Archive - Jul 2011

Risk is back on in Europe (and thus spilling over to the US), confirmed by both a tightening in PIIGS spreads across the board and a jump in the EURUSD by 100 pips from overnight lows following a rehash of the same old rumor that the EFSF, or Europe's "toxic bank" off the books CDO equivalent, will provide emergency credit for insolvent countries. With the European Parliament summit starting tomorrow at 1pm (moved back by an hour), there is anticipation that Europe will finally present a strong resolution to ongoing problems. The expectations are not lost on Europe itself: as Barroso said "The minimum we must do tomorrow is to provide clarity on the following: measures to ensure the sustainability of Greek public finances; feasibility and limits of private-sector involvement; scope for more flexible action through the European Financial Stability Facility, the EFSF; repair of the banking sector still needed; and measures to ensure the provision of liquidity to our banking system." Unfortunately just like every previous time, Europe will disappoint as there is no holistic resolution that does not involve the default of the PIIGS. In the meantime, as Bloomberg reports, "European officials are considering steps previously rejected by Germany, including the use of precautionary credit lines, to prevent the spread of the region’s debt crisis, a person close to the talks said. Other options up for discussion at tomorrow’s Brussels summit include enabling the main 440 billion euro ($624 billion) rescue fund to lend to recapitalize banks, said the person, who declined to be named because the talks are in progress. Nothing will be decided until leaders convene. Together with a second Greek aid package, the goal is to prove to markets that Europe has the will and the tools to prevent the crisis from engulfing Spain and Italy." With Italy already "engulfed" it shows just how badly behind the curve Europe still is.

The Bloomberg Chart of the Day (see above) shows how gold in dollars is correlated with increases in the U.S.’s debt limit, particularly in the last 10 years. Julia Yoo, a Seoul-based analyst at Korea Investment told Bloomberg that “gold’s rally is quite explosive.” “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price,” adding to gains this year that were driven by demand from countries including China.”

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He had the unmitigated hubris to publish another piece of feeble hubristic trash in the WSJ at precisely the same time Citizen Murdoch was being castigated for his hubris and Goldman Sachs was reporting on the sorry quarterly result of it's...hubris.

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To say that systemic risk is a MAJOR problem for the EU would be the understatement of the year. For instance, if Portugal defaults, Spain’s banks will get taken to the cleaners. This in turn could trigger a HUGE systemic collapse as exposure to Spanish debt is equal to 4% or more of GDP for Switzerland, France, Germany, the UK, and the Netherlands.

When just under a year ago, Tim Geithner penned "Welcome to the Recovery" he top ticked the zenith of the business cycle to the day if not the hour, with the economy finding itself in a straight line contraction ever since then, blissfully delayed by a 9 month QE2 detour. Now that the QE2 is no longer a factor, we are already seeing economists everywhere cut their Q2 GDP forecasts to sub 2%, an effective stall speed for the economy in real terms, and reducing their full year economic forecasts. Which is why we were delighted to learn that today Geithner has just released his latest iteration of a top-ticking missive, this one titled inappropriately enough "Dodd-Frank Has Made Our Banks Stronger" which is supremely ironic because not only has Dodd-Frank not made anything stronger as it has not even been remotely implemented, but as Bank of America, Goldman and Citi's Q2 results have just confirmed, the US bank sector is now the weakest it has been in years. Thus, when accentuated with a Geithner adminition to not panic our only advice is to do precisely the opposite. Oh yes, it took precisely 25 days between Geithner's heartfelt appeal to America's idiot class last year and Bernanke's Jackson Hole appearance. We wonder if this year it will be shorter.

Precisely a year ago, a summary report by Fitch shone the first, if relatively weak, light on the massive Chinese securitization industry which had for years allowed the country to fund its housing bubble without forcing the banks to actually take much if any of the loan risk associated with this unprecedented expansion. At the time of the Fitch report, the securitization discrepancy was not deemed to be excessive and at about RMB 1 trillion in annual issuance it was promptly swept under the rug. Nonetheless the key statement remained: "Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements." More recently, and long overdue, Moody's took a refresh look at the same problem and on July 4 released a rather disturbing report which found "that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." At 10% of GDP, the number sure is starting to get larger. Today we present what we believe is the most comprehensive report we have seen to date on the matter of the Chinese "Shadow Banking" industry courtesy of SocGen. For those who enjoy putting things into perspective, SocGen quantifies the total shadow banking system in China to be as large as RMB10 trillion (or 55%, of the Total Social Financing of RBM18 trillion): nearly USD1.5 trillion. While the number is not massive (considering that the most recent corresponding shadow banking number for the US is well higher at about $16 trillion), it keeps increasing as a portion of GDP. Why is this important? Because as SocGen's Wei Yao says, "The currently unsupervised development of the informal financing market delays the intended impact of monetary policy tightening, but adds to the risk of precipitating a liquidity crunch of the entire financial system later." So it this Chinese shadow banking system a potential monetary time bomb, destabilizing the PBOC's efforts at normalization and adding materially to systemic risk? Read on.

Any of this money yours?

No, the soap opera is not done just yet. According to The Hill the office of John Boehner has said that the Gang of Six proposed $3.7 trillion fluff "settlement" appears to fall short of goals set by House Republicans. "This plan shares many similarities with the framework the Speaker discussed with the president, but also appears to fall short in some important areas. The House is voting today on our 'cut, cap, and balance' plan, and we hope the Senate will take it up soon. That remains our focus,” a Boehner spokesman said. As expected the kicker is the impact on Social Security which will see drastic changes if Chained CPI is implemented in conjunction with cost of living adjustments: "They also are wary of the plan's complicated mechanism for dealing with Social Security. The plan states that Social Security reform only be taken up once the rest of deficit-reduction plan is completed. If Social Security reform is not passed by a 60-vote margin, the earlier vote on the rest of the deficit-reduction package is nullified." The actual impact on COLA was not mentioned by Boehner's office. We expect the AARP will require clarification on the speaker's stance on that issue shortly.

The last three years of global recession have dealt a major blow to American capitalist ideas trumpeted throughout the world on the value of “free markets.” Wall St has been revealed as a form of casino economy, with the bankster insiders gambling with other people’s, and eventually, the government’s money in the form of bailouts. As the Republicans in Congress, scenting victory in the 2012 presidential elections, hold a gun to the Obama administration’s head and rating agencies consider downgrading U.S. government bonds in light of Washington’s possible defaulting, many ideas around the world that previously seemed implausible because of the dominance of the U.S. economy are garnering renewed interest.

Yes, we know Apple is a cash juggernaut, and could easily lever up its cash and equivalents balance, retain a 10% Tier 1 Capital Ratio and be one of the largest (and perfectly solvent) banks in America (just think of what $760 billion in fractional reserve power would do). But what about the benefit to Uncle Sam? Well, we decided to pull the cash taxes paid Apple disclosed on its cash flow statement for the purest definition of actual taxes paid each quarter, avoiding all that GAAP vs Tax accounting mumbo jumbo, and compare it to the cash the company has had at any given quarter end period. Prepare to be surprised...

So you see, Florida Bar, you are wrong, wrong, wrong when you say I have to bestir myself and do a darn thing about the fraud I helped my clients commit on the court. Because, I’ll tell you one thing, if one of those nice people’s affidavits was phony, they were all phony! Geez, give me a break. Seriously, whose side are you on???