Archive - Dec 2011

This is not a rescue, but merely going from the frying pan into the fire by funding bad trades with impunity.

It was three short years ago that the small former British colony of Zimbabwe was spewing forth 100 trillion dollar bills. Since then, courtesy of a few trillion extra percent of inflationary RDA, the country had given up on its currency and replaced it with US Dollars. Now, the country's cult central banker Gideon Gono has made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yet the screaming sarcasm is the following: "Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value. With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse." And the terminal slap in the face of all that is American: "As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy." Well, if recently hyperinflating Zimbabwe is complaining about the US as being on the same path as itself, and instead wants to become a Chinese FX vassal state, perhaps alarm bells should go off somewhere. So the next time Tim Geithner is up on stage somewhere, it may be prudent for a question to be be asked: how and why is it that the world's (formerly) de facto banana republic is complaining that the next up and coming B-Rep is about to replace it in the annals of idiotic monetary policy?

The problem here is JP Morgan's lawyers are running the show...and they're running the agenda...Judge, the fox is in the hen house. JP Morgan cannot be dictating the agenda.

We have often discussed the temporary and tenuous nature of any and all government-suggested solutions so far to the European crisis on the basis that the 'model' is broken. Following the decision to go for PSI, and the possibility of a sovereign leaving the Euro-zone (Greek referendum ultimatum), money is no longer fungible in and across European banks (deposits) and sovereigns as it seeks the stability of a narrower and narrower core. Arnaud Mares, of Morgan Stanley, who wrote the initial and definitive Greek story long before most others, brings up this very point; questioning the fungibility of Greek Euro deposits with French Euro deposits, for example, and interpreting the situation as a 'run on banks and governments'. His view that without a clear path to a fiscal lender of last resort - or a true fiscal federalism across a united Europe - which ensures solvent governments will never go illiquid, then the December 9th decisions mark a bifurcation point of critical import.

If governments choose to engage on the route to fiscal federalism, we believe that this does not mark the end of the crisis. It could, however, mark the beginning of the end of the crisis, as it would be a decisive first step towards stabilisation and a European federation. The alternative could well be the beginning of the end for the European confederation.

Europe has to choose between debt assumption (enhanced federal control of national budgets accompanied by centralised funding of governments) and a debt jubilee (wide-scale debt repudiation), with all the social, economic and political consequences this entails. Mares' four-question-framework for considering the words and deeds of December 9th is critical, though complex, reading to comprehend the tipping point we are at.

It’s fascinating to watch things play out as we rapidly approach the final rounds in the end game of the great game.  The great game is of course the never-ending global struggle for power and dominance.  The current entrenched powers that be have been in their positions for a very long time and they have no intention of giving up that role.  What the moral and decent percentage of humanity need to understand in no uncertain terms is that these folks and their minions have no conscience.  They could care less how many starve to death, get blown to bits in war or waste their lives away in front of the television set watching Snookie on the Jersey Shore.  In fact, I am certain that they totally get off on these things.  Degrading humanity into an animal-like state clearly appears to be their aphrodisiac.  Notice how the media encourages people to go out and trample each other for a $2 waffle maker on Black Friday.  The scenes of people running into Wal-Mart or Best Buy in the early morning hours when they should be at home with their families having conversation after Thanksgiving dinner reminds me of scenes of cattle being shuffled into a sorting pen.  Actually if you look at this video the cattle appear much more civilized http://www.youtube.com/watch?v=C71324F_Q-8 (just go a minute and a half in).  I think the second step after one sees the insane matrix we are trapped in is to free yourself from it mentally and emotionally.  It is the mental and emotional control that they are really after.  That is the most powerful and effective tool of control so don’t give them the satisfaction.  Try to buy local and support your communities.  It may cost more but in that case just buy less.  You will feel good about it.  More specifically, anything encouraged by the mainstream media, like spending money you don’t have on superfluous items made in China with slave labor and sold to you at a giant tax dodging corporation should be avoided if possible. With that out of the way, on to the main topic of this paragraph.  The good ol’ SDR.  I will tell you one thing right now.  When TPTB progress to talking about IMF rescues and SDRs we are the end of the line boys and girls.  This is the LAST play they have in the conventional playbook.

Five National Banks Sued by AG Coakley in Connection with Illegal Foreclosures and Loan Servicing

Nassim Taleb rants against it all the time: the propensity for the media to frame a narrative, or a plotline, to explain market moves. His contention is that for the human mind it is always far more reasonable to have a cause and effect relationship to what is effectively an engine of chaos at the margin, especially these days when the margin is defined 70% by various algorithms, all of which engage in often times illogical feedback loops (such as the ES is high because of a high EURUSD, which however is high due to stressed French banks liquidating USD-assets and repatriating the funds to shore capital) and/or with levered synthetic products such as ETFs, amplifying the noise. On the other hand, sometimes a narrative fits: what Art Cashin describes today as the "post hoc" syndrome. Is he right, or is the human mind desperately grasping to attribute a pattern, and thus pretend it is in control, when faced with the strange attractor that modern capital markets have become. You decide. Here is Art explaining the basics of "post hoc", aka Monday Morning quarterbacking.

In case you are wondering what that looks like...

In the wake of chopping its Central Bank swap rates, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right. The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball.  Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks). Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks. Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.

Given the better-than-expected ISM print earlier, one could be forgiven for believing that the US is just fine thank you very much. Our earlier discussion of the dispersion in the ISM sub-indices, and yesterday's discussion of the PMI 'catch-up' nature of the very recent pre-holiday seasonal orders given the unusual slump in October may weaken the decoupling view but strategists will extrapolate trends as normal. Whether you believe in tooth-fairies or decoupling, Goldman's Global Leading Indicator continues to accelerate downward and moved into negative territory for the first time since August 2009. Amid a broad deterioration in components their outlook for global growth remains soft, even as the US export miracle remains alive and well.

The whole thing smells fishy to me. Aside from the fact that the Fed clearly leaked its intentions as early as Monday night (hence the reason stocks rallied while credit markets weakened), there’s something peculiar about the fact the Fed chose to do this at the end of November.

Just when you thought it was safe to go all-in buying financials, stocks, commodities, Chinese IPOs and even Tilson's fund, the last few hours of Europe's day was very disappointing. Commodities took a fairly serious plunge as the dollar strengthened (macro data? or just a reality slap). Credit and equity markets oscillated but legged down into the close and ES also slipped to day's lows as we closed. Sovereigns were on a tear, thanks obviously to a helping hand early on from ECB's SMP program, but even they started to leak back wider in spread and higher in yield into the close. It was not cataclysmic, obviously, but was hardly the follow-through risk-on day that so many had hoped and dreamed of last night and most notably, broad risk assets in general have been leaking lower since US close last night, leaving ES rich relative to CONTEXT.

Grandma said, "There is never just one roach". What damning characteristics does MF Global, Goldman Sachs, and JP Morgan have in common? Yes, I mean besides common CEOs and an auditor that gives the green flag months before historically record setting bankruptcies due to inadequate controls...