Archive - Jul 2011

As more news comes across the tape, we now learn that somehow Greece is expected to experience a default but not just any default: a "transitory" default. From Bloomberg: European officials are trying to orchestrate a second Greek bailout so that a default would only last for a few days, said two officials familiar with the discussions.

After posting two consecutive negative prints, the most recent of which coming at -7.7, the July Philly Fed rose modestly to 3.2, just above consensus estimates of 2.0. Reading between the lines however confirms that there is nothing to write home about - from the report: "Responses to the Business Outlook Survey suggest that regional manufacturing activity remained weak in July. The survey’s indicators for activity and new orders, which had turned negative last month, recovered somewhat but are at very low positive readings. Firms indicated that employment grew modestly while the average workweek lessened. Indexes for prices show a continuing trend of moderating price pressures. The broadest indicator of future activity improved markedly this month, rebounding from its lowest reading in 31 months in June." Among the key components of the index, those relating to corporate margins, the prices paid declined by 1.7 even as prices received declined by 3.3, once again confirming that economic margin reality and corporate ZIRP driven surreality refuse to match. And while number of employees increased from 4.1 to 8.9 the Average Employee Workweek plunged from 1.9 to -5.4. Just hire many people and have them all work 1 hour a day: sounds like the unions building the 2nd avenue subway. Nt surprising, inventories rose from -8.5 to 1.4. The survey conclusion: "The survey’s indicators suggested flat demand for manufactured goods this month, while shipments and employment grew only slightly. Price measures suggested continued moderation in price pressures. The broadest indicators for future activity rebounded after falling sharply last month and firms are somewhat more optimistic about their hiring plans over the next six months."

Those so inclined can watch the Chairsatan and other regulators testify on financial oversight on year after Dodd-Frank enactment. Dep. Treasury Sec. Wolin, SEC Chair Schapiro, CFTC Chair Gensler, FDIC Acting Chair Gruenberg, Acting OCC Comptroller Walsh will also testify.

John Taylor, the "Fed Chairman who should have been", has penned a terrific op-ed in the WSJ. Advocating nothing short of a great reset, this is one of today's must read pieces: "If government interventions are the economic problem, then the solution is to unwind them. Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles. Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward. "

The below is a letter I recently found in my "examiner friends" archives that I thought was worth sharing. This was written in 2005 by an anonymous former Federal Reserve examiner. As a former bank supervisor myself, the accuracy should challenge us all to pay more attention to those in the trenches doing the actual work (whether bank supervisors or in your own firm; management by walking around, as Tom Peters used to quip). To say the below is insightful is an understatement.

Citi, whose Steven Englander has been bearish on the EUR for a while, and with good reason although when faced with central planning, and Chinabot of course, it is tough to remain rational, sane, and certainly solvent, when the market can remain idiotic and socialist for far, far longer, has just released another note bashing the kneejerk reaction in the EUR. Bloomberg's terrific new All News service summarizes.

As news comes fast and furious out of Europe, here is Goldman's take on the so far unconfirmed details of the latest Marshall Plan in Europe, which unlike last time comes before the war. Incidentally, Europe just approved debt monetization, only unlike in the US, it will do it off balance sheet, via the EFSF "CDO" SPV. "EFSF empowered to buy in secondary markets with input from ECB; BETTER THAN EXPECTED, PENDING clarification on SIZE and ACCOUNTABILITY; EFSF able to recapitalize banks in non-program countries through loans to governments; BETTER THAN EXPECTED, ditto. IF ALL OF THIS IS CONFIRMED, VERY positive relative to expectations. Particularly the systemic stuff is a big step forward to unconditional mutual help. If sovereign cross-correlation of default is low, ex ante risk sharing helps everyone participating"

So far all the news out of Europe is based on changes to EFSF. Greece will be able to borrow for 15 years at 3.5%. French bonds with a 15 year maturity trade at 3.8%. So the EFSF will have to pay more on its debt than it receives? Interesting. Have the rating agencies signed up to rate the new EFSF as AAA? From deals I've worked on, things that always hurt ratings were i) extending maturity, ii) including banks in addition to sovereigns, iii) allowing trading, iv) vague rules as opposed to written rules. The headlines all indicate the new EFSF has all of these components. I am sure the agencies have been involved in these discussions, but I remain dubious how happy the market will be to finance the EFSF at rates that are remotely in line with the rates the EFSF plans to provide financing at. Lots more details likely to come out during the day, but watch for the details. The headlines sound great, but can they be executed. I also noticed somewhere that new lending would be collateralized. If that is true, has anyone asked the borrowers if that makes sense for them?

A rather sobering report out from S&P, which has no other function than to tighten the screws even more on those who prudently are holding out against extending the debt ceiling. As for S&P: please explain to US how 120% debt/GDP is better than 100% debt/GDP, and thus more worthy of a AAA rating? Please. Because we must be bloody stupid: "In our view, the need for an agreement to raise the debt ceiling before it is breached--which the government has said would occur on or around Aug. 2--remains a major risk to the U.S. economy, in our view. Because we see a real risk that efforts to reduce future deficits may meaningfully miss the targets that Congressional leaders and the White House have discussed, we put the likelihood that we would lower the long-term rating on the U.S. within the next three months and potentially as soon as early August--by one or more notches, into the 'AA' category--at about 50-50."

The economic disaster continues with the next target of Europe's reverse Marshall Plan likely being the US itself. Initial claims just prolapsed to 418K, the 16th week over 400K, a 10K increase from the upward revised 408K last week (naturally before it was 405K), and a miss to expectations of 410K. Keep in mind this number will be further revised higher next week. Continuing claims was slighly better than expectations of 3,705K, printing at 3,698K, down from 3,748K. The ongoing 99 week cliff problem is hitting more and more people as 132K dropped off EUC and Extended benefit rolls for the week ended July 2. And while 9,681 of the claims were associated with Minnesota shutdown, nothing explains why there was a surge in 20,599 new claims out of New York of all places.

Headlines out of Reuters:

• Draft EU summit conclusions call for "Marshall plan" of investment, growth stimulation for Greek economy
• Collateral will be part of new Greek aid deal according to Eurozone draft
• Draft EU summit conclusions says three options for private sector role in second Greek bailout remain on the table; debt buyback, rollover and swap
• Draft EU summit conclusions says EFSF will be able to recapitalise financial institutions through loans to governments,including non-programme nations
• Cost of recapitalising Greek banks estimated to be total of EUR 25bln according to Eurozone document
• Draft EU summit conclusions see rate of around 3.5% on new EFSF loan for Greece
• Draft EU summit conclusions says EFSF will be able to intervene in a precautionary basis
• Draft EU summit conclusions see extension of EFSF loans from 7.5 years to at least 15 years, according to a Eurozone document

The Rubicon has now been crossed: Europe goes all or nothing on Greece. When this latest bluff fails it is all over.

Strength was observed in European equities, led by financials, in early trade on the back of news that France and Germany had agreed on an accord ahead of the Eurozone leaders' summit on Greece and PSI. However, later in the session it became increasing apparent that EU leaders may opt for a selective default on the Greek debt, which resulted in equities moving back in negative territory, and weighed on the EUR. Weakness in equities supported Bunds and also observed some widening in the Italian/German and Spanish/German 10-year government bond yield spreads, after EU's Juncker said that selective default for Greece is a possibility. Elsewhere, EUR/USD came under further pressure on the back of weaker than expected manufacturing and services PMI figures from core Eurozone countries such as Germany and France, and as the USD-Index gained strength as the session progressed. Also, GBP/USD moved up around 30 pips following higher than expected retail sales data from the UK. Moving forward, markets look ahead to key economic data from the US in the form of jobless claims figures, house price index, leading indicators, and Philadelphia Fed. In fixed income, 2-, 5-, and 7-year Note refunding announcements, together with USD 13bln 10-year TIPS auction are scheduled for later in the session. US corporate earnings from the likes of Microsoft, and AT&T will also be keenly watched, whereas markets will keep a close eye on the outcome of the Eurozone leaders' summit.

The old Cold War USA-USSR nuclear arms race has been replaced by the East-West battle to accumulate physical gold and physical silver reserves. While Western Central Banks and their puppet bullion banks have distracted and goaded private citizens with the invention of fraudulent bogus paper gold and paper silver derivative products, they themselves have been diving headfirst into real physical precious metals.

An interesting analysis article on gold by Reuters confirms massive and growing demand for physical gold in Asia and the risk of dislocations and rapidly rising prices in the gold market due to central bank demand. The giant middle class populations in Asia, especially China and India are buying physical gold bullion in volume due to concerns about global growth, in order to protect themselves from stubbornly high inflation and concerns about the declining value of their respective paper currencies. Gold demand in China alone is expected to rise about 20% to near 700 tonnes this year from 570 tonnes in 2010. The massive increase in demand from Asia is sustainable. Especially in China where gold ownership was banned from 1950 to 2003 and therefore per capital consumption of gold is increasing from a near zero base. Besides this Asian demand, there is also the continuing and growing central bank demand. Central banks were net sellers for most of the last 30 years and became net buyers in 2010 due to monetary and systemic concerns. The analysis piece reports something experts on the gold market have been saying for some time, which is that “central banks have to tread lightly, as sizable purchases could jolt the relatively small gold market.”

While the entire world is focused on political developments, namely the rescue of the Eurozone, and the extension of America's credit card borrowing limit, there are some economic updates to keep track of in the US, namely initial jobless claims and the July Philadelphia Fed Index. As Goldman observes below, a weaker than expected initial claims number will be lamed on the ongoing Minnesota shutdown, while it appears that as expected yesterday the surge in M2 has been completely ignored by the economists, and thus expect a massive beat in today's 10am LEI. That said, the only thing that will drive the market once again will be headlines from both sides of the Atlantic.