Archive - Jul 29, 2011

Watch this suit. The big USA financials are going to get hit on the head.

A simply unprecedented miss in Q2 GDP well below the consensus range, with the official number printing at 1.3%, giving it upside room for revisions in case QE3 does not pass, although at this point it is more than obvious that this number is goalseeked to give Bernanke the carte blanche to start more easing any second. This number follows an epic revision to prior data, with Q1 plunging from 1.9% to 0.4%. The GDP internals were simply appalling: Personal Consumption tumbled from 2.1% to 0.1%, on expectations of 0.8%! The US consumer is dead despite not paying mortgage payments. Lastly, US PCE Core printed at 2.1% on expectations of 2.3%. As we have been expecting since December, the US is on the verge of a triple dip recession within the bigger depression. With a deadlocked Congress, the Fed has no option but to do another monetary stimulus as seen by the surge of gold to near record highs on the data in the $1.625 range and the implosion in the USDCHF to fresh all time lows.

Amid Debt Battle, More Americans Say Economy Getting Worse (Gallup)
Treasury Faces Pressure to Detail Backup Plan (WSJ)
Debt-Increase Dispute Tests Boehner’s Power (Bloomberg)
U.S. Economic Growth Probably Slowed (Bloomberg)
IMF Board Holds Informal Board Meeting On EU's Greek Financing Deal (WSJ)
Why are we in this debt fix? It’s the elderly, stupid (WaPo)
France Seeks Rapid Adoption of Greek Bail-Out (FT)

Several important releases today, including the advance report for Q2 GDP, which consensus sees at 1.8% and Goldman is materially lower at 1.5%. A QE Lite POMO closes at 11:00 am. Chicago PMI and UMich consumer confidence round out the data, which will again be vastly inferior in market movery to headlines out of Europe and the US.

As we learned working in Mexico in the 1980s and 1990s, the world of debt defaults and fiscal crises inevitably results in strong inflation, but a big part of the inflationary process is perception.  Think of this week as the point in the learning curve when Washington started getting the attention of the entire nation and world -- a year before the next election

New IMF Chief Christine Lagarde has warned overnight that the global reserve currency status of the dollar is at risk due to the “worrisome” US debt debate. Failure by the United States to raise the debt ceiling would likely lead to a decline in the U.S. dollar and raise "doubts" among those using it as a reserve currency, Lagarde said. "One of the consequences could be a decline of the dollar as a reserve currency and a dent in people's confidence in the dollar." The U.S. currency has had an “exorbitant privilege because it was the reserve currency that most central banks had,” Lagarde said in an interview on PBS’s “Newshour” yesterday. “If there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar, it would probably entail a decline of the dollar relative to other currencies.” The use of the “exorbitant privilege” phrase by the former French finance minister is important and not an accident. It echoes the former French President, Charles de Gaulle’s comment regarding the dollar being “America’s exorbitant privilege” at a landmark press conference in 1965 that led to the end of the London gold pool or government cartel which attempted to keep the gold price fixed at $35 per ounce.

When one things of Europe's default contagion, one traditionally thinks of the Club Ded countries along the Mediterranean. It may be time to change that after Denmark's CDS has surged by nearly 20% overnight, from 74 to 88, and by over a third since June 7, making it the worst performing government in the past month. The reason for this is that the country, which unlike other European nations, has allowed its insolvent banks to actually fail without masking their poor state. This in turn prompted S&P to come out with a report yesterday that as many as 15 more banks could default. In its report, S&P said that "In our base-case assumption, we estimate the gross loss due to additional bank failures to be Danish krona (DKK) 6 billion-DKK12 billion over a given three-year period. If the losses are larger than we expect, we would have to reassess our ratings on individual Danish banks, based on the impact of the fallout on each. Eleven banks have failed in Denmark since 2008. Although the banks were small by international standards, it is nevertheless an unusually high number for a developed market where bank defaults are generally rare events and extraordinary government support mostly averts losses to senior creditors. While the Danish regulatory authorities accept the concept of systemically important institutions, they have so far given no formal indication of which institutions fall under this definition. In our opinion, the banks we rate would be considered systemically important and therefore may receive extraordinary government support, beyond that defined in the country's established bank resolution scheme." So according to the rating agency any country that dares to avoid the Paulson-Summers TBTF doctrine is in prompt need of annihilation if we read this right. Either way, this latest black swan means that the crisis is creeping ever closer to German, which now has to fund two insolvency fronts: a southern and a north one. And when S&P finally puts France on downgrade review, the time to panic will have come and gone.

Who says only America has a major political crisis that threatens to destroy the country. Following earlier press reports that Spanish PM Zapatero would dissolve government on September 26 in order to have a new general election on November 20, which were summarily denied by the government immediately, it only took about 20 minutes for Zapatero to make a TV appearance and admit that there will indeed be early elections. And judging by the recent surge in popular protests a government overthrow appears certain, which means that Spain's entire role in the Euro bailout mechanisms will transfer from asset to a liability (which is great for German leadership aspirations for a Fourth Reich in which the fate of the entire Eurozone depends on its, and not the ECB's every whim, broader population be damned), and that Spain can kiss future austerity plans goodbye. The immediate result, though, was another major move in the EURUSD, which tumbled by another 60 pips following overnight news of Spain's downgrade review by Moody's. Overall, the EURUSD moved from a high of 1.4360 on the Boehner news all the way down to 1.4230. Our heartfelt condolences to all FX traders. In addition the Spain - Bund spread is 348, +7 the highest in two weeks, while the Italy Bund spread moved higher by +13 at 332, matching last week's record high. Bailout #3 beckons, only this time the EFSF will be a cool two trillion.

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Just to make sure that we all get the message that a consolidated sell off across all asset classes is what the cental planning doctor ordered, here comes Moody's to not only trim all the gains in the EURUSD since the Boehner debacle, but to remind us that the Fourth Reich is coming, even as the US of Aa- still struggles to pass its 2009 budget. Oh, and as a reminder Moody's put Italy's Aa2 rating on downgrade review on June 17, which means the formal downgrade is due right...   about.... now.