Archive - Dec 2011

But it's for our own good ...

As much as we hate to say it, Europe is now without a shadow of a doubt the new AIG, only this time such heretofore considered insane (in retrospect) activities as doubling down to infinity on ones TBTF status are out in the public record for all to see. At least AIG conducted Joe Cassano's "made in London" $2.7 trillion bet on home prices never dropping in the shadows of Curzon 1. Whereas two days ago we made it  clear how the unwind of trillions in rehypothecated securities could be the avalanche that buries first Europe and then the world, we explicitly excluded the impact of synthetic products such as CDS. Now it is time to bring the picture full circle, and put CDS front and center. As Bloomberg reports, "BNP Paribas SA, France’s biggest bank, sold a net 1.5 billion euros ($2 billion) of credit- default swaps on the nation’s sovereign debt, according to data compiled by the European Banking Authority. UniCredit SpA, Italy’s biggest lender, and Banca Monte dei Paschi SpA are net insurers of more than 500 million euros each of their government’s bonds, and Oesterreichische Volksbanken AG, the Austrian lender which has yet to pay interest on 1 billion euros of state aid received in 2009, has guaranteed a net 839 million euros of its national debt, EBA data show." (EBA source - link). For those confused by the above, here is the explanation: European banks, in order to generate modest cash flow from collecting on the pariodic interest premiums owed to them in order to plug increasingly large capital shortfall holes that otherwise would simply keep growing ever larger, have sold and continue to sell massive amounts of default protection on their very own host countries! As a reminder, it was precisely this that destroyed AIG when the illusion of the credit bubble burst.

As for him and Blankfein they believe...

Every year since 2005, more than 50% of China's GDP has consisted of construction-related spending. The law of diminishing marginal returns says this simply cannot continue. It represents a misallocation of the household sector's hard-earned savings on a colossal scale, and I believe it will end badly. Not a day goes by that there aren't riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point. Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered. And they're not hanging around.

By now, most sane market observers and participants understand that perhaps, just perhaps, everything we believed about neoclassical economics is not without fault. In fact it is possible that the entire macro-economic safety net of Keynesian policy has come into question. One look at the chart below of the changes in US financial stock prices should be enough to show that when S&P downgraded the mighty USA's credit rating, they proved the impossible is possible. The market is now entirely paranoid. Investors have fled the market in droves, as we have discussed endlessly. The banks themselves seem to question their own existence given the plunge in liquidity, and the huge rise in volatility and correlation appear to suggest the market is indeed terrified of its own shadow.

Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks. Said otherwise, the stolpering of clients gullible enough to do what Goldman says and not does, has recommenced. Our advice, as always, do what Goldman's flow desk is doing as it begins to unload inventory of bank stocks. Translation: run from European bank exposure.

Follow Europe, banks or corporates? You're out of your damn mind if you subscribe to rating agencies over Blog based independent research!!! Don't believe me? I'll walk you through the evidence, step by step!

The Council on Foreign Relations has released their politically-correctly-named 'Preventive Priorities Survey' or put another way - where-in-the-world-is-stuff-going-to-hit-the-fan-next report. The report is designed to help the US policy community comprehend where the next conflict will occur in the world and the relative catastrophe factor. The 3 tiers of chaos offer a menu of drivers-for-war, likely terrorist targets, and political tensions. Notably they include such systemic factors as the European debt crisis, budgetary limits, and Saudi political instability's impact on oil supplies at Tier 1 (most critical) contingencies.

Imagine driving all day, every day, for 31 days. That relentless line of people standing heel-to-toe passes by at 60 miles per hour for an entire month.

Last night, when headlines hit that it was the UK's "fault" for vetoing a joint dictatorial Fra-Ger "compromise" and in essence making the Eurozone summit a total failure (with a follow up summit scheduled for March), it became clear that a new cold war has broken out in Europe: between France (not so much Germany as Germany frankly does not want to bailout Europe if its has to pay for the bail out) and the UK. We now have official video confirmation that the latest conflict in Europe is between the countries just across the Chunnel. The video below of a diminutive Sarkozy giving David Cameron the proverbial cold shoulder (described in painful detail here) will achieve nothing but merely inflame further the animosity between the two countries: just what Europe can least afford right now.

Yay verily, Michigan Consumer Sentiment jumped more than expected and there was rejoicing all around. Of course, a simple scratch beneath the surface reveals what many realists suspect, expectations for the future are the major driver of the headline number. Unfortunately we have seen exactly this pattern before. Not only are the levels and changes similar to Q3/Q4 2008 but the underlying events (recessionary concerns, banking liquidity concerns, crisis of confidence) are eerily similar. The we've-been-down-so-long-it-has-to-get-better crowd psychology is intriguing as the rise in hope over the past four months is the largest in over 30 months as the delta between current reality and the green green grass of next year drops. While animal spirits are arguably of interest in short-term macro cycles, we note that the ramps in the hopium index tend to last 4-5 months at most and that is where we are now.

Just because Solyndra was not enough of a humiliation for the president, not to mention MF Global where inquiring minds are wondering when the president and vice-president will refund any and all campaign donations received by Jon Comminglerzine, here comes the next public fiasco for the administration, as the broader public shifts its attention to LightSquared by way of owner Harbinger capital, and its flamboyant head (and wife) - Phil Falcone. As has been just released in an SEC filing, Harbinger has received a Wells Notice from the SEC. Now in a time long, long ago, or about three years ago, before market criminality and manipulation became wholly endorsed by the US government, getting a Wells Notice was a death sentence for any hedge fund. Alas, it still is: "The Wells Notices state that the staff intends to recommend or is considering recommending that the Commission file civil injunctive actions against HCP, Harbinger Capital Partners Offshore Manager, LLC, Harbinger Capital Partners Special Situations GP, LLC, Mr. Falcone, Mr. Asali, and Ms. Roger alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors." And whether the Wells Notice is merely an inquiry into Falcone previous shady hedge fund-dipping practices described here, or a preamble to a full blown public spectacle-cum-humiliation on Harbinger's LightSquared remains to be seen. One thing is certain: Mrs Falcone will milk the newly found notoriety to its full extend, prenup firmly in gold-braceleted hand.

Confused why Tim Geithner has seemingly booked a weekly round trip ticket to Brussels to give the Eurocrats their weekly pep talk (much to his endless humiliation as Europe Tells Geithner To Take His Advice And Shove It reminds us)? Art Cashin explains not only this, but why the biggest threat to Obama's reelection chances is not who the GOP candidate is in November, but what happens in the EURUSD as early as today. Lastly, by implication, Cashin shoots down any hope that US decoupling from Europe is even remotely possible... something anyone who actually has seen a full business cycle, which automatically excludes 90% of all traders today, will know too well.