Archive - Oct 14, 2011

All you need to read.

When we looked at the latest release of consumer debt a few days ago, we spread the data into its constituent government and non-government loans. Needless to say, taking away the "government" means consumer credit has imploded. So where does all this government debt go? Two places: car financing (see previous post about retail sales surging on a spike in car sales especially subprime loans to Government Motors clients), and student loans. Below we look at the letter. As the following infographic from HealthcareAdministration.com shows, student loan debt, now at $830 billion, has surpassed credit card debt—a statement not likely to have been heard 20 years ago. Student loans, unlike any other form of debt, cannot be forgiven via bankruptcy—these loans must be repaid. Is this the next bubble to burst? Look for clues in this comprehensive infographic.

There is good and bad news in today's economic data release: on one hand retail sales in September beat expectations at 1.1%, on expectations of 0.7%, and up from an upward revised 0.3% in August. Retail sales less autos was a modest beat at 0.6% on expectations of 0.3%, although the previous number was revised substantially higher from 0.1% to 0.5%. Yet confirming that the bulk of the "beat" was in auto and associated gas sales, was that Retail Sales ex Autos and Gas (duh) came at 0.5% on expectations of 0.4%. Basically, surging subprime loans to autopurchasers and the resulting increase in gasoline sales was the reason for this "surprise" beat. And as for the bad news, import prices jumped to 0.3% in September, on expectations of -0.4%, a surge from August's revised -0.2%. And while fuel imports had dropped in August -1.4%, in September these jumped to a positive 0.1%, showing just how big the monthly sensitivity to any moves in the energy complex are. In other words, should inflation persist, don't expect for retail sales, which we expect to decline to recent deleveraging at the consumer level, to persist.

This morning feels like a bad facebook scam. Mr. Geithner continues to remain convinced that nothing bad would have happened had Lehman not gone bankrupt - in spite of a dearth of evidence supporting that view - and has decided that giving more of my money to the IMF will help "solve" things. Solve had been re-defined to mean temporarily, possibly, delay facing consequences only to face bigger problems at some point in the not too distant future. The IMF, EFSF, EU, G-20 are all busy figuring out how to take more taxpayer money to "solve" the problem. The problem is debt that cannot be paid back. Nothing is being done to ensure that the original lenders can pay back the debt. Not a single word of what is being discussed does anything about that. All this done is shift who will ultimately lose when that debt is not repaid. That is it. Instead of banks bearing the risk for bad credit decisions, they will roll out of their positions and shift it into all the supra-sovereign creations they have devised...I am sure we are due to get a good IMF rumor, a good EFSF multi trillion rumor, or even plan, so am prepared for one more good run in stocks, though I think a lot of this is built in, and shortly after any new grand plan is announced, the attention will shift to France and its problems.  French and Belgium bonds are the worst performing bonds in Europe today.  I would expect that trend to continue.

Update: it's over - the going rate for votes was met and Silvio got 316 to 301. The Bunga Bunga shall continue until morale improves and Italy is broke.

Just out from Bloomberg: Italian Prime Minister Silvio Berlusconi won enough votes in the first round of balloting to survive a confidence vote today in parliament, an opposition official who attended the vote said. Berlusconi won 315 votes in the first round, the party official said. Lawmakers are still voting in the second round of balloting. Not surprisingly, just like in America, Italians completely deserve the politicians who lead then.

• S&P downgraded the long-term sovereign rating of Spain by one notch to AA- from AA with a negative outlook
• Fitch placed five major European commercial banks – namely, Barclays, BNP Paribas, Credit Suisse, Deutsche Bank and Societe Generale - on credit watch negative
• Strong corporate earnings from Google boosted appetite for risk during the European session
• The French/German 10-year government bond yield spread widened to a record level on concerns surrounding the impact of an EFSF leveraging on the French sovereign ratings
• Market participants keep a close eye on the outcome of the confidence vote in the Italian Parliament. In latest news, according to ANSA, Berlusconi has enough votes to win the confidence vote

Don't tell the stock and EUR momo squeeze-based melt up, but even as European funding markets continue to be completely snarled up, default risk has taken a big step wider today. As usual, expect the HFTs which now thoroughly control both equity and FX markets, to be the last to get the memo. Most notable: Belgium CDS have just soared to over 300 bps, a 15 bps move wider on the day (and a welcome boost to anyone still holding on the Dexia-Belgium compression trade), and are about to invert.

• China inflation dips to 6.1% in September (FT)
• G-20 Said to Weigh Boosting IMF Lending Power to Stem Europe Debt Crisis (Bloomberg)
• German Bankers Argue Against Capital Plans (WSJ)
• State Revenue Under Forecasts to Produce Cuts From New York to California (Bloomberg)
• Germany’s Banks Said to Prepare for Greece Debt Losses of as Much as 60% (Bloomberg)
• Bank’s Bean says will do more QE if needed (FT)
• Banks’ Paths Vary in Greek Write-Downs (WSJ)
• ECB warns against private role in bail-outs (FT)
• China Inflation Wen’s Scope for Easing (FT)

While the euro has been gloriously soaring higher over the past nine days, to much pomp and circumstance, with the move now 3.2% on the week - the biggest 5 day gain since the beginning of the year, and European bureaucrats overeager to point out that there is no way the currency could be on the verge of implosion if it is in fact soaring, a far more quiet and stealthy move has occurred in the spread between French and German bunds, which just hit an all time record. Why is this important? Because as the chart below shows, the correlation between the two had been for all intents and purposes 1.000... until 5 days ago when it bexome -1.000. Which is a clear signal that the move in the EUR is now purely technical and on last fumes from the ongoing short squeeze long discussed on Zero Hedge (watch for the CFTC COT update at 3pm today for the plunge in net EUR short exposure); it is also a loud signal for a compression trade between the France-German bund spread and the EUR, and as such we encourage readers with a capacity to enact said compression trade to boldly go where no weak EUR short covering hands have dared go in the past 5 days.

The Bloomberg ‘Chart of the Day’ shows the proportion of gold in the international reserves of India, Russia, China and Mexico is significantly lower than the rates in the U.S., Germany and France, based on data compiled from the World Gold Council. The lower panel tracks central bank holdings in metric tons and the bullion price since March 2008. Central banks last year were net gold purchasers for the first time in two decades. Central banks, the biggest gold holders, have expanded reserves due to the international financial crisis. Central bank and government-institution buying totaled 192.3 metric tons in the first half of 2011, World Gold Council data show. Gold accounts for 75.4% of the U.S.’s reserves and 72.7% of Germany’s. The ratio is just 1.6% for China and 8.2% for Russia, WGC data show. “Governments in many places like Asia and South America are rapidly embracing gold as a security mechanism,” said Wendt, who expects gold at $2,500 in 2013. “The value of their U.S. dollar foreign reserves has drastically fallen over the past decade.” Thailand, Bolivia and Tajikistan raised reserves in August, according to the International Monetary Fund. Central bank demand is strategic leading to gradual accumulation and it is long term meaning that official sector demand will provide support to prices for the foreseeable future. Thus, continuous suggestions that gold is a bubble today and in recent years and of a gold bubble bursting and prices falling sharply as seen in 1980 is uninformed and misguided. The world of 2011 is very different to that of 1980.

Just when it seemed that a Fitch downgrade of all global banks and an S&P cut of Spain may finally snap the back of the EUR, the European currency decided to shove its head even deeper in the sand and proceed to melt up by a nice 100 pips on hope that some big, fat, juicy rumors may come out of a G-20 meeting in Paris, and that a bumbling Barroso may say more unbearably stupid things (such as this one from Bloomberg: Barroso reiterates call for Euro-wide bank recapitalization: apparently the unelected European dictator is not aware the EFSF somehow has to be increased to €3.5 trillion first. Never let facts stand in the way of fictional propaganda) about bank recapitalization. Either way, what appears to be a certain risk off day, has in the past 6 hours, been completely reversed. Here are the key catalysts that drove that, courtesy of Bloomberg First Word.

The first call of voting for the Berlusconi "vote of confidence" in the lower house of the Italian parliament has started. Follow it live here. Should Berlusconi ultimately not get enough votes, and his government tumbles, all hell may soon break loose.