Archive - Oct 2011

Growing optimism over the progress in tackling the Eurozone debt crisis together with higher than expected HSBC manufacturing PMI data from China helped risk-appetite in early European trade. In their weekend summit, the Eurozone officials said they planned to use the EFSF to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries. These developments provided strength to European equities in early trade, however appetite for risk was dented somewhat as the session progressed, weighed upon by lacklustre manufacturing PMI data from the core Eurozone countries, together with uncertainty surrounding the issue of losses incurred by the private sector investors on their Greek debt holdings. The private sector participants seemed to be willing to take upto a 40% haircut, however Eurozone leaders wanted a 50%-60% loss. This resulted in European equities to come off their earlier highs, which in turn supported Bunds, while the Eurozone 10-year government bond yield spreads widened across the board. Moving into the North American open, the economic calendar remains thin, however Chicago Fed report from the US is scheduled for later in the session, and markets will keep a close eye on developments in the Eurozone.

• US Treasury considers new debt security (FT)
• Obama to announce help on housing, student loans (Reuters)
• China on China: Double-dip recession unlikely in China (China Daily)
• Berlusconi calls crisis cabinet meeting (FT)
• Sarkozy yields on ECB crisis role, pressure on Italy (Reuters)
• France, U.K. Spar on Role of Non-Euro Nations (Bloomberg)
• Hong Kong looks to private IPOs from China (FT)
• Medicare Program for Doctor Groups Gets Looser Rules (WSJ)
• Banks must find €108bn in new capital (FT)

And so the second leg of the "triangle of terror" (recall Bank Funding Stress discussed earlier which is getting far worse by the day), "Sovereign Stress" returns with a vengeance. In other words, two out of three components of the European crunch have deteriorated to late September levels. Expect stocks and FX to follow shortly.

One of the major issues and talking points in the precious metal markets in recent years has been allegations by GATA and others that bullion banks and central banks may be intervening in free markets and surreptitiously manipulating gold and silver prices and keeping them artificially low. It is an issue that is quite divisive amongst investors and in the market - including in GoldCore where opinions differ. It is an important debate and one that has ramifications not just for the gold and silver market but for markets in general and for free market capitalism. The ‘Great Silver Debate’ took place at the Silver Summit in Spokane, Washington on Friday where Bill Murphy of the Gold Anti-Trust Action Committee (GATA) debated  Jeffrey Christian of the CPM Group. The debate, hosted by Kitco, did not see a knockout blow with both contestants voicing their long held opinions regarding the manipulation of silver and precious metals. It was a bit short on time at just 30 minutes and a full hour may have been needed in order to flesh out some of the many issues raised.  Christian recently accused GATA of being "a group that makes money by basically bilking gold investors out of fees to support GATA so they don't have to get legitimate jobs." In the aftermath of the debate, GATA secretary Chris Powell accused Christian of "graduating from his usual distortions to outright contrivance." Most of the mainstream media has ignored GATA’s allegations and the debate was not reported. However, an important development over the weekend was an op-ed piece by the respected Gillian Tett in the Financial Times.

This morning, the ECB announced that use of deposit facility as of Friday hit €202 billion (while use of the marginal lending facility jumped to €4.6 billion, confirming that in addition to the USD shortage expressed by the 50-something^th sequential increase in USD Libor from 0.418% to 0.42%, European banks now have a EUR shortage as well, and hence the FX repatriation and EURUSD levitation). As the chart below reminds, the ECB deposit facility usage is already past the second highest MRO cycle peak, having now surpassed the August peak high of €198 billion. But it's worse than that, because while the events of September lead to the first week of October when the whole world appeared set to implode until the FT rumor (since mocked repeatedly) of a European bail out hit on October 4th leading to a relentless market melt up, in the current post reset cycle, things are coming to a head much faster. To wit, the number of days it has taken since the deposit facility usage reset post MRO, since the beginning of the cycle, is now a mere 11 days: this is how long it took to go from €62 billion to €202 billion. In the previous, September, cycle, it took double that, or 20 days, to get from €76 billion to €210 billion. It seems that for all talk of European improvement, the key angle of the European "triangle of terror" - Bank Funding Stress, is now the worst it has been in all of 2011 and the worst since the first, and very much unexpected, Greek bailout in May 2010.

While the market continues to look forward to the latest Eurosummit on Wednesday (which rumor is may be postponed once again) with mouth-gaping expectations, the truth is that Europe "may have already entered a recession" as Goldman predicted some weeks ago, a prediction which was confirmed by today's miserable manufacturing and services PMI numbers. From Goldman: "The Euro-zone flash composite PMI came in at 47.2 in October, down from 49.1 in September. The October reading is below consensus expectations, which pointed to a somewhat more modest drop to 48.8. The decline was registered in both manufacturing and services, though it was slightly more pronounced in the latter (Manufacturing: down from 48.5 to 47.3, Services: down from 48.8 to 47.2). The pace of the decline in the headline output component of the Composite PMI accelerated in October. With its sixth consecutive monthly decline, the composite PMI has reached its lowest reading since July 2009." This is bad, and it gets worse. As Reuters concludes: "The euro zone's debt crisis might already have pushed the bloc's economy back into recession, according to business surveys that showed China's economy taking a stride forward in October." So why is this an issue? Simple - as a reminder in a little noticed statement last week, S&P said it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well there's you recession confirmation. So: where is the European bailout killing downgrade of France?

When it comes to reading the world's "tea leaves", few are as capable as Ray Dalio, head of the world's biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS' Charlie Rose that "there are no more tools in the tool kit" of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not... and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker's rally. More importantly, Dalio shares some truly unique perspectives on what it means to run the world's largest hedge fund, his perspective on Occupy Wall Street and demonizing wealth and success (in a way that does not imply crony capitalism unlike some others out of Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio's conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is "concerned." And that's why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement).

You mean, aside from the relentless headline barrage? Why yes, in a vivid reminder of what used to happen when actual fact-based events mattered, here is a complete summary of the key events in the coming week.

Unaccustomed as we are to discussing the American Psychological Association's 12-Steps to recovery, Credit Suisse have produced a clarifying reduced set that enables us to better judge the road being taken by the heterogeneous set of deaf-dumb-and-blind monkeys currently 'solving' the European addiction issues. The critical underpinning, that we have tirelessly brought to the public's attention, is a fear that the illustrious leadership of our world are not even grappling with the real issues. CS tries to answer the following deeper questions: Are we recognizing the cost that is coming to the core, multiplying as we wait? Are we building credibility and starting to stem this overwhelming tide, or are we pretending, taking the target of our addiction from whatever source we can find it (latest target: the IMF) in the interests of a brief respite? Market expectations are simply not considering the right problem set and so we suspect the broad-market-seers will be pleasantly surprised by some ridiculous EFSF bidding process (and markets satiated short-term), but one day WE will not be disappointed; bullets will be bitten, cold turkeys endured and the markets will be enrolled as allies in a financial reconstruction effort not seen for 60 years. In what feels like the biggest sell-the-lack-of-news event, perhaps this week will open the eyes of many to the real problems to be addressed as opposed to back-fitting what markets 'want' to hear.

Even our non-polyglot readers will have zero problems understanding the response (in French) by Merkozy, when asked during the press conference, whether Italy, which has the second largest debt load in Europe at $2.2 trillion and inches behind German, will succeed in implementing promised 'reforms.' The wholesale laughter 19 seconds in the the clip, by not only the entire audience, but by Merkel and Sarkozy pretty much explains what the "next steps" in Europe are as the continent has now given up any pretense it is even trying to keep a serious facade on the upcoming serial defaults... and why 10 Year BTPs will need much more than just the SMP, EFSF and the hand of god to stay above 90 in the coming week.

Different views for next week....

Europe has officially entered the Tropic Thunder zone, where one, forget one thousand , monkeys armed with one simple solar-powered calculator, can come up with a better plan than (JP Morgan-advised) Europe. Because as we pointed out on Thursday, "nothing changes the fact that with €100 billion set aside for bank recaps, a woefully low number and one which will do nothing to assure investors that banks have sufficient capital, there is still not enough cash to "guarantee" all future issuance" - well it appears that Europe finally did the math which led us to conclude that the EFSF is DOA. So what is Europe's solution? Why double counting aid already pledged of course: "EU bank plan may include aid already pledged to bailout states-sources." Uh, what? "A drive to lift bank capital across Europe by up to 110 billion euros ($153 billion) is expected to include the roughly 46 billion euros already pledged to Ireland, Greece and Portugal to help their lenders, EU sources told Reuters....Another official confirmed the intention to count money already earmarked for banks in Ireland, Greece and Portugal in any recapitalisation plan. "The problem with shock and awe numbers is that it implies that the money is there," said one official, reflecting on ministers' reluctance to set public goals for recapitalisation. "But governments don't have the money."... Just as was repeated here over and over and over and over... And yes, that red stuff shooting out of the place where your head was a few second ago, is blood. It is now Europe's official "plan" (for at least the next 2-3 hours) to use mystical, magical money, which is somehow double-counted to bail out both a bank and a country at the same time...

The only thing that will rally the market is another bailout rumor. Nobody asks who's going to pay for it.