Archive - Jun 2011

With Goldman having recently downgraded its outlook on China, it was only a matter of time before its FX team came out with a completely nonsensical and inverted call on the first derivative of a Chinese slowdown: the AUD. As of tonight Goldman is advising clients that its prop desk has a lot of AUDJPY to sell up until 90, and will buy everything below 84, in other words Thomas Stolper says to go tactically long the AUDJPY until 90, with an 84 stop. Of course, this makes all the sense in the world if China is slowing down. As a reminder, Stolper is the same guy whose call track record in 2010 was about 0 out of XXX. On account of it being a long day we refuse to even attempt to deduce how many level of reverse psychology are involved in this call. Needless to say, any time a hedge fund tells you to buy a bridge it probably has one to sell.

Over the past two weeks, we have been suggesting, tongue in cheekily, that despite the relentless desires of everyone to sell the EUR, it has continued to drift higher, due to some inexplicable force with bottomless pockets, which, after some deductive logic, we assumed was China. It turns out we were correct. Naturally, figuring out what China does with its $3 trillion in foreign reserves is sometimes more complex than brain surgery (except what it does every time it sees a barrel of oil for sale: then it is pretty much guaranteed what it will do). But when it comes to preserving its 3 rounds of horrendous European down payments, it was pretty logical that China would do everything in its power to prevent a waterfall effect that would result in Europe imploding in a ball of illiquid singularity. The WSJ has confirmed that China's SAFE is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. And while this does not mean the EUR is the new reserve currency, it certainly means that China has now become the deciding factor as to just who is (much to the chagrin of Markel, and delight of Geithner... for the time being).

The worst thing about following the neverending Greek bankruptcy saga is that while everyone knows that the can will be kicked down the road in one way or another until the population simply snaps and brings the bulldozers out to Syntagma square, the recent pick up in daily very irrelevant voting events (which are supposed to occur in the middle of the night but are delayed until noon Eastern), among many other irrelevant events, has made sleeping for US-based coverage nearly impossible. It has also caused a surge in noise-based newsflow that has absolutely no real relevance to anything except sending the EURUSD higher (more on the reason for that in the next post). And yes: today's vote was not the last one. Not even close. There is much more. But since we are sick of typing, here is SocGen explaining what the next steps in Greece's voyage throw the treacherous waters of the Southern District of New York are.

Bernake is slowly losing control of the system. In 2007, he was putting $30 billion into the system here and there. In 2008-2010, he upped the ante to $50 billion PER MONTH. QE 2 pushed the amount up to $100 Billion per month. And here he is, hinting at giving ANOTHER $300 BILLION when QE 2 ends!?!?

With the Greek vote now done, the oil reserves opened up and the equities market going higher during the last days, all is great. Let’s not forget about the US Debt problems though. August 4th coming up soon, and Obama needs to extend that parabolic chart….
From www.thetrader.se

In what appears to be an increasingly tenuous attempt to redirect focus from terminal federal government failure through the imposition of yet another round of class antagonism, Barack Obama, as part of his earlier address to the nation, stressed that more revenue "must be part of any deficit-reduction deal" and criticized Republicans for protecting tax breaks for "millionaires and billionaires" in the process even invoking users of corporate jets (despite that fact that he himself boasted using the $56,000/hour taxpayer funded Air Force one to travel the 110 mile distance between Washington DC and Williamsburg, VA). As the WSJ puts it: Obama "staked out his position in budget negotiations, which have reached a critical phase and increasingly appear to hinge on which side wins the public-relations battle." Well-aware of the dead end trap that Bernanke finds himself in namely that monetary policy alone is now (or ever) powerless to fix the economy (although it sure would do miracle for the Russell 2000... and hyperinflation), and that a fiscal stimulus is currently unpassable, Obama dragged out the strawman, suggesting "that some initiatives designed to stimulate the economy in the short term should be included in a final deal, singling out a yearlong extension of the payroll-tax break for employees, which expires in January." The bottom line is that as the $4 trillion budget cutting goal is completely unattainable (something the Republicans have claimed is a priority in allowing a debt ceiling hike, yet which is nothing but a PR bluff), Obama has instead once again resorted to what he does best: foment class antagonisms within America, by singling out the rich versus the poor. Ironically, as a WSJ commentator puts it so eloquently, "Obama clearly wants all Americans brought down to a shared level of misery --- except, of course, our federal overlords who will continue to demand their own personal jets, international family travel at taxpayer expense, lifetime health benefits while being excused from the ravages of ObamaCare, and of course their recurring exemptions from all other laws that they impose on us lowly serf taxpayers. Obama wants class warfare? Well he got it: Americans vs their elitist, corrupt, irresponsible, thieving government." One can hope that the final outcome of said warfare here will be more effective than any and everywhere else, where said "governments" continue to dangle the carrot of (insolvent) entitlement program elimination should the population dare to change the status quo.

I'm not going to even begin to try and make sense out of today's market. Watching fires burn and teargas fired in Greece, 100 pip moves in the EUR/USD in minutes and computer algos tripping over each other was surreal beyond words. This market right now is a lottery. Calling equities forward looking or a pricing mechanism is beyond ridiculous. It is during noisy times like these that investors must step back and keep things in perspective. Trading on days like today requires little skill and a lot of luck. When I step back I see a deteriorating economy and an equity market trying to understand what to do. Do they "price in" a soft patch or a full blow recession. Market participants are told it is in fact a soft patch. The slightest hint of positive data reinforces those views.

A few days ago we pointed out that special repo rates are now negative. Fine. How big is special collateral after all - in the grand scheme of things it is a tiny market. Well, as of today, General Collateral just hit -0.002, the lowest rate in the history of the series, and in our humble opinion this is a far more troubling indication of broad liquidity developments than the 1 month bill touching on -0.001%. Simply said, this confirms our speculation that there is now a massive rolling of funding out from money markets and into any market that will accept the maturing short term funding without it being rolled due to European contagion concerns. We said: "this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort." As of today, this prediction is well en route to being confirmed.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 29/06/11

"What we ask is that you spread the Truth and take ACTION! WE ARE ANONYMOUS. WE DO NOT FORGIVE. WE DO NOT FORGET.EXPECT US."

When two weeks ago we wrote about a (short-lived) mutiny within Pasok, we noted the name of one Aleksos Athanasiadis, who had decided (briefly) to vote with his conscience and against his ruling party (and proxy for European banking interests) against the austerity measures. Another mutineer MP we cited, was Giorgos Lianis, who had declared his intention to leave politics in order to be able to safely "walk the streets" and not vote for the austerity. He stuck to his word. As was discovered yesterday, Athanasiadis subsequently recanted and backtracked on his promise to vote with the people. Alas, he should have listened to his buddy Lianis. As Reuters reports, Athanasiadis was attacked shortly following the austerity vote which, among other things, passed with his blessing. Ironically, he was walking the street. This time he got away. But something tells us Greeks never forget. And the one thing they hate more than being a slave to the central banking cartel, is being a slave to the central banking cartel and a traitor.

Greece’s problems are now “solved”, at least for some weeks, until the next debt tranches are to be repaid. The biggest pink Elephant in the Mediterranean, Spain, is passing by very calmly, with the tourists enjoying the cold cerveza on the beach. The summer months are the tourist months, but after this summer, when people decide not to buy all those cheap houses, the Pain will come back. Zapatero won’t run for another term next year, and the blame game has already started. With Spain facing the huge unemployment, the more than a million unsold homes, and local regions carrying “hidden debt”, we expect the autumn to be rather Spain oriented. From www.thetrader.se.

We were getting a little worried there for a second.

How many times can the market rally on the same news - news that we know is nothing but BS number shuffling out of Europe that pushes the Greek crisis back for a year or two and nothing more?

Since I arrived to Spain a few days ago from London, I’ve been sniffing around to get a sense of how Spain’s crisis is unfolding. We see the news clips and YouTube videos of protests, of governments collapsing, of soaring unemployment, but I wanted to see for myself how feels on the ground, and how things have changed over the last year. The most startling change that I’ve noticed, without doubt, is the inflation. Literally everything I’ve looked at– food prices at the local market, restaurant tabs, local electronics, highway tolls, raw material construction costs, mobile phone tariffs, taxi fare, etc. are much more expensive, to the tune of 10% to 25%. So much for the theory that an economic slowdown would decrease prices. John Maynard Keynes, who is consistently held up as the father of modern macroeconomics, suggested in his General Theory that keeping interest rates low and government spending high in order to sustain a boom (or get an economy moving again) would likely NOT result in inflation. Spain is one of many examples that proves this theory to be utter nonsense. Everyone on the ground knows that inflation is high; local newspapers are even running stories about how to best deal with inflation and preserve your savings.