Archive - Dec 2011

Despite another weekend of hope-driven chatter of a support-the-profligacy, print-til-we-die, mutually assured destruction game of chicken, we remain as far from the fiscal federalism, that we discussed earlier in the week (and the four critical questions that need to be answered) as ever. As we embark on yet another critical week in Europe's (and perhaps the world's future), ING addressed a critical aspect of the conundrum - that of Merkel's (read Germany's) reluctance to step on the gas and save the known universe. While attempting to quantify the price of break-up and the pay-now or pay-later perspective, they describe perfectly the 'Paradox of Merkelism' in that the core countries' attempts to limit their exposure have served only to increase it. They further worry that while a plan for a Grand Bargain may appear, this may rapidly give way to the recognition that the reality is not so grand - the bargain would still have to be delivered.

The new dollar liquidity injection from 6 central banks essentially took the urgency out of a much needed decisive resolution.  More crises similar to the one in the Euro Zone popping up to the point of one Scary Grandioso--No more spare bailout capacity.

Forgive our skepticism, but since our earlier market snapshot, most of the broad risk drivers have notably receded from their evening highs - while ES remains at highs. Together with the worst Composite China PMI print in 32 months, we are seeing CONTEXT diverge notably weaker than the 'resilient' ES futures. TSYs did open modestly offered but it is the retracement in FX carry, Silver, Gold, Copper, (and even Oil) that is dragging risk 'off' as the e-mini S&P futures contract holds magically at Friday's closing VWAP. We wonder what comfortable bid is being maintained by them-that-know-better-than-us-what-comes-next? We can only assume that the old adage that the 'worse it gets the better it will be' so BTFD is back in full force but we remind those knife-catchers (alone in the equity market for now this evening) that optical backstops are showing cracks and balance sheets are deleveraging no matter what is done to prop-up sovereigns until Santa arrives.

While we have long been mocking any rumors indicative formal attempts to get the IMF's funding to higher level, due to the need for a congressional approval over and beyond what is currently permitted which means any such plan is DOA, one loophole always has been the private bank known as the Federal Reserve, which may, as permitted by its charter since its charter allows it to do pretty much anything even buy Greek and EFSF, not to mention Italian, bonds, lend to the IMF at will. And just as last week demonstrated, when push comes to shove the Fed will always bail out Europe, so tonight German paper Die Welt (which has about the same success rate as Thomas Stolper at predicting the future) had put two and two together and come up with the latest rumor, namely that Ben Bernanke is about to directly bail out Europe using the IMF as an intermediary. Specifically, via Reuters, "The Federal Reserve, along with the 17 euro zone national central banks, may help provide the International Monetary Fund with funds that could be used to aid debt-ridden states, a German newspaper said. Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least 100 billion euros ($134.2 billion) into a special fund that could be used for programs for nations struggling to control their debts. "Also other central banks, for example the U.S. Federal Reserve, are apparently prepared to finance a part of the costs," the paper said in an advance copy of an article to appear on Monday." That there is not an iota of truth in this article is a given, yet the market will latch on to this latest rumor like a rabid pitbull... until it realizes that by having to resort to such grotesquely made up stories it means that the ECB, which is the only real short-term rescue mechanism for Europe, is nowhere near close agreeing to do what the bulk of Europe's bankers (but not Goldman) demand it do - print.

Psychopaths flew financial weapons of mass destruction (derivatives) into the twin towers of our economy, the housing market and the stock market.  Ten trillion dollars of wealth imploded in a cloud of dust. Ninety-nine percent of the economic experts – financial planners, economists, economic professors, brokers, and investors – missed the largest bubble in history as well as the systemic risk that the bubble posed. The National Board of Economic Research (NBER) (who is responsible for declaring a recession) was 9 months late calling the worst recession since the Great Depression.

While the world continues to be hypnotically captivated with every word out of Europe, the ongoing fiasco in the insolvent socialist continent is a welcome diversion from our own issues here in the US, which as we noted yesterday, has not "decoupled" from the rest of the world's woes but merely is "lagging." After all the European recession is now guaranteed, and no matter how it is spun it will never amount to a positive GDP event for the US, even more when considering that the PBoC's recent resumption of monetary loosening will take at least several quarters to be felt globally. But a lag to what? Why 2012 of course, and specifically the January 24-25, 2012 Fed statement when as SocGen pointed out the Fed is most likely to announce yet another $600 billion episode of quantitative easing. But why then? Why not at the December 13 meeting, the topic of Fed telegraph Jon Hilsenrath's latest piece, according to which the Fed will soon emphasize that it will never hike rates and as a result collapse all refi activity because who wants to go into a 30-year fixed at 4% when it will be available at 2% 3 months later, and at 0% 6 months after that? Simple: the Fed's balance of power is about to shift substantially. With under 30 days left in 2011, the current roster of 4 rotating voting Fed governors is about to be swept out, only to be replaced with 4 new ones. Yet as the chart below from SocGen shows, the rotation will probably be the most dramatic in Fed history as 3 die hard Hawks (and 1 dove) are eliminated only to be replaced with a panel which is almost exclusively Dovish. In fact, at the end of the day the only modest Hawk on the Fed's voting committee will be Richmond Fed's Jeffrey Lacker (the only member to vote against the drop in FX swap line rates), and even he in the past has shown his dovish wings. Which means that for all intents and purposes, the major delay in global events, and market uncertainty, merely has to last until the end of the year when the doves take over. Furthermore to anyone who will point out that in 2012 virtually every single Hawk will be mysteriously out of the voting rotation, all we can say is: "you are correct." And if Europe or Iran or China or any other event serves as a welcome distraction for a few more weeks until the Fed once again does what it does best (and only), so be it.

A few ideas from my FCF screen

John wrote, “The pattern is by now so familiar that it deserves a place beside other technical indicators like moving averages and Fibonacci retracements."

While EURUSD is off its highs of the evening so far, it remains 20-30pips higher and is mildly supportive (given EURJPY and also AUDJPY's moves) of the 7pt better open in ES (the e-mini S&P 500 futures contract). The Italian austerity measures seem the main driver which is odd given this is not news and was fully expected. Oil is also popping (above $101.50 now), on the Iran news we assume, and Gold is above $1750 as Silver outperforms +0.8% from Friday's close.

Classified documents surfaced in Germany that predicted a dire future for Afghanistan after the departure of NATO troops.

Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks.

A few weeks ago, SocGen's Dylan Grice released a piece which quickly became a scathing focal point in the inflation-deflation debate, in that he speculated that it was not the Weimar-unleashed hyperinflation (which incidentally is the primary reason why most Germany now dread what the outcome of a profligate ECB would look like) that led to the surge of the Nazi party, but in fact the opposite: the stinginess of German monetary authorities in the 1930s that further exacerbated the situation and helped unleash the Hitler juggernaut. Many promptly took sides in the argument, the bulk of which were shocked that Grice - traditionally a defender of prudent monetary and fiscal policy, would go so far as suggest that it is the ECB's duty to print or else it may justify another "Hitler"-type advent. Well it seems there was more than meets the eye, and in a follow up piece the strategist says: "The purpose of the historical analysis, therefore, was not to reach conclusions about how adherence to hard money principles will linearly lead to resurgent fascism, or war on a par with that seen in the 1930s. Neither was it in any way a defence of Keynesian fiscal activism. It was to illustrate that adherence to even the best principles must come at a price, making a judgment on whether or not that price is prohibitive or not is unavoidable, and today Germany and the ECB have to make that judgment." And his conclusion: "From the beginning of this crisis I've believed the only way politicians will get ahead of it is to bring in the ECB. Since I believe politicians do want to get ahead of it, I expect the ECB to print, and print copiously. I've repeatedly emphasized that printing will solve nothing, beyond buying market confidence for a while... All ECB printing will do is buy the politicians time and space to reset government and private sector balance sheets, to reform how their economies function and be honest with their own citizens. Whether they use that time or not is a separate question (frankly, I'm not hopeful)." But instead of us putting words in Grice's mouth, here is the explanation straight from the horse's mouth. Incidentally we agree 100% with Grice on the issue that eventual printing is inevitable. Which for the TLDR crowd means the entire Grice missive can be summarized as follows: 'buy gold.'

While everyone is focusing on what empty words and promises will come out of Europe this week which continues to valiantly, yet with utter futility, fight simple math, our friends at Religare Research remind us that there is a whole another theater of operations (pardon the phrase) that many are so far forgetting about located in the middle east which is far closer to what at the end of the day really matters: oil. As Emad Mostaque notes: 'While North Africa is busily transitioning to a set of neo-Islamist, GCC-sponsored Sunni democracies (we are positive on this trend), Shia groups in the Middle East have started to stir. In this monthly we focus on some of the key elements of the Shia tradition that may have a significant impact on global markets in the near future." Below are the key takeaways.

Let the banks implode in bankruptcy, clear the worthless "assets" of debt from the books, and let the market price currencies and everything else. The only other choice is debt-serfdom. All the other schemes and proposals are simply variations of one single fantasy: that the feckless leadership can fool the repricing genie with parlor tricks. They can't. Everybody with any understanding of the situation knows that the debt bubble has already burst, an risk and debt cannot be repriced back to fantasy levels. That repricing has already occurred, and cannot be revoked or shoved back in the bottle. The Great European Debt Bubble has already burst, and so now it boils down to a simple choice: debt serfom or open rebellion against the banks that profited so handsomely from the euro-fantasy. There is no middle ground, as the debt cannot be repaid, not now and not in the future. It cannot be reshuffled, masked, or hidden; it can only be renounced. It's your choice, Europe; choose wisely. If you want a model for sanity and growth, look to Iceland. They renounced their unpayable debts and debt-serfdom, and let the market reprice their currency, debt and risk. The nightmare is past for them; they chose wisely. Now it's your turn to choose. The debt-serfdom will fall to you, not the banks or your Elites.