Archive - Jul 2011

Is the Balkan mentality the biggest problem in trying to solve the Greek situation?

Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.

There may have been those who thought that our focused mockery of Moody's head something Mark Zandi went a little too far last summer when he and other prominent Princeton proctovoodoologist Alan Blinder praised Tim Geithner's abysmal "recovery" in a desperate attempt to get an administrative job away from their respective sinking ships. Well now he have pure comedy genius to add to allegations of incompetent buffoonery. On Friday, Zandi told Yahoo's Daily Ticker that of all proposed replacements to Tim Geithner (a list which he somehow was not part of despite years of sycophantry) JPMorgan head, currently embroiled in billion dollars worth of mortgage fraud litigation, would make a "Fabulous" Treasury Secretary. That's right: the head of the bank that effectively shares its balance sheet with the Fed courtesy of being the primary shadow banking system gatekeeper as one of two tri-party repo clearers, and whose relentless printing of new bonds would necessitate round after round of QE, would make a "fabulous" treasury secretary... While we are at it, why not just get Bernie Madoff, who continues to be in jail for doing what the global financial system does each and every day, furloughed and have him run the US Treasury every Tuesday, Wednesday and Thursday on alternative weeks when the bimonthly refunding occurs. After all who better to lead the US Treasury than him?

Below is a translation of a letter from Professor Schwarz-Schilling to Richard Herzinger of Die Welt c/o my friend Achim Duebel in Berlin. He writes: "Mr. Mladic perhaps is right to be angry, sitting so lonely in the dock in The Hague. A Europe unable to learn from its past sits in the shadow behind him."

Erste Group's Ronald Stoeferle has released another must read report on gold, recapping all the recent developments in the space, and more importantly putting the recent price moves in context. While there are numerous key observations which we leave to readers to uncover on their own, arguably the key fact is the following: "The possession of gold is tantamount to pure ownership without liabilities. This also explains why it does not pay any ongoing interest: it does not contain any counterpart risk. Along with the International Exchange and the Chicago Mercantile Exchange, JPMorgan now also accepts gold as collateral. The European Commission for Economic and Monetary Affairs has also decided to accept the gold reserves of its member states as additionally lodged collateral. We also regard the most recent initiatives in Utah and in numerous other States as well as in Malaysia, and the planned remonaterisation of silver in Mexico as a clear sign of the times. The foundation of a return to “sound money” seems to have been laid." And as the currency basket vs gold since 1999 chart below demonstrates, the key feature of fiat money is that is most certainly has liabilities, paradoxically in the form of central bank assets which collateralize it. The more worthless "assets" that are taken up by central banks to match the balance sheet expansion, the more worthless the actual currency in the form of actual circulating paper and reserves. As such it is not so much the actual dilution of fiat paper that devalues it: it is the increasingly less valuable available collateral that supports it. As for the future: one of Erste's scarier hypotheticals is that should the US lose control of its monetary base, leading to a 1000% jump in said monetary metric, the shadow price of gold assuming 40% backing of gold, would be $99,419. Frankly we have yet to hear even some of the most undaunted gold bulls throw this number around.

While the legal case against DSK in New York may be ending shortly, a new one, and possibly the first of many if the man's reputation as a womanizer is indeed valid, is about to be launched against him in France. From Reuters: French writer Tristane Banon will file a legal complaint on Tuesday over an alleged rape attempt by former IMF chief Dominique Strauss-Kahn in 2002, her lawyer told Reuters. David Koubbi, Banon's attorney, said the complaint would relate to an incident that took place when she went to interview Strauss-Kahn in an apartment in Paris. She was 22 at the time and has already publically discussed the incident. "Tristane Banon will file a complaint on Tuesday for attempted rape in Paris," Koubbi said." It is unclear if the case will be civil or criminal although considering statuse on limitations on these kinds of things for a criminal trial is hardly 9+ years, we are confident the weakest for of allegation against DSK will be filed. Of course, this is to be expected when one waits 9 years to actually lodge a complaint against something that should have been brough to the authorities' attention immediately.

Some fireworks go off.

A few weeks ago Barclays compiled a useful chart representing the largest holders of Greek debt. Today, the bank's Laurent Fransolet has issued an update "of the table “Top 40 holders of Greek government bonds and Greek debt” (Figure 1), in which we show updated holdings for Q4 10 for AXA and add KA Finanz from Austria to the list. We also clarify that the holder EFG in previous versions is Eurobank EFG." Not surprisingly, despite the refining drill down of secondary exposed parties, the top holders remain central bank and affiliated institutions, explaining the ongoing prerogative to not impair central banks' Greek holdings as a result of a rating agency event of, even selective, default.

The 4th of July is a fitting day to ponder the reality that we are at Peak Government, and the Savior State is unsustainable. This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State. In his book Collapse of Complex Societies, anthropologist Joseph Tainter identified two causes of economic collapse: investments in social complexity yield diminishing marginal returns, and energy subsidies, i.e. cheap, abundant energy, decline. In my terminology, the dynamic he describes is one in which the cost structure of a society continues rising due to “the ratchet effect” but the gains from the added expenses are increasingly marginal. At some point the additional costs, usually justified as the “solution” to the marginal returns problem, become counterproductive and actually drain the system of resilience as dissent and adaptability (“variation is information”) are suppressed. This feeds systemic instability: on the surface, all seems stable, but beneath the surface, the potential for a stick/slip destabilization grows unnoticed. Cheap, abundant energy offers a surplus of value that can be invested in social complexity and consumption. Once the cost and availability of energy declines, then that surplus shrinks and can no longer be used to support the high cost structure. The U.S. economy has clearly been driven to the cliff edge of instability by both dynamics: the cheap, abundant energy which enabled fast growth of consumption and high cost social complexity is vanishing, and the cost structure of the economy has ballooned far beyond sustainability.

Last Wednesday we cited from a Reuters report, according to which the last ditch Greek MLEC/CDO rescue operation, would be welcome to S&P and Moody's as "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." Because absent a decree of no EOD, the whole thing is pointless. Well, as often turns out, this was yet more wishful thinking on behalf of some bureaucrat, masked as fact. S&P has just come out with the following: "In recent weeks, a number of proposals relating to this  topic have surfaced, and the particulars in some cases are evidently still  in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria" and specifically: "we believe that both options represent (i) a "similar restructuring"
(ii) are "distressed" and (iii) offer "less value than the promise of
the original securities" under our criteria. Consequently, if either
option were implemented in its current form, absent other mitigating
information, we would likely view it as constituting a default under our
criteria." Goodbye MLEC 2 - as expected you were just as useless as your first iteration back in 2007.

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I wish all you a very Happy Independence Day 2011!

A week ago, Zero Hedge penned "An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed" in which we explained how the current fatally flawed proposal for a Greek bailout is nothing more than a structured vehicle, expected to remain off the books, and much more importantly, expected to not trigger rating agency ire, and kill the entire extend and pretend game: remember - an Event of Default by a rating agency, even a Technical one (completely irrelevant of what ISDA does with Greek CDS) means game over for the European Central Bank and its €2 trillion in "assets", not to mention the western financial system. Now, a week later, the FT's own Wolfgang Munchau explains why our observation of how toxic the "bailout plan" is was rather accurate: "This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out... I have no space for a large drawing with lots of boxes and arrows to explain the complexity of the vehicle, through which eurozone governments want to involve the private-sector banks in its next loan package." Munchau's conclusion: "If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer." On the other hand, all is fair in love and perpetuating the ponzi Status Quo^TM. Our follow-on observation that "The two things that are keeping the Eurozone afloat: an SPV and a CDO" alas appears also to be rather in line. And before the entire financial system collapses upon itself like a cheap lawnchair, this will be fondly remembered as one of the more prudent "rescue" mechanisms enacted to delay the inevitable.

Two weeks ago we demonstrated what happens to prices of so-called "rare" earth minerals, which are almost exclusively controlled by China, and whose exports China recently decided to cut to a mere trickle, resulting in a 10+ fold increase in some of the most rare minerals in under a month. It also has allowed the third R bubble to persist as long as it has. It appears that the bubble is about to pop big time. According to Nikkei, "Vast deposits of rare earth minerals have been discovered on the seabed of the Pacific Ocean amounting to 1,000 times those on land, media reported on Monday citing a study by Japanese researchers." Of course, this could merely be one of those not quite definitive discoveries, which end up being disproven eventually, but which serve to merely pop a temporary speculative bubble. Just like the IEA. In the meantime, it may be time to temporarily erase the Rare from Rare Earth Minerals, and change Earth to Underwater.

As is by now well known, when it comes to upside theories debunking the bearish "economic contraction" case, there are two core arguments: a Japanese pick up, and a surge in automotive production and sales. And following a jump in Japanese industrial production last week, there was a brief consensus that the soft spot as a result of the earthquake and tsunami have been overcome. Until the subsequent Tankan confidence index release, that is. And in the meantime, nobody can still explain how the economy is expected to return to trendline if peak electric consumption can not be met by a crippled electrical infrastructure. Which leaves auto production, and the latest iteration of inventory restocking. Zero Hedge already discussed the glaring split in inventory data between the Chicago PMI and the Manufacturing ISM, which as Goldman noted previously is a major wildcard in determining future GDP growth. Perhaps David Rosenberg said it best in his Friday Breakfast with Dave: "While there is no doubt that we will see an inventory boost from a revamping of auto production in the coming quarter, what will be critical is whether final sales will hold up. So far in June, chain store sales are running below plan. Auto sales, however, are the real wild card and could hold the key as to whether we are, in fact, at an inflection point. Go back to August 2007 and they put in an interim peak of 16.3 million annualized units. They bottomed for good in February 2009 at 9.2 million units. Then they hit a nearby high of 11.7 million units in March of last year just ahead of the market downturn and "double dip" concerns, only to then trough at 11.5 million in August 2010 just as the market was ready to rip. And then, in February of this year, sales peaked at 13.4 million in February. The May number was 11.8 million - and today we get June. Stay tuned." Consensus was for a significant rise to 12.0 million in June. The actual number was 11.45 million. The lowest since August 2010. So much for an inflection point (not to mention that all of this ignores the record channel stuffing in post-reorg GM).