Looking at the European theater of Keynesian war, Erik Nielsen says, "We optimists have had a very good week in Europe." Well, when after a 70 year sabbatical, it is once again the pan-continental doctrine to fabricate a lie so bold, the population has no choice but to believe in it, it is truly a victory for the bulls. Yet even the consummately rosiest outlook out of Chiswick agrees there are at least a few thunderclouds on the horizon: "Hungary is a space worthwhile watching. Orban’s government seems to have taken a populist line, but I think the EU and IMF will be prepared to make a demonstration effect out of Hungary, if needed. The government will most likely end up caving, but it could become quite messy before then."
I have written in the past about the prospect of a nuclear Iran and its destabilizing effect in the world’s most important energy region. But what if Israel strikes before Tehran’s nuclear ambitions are realized? Although given that Iran currently could have as many as 8,000 centrifuges enriching uranium by December (IAEA estimate), an Israeli strike now, as opposed to say 2003 when the secret program was first revealed, may not effectively shut down the decentralized program. Still, it could cause a frustrating delay in Iran’s timetable and, depending on the line the mullahs take immediately succeeding the attack, weaken the regime’s hold on a populace that is more educated, more worldly, more pro-Western and less easily cowed than others in the region as the green protests last year revealed. The (literally) billion dollar question of course for commodities traders is what will be the effect on the price of global energy in the immediate and longer dated aftermath of such a military strike? As with the current diplomatic stand-off today, much of that will depend on Tehran’s reaction. Here are three possible scenarios should we wake up to news of Israeli fighter-bombers winging away from Natanz, leaving a burning nuclear facility and a thousand questions in their jet wash behind them.
The European stress test today was a very very sad buffoonery to witness. Firstly the worst case scenario is a 3% GDP contraction and a 20% equity market sell-off. Let's be frank if GDP contracted in Europe by 3% stocks would fall a bit more than 20%. More importantly, as 20% correction would leave the market clear by 33% above the lows of 2009. You would think the worst case scenario would be at least to revisit these lows. So basically the worst case scenario is not really credible as a "worst" case. Secondly the test focused strictly on the mark-to-market holdings of sovereign bonds. That is like sizing up an iceberg using only the tip. Spanish banks for example are ridden with housing inventories that are most likely marked at the 2006/2007 highs, and all that is happily excluded from the test, as well as accrual accounting books. The fact that they had to resort to truncating the scope so much given a relatively mild worst case assumption tells you how much head scratching must have gone on to make this look half way decent. It even felt like they invented some random unknown banks that failed just to make it legit. Solid work I must say, and on a summer Friday with no volume and syndicated desks using algos to push up the tape, the reception by the market looks quite grand on paper. The fact sadly is that no one cared today and there is not one reasonably informed investor out there who doesn't see this for what it is: a sad joke. Unfortunately when everybody gives up on the market and it melts up for no reason, I think we are really worst off than if we took the pain we deserve now and deal with the real state of affairs. This expensive extension of a broken system will only make it worse in the end. - Nic Lenoir
Just as Goldman's hope that the BP gusher's taking front page priority, especially in the aftermath of the rather amusing settlement between the firm and the SEC, was finally appearing to bear fruit as for the first time in over a year there was nothing relevant on the news front regarding the 200 West company, here comes Senator Chuck Grassley lobbing a grenade full of provocative and very much unanswered questions directed at the GAO, at Elizabeth Warren, and at Neil Barofsky that demand clear and prompt answers. We are also quite content that Blackrock and AIG once again manage to get themselves dirty.
The United States and the NATO allies are preparing to disengage and soon withdraw from Afghanistan and even the most vocal advocates of the "long-term commitment" do not anticipate more than five years of active US and NATO involvement. All the local key players — in Kabul, Islamabad, and countless tribal and localized foci of power — are cognizant and are already maneuvering and posturing to deal with the new reality. Irrespective of the political solution and/or compromise which will emerge in Kabul, the US is leaving behind a huge powder keg of global and regional significance with a short fuse burning profusely: namely, the impact of Afghanistan’s growing, expanding and thriving heroin economy. The issue at hand is not just the significant impact which the easily available and relatively cheap heroin has on the addiction rates in Russia, Europe, Central Asia, Iran, Pakistan, and Afghanistan, and the consequent public health, social stability and mortality-rate issues. In global terms, the key threat is the impact that the vast sums of drug money has on the long-term regional stability of vast tracks of Eurasia: namely, the funding of a myriad of “causes” ranging from jihadist terrorism and subversion to violent and destabilizing secessionism and separatism.
Yesterday the OMB released its Mid-Season Review of the US Budget. In keeping with the encroaching Beijingization of all data releases, the administration now sees yet another decline in the 2010 budget deficit, this time a reduction of $84 billion compared to the February forecast. According to the budget office, despite a $33 billion projected drop in revenues, outlays will see an even greater haircut courtesy of "lower unemployment and government program" spending. Yet even so, the 2010 budget deficit is expected to hit $1.47 trillion and $1.42 trillion in 2011. Of course, all these numbers are flawed and irrelevant: the confirmation - the OMB's assumption about jobs projections. To wit: "With continued healthy growth in 2011 and beyond, the unemployment rate is projected to fall, but it is not projected to fall below 6.0 percent until 2015." One problem with this "assumption": for this projection to actually happen, it means the US government needs to start creating 245 thousand jobs every month beginning in July through the end of 2005 (and we give the OMB the benefit of the doubt: if their assumption means 6% by the beginning of 2015, it implies a ridiculous job creation rate of 300,000 per month for 54 months straight). Alas, in attempting to present the rosiest picture possible, the budget office is now completely ignoring such useless things as logic and merely discrediting itself with increasingly more ridiculous "analyses."
We are happy to announce our latest joint collaboration, by launching a weekly chart update of the CFTC's Commitment of Traders report for key commodities courtesy of Libanman futures. The commodities presented include crude, nattie, heating oil, cocoa, coffee, sugar, gold, silver, platinum, copper, soybean, wheat, cotton, and OJ. As currencies are not includes in the summary, we will continue our ongoing observation in key currency trends, particularly as pertains to speculative sentiment in the key EUR, JPY and CHF pairs.
Due to an intensive travel schedule over the next 24 hours, posting will be limited (and if prior travel experience is any indication, Greece riots over the next week may be anticipated). Please consider this thread open to mock, ridicule, debase and taunt the now completed Stress Farce, as well as to brainstorm anything and everything else that may be of interest.
Also Europe finds that :
- Full GoM clean up will be around 2 bucks
- The cost of the Large Hadron Collider was reduced to a couple of dimes
- The US budget "deficit" is estimated to actually be a $100 quadrillion budget surplus
- Merrill's expense tab at Hustler Club is only $19.95
And we uncover that the German Landesbanks (the equivalent of the bankrupt Spanish cajas) did their own stress tests. Time for the PPT to step in with this pretext and soak up all offers. Totally pathetic BS.
Update 1: Somehow Bank of Ireland "passes" the test but needs over €2 billion in extra equity... uhm... WTF??? This is the point where the audience rushes the stage and burns the theater down.
Update 2: 5 Spanish cajas, 1 German and 1 Greek banks are eliminated on their quest to marry the US taxpayer. 84 other banks will soon be the recipients of far more US taxpayer generosity. And with that the season finale of the farce comes to a close.
The Cleveland Fed has spent another boatload of taxpayer money analyzing a topic so simplistic even a 5 year old would know the answer in advance, to wit: "Is debt overhang causing firms to underinvest?" Let's see here... Uh yeah. And you can keep the $1,000,000 "research" cost. While the paper is sufficiently entertaining courtesy of a few graphs, flow charts and general widgets, the conclusion is startlingly absurd. In essence the authors conclude (in less than definitive terms) that debt forgiveness may be the best outcome for highly leveraged companies: "The debt-overhang problem may be so severe that creditors can actually benefit from forgiving a portion of the debt. With excessively high levels of debt, the risk of default is large and the market value of debt is well below its face value. If the creditors forgive part of the debt in this situation, the lower debt burden helps realign the interests of the equity holders and the creditors. The firm’s effort and investment will rise, increasing the total value of the firm and the market value of the remaining debt. If this effect is strong enough, the market value of the remaining debt may be even higher than the market value of the total debt in the absence of debt forgiveness, in which case debt relief will ultimately benefit the creditors themselves." Well, now we know the reason for the financial cram up, in which stockholders were spared while preferred and sub debt was being raped back in 2008. Yet if this thinking is indicative of prevailing Fed ideology, the move for a wide-reaching, Federally-mandated debt repudiation may be just steps away. And just in case you note that the Chapter 11 process, in which existing underwater debt is converted into post reorg equity, is a perfectly logical, viable and working alternative, the authors will have none of such dogma: "A creditor takeover of the firm after it defaults is another potential solution to the debt-overhang problem. Creditors would have an incentive to undertake all profitable investment
opportunities. However, this solution is not satisfactory either, since
most investment opportunities depend on business continuity and
disappear or lose substantial value when default occurs and the equity
holders lose control of the firm." Because creditors obviously have no idea how to preserve business continuity if they end up being the equityholders....And in case you were wondering, author Filippo Occhino does have a Ph.D from a (semi) respectable institution.
Whereas Alphaville presents several statutory observations by David Rosenberg as to a variety of reasons over which one "could" be bullishly inclined based on a goal seeked read of the data (if one so chose), his daily letter is once again capped with yet another bearish summation: the bad news more than drowns out all the positivity, even if that means that another double dip is practically priced in.
A lot of talk about what the “New Normal” means. Here’s a contribution.
There are three essential ingredients to the one we have.
- Higher, less stable volatility
- Lower returns
- Unstable inflation expectations
All three of these contribute to the risk?on/risk?off mentality markets exhibit. The focus here is inflation expectations. Not only is it the fuel for the inflation?deflation debate, it is a leading indicator for the shape of the next normal coming up. The next step is a settling down of expectations.
If in addition to 85% of the economic data releases in the past month coming below expectations was not enough, the ECRI leading indicator has just came below the critical threshold of -10%, which according to Rosenberg has virtually assured recessions based on data from the past 50 or so years, hitting an annualized rate of -10.5%. And since even the index creators (and Ivy League tenured professors) are openly refuting the adverse implications of their own index (when they, and everyone were praising it when it topped out at 27.80 a year ago), one can be sure this is a rather dramatic data point.