Archive - Oct 19, 2011

When it comes to manipulating income and wealth data, the government and the BLS are second to none (well, maybe only second to China but we digress): after all there is nothing that gets Americans to spend more than thinking Joe Blow down the street may outspend them. And at 70% of GDP, Americans have to consume. And what better way to do that, than to fill the airwaves with propaganda that spending is going up, up, up (even if said surge is nowhere to be seen). So far so good. Yet one place where nominal and real income data can absolutely not be fudged is the Social Security Average Wage Index based on withholding data reported by employers, particularly the median wage, whose nominal change can then be extrapolated in real terms using CPI to create a chained series. And here is where things get messy: as John Lohman demonstrates in the chart below, real income based on median wages, dropped (in real terms) by 1.2% - the biggest year over year slide in over 20 years of data, which is surely news to Joe Blow, whose impetus to spend, spend, spend would be substantially less, if the awareness was there that everyone is making and thus spending less, which in turn would lead to even more accelerated deleveraging, which would ultimately lead to a faster return to the mean for the overall economy: a mean which is sustainable without constant monetary and fiscal intervention. And yes, there will be lots of pain in the transition from the current Frankenstein state to a true equilibrium state - something that Ron Paul has been pounding the table on for years, and is the reason why unfortunately he is unelectable - Americans can not stand to hear the truth. For this and more factual trivia, see the chart below.

Doctor copper that is. Because apparently someone forgot to tell China that "Europe is fine." As a result, over the past 3 days we have seen a relentless selloff in all risk assets and commodities when China is open (the weak GDP print sure didn't help), at time bordering on liquidation, but most notably in copper which is now down 7% on the week, and which in a feedback loop forces domestic speculators to sell anything that is not nailed down, due to copper's use a core Letter of Credit pledge. As a result, any drop in copper leads to leveraged selloffs in all other assets, which leads to even more selling in copper and so on. Perhaps the Beijing editions of the FT or The Guardian can promptly put an end to this lunacy, which can be ignored by vacuum tubes only for so long...

While Morgan Stanley only recently became a second derivative for everything European-related (thank you financial short selling ban in Europe, and also thank you Mr. Gorman for updating investors on your firm's $39 billion gross derivative exposure to French banks (not France the country). What's that? You didn't provide one? Oh, our bad, just as it is "anonymous bloggers" bad that your CDS blew out this quarter and generated over $3 billion in "income" for your firm - you are truly welcome), Bank of America has, for quite a while, been a proxy for all that is wrong with America's mortgage industry, courtesy of that most value-destroying purchase of the insolvent criminal entity that was Countrywide Financials. For a while the market was content that the proxy would not be in need of a shallow grave, unlike the US housing market (go ahead, ask where PrimeX closed today), after the bank managed to bribe enough "plaintiffs" and proceed with a quick and painless $8.5 billion settlement on all of its mortgage putback claims. A settlement that, however, had a very weak link: "Article 77", a critical provision enabling the deal in its current form. And as we first reported and explained back on August 26, said weakest link was attacked by David Grais of Walnut Place, who "filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new." Well, today Grais won, and Bank of America lost after US District Judge William Pauley ruled that "Bank of America Corp.’s proposed $8.5 billion settlement with Countrywide Financial Corp. mortgage-bond investors must be considered in federal court instead of the New York state court where it was first filed." Not content with making a factual statement, the Judge proceeded to skewer the bank which, on top of evertyhing, recently decided to stuff its depositors with a bill as large as $53 trillion should things turn sour, added "The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets."  Integrity? From a bank which secretly, though with the Fed's blessing, has tried to put its client interests over those of depositors of over $1 trillion, and over the objections of the FDIC? Don't make us laugh.

Ugly numbers speak volumes on how Fed policies hurt the economy. But those policies enable Congress and the White House to run up deficits that make the Eurozone look benign.

Just say no ...

One quarter after going on an epic anti-Obama monologue at the end of his Q2 earnings call, Steve Wynn comes back with a sequel, confirming that when it comes to completely justified anti-presidential rants, he is truly second to none. Topics touched upon include massive government deficits, the business climate, the administration's horrendous handling of the economy, and of course, Occupy Wall Street. His damning conclusion: " I am watching my employees standard of living drop off because of deficits. I think that the American public is beginning to make the connection between deficits and their own loss of the standard... I say right now that the Democratic agenda of spend and bribe the public has bankrupt this country, and until it stops, the citizens of this country are in for more hard times. And fancy speeches aren't going to change that. Only a fundamental realization that citizens are going to have to take real, sophisticated responsibility for how we allocate the resources of this country."

The world may not be re-entering a recession (after all just look at the S&P in the past two weeks - reputable economists will tell you there is no way the market can soar like that if the world was entering a double dip - and everyone would believe them because they have a Ph.D.), and America may be decoupling from everyone all over again just like every other time it was supposed to decouple but didn't, however Brazil is not waiting around to see the result. Less than two months after its first rate cut, the Brazil central bank just cut its main "selic" interest rate by another 50 bps, this time citing a "more restrictive global environment" instead of "substantial economic deterioration." At the end of the day, the result is the same. So will China finally follow suit and join the global loosening game?

Well, it is not just the CDS ban, the fact that Greece is now done is also a modest factor, but since nobody can short Greek default risk unhedged, the only option is to short the bonds. As they did today en masse. Greek 1 Year bonds: the most liquid proxy for default in the absence of 1 Year CDS, closed at 183%, after hitting an all time high of 188%, following yesterday's 173% close. To all those who bought 1 Year Greek bonds when yields hit 100% a month ago because "they just couldn't possibly drop any more, and you would double your money in one year guaranteed", condolences for the 50% loss. We are certain that a new batch of bottom callers will emerge, this time calling for doubling your money in six months.... Then three.. Then one and a half... etc... Until finally Zeno's paradox catches up and you either double your money overnight or you lose it all.

Earlier today we presented Bloomberg's Chart of the Day which represented the GDP and Debt per capita on a historical and projected basis, and we hysterically, and tongue-in-cheekly, dubbed it "the scariest chart ever" because it confirmed that at some point, very soon, US Debt will surpass GDP and never look back. We decided to dig into the actual numbers (cancelling out the per capital denominator as it is the same on both sides of the equation) and came to a very disturbing revelation: as of today, total US Debt, is $14.942 trillion (source), obviously an all time high. Q2 GDP as was reported by the BEA three weeks ago, was $15.012 trillion in current dollars. In other words, the spread between total GDP and total debt has now collapsed to an all time low $70 billion. Incidentally, this number was $1.8 trillion at the beginning of 2010. Then we decided to take a quick look at the upcoming bond issuance and find that tomorrow the Treasury will announce approximately $99 billion in 2, 5 and 7 Year bonds to be auctioned off October 25 through 27... With a very appropriate settlement date: October 31, elsewhere known as Halloween. Yes, ladies and gentlemen: All Hallows E'en will be doubly scary this year: for the first time since World War II, US debt will officially surpass GDP on Halloween 2011.

The market has begun to choke on the additional Treasury supply dumped on it by the foreign central banks (FCBs).

It's 3pm: do you know where you last hour of trading bailout rumor is? Today, the Guardian passes the baton back to the FT, which however has released a report which when digested will be very negative for the zEURo.qq. It appears that in order to accommodate more funds for sovereign bailouts under the total max EFSF guarantee cap, as reported on several occasions yesterday by Zero Hedge, only €100 billion will be set aside for bank recapatialization. There is a problem with this number: it is predicated on the European Banking Authority's estimates of capital shortfalls of between €70-90 billion, the is the same EBA which 4 months ago said Dexia was in sterling health when it passed the 2nd Stress Test in pole position. As a reminder, Goldman predicted a €1 trillion capital shortfall, while Credit Suisse said €400 billion. No matter: the EU will come out with a number from its lower colon, just to make the residual maximum sovereign debt "guarantee" notional appear that much bigger. Too bad, however, that in the process it will once again crush Europe's banks which the market will suspect, rightfully so, that they are undercapitalized even post the recap, anywhere between 90% and 75% and will have to accelerate their asset liquidations to fund themselves one more day in lieu of a functioning interbank liquidity market. And so the risk flaring will shift from Europe's sovereign to Europe's banks, and their main proxy in the US - none other than Morgan Stanley which repeatedly refuted it has any exposure to France... but said nothing about its gross (gross because counterparties will blow up fast and furious) to French banks. End result: this is very bad for Europe because it means they have finally done the math and realize that to get the €2 trillion or so in EFSF insured capital they have to sacrifice their banks. Alas, there is no outcome that saves both the banks, and guarantees future European sovereign issuance under the currently contemplated structure. None.

It appears that any hope for a quick resolution (not like one was even available) over the weekend may have just been jettisoned. According to FAZ, the German parliament, which made it all too clear wants to be heard in all future European bailout instances courtesy of the constitutional court decision in early September, has just announced it wants to be heard, this time for real, and decide, on any EFSF expansion facility and specifically the usage of more leverage to fight already unbearable systemic leverage. To wit:  "Before the meeting of Heads of State and Government of the Euro zone, which will decide on Sunday in Brussels on the guidelines ("Guidelines") of the euro rescue fund EFSF, the federal government is faced with demands from parliament. The fractions from the CDU and FDP want to discuss this Thursday in special session on the voting behavior of their representatives on the Budget Committee, according to the Law on the Participation of the Bundestag, Chancellor Angela Merkel (CDU) in Brussels to rely on an affirmative vote of the Committee." Unfortunately for Merkozy, their despotic and tyrranical measures according to which they represent the will of the people yet really all they do is preserve the viability of insolvent French banks, will no longer fly.

We have gotten to the point when the nanosecond there is even a whiff of "risk off", everyone hits the Sell button at the same time. Observe Crude. And, yes, volume was involved.