Archive - May 2010

The Nomura strategist shares his latest insights into Greece and the European contagion. As widely reported, the Western media blames the subprime crisis on “the bankers” for lending to American home buyers who lied on their loan applications and who clearly could not afford their interest payments. It is somewhat ironic that the same popular outrage (at least in core Europe) is now directed entirely at Greece for taking on debts it could not repay, while the bankers who lent the money remain without blame. Perhaps the media thinks the Greek government should have known better, while the average subprime borrower was too simple-minded to be culpable? Koo is happy to lay the blame with the bankers, in both instances, for not doing adequate due diligence. In the case of Greece, the economy’s structural problems were well-known, and he points out that both the subprime and Greek crises were the result of banks/investors chasing high yields and ignoring the inherent high risks. Koo thinks the Maastricht Treaty’s 3% ceiling on fiscal deficits is extremely problematic, as it does not allow for necessary fiscal stimulus when nations find themselves in a balance sheet recession. It is also unenforceable (as we have just seen); plus levying fines on Greece for its violations makes little sense at this point given that it has no money.

When global governments refuse to act responsibly toward their currency, the people will create their own currency. Welcome gold.

( NAW ) 05/12 08:57AM AUSTRIAN MINT SAYS SOLD 243,500 OZ GOLD IN COINS AND BARS IN LAST 2 WEEKS, MORE THAN IN ENTIRE Q1

( NAW ) 05/12 08:58AM AUSTRIAN MINT SAYS GOLD ORDERS COMING ENTIRELY FROM EUROPE IN LAST FEW WEEKS, SIGNS OF "PANIC BUYS"

Equities now officially have an active memory of about 24 hours. The biggest market drop in history is now long forgotten, and the only consolation to investors is that SEC is actively fixing the problem even though it has no idea what the problem is. Overnight, futures went up by 20 handles in the span of 4 hours as the invisible bid appeared yet again, afraid of what would happen if the immediate drop in ES was not breached. Luckily, funding markets are not nearly as stupid as stocks, and as a result the TED spread has yet to show any signs of moderating. At last check 3 month LIBOR was 0.4302%, the highest it has been since Q3 2009, and certainly a change from the funding market calm that hadenveloped all market participants like Federal Reserve "no risk" amniotic sack over the past year. At the same time the 3 Month Bill is once again grinding tighter, as investors unsure what to buy, buy everything: stocks, bonds, oil and especially gold. Another perfectly insane day in US capital markets glutted by endless liquidity.

As we pointed out last week, nobody cares about either Greece or the PIIGs any more. The focus among the smartest money out there, in the face of CDS traders, for the third week running, is on the core of Europe, and specifically on the UK. Last week the net notional derisking in UK was a massive $1,063 million in 280 traded contracts, which according to our files is the single biggest one week derisking amount on record. all the Greek "speculators" are now focusing their attention squarely on the UK... and France, which came in second with $384 million in derisking. Incidentally, these two represented the greatest amount of of derisking in all top 1000 CDS reference names (third altogether was not surprisingly Goldman Sachs with $256 million). The bet is now squarely on that the PIIGS contagion will move to the UK, and that France will also not be spared. We wish Mr. Cameron all the best as he attempts to push the $50 billion austerity measure through. We have a feeling his popularity rating in under a year will be even lower than that of president Obama. And if it isn't it will be because the cable and the dollar will be at parity. After all, we are all money devaluaing comrades now.

• Argentina backs off $1B global bond sale plan after surge in yields.
• Asian stocks rise on Toyota profit forecast, record gold price.
• European stocks rise as earnings reports outweigh national deficit concern.
• German economy unexpectedly grew in first quarter on exports, investments.
• Gold climbs to record for second day as Euro risk fuels demand.
• Osborne to set out $9B in emergency UK budget cuts within 50 days.

The only obvious market going anywhere this morning is Gold. The precious metal broke out yesterday and made all time highs against the green back. As we have discussed at length recently whether it is from a fundamental or a technical standpoint it is the only trend with shorting EURUSD that is clearly established. Back before September 2009 I was a bit dubious as to whether major upside was in the cards for Gold because as we have highlighted several times before I think the deflationary forces at work are huge. However, ever since 1,000 was bypassed again we have validated a technical breakout. What's more: monetary policy by central banks and governments around the world is nothing shy of a race to the bottom as sovereigns have been printing the money needed to make good on their liabilities an that of their private sector. The recent European bailout which was 100% predictable confirmed the trend and the gold market acknowledged it breaking out yesterday. The next key target on the upside is 1,381. We recommended getting exposure in the 1,080/1,090 zone after the pull-back following the previous highs of December 2009 and would advocate riding the trend with a trailing stop on a daily close below 1,170. The only way to stop this train is if the market and the people force politicians into acknowledging defaults and restrucuture while let banks that need to fail and start with a clean slate. That would be hugely deflationary and the shrinking of the money base would cause a collapse in gold. Since we have not seen a politician with one ounce of courage in about 50 years I would feel pretty good being long: heads of states will continue fighting evil speculators by short-squeezing them with trillions of ponzi money. - Nic Lenoir

How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?

RANsquawk European Morning Briefing - Stocks, Bonds, FX 12/05/10

• The European Financial Stabilization Mechanism backstops EMU public finances without distorting incentives.
• The focus now turns to budgetary plans by individual countries, and the new rules on fiscal coordination.
• The ECB’s ‘interventions’ in sovereign bonds have so far targeted the smaller, weaker credits.
• Secondary trading in Spanish and Italian government bonds is slowly ailing; over time, this should help financial risk subside.
• The dispersion of EMU sovereign spreads will remain wide going forward, reflecting greater differentiation across fiscal positions.
• EMU GDP-weighted 5-yr government yield is now 2.4%, comparable to the US, and roughly 80% of Emu public debt is held within the Euro area (relative to only 52% in the US) 

Late yesterday, the FRBNY posted the full terms of the various FX swaps that it instituted as part of the bailout of the Euro, and of various French and German banks. The specifics of the rescue agreements with the BOE, the ECB and the SNB are below while the Bank of Canada and BOJ swap details are still pending. One thing we know is that all swap arrangement will have a maximum duration of 88 days. Surely at that point they will merely be rolled over as the Euro could be facing parity and various European banks will all be on the verge of bankruptcy due to the $6 trillion USD/EUR underfunded mismatch which the BIS and Zero Hedge have previously discussed. Yet a critical missing item is the full size of each specific swap, leading us to believe that the Fed's latest swap lines are limitless in size. If the expectation is that the Fed should not be constrained by how large any given swap line can get (and even in the first European bailout round each swap line had a hard ceiling), one can speculate that the Fed fully anticipates European dollar funding needs well into the trillions. Which of course would mean that the Fed's balance sheet is about to go up by 50% on behalf of rescuing Europe... And that FR banks will make double the expected $1.25 trillion in interest on excess reserves. Thank you US taxpayers.

Tom Hoenig's Chinese doppelganger has finally appeared. Yesterday we pointed out that the Chinese economy is now in unsustainable overdrive mode and is likely at most months away from entering runaway inflation mode. Today, Li Daokui, a monetary policy committee adviser of the People's Bank of China, was quoted by the China Business news as saying conditions necessitated a start to policy tightening. Should the PBoC decide to do the right thing and officially enter a tightening mode, watch oil and copper, not to mention the BDIY, to crumble by 10%-15% overnight.

The WSJ reports that "Federal prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter say, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis." In essence, Abacus comes to Times Square. And the latest soundbite for today's media feeding frenzy: the "Dead Presidents." So going down the list: Goldman - check, Morgan Stanley -check, Merrill, Deutsche and UBS - to come, especially once Khuzami finds a replacement to fill his recused status when investigating the German bank.

Themis Trading's Joe Saluzzi, who still has oddly not be asked to discuss his perspectives on the flaws in not only HFT but broader market structure and topology issues before a congressional commission, is interviewed by Bloomberg (and amusingly Carol Massar, after mocking him the last time around, finally gives him props for having been right all along). Fans of A. Joseph Cohen would be better advised to look elsewhere for their daily dose of Vitamin H_opium. The take home message"It's gonna crumble, it's just a matter of when." Alas, with gold now at $1,241 even lifelong Keynes fanatics are finally throwing in the towel. The time when we could have done something to fix the system is now long gone, courtesy of the administration's waffling for the past two years as instead of getting to the root cause of the last and future crash, it was focused on bailing out bankrupt banks. And in related news, Jim Rogers, joins the Euro death squads, and says that the $1 trillion bailout is the "Nail in the coffin for the euro." As Rogers said in discussing the now failed bailout: "I was stunned. This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency, you have all these countries spending money they don’t have and it’s now going to continue. It’s a political currency and nobody is minding the economics behind the necessities to have a strong currency. I’m afraid it’s going to dissolve. They’re throwing more money at the problem and it’s going to make things worse down the road.”

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 12/05/10