Archive - Dec 2011

Just as Blythe Masters' (yes, that one) team suffered huge trading losses in the middle of 2010 following the abysmal RBS Sempra purchase, showing that when traders of scale lose, they lose big, so today another big commodities trader, Barclays, is reported to have gotten crushed on copper and other base metals bets gone wrong. Dow Jones says that Barclays is set to reshuffle its base metals trading team following a series of significant financial losses made by the desk this year. "The base metals trading team is run by Iain MacRae, who is currently still working at Barcap. The company has been unravelling a number of its copper positions recently, traders and brokers said, along with positions in other base metals it trades. The majority of the losses were in forward copper spreads, people familiar with the matter said. Although these positions were in-the-money a year ago, the market has since gone in the other direction, forcing Barclays to close the positions out at significant loss, these people added....The investment banking division of Barclays Bank, Barclays Capital has been a category one ring dealing member of the London Metal Exchange since May 1997 and is traditionally a high volume participant in base metals futures and options trading. It also owns a 2.3% stake in the LME." As to who the most likely beneficiary of this collapse is Goldman, which in tried and true fashion told its clients to be buying copper throughout the carnage, only to close its copper position at a 20% loss a few days ago. But not before indicating that even more bloodbathing is in store for the future, having concurrently reopened future bullish positions in copper.

While volume today will be rather abysmal with virtually everyone now gone, the robots will be quite busy kneejerking themselves to a variety of economic reports, starting with the final Q3 GDP revision, consumer sentiment, index of leading indicators and ending with FHFA. On the political front it is unclear if there is any progress to the payroll tax extension negotiations, which has huge implications for if not the Q1 market, then definitely economy.

Credit calling, are you listening?
On the horizon, defaults are looming
A dreadful sight,
To see high yield's plight,
Walking in a weaker Euroland.

Without a pledge from the German,
Credit spreads are gonna widen
Who wants to pay?
For the peripheral disarray
Walking in a weaker Euroland.

• The watchdogs that didn't bark (Reuters)
• Italy's Monti faces key final vote on austerity (Reuters)
• Finland 'finds Patriot missiles' on China-bound ship (BBC)
• Swiss Panel Studying Measures to Curb Franc’s Gains, Widmer-Schlumpf Says (Bloomberg)
• U.S. exporters brace for cutbacks in European bank lending (WaPo)
• Gundlach fears debt ‘crescendo’ (FT)
• China accuses US of protectionism (FT)
• China banks eye easing as household inflation view cools: PBOC (Reuters)
• Obama Gets a Lift From Tax Battle With Republicans (NYT)... yes, the NYT

Credit Suisse has been producing country-specific and global risk appetite indices for years, offering a quick-and-dirty perspective on the market participant sentiment in global risk assets. By empirically tracking the relationships between 'safe' and 'risky' asset classes, they have created a useful contemporaneous view of current market perceptions. The index swings between euphoria and panic modes and shifted to full-scale panic around mid-year. Since then the index has gradually improved as the psychological bias of 'it can't get any worse, right?' seems to have kicked in until recently where CS notes a recent downturn. So while we have 'improved' back to only Panic Mode, the expectations are for a prolonged risk-off session in the short- to medium-term.

Since the 2012 Outlooks have now slowed to a drip, its appears retrospectives are the stocking-filler of choice for the week. Goldman's economist group reflects on their '10 Questions for 2011', released at the end of December 2010, and finds they were correct seven times. The tricky thing about judging the 'score' is the magnitude of the error - or more importantly the magnitude of the question's impact on trading views. Jan Hatzius and his team have had their moments this year, for better or worse, in economic sickness or health but they have largely been accurate at predicting Fed policy (or should we say 'directing/suggesting' Fed policy), but were significantly off (along with emajority of the Birinyi-ruler-based extrapolators from the sell-side) on growth (high) expectations and inflation (low) expectations. Nevertheless, the lessons learned from over-estimating the speed of healing from the credit crisis and the disin- / de-flationary effects of a large output gap (which BARCAP would argue is not as wide) when inflation is already low and inflation expectations well anchored are critical for not making the same overly-optimistic mistake into 2012.

12 Scary Economic Facts to fill your Festive Boots

While the rest of the world enjoys the New Normal, which lately has primarily and mostly negative connotations, when it comes to such "legacy" aspects of life as holiday shopping, we all enjoy the fall back to a simpler time assuming that at least such basic behavior as buying presents for the loved (and not so loved) ones can hardly change much with the years. Alas, even this last bastion of nostalgic simplicity has now been swept away: Nick Colas and his team from ConvergEx, have once again decided to educate us about the folly of assuming the old ways are with us, and has created a useful compilation exposing the finer nuances of the "twelve days of online Christmas" which show that just like everything else, holiday shopping patterns are rapidly changing as well. "This holiday season consumers aren’t quite as concerned with finding “cheap gifts” as in recent years, though traditional luxury items such as jewelry and cashmere sweaters are still losing traction with gift-givers. They’re seeking sales on electronics, becoming increasingly enamored with real vs. artificial Christmas trees, and backing off catering services in favor of home-cooked ham. New York City is the most popular place to spend Christmas and New Years (hey, it’s cheaper than a ski destination), but interest in the Radio City Rockettes and Broadway shows is dwindling. All these observations come courtesy of two of our favorite online gauges of consumer behavior – Google Trends and search engine autofills from Google, Yahoo and Bing. We’ve compiled a collection of 13 visuals (12 for the days of Christmas plus a bonus for Hanukkah) that ultimately show consumer spending patterns are still decidedly cautious."

Keeping track of all the various verticals of instability in Europe, which is now forced to improvise on a day to day basis with a leaking dam wall of increasingly insurmountable problems, and is torn between plugging holes in the EFSF/ESM mechanism, Bank recapitalization, generating an overarching fiscal union and, last but not least, getting the ECB involved, has become virtually impossible. Which is why we are happy to present the latest updated UBS flowchart summarizing Europe's sovereign and bank problems. Because there are many. We hope this makes it clearer.

Yesterday, before today's latest ICI release of the weekly mutual fund flow report, we predicted that "Tomorrow ICI will reaffirm the retail investor boycott of stocks with the 33rd out of 34 equity fund outflows." Sure enough, the report came and, as expected retail investors have pulled money from domestic (and foreign) equity funds for 33 of the past 34 weeks, with last week another $4 billion getting redeemed as mutual funds, now unchanged for the year, somehow have to deal with a $133 billion lower cash balance than at the beginning of the year. Because if anyone thought last year was bad with the flash crash and all, the $98 billion that was pulled in all of 2010 is a pale imitation of what 2011 is setting up to be. And this year we didn't even need a 1000 point DJIA drop.

Congress, the ideal American institution: it spends more than it takes in and borrows the difference. We love that. It means free money, services, wars, and other goodies. And yet....

No, it's not Friday and no, it's not a total joke, but UBS' Stephane Deo takes a retrospective look at what his firm's economists were saying back in 1996 about who should be in and who should not be a part of the Euro 'project'. Given the growth and performance of the 'ins', it seems perhaps we should, as Deo says, always pay attention to economists for a happy and prosperous existence but it is somewhat insightful that as far back as the beginning of this experiment, it was relatively clear (in 1996) that proximity to Maastricht rules, political flexibility, and real economic prospects separated the 17 nations, leaving an at-the-time optimal five (or maybe six) nations. There are many yeah-but comments with this look-back, but for sure, it provides a quick-and-dirty view on what these countries looked like before whatever integration they have now, and maybe what they should revert to once again - it is certainly cathartic to see the peripherals already standing so far from the core. The growth differential for the Euro 17 is huge, unmanageable, and symptomatic of an entirely dysfunctional monetary union. The growth difference for the Euro 6 is steady, modest, and entirely manageable.

With precisely one year left for the world and all of its inhabitants, at least according to the Mayans, not to mention on the day of the Winter Solstice, it is only fitting that US debt, net of all settlements for all already completed bond auctions, is now at precisely $15,182,756,264,288.80. Why is this relevant? Because the latest annualized US GDP, according to the BEA, was $15,180,900,000.00. Which means that, as of today, total US debt to GDP is 100.012%. Congratulations America: you are now in the triple digit "debt to GDP" club!

Rather than focus simply on the actual adjustments in the real effective exchange rates which shows the UK and US as having used monetary policy to devalue/weaken their currencies since the 2008 crisis really took shape, we look at an intriguing chart from Nomura's EEMEA FX research team. Google Trends shows, that in the year since Brazil's finance minister Mantega warned of a currency war's immediacy, a dramatic pickup in searches for both 'Currency Wars' and 'Recession' and we believe, like them, that 2012 will see further engagement of the vicious circle of antagonism around the world (with the EUR the obvious next chapter). Only EUR, USD, and TRY are actually weaker since the 2009 lows with most of the Emerging Market over 16% higher on average. It would appear that whether Europe escalates or US retaliates, gold will eventually benefit from this fiat fiasco and the search patterns set a rather nasty precedent. Simply put, you can't grow fast enough, you can't cut rates, that leaves only one option (call it what you want), currency devaluation.