Perhaps the most defining features of an asset bubble is a marked and persistent deviation from the underlying metrics that once determined fundamental value. We know how real estate in Canada stacks up when compared to GDP, personal disposable income (cities and provinces), rents (cities and provinces), and inflation. It's not pretty. As with any real estate bubble, the overvaluation is most extreme in a handful of cities. The regional data can be seen in the highlighted links. Certainly not all areas of the country have experienced a massive divergence from underlying fundamentals, but it is extensive enough to concern us.
Last week we had Citigroup warning that the market bottom is about to fall out, as the Fed is more than likely to disappoint already very lofty expectations (according to various estimates from both Goldman and the second Tier banks, i.e., all of them, the market has priced in roughly $500 billion in QE3 already). Today, Bank of America, which may or may not be with us much longer, has taken this desperate alarmism several notches further, and is warning that due to the gridlock in both the fiscal ("fiscal authorities have bombarded the markets with a quadraphonic message of hopelessness") and monetary ("the Fed is out of bullets anyway") stimulative pathways, the likely outcome of anything from DC will be nothig short of a disaster. To wit: "rather than a repeat of 2010, when the Fed saved the day with QE2, we think we are moving closer to a repeat of 2008, when major policy errors devastated the economy." For once we actually agree with Bank of America: "In our view, the pressure to “do something” is now far more likely to result in more desperate or radical measures, even if it is bad policy." Does this mean that we are looking at a TARP "vote down" market reaction this Friday if indeed the chairman disappoints? We will know for sure in about 100 hours, which just may be the longest 100 hours for bulls since the start of the artificial and solely QE inspired bear market levitation in March of 2009.
We take this moment from your busy schedules to update you that the CDS of Bank of America has reached escape velocity and has now entered suborbital traffic. At 370 bps, which is where the CDS is trading as of this moment, it is only 30 away from the 400 it hit in March of 2009 when the world had to be bailed out by the Fed: a ploy which this time will not work since every central bank has already doubled down to the hilt. In other news, expect bashing of evil bloggers who indicate BofA default risk spikes to commence momentarily as obviously it is only they who are to blame for BAC's upcoming bailout.
It may not be quite Obama telling us to buy stocks as he did on March 6 due to attractive "profits and earnings ratios", but it is about as close as him advising it is time for everyone to do their patriotic duty and buy shares of floundering Wells Fargo:
- OBAMA CALLED BUFFETT TO DISCUSS MEASURES FOR SPURRING ECONOMY
We can't wait to hear what 'altruistic', taxpayer bailout-funded ideas the Octogenarian of Omaha had. In the meantime we wonder: just why does Obama have an economic advisory team. Oh wait, after everyone bailed on him, Obama has no economic advisors left at all. Carry on then.
BAC CDS is 30 wider, and back to 360. Its stock is getting hurt. How long before some renewed focus is applied to the other banks here. Every day it seems that it is news about real estate that drags down BAC. The residential problems are at the forefront, but there are problems with the commercial market as well. Rating agencies, burned so badly before, may be reluctant to provide such generous ratings when deals need to be re-financed. And in a country where commercial building continued for the past 3 years, but jobs haven't reappeared, how much pricing power is really there? The CMBX are hitting one year lows (in price terms). Since commercial real estate problems haven't been grabbing the headlines, I suspect there is more room to go on banks. In Europe, the banks are all under renewed pressure. This is morphing into both a sovereign debt problem and now a senior bank debt problem. Stories of some difficulties getting overnight funding abound. Most stories are probably just rumours, but in this environment, they are believable.
Our congratulations and belated birthday wishes to Ron Paul, who yesterday raised a sizable $1.8 million in a "money bomb" fund raiser in under 24 hours. As a reminder this is merely an appetizer of what Paul's loyalists can do, considering back in 2007 Paul raised over $6 million in the same time frame. Nonetheless, we find it ironic that the very same fiat confetti that Bernanke prints with reckless abandon is the same that will be used to hopefully one day end the tyranny of central banking.
Courtesy of Morgan Stanley's Huw van Steenis, we present the only chart one needs to see to understand what is going on in Europe.
And so we return to that point when the most engaging, yet useless, topic of discussion is what Bernanke will say or the Fed will do, in this case this coming Friday at the 2011 edition of the Jackson Hole Fed meeting, and specifically Ben's keynote speech. By now we have seen endless iterations of what pundits expect will happen: from nothing to another round of QE. Today, we present SocGen's take which is that while an outright third round of monetization is unlikely for now, the Fed may well proceed with a lite version of QE in the form of "sterilized" operations, or curve targeting, aka Operation Twist, as was noted here some time ago. One thing we certainly agree with SocGen on: "If markets remain under pressure, Bernanke could be forced to commit to something next week." The market obviously knows this, in which case if the market case is for QE3 or bust (and remember: Wall Street is still stuck in beta levered world where the only P&L comes courtesy of the Fed this will be most welcome) today's latest vapor rally will be promptly nullified by Wall Street which has only 4 days left to send a very loud message to the Chairsatan.
Following last week's €22 billion in secondary market bond purchases, this week we get a new total of €14.291 billion in settled Italian and Spanish bonds monetized: the third highest weekly total ever, bringing the cumulative total E110 billion. This follows on the heels of the BOJ intervening (or not) in the JPY market and the SNB buying 1 month CHF futures (leverage, leverage, leverage). What can one say but free, efficient, and central-bank free markets as far as they eye can see. Also guess what will happen when political pressures push the ECB to stop monetizing: all the moves tighter will be unwound in a manner of nanoseconds, and then a whole lot of "some."
We were wondering how long it would be before Germany, following in the footsteps of such luminaries as Hank Paulson and Tim Geithner, would formally announce to the world that with it now openly calling the shots in Europe, it would be its way or the mutual assured destruction way. We just got our answer courtesy of the just released August Outlook from the Bundesbank, in which the German national bank lays out the framework of the upcoming European anschluss play by play, as Germany prepares to roll out the Fourth Reich welcome mat without ever spilling a drop of blood. After all: why injure the soon to be millions of debt slaves? To wit from the report: "Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened." Translation: "we will gladly help everyone out... in exchange for a little of that vastly overrated fiscal sovereignty... Did we say a little? We meant all of it..."
Well, stock futures have already had a decently volatile session. From a low of 1112 all the way back to 1142, with a couple of 10 point moves in between. Broken. I think credit markets are telling you that this is a great second chance to short stocks if you didn't last time. MAIN is basically unchanged. SOVX is 4 wider, back to 292. More concerning, since the crisis has been infiltrating the banks is that SocGen is 15 wider at 320, and BAC is 5 wider even while their stocks are trading up. Those all seem like pretty solid warning signs that stocks so far are ignoring.
- Majority of Swiss Polled Back SNB Currency Operations (Bloomberg)
- Merkel, Van Rompuy Caution Against Euro Bonds (Bloomberg)
- Italy’s Debt May Swell as Austerity Chokes Growth (Bloomberg)
- Jackson Hole Build Up (FT)
- China Previews Rising Leadership (WSJ)
- Gaddafi Regime Collapsing (FT)
- Prosecutor to drop Strauss-Kahn case: report (Reuters)
- Inflation a danger for safe havens (FT)
WTI and Brent crude futures traded under pressure in the early European session weighed upon by the news that Libyan rebels have taken control of most of capital Tripoli and increasing prospects that the ongoing civil war may come to an end soon. However, as the session progressed, prices came off their earlier lows with a weakening USD-Index. News from Libya also supported the oil & gas sector in the hope that companies may resume their business in the country, which also helped European equities to trade higher. Equities received additional strength on the back of early market talk of asset re-allocation from fixed income into equities, which exerted downward pressure on Bunds. Elsewhere, weakness in the USD-Index underpinned the strength in EUR/USD, GBP/USD and commodity-linked currencies, however CHF weakened across the board partly on the back of market talk that the SNB was active in one-month forward market. In other forex news, a sharp uptick was observed in USD/JPY overnight, however there was no confirmation of any forex intervention by Japan. Moving into the North American open, the economic calendar remains thin, however the Chicago Fed report from the US is scheduled for later in the session. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Nov'21-Aug'41, with a purchase target of USD 0.5-1bln is also due later.