italian 10Y worst for now +13bps (and BTP yields now breaking 7% again). US TSYs are 1-2bps lower in yield from the afternoon surge on Christmas Eve's discorrelated action. Given the markets that are open so far, CONTEXT (a broad risk market proxy for where ES - the e-mini S&P futures contract - should trade) is practically unchanged, which given the late-day surge on 12/23, leaves us looking for modest weakness when it re-opens later today.
In an interesting analogy to the 'tragedy of the commons', Philipp Bagus, of Madrid's Universidad Rey Juan Carlos, explains how European governments have 'outfished' their respective pools of spending/borrowing capabilities as the enforcements of the Maastricht Treaty were entirely impotent. After addressing his perspective on how Europe got here, he discusses, with Alasdair Macleod of the GoldMoney Foundation, possible solutions to (and consequences of) the euro crisis. Bagus points out that there are basically three different ways to go about it. Firstly, governments could make drastic cuts in public spending and privatise public assets in order to balance their budgets. However, there will be – and is – strong political resistance to such proposals. Secondly, the eurozone could disintegrate, driven by a reluctance of German citizens to pay for other countries’ expenditures. And lastly, central banks and governments could decide to print their way out of the crisis, leading to high inflation. The thought-provoking professor provides some interesting color on the dichotomy between the official opinion in Europe and the sentiment on the street. Amid the ongoing expansion of the money supply and persistent deficits, Bagus can’t see the dollar gaining in value over the medium to long term. He also says that ECB policies are a lot more pragmatic than the ones undertaken by the US Federal Reserve. Talking about sound money, Bagus explains different ways to go about its introduction. One way would be to back all the money in existence by gold, adjusting the price of gold accordingly.
Typically limited to 90 second soundbite-gathering exercises on mainstream financial media, Australia's Finance News Network gives Jim Rogers the chance to discuss much more broadly his outlook not just for 2012 but beyond. Surprised by the false optimism he sees globally, he is not concerned that consensus is too bearish, and worries that the political pressure and central banker un-independence will inevitably lead to more and more money printing. We have discussed the kick-the-can thesis extensively but Rogers moves from the desire-to-print to the consequences while covering Ron Paul and the US election, the myth of government job creation, his potentially controversial view of the Euro (and separately the Euro-zone) - all the while reminding us that he expects at least another lost decade for the US and Europe as Japan ebbs ever lower. With a view to both his geographical location and his investments, the global commodity bull remains optimistic that a Chinese slowdown will not be the end of the Asian economy (as we see in Western economies) but is broadly short equities around the world while urging investors to own real assets. Summing up, Rogers notes "...the problems are going to continue to get worse until somebody solves the basic underlying problem of too much spending and too much debt... [governments and central bankers] are not going to do anything until there’s a serious crisis or semi-crisis."
While someone continues to guietly push the EUR offer ever higher in the quiet holiday session, the reality is that with only 5 days to go in 2011, the holiday for Europe is ending, and "the pain"TM it about to be unleashed. All 740 billion worth of it. Because while Japan is monetizing its deficit (and having to issue more debt than it collects in taxes), and America is hot on its heels (as a reminder the US also issues roughly one dollar of debt for each dollar in taxes collected), Europe is still unsure whether it will monetize explicitly (that said, we did clear up that little bit of confusion over implicit monetization, with the ECB's balance sheet having exploded by €500 billion since June, or more than all of QE2). Unfortunately, as the following analysis from UBS indicates, it won't have much of a choice. Here are Europe's numbers: €82 billion in gross debt issuance in January, €234 billion in gross debt issuance in Q1, €740 billion in gross debt issuance in 2012. And then it really picks up because what is largley ignored in such "roll" analyses are the hundreds of billions in debt that financials (i.e., banks) will also have to roll in 2012. In other words, the biggest risk for 2012, in our humble opinion, is that the global repo perpetual ponzi engine (where every primary dealer buys sovereign debt than promptly repos it back to its respective central bank, and courtesy of Prime Broker conduits is allowed to do so without ever encumbering its balance sheet - explained in detail here) is about to choke.
It is not unusual for us to note the Knightian uncertainty that lies ahead of us (the unknown unknowns) and question the nth-decimal-place accuracy of VaR-based risk budgeting when the next long-only strategist suggests 90% allocation to high-dividend-US-Equities. In a quick and thought-provoking Q&A from the Swiss Private Bank Pictet, they see the world in a similarly non-normal manner and focus in one case on the growing tension that globalization has created between winners and losers. As the crisis of confidence spreads from asset class to asset class and from sovereign to financial entity to macro-economy and back in its viciously circular manner, the realization that forecasts are useless when judged in the linear normal bias that investors have carried with them for decades, must bias current and future investment decisions to more asymmetric or 'hedged' perspectives. With the veil of financial complexity (and implicit opacity) being taken down brick-by-brick (by us as well as many others), we suspect the credit creation process and project-financing in general will shift from a game-theoretically optimal 'one-in-all-in', to a more nuanced 'if-you-don't-know-who-the-sucker-is-at-the-table-it's-you!' view of investing - especially given the balance between indefinitely long low real rates and the insatiable need for yield - leaving the cost of funding indefinitely floored at a much higher premium than in the past.
While the world is watching Europe and the US for signs of imminent decoupling, and now has added China to its insolvency focus list, things in Japan, which is "fine" courtesy of a self-destruct autopilot, are just getting plain ridiculous. As we reported earlier this year, Japan's marketable public debt, already the largest in the world at $11.2 trillion compared to America's $10 trillion (of course this assumes the whole SSN sleight of hand is funded, which it isn't), is due to surpass ¥1 quadrillion any month now (aka the exponential phase). And that's just the beginning. As Bloomberg reports, "Bond sales to the market will climb to a record 149.7 trillion yen ($1.9 trillion), while the national budget’s reliance on debt for funding will rise to an unprecedented 49 percent in the year starting April 1, Japan’s government said Dec. 24. The government said it plans to sell 44.2 trillion yen of new bonds to fund 90.3 trillion yen of spending in next fiscal year’s budget. It estimates that tax revenue will total 42.3 trillion yen in fiscal 2012, meaning that new bond sales will exceed tax revenue for a fourth year." In other words, in a world increasingly disconnected form any sort of reality, very soon no taxes at all will be needed: after all each and every government (or uber-union in teh EU's case, once the imploding Eurozone turns to the final Deus Ex - a fiscal protectorate issuing joining Eurobonds) will simply fund all its cash needs by printing its own money. Naturally, anyone daring to suggest that this is beyond idiotic will be given an MMT 101 manual and/or incarcerated for grand treason. And any last voices of sanity will be promptly muted: "I think the reliance on bonds to compile budgets is reaching its limit,” Japanese Finance Minister Jun Azumi said Dec. 24, after the announcement of the budget plan.
Last week the Federal Reserve and the Bank of England announced plans to tighten the control over the balance sheet management and the risk-taking of private banks. This is just the beginning, believe me. The nationalization of money and credit will intensify in 2012 and beyond. More regulation, more restriction, more control. Not only in defence of the bankrupt banks but also the bankrupt state. We will see curbs on trading, short-selling restrictions and various forms of capital controls. A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser. The conclusion from everything we have seen in 2011 is unquestionably that the global monetary system is on thin ice. Whether the house of cards will come tumbling down in 2012 nobody can say. When concerns about the fundability of the state and the soundness of fiat money, fully justified albeit still strangely subdued, finally lead to demands for higher risk premiums, upward pressure on interest rates will build. This will threaten the overextended credit edifice and will probably be countered with more aggressive central bank intervention. That is when it will get really interesting. We live in dangerous times. Stay safe and enjoy the holidays. In the meantime, the debasement of paper money continues.
Remember, back in the day, when a bankruptcy was simply called a bankruptcy? Naturally, this was well before ISDA came on the scene and footnoted the living feces out of everything by claiming that a bankruptcy is never a bankruptcy, as long as the creditors agree to 99.999% losses at gunpoint, with electrodes strapped to their testicles, submerged in a tank full of rabid piranhas, it they just sign a piece of paper (preferably in their own blood) saying the vaseline-free gang abuse was consensual. Well, now we learn that as the global insolvency wave finally moves to China, a bankruptcy is now called something even less scary: "deferred loan payments" (and also explains why suddenly Japan is going to have to bail China out and buy its bonds, because somehow when China fails, it is the turn of the country that started the whole deflationary collapse to step to the plate). After all, who in their right mind would want to scare the public that the entire world is now broke. Certainly not SWIFT. And certainly not that paragon of 8%+ annual growth, where no matter how many layers of lipstick are applied, the piggyness of it all is shining through ever more acutely. Because here are the facts, from China Daily, and they speaks for themselves: "China's biggest provincial borrowers are deferring payment on their loans just two months after the country's regulator said some local government companies would be allowed to do so....Hunan Provincial Expressway Construction Group is delaying payment on 3.11 billion yuan in interest, documents governing the securities show this month. Guangdong Provincial Communications Group Co, the second-largest debtor, is following suit. So are two others among the biggest 11 debtors, for a total of 30.16 billion yuan, according to bond prospectuses from 55 local authorities that have raised money in capital markets since the beginning of November." So not even two months in and companies are already becoming serial defaulters, pardon, "loan payment deferrers?" And China is supposed to bail out the world? Ironically, in a world in which can kicking is now an art form, China will show everyone just how it is done, by effectively upturning the capital structure and saying that paying interest is, well, optional. In the immortal words of the comrade from Georgia, "no coupon, no problem."
To all who still think that in the war of attrition between the USD and the EUR (because contrary to what some have "discovered" only recently, currency wars have been going on for a long, long time and will continue to do so, before morphing into trade and real wars), in which both currencies are doomed, and where the winner takes it all, if only for a few minutes, we bring to your attention the following most recent update out of the Pacific Rim (where incidentally the Shanghai Composite has resumed its relentless track lower with the obvious intention of closing 2011 at its 52 week low) in which we find i) that the dollar's hegemonic control over the world is ending, and ii) that the mercantilist relationship so long sustained between China and the US, may be shifting and reversing, and in its next metamorphosis will see Japan buying the bonds of... China (although probably not for long - see next post). As Bloomberg reports, "Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday." And before someone blows it off as merely more foreign relations posturing, "“Given the huge size of the trade volume between the Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd." As for China's reverse mercantilist move, one which will stun anyone who believes that Yuan is still undervalued, "Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about financial markets in China, the world’s largest holder of foreign currency reserves." Speaking of, has Albert Edwards gloated yet that given enough time, he always ends up being proven right, in this case about the CNY's upcoming devaluation?
Three years ago, when it first became largely adopted by the mass investing population as a hedge to a collapsing market, the 3x levered ETF known as the Direxion Daily Financial Bear 3X Shares, or FAZ in short, was the hottest thing since sliced bread. Subsequently, it has transitioned form being an object of affection to one of infinite scorn, hatred and outright homicidal urges, for one simple reason: it, like many of its other levered bearish peers, is anything but a way to profit from a collapsing market. In fact, as a recent proxy filing by Direxion indicates, it is virtually impossible to make money in the long-term using FAZ... or medium-term... or, as many would say, even intraday as well. The reason for this is simple: while nobody gets the true inner workings of these inverse x-levered ETFs, certainly not the "experts" who post three times a day on Seeking Alpha, one thing everyone should understand is what the following table straight from Direxion is saying: namely that even if the market collapses by 60%, one could lose up to 96.1% of their entire investment in the FAZ, if for some ungoldy reason, annualized vol surges to 100%. Because, you know, vol only occasionally rises when the S&P plunges by more than half. The same is applicable on any time frame: in essence the FAZ only works if the two massively contradictory Venn diagrams overlap: a market plunge and not rise in vol. Uhm, maybe they should have disclosed that a little bit sooner...
While we have long known that the drachma, and recently the lira, have seen significant "when issued" interest by institutional clients desiring to hedge their currency collapse exposure, and thus early markets by various trading desks, little did we realize just how destabilizing this fact to the system would be, at least according to SWIFT. According to the WSJ, this organization, best known for making an abrupt appearance any time one wishes to do a wire transfer, then promptly disappearing until the next such instance, ended up promptly shutting down any Plan B optionality when "at least two global banks took steps to install back-up technology systems that could handle trades in old European currencies like drachmas, escudos and lire... quickly found, is not so easy in a financial world that is trying to both exhibit confidence in the ailing euro and—just in case—plan for its possible demise. Technology managers at the banks contacted Swift, the Belgium-based consortium that manages the network used in financial transactions, said people familiar with the matter. The banks wanted Swift's technology support and the currency codes that would be necessary to set up the backup systems." And got promptly rejected: "Swift declined to provide some information for such contingency planning, including whether old codes could be used in the system, said the people familiar with the matter." The reason is that in Europe, the mere admission that Plan B is a possibility, apparently set off a chain of events that makes Plan B an inevitability: "...officials there feared that releasing the information could fuel further doubts and instability in the euro zone."... And the kicker: '"As soon as you start contingency planning . . . it can become a foregone conclusion," said Alastair Newton, senior political analyst at Nomura PLC. "But if things go wrong and you don't have plans in place, you're in trouble."
Often times we are asked "why does Zero Hedge prefer to provide information in piecemeal increments and isolated snapshots (of irregularity) rather than write comprehensive articles (or even a book) that explain, from beginning to end why everything is broken - the end?" There are two answers - a short and a long one. The short answer is that finance, more so than any other field, changes so rapidly that the nuances are always and constantly on the margin, which in turn is stable only for the period of time that it is observed, and then it becomes part of "technical analysis." (Indeed, the Schrodinger wave function collapse is just as alive and well in finance as it is in the quantum arena). As such, we adhere to the paradigm describing the distinction between giving a man a fish and teaching a man to fish: we believe that it is far more useful to demonstrate all that ways in which the market (and global economy) works, or rather doesn't, than engage in extended exercises of vanity, which serve as much to stroke the author's ego, and demonstrate one's knowledge of SAT words, as they do to elucidate the matter at hand. By sharing our own views of events as they transpire in real time, be they right or wrong, we hope to provide our readers with the "connect the dots" patchwork required to evaluate relevant financial events as they occur in real time, instead of describing them in the in vitro vacuum of moody brooding. (As for a book, we are more than confident enough "independent" bloggers out there will succumb to the very system their protest against, and pen a few hundred pages on the goal-seeked topic of their choosing - the last thing the vast upcoming book pyre needs is our own intellectual self-pleasuring). The long answer is far longer, and, ironically, deserves a post of its own. But this is neither the time nor the place. What then is the purpose of this post is to break away from our tradition, but also not to recreate the wheel, as many others find delight in doing. Instead, as a special present to our readers, we share the seminal analysis by Citigroup's Matt King from September 5, 2008, titled "Are The Brokers Broken?" which in one place explains, better than anyone else has ever done, why the system is terminally broken, and why the best anyone can hope for is to keep kicking the can down the road until it all comes crashing down.