Archive - May 13, 2010

As we "socialize debt", we risk seeing more drastic adjustments in currency markets, and the world could very well be heading towards parity.

Portuguese National Statistics Institute reported yesterday that the average debt-to-equity percentage of Portuguese companies has reached a staggering 140%. In the economy which is now perceived as the next problem within EMU, such high average percentage of enterprise debt will not only have a big impact on Portuguese economy, but also on EMU in general.

Futures charts + an open thread

Random thoughts on the FX market.

Here's a partial list of ways in which we've REALLY been bailing out the behemoths.

First the euro, now the cable. Europe is openly capitulating. And as the flush in the GBP is what caused the late day sell off, watch for active central bank currency purchases tonight, or else a very unpleasant market open tomorrow. The only question now is which PM dealer still has anyinventory left (incidentally that is a legitimate question - if readers can recommend European PM retailers, please note them).

Why the euro-bailout won't work, what will happen when it fails, and what they should do about it.

We view gold as potentially the best currency; an ongoing portfolio theme based on the probability that central bankers in the U.S., Europe and Japan will continue their efforts to stimulate their economies with excessive monetary easing (printing money), while ignoring for the time being the dangerous fiscal ramifications. While deflation is the current problem, these policies increase the risk of a sudden turn to inflation. Without the return of significant global growth it is possible that we get the worst outcome in the form of stagflation. For example, oil and other commodity producers may start to demand higher prices in debasing currencies even though unemployment remains high and wages are stagnant or falling. Our analysis of commodities markets indicates that this effect has already begun. James Melcher, Balestra Capital

Now that legislation to spin off swap trading desk from commercial banks is picking up steam it is time to roll in the big money printers. In a letter to one of his lame duck minions, i.e., Chris Dodd, Bernanke said that daring to change the status quo in any way would like destabilize the system and who knows what would result. In other words: not only in swap-related legislation, but in any proposed rule, such as that long forgotten thing which Barack Obama was parading on national TV 24/7 for about a month known as the Volcker Rule, which seeks to take away from bank revenues, Bernanke will step in and say that even though the proposed rule will make the system safer it will really make it that much more prone to "weakness" (don't think about it too hard - it's so complicated only the Fed and Goldman Sachs understand the vast implications of that statement). Of course, weakness, is simply another word for less than record taxpayer funded annual bonuses. As Bloomberg reports, in his letter, Bernanke says the proposed law “would weaken both financial stability and strong prudential regulation of derivative activities.” In other words: make sure my banking buddies can continue to rob the middle class blind, or else. Expect another market crash just so Bernanke can prove his point.

Set aside the stupidity about Taleb causing last week's sell off for a minute and you have 14 minutes of very relevant insight not only into last week's crash, but into the real events that precipitated it: namely market structure, European contagion and the precarious US economic situation. In a Bloomberg TV interview a thousand times more informative than Taleb's CNBC appearance (presumably it has to do with the absence of the Power "I love to hear my voice" Lunch brigade), the Black Swan author discusses what keeps him up at night: a failed auction. Once again, we differ in a slight nuance that not even a failed auction, but the impression that the auction status quo is changing will be sufficient to set off the treasury avalanche. Whether that means a dramatic change in the Direct Bidder regime, the Primary Dealer hit ratio, or some other metric, we don't know, which is why we log each and every auction to keep track of any potential outliers and aberrations. Taleb's advice: stay away from Treasuries (especially long-term), avoid both the euro and the dollar, have a collection of metals and agricultural land exposure, and "use the stock market as something for entertainment not investment." And definitely stay away from school and equations.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 13/05/10

The first bill to US taxpayers for volunteering to bail out Europe is in. It appears in the past week the New York Fed executed an FX swap with the ECB for $9.2 billion notional of FX swaps. As we reported earlier by demonstrating the lack of bids for the BOE's dollar repo operation, only the ECB is (currently) in need of dollars. Yes America, in addition to the IMF contribution of ~$50 billion, with each passing week you will see more and more billions of dollars collateralized by a rapidly devaluing foreign currency serve as the backstop for your currency.

Just when you thought things in Greece could not get any stranger:

There was a large explosion outside the main prison in Athens on Thursday, Greek police said, but there were no immediate reports of injuries or damage.

"It was a really strong explosion that was heard kilometres away," said a police official, who requested anonymity.

The top security Athens prison is in the Korydallos suburb, west of Athens.

 

...Yep, you guessed it: a 10 handle drop in the ES in 5 minutes. The second someone lobs a big sell block everyone immediately follows. The Dow is still shy to repeat its performance from a week ago. And yes, everyone expecting it only adds to the stage fright. Note that we are now at the VWAP from Sunday night.