Archive - Jul 2010

When I began writing ten years ago, I would offer that the opposite of love wasn’t hate; it was apathy. I shared that thought after tech stocks dropped 40% in less than two months and then recovered half those losses the next two months. We all know what happened next; the tech sector melted 70% the next few years. Wash and rinse, Pete and repeat; we’ve seen that sequel again and again and again. From the homebuilders (real estate) to China to crude oil, a “new paradigm” arrived. Every time was different and each offered a fresh set of forward expectations that would finally prove historical precedents need not apply. I traded all of those bubbles thinking quite sure they would follow the path of false hope and empty promises paved by their predecessors. That proved true as the real estate market crashed, China imploded under the weight of the world, and crude crumbled just as it seemed ready to stake claim to the new world order. While those bubbles hit home for many Americans, they’re hardly unprecedented through a historical lens. - Todd Harrison

In an interview conducted with Business Week, Nassim Taleb discusses his view of the biggest black swan in the market currently, and isn't shy to call government debt a "Pure Ponzi scheme." - When asked where he the biggest potential source of systemic fragility is, he responds: "The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it. The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers." Alas, Taleb is wrong: Ponzi or not, today's UST auction will likely once again come at a multi year high Bid To Cover as the suckers (especially those who recycle Fed discount window money) just refuse to go away.

Yesterdays’ activity was wild. The range was very tight but violent. This happens often after a big move. People step back to reassess, profit takers and liquidators come in and the result is a choppy range. That I can handle. What was different was the behavior of the Q rollover players. And the behavior is consistent with a market in flux, evolving to the point where the old way of making money for bullion dealers may not be viable going forward.

I suppose the argument goes, if you need less and/or, spend less there starts a vicious downward spiral. Except- that’s an extrapolation that doesn’t necessarily hold – examine the rephrase: if you need to spend less…well then, you have more to spend on discretionaries. The Demand function is after all constructed from the current aggregate spending – mortgages, utilities, foods, gas, schooling, bills, beer, women, crisps- and it is exactly this Demand function that is being defended when we talk of the threat of Deflation. In essence, the argument goes, when things get really bad then what happens is that, as a population, we stop being able to support the spending on these items...jobs will go, investment will collapse, services will vanish... and the government won’t have enough money, for one- there won’t be any tax revenue, to help. Except of course, that this is the situation we have right now. Perhaps then, yes, it should be stymied, but what is meant by Fighting Deflation is exactly a continuation of the policy we have to date – and this is where the defending of the Demand function is important to understand - that essentially, the FRBNY is asking to preserve the current cost ratio of all major items in the personal budget.

Don't be so quick to dismiss the behemoth known as Microsoft!

• SEC Says New Financial Regulation Law Exempts it From Public Disclosure, in other words the SEC did not reply to your FOIA before, when it was busy watching porn, it surely won't reply now, when it is again busy watching porn (Fox Business)
• Fannie Mae, Freddie Mac Still Too Big to Nail (Bloomberg)
• Moody's says US needs debt plan to keep rating (Reuters)
• Niall Ferguson: Sun Could Set Suddenly on Superpower as Debt Bites (Australian)
• Europe economic confidence rises as exports benefit from record low EUR (Bloomberg), and now that the regime has changed, expect Europe to plunge again as US exports pick up, and so forth, and so forth, with the capital flow from Europe to the US becoming a daily occurrence
• Europe Follows Misguided U.S. Policy: The Stress Tests Conducted in 2009 Were a Disaster (Forbes)
• Renminbi Peg: On Again, Off Again - Cleveland Fed says depegging CNY will not help US trade deficit (Cleveland Fed)

• Asian equity markets had a mixed session overnight. The Hang Seng finished flat +0.01% up. The Nikkei 225 was down -0.59%.
• European equity markets are making gains today and are progressively getting higher. This is on the back of strong European economic data.
• Commodities are pushing higher this morning. Oil and Gold are both trading higher in today’s session while copper is up over +1%

Those looking to find a catalyst for today's market action will probably not find it here. Which likely means ramp time as there will be no volume in the market once again. And good thing Obama extended that job stimulus for the nth time, as EUC claims plunged another 230k in the week ending July 10, a 1.5 million drop in just over a month: on July 10, total EUCs were 3.253 Million, a drop of over 1.3 million since the 4.7 million on June 5. These are all people who no longer used to receive their monthly $1,000 bonus check for not working, taking out tens of billions of dollars in circulation out of the economy.

After the Swiss National Bank was actively gobbling every euro it could find for months on end to punish its own currency, in the process swelling its balance sheet to half the country's GDP, the WSJ's MarketBeat reports that the SNB is now in reverse mode, and has been a steady seller of EUR for the past 10 days. And since the dramatic ascent in the EURUSD is still rather confounding in light of increasing Yen strength, one potential explanation is that this has merely been a coordinated effort to provide the SNB with appropriate EUR selling levels as another quarter of massive FX-related losses would likely be Hillenbrand's last. From MarketBeat: "The Swiss National Bank is once again at the center of the currency markets, with London-based traders at two banks saying the SNB has been dumping some of the euros it hoarded during this year’s aggressive but ill-fated intervention program. London traders said the SNB has been a steady seller of euros against the dollar over the past 10 days, likely limiting the scale of the single currency’s ascent. The central bank declined to comment." We have covered the SNB's dramatic and frequent interventions in the FX markets over the past 6 months, many of these predicated by the hundreds of billions of CHF denominated loans in non-Euro countries, which had the potential to destabilize the Swiss economy, and to force a massive squeeze in the CHF bringing the currency not only to parity with the USD but with the EUR (a topic covered extensively by the WSJ yesterday). For those who may have missed the "logic" of the interventions, and the current unwind, here are some more observations from Marketbeat

Even as RBS attempts to once again soothe the frayed nerves of concerned investors with groundless Koolaidery, 3 Month EUR Libor has once again jumped to 2010 highs. As Market News reports, even as the overnight EUR LIBOR rate "plunged, and one and two week rates fell markedly, ahead of the month-end" and ahead of eurodollar arbitrage settlements, "the 3-month LIBOR continued its ascent." Which should be very concerning to all, especially RBS which once already burned its investors by outright prevaricating the truth about Greece in February when the bank refuted facts presented by Zero Hedge there was a bank run in the country. Alas, those who listen to RBS' unfounded optimism once again likely to be burned: "The “widening is very minimal,” says Jacques Cailloux, chief European economist at Royal Bank of Scotland Group, who says this same rate surpassed 5% at the height of the global financial crisis in 2008. “I wouldn’t go so far as to say that it (the rise) suggests things are getting worse. With both Euribor and 3 Month EUR Libor, not to mention top tier European Commercial Paper, at 2010 highs, to say that the European money market is getting better is simply idiotic.

A disorderly unwinding of China’s credit and property bubble may well be the principal global macro risk today. While
all eyes are on Europe, it would certainly have the potential to catch investors by surprise. But such an unwinding is not
necessary to have a noticeable impact on its largest supplier. In macro, what happens at the margin matters most. Many
argue that a slowing of Chinese GDP growth from 12% toward 8% still represents an exceptional growth rate for the
world’s second largest economy. We suggest that investors focus instead on the 33% decline in the rate of growth, which
will have a comparable effect on China’s demand for (Australian) commodities. Any significant reduction in said demand
could easily provide Australia’s property bubble with a Chinese Pin. Then again, bubbles of this magnitude often collapse
under their own weight as gravity pulls valuations back to earth over time...Today, the consensus remains whole-heartedly in the bullish commodity camp based primarily on China’s insatiable and uninterrupted appetite for resources. We have invested considerable time
exploring cheap hedges to profi t from a speed bump in Chinese demand and another deflating property bubble (or two). While we remain constructive on the long term prospects for commodities and other real assets, buying a little insurance in the face of near term cyclical risks seems like the prudent thing to do, particularly since market participants have again
forgotten that prices are capable of moving in a direction other then up.

It has been a while since political bickering over who can piss the farthest was an issue of global concern. Today, China communist party's mouthpiece People's Daily has released an essay in which the country once again resorts to thinly veiled threats against the US, and demands that not only the country's territorial demands in the South China Sea be uncontested, but that the US accept China as a global power , as the alternative could promptly generate the appearance of rocky relations between the two countries and "no one would like to see the negative effects rocky relations would bring to China, the United States and possibly to the world as a whole." Of course, with China the world's biggest creditor nation, and holder of anywhere between $800 billion and $1.2 trillion (assuming all that London flotsam is really Chinese stealth accumulation), Beijing can rest assured the essay has been duly noted. Of course, with the administration doing one wrong thing after another, it would not be at all surprising if the president's advisory henchmen seek to push the tenous relationship as far as it can go, and truly test the decoupling (this time it IS different, Jim O'Neill said so) hypothesis, however with nothing but downside if decoupling is finally proven true (breathholding not advised).

The FT reports that an intimate group of 12 banks has been contacted by ISDA to begin preliminary contingency plans in anticipation of a European country leaving the euro. Don't panic: just because banks are mobilizing it simply means that there is no chance of Greece, er, any country ever getting kicked out of Europe, as this would be predicated by a sovereign bankruptcy. And the stress test even refused to consider that alternative, which once again confirms that the stress test is completely right and watertight while ISDA is simply being foolish for not having faith in the Kardinals of Keynesianism. In other news, the market will only go up always, faster, forever.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/07/10

Someone stubbornly refuses to give the European interbank lending market the memo that all European banks are all fine and dandy now. Either that, or the EUR short covering squeeze which has taken the EURUSD all the way to 1.306 this morning, continues in full force as European banks continue experiencing a shortage of euros as Zero Hedge discussed several times previously, snarling up money markets worse than at any time in 2010.