Archive - Aug 15, 2011

There was little to smile about in today's Treasury International Capital data for June (as always 2 months delayed). As usual the press release was chock full of irrelevant gross level data, so here is the bottom line. The good news: despite all the posturing China, continued to buy Treasurys, with its total increaseing from $1160 billion to $1165.5 billion. The bad news: China was more or less the only one buying, as total LT Treasury activity saw a net sale of $4.5 billion in June: the first net sale of US paper since May 2009, and only the third time we have seen a net sale of US paper since the start of the Second Great Depression (the third time being, paradoxically, just after the bankruptcy of Lehman, see chart below). The bad news gets downright ugly when digging into the foreign transactions. As is well known, total foreign purchases (or sales as the case may be) consist of central bank transactions, as well as those by non-monetary authorities, i.e., retail and institutionals. And here is where we get today's record: at $18.3 billion in total non-central bank sales, this was the biggest one month sale of US Treasurys in history! Luckily, in keeping with the maintenance of the optics of the global ponzi, this was buffered by central bank purchases of $13.8 billion. With everyone needing someone else to buy their debt we wonder just how much longer, everyone will be able to buy everyone else's debt, even as sales are bound to increase month after month. And the last really ugly news (for ponzi'ists): while China may be posturing, Russia is doing anything but: its holdings have plunged to a fresh multi-year low after Putin gave the green light to dump another $5 billion in US paper, bringing Russia's total to just $110 billion, a 38% drop from the $176 billion in October.  A little birdie tells us gold is the primary beneficiary of this asset roll over.

The ECB just disclosed its much anticipated weekly purchases under the SMP (or direct monetization) program, which at €22 billion came well above expectations of €15 billion, and represents the biggest weekly total in the 66 weeks of purchases under the program, more than the previous record €16.5 billion purchased in the inaugural week of the SMP. Furthermore, as has been disclosed before on Zero Hedge, with a regular (T+3) settlement on SMP purchases, this means that the full weekly total will not be clear until next week's number is announced, and the presented number is only indicative of the pre-settled purchases of Italian and Spanish bonds. As before, what happens under the SMP is irrelevant (although is occurring as predicted by Zero Hedge back in November, when we said the SMP total is about to double as the crisis spreads) since the only thing that matters is when and how big the EFSF will become. Continuing monetizations at this rate under the SMP is political suicide (because make no mistake: the ECB is nothing but a political player now) for JC Trichet and his Italian soon to be replacement. We can't wait to hear Germany's reaction to the fact that cumulative SMP purchases (and thus "Weimar" risk) increased by 30% in one week.

Let's get the week off to a good start. Let's make $200 million by Friday! Plenty of oportunity!

On this day, August 15th, 40 years ago, President Nixon announced the end of the Gold Standard and the end of the Bretton Woods international monetary system (see video of Nixon’s dramatic announcement here). This was one of the most important decisions in modern financial, economic and monetary history and is a seminal moment in the creation of the global debt crisis confronting the U.S., Europe and the world today.  Nixon ushered in an era of floating fiat currencies not backed by gold but rather deriving value through government “fiat” or diktat.  While Nixon justified the move was that the U.S. , then as today, was living way beyond its means with the Vietnam war and growing military industrial complex leading to large budget deficits and inflation. Governments internationally including the French and their President Charles de Gaulle were concerned about the debasement of the dollar and began to exchange their dollar reserves for gold bullion bars. Subsequent to Nixon’s decision 40 years ago, the U.S. dollar has fallen from 1/35th of an ounce of gold to 1/1750th of an ounce of gold today. This is not the fault of “speculators”, rather it is the fault of profligate governments and central bankers debasing the U.S. dollar since 1971 (except for Federal Reserve Chairman Paul Volcker).

The first August leading indicator starts off with a thud, after the Empire State manufacturing index just confirmed that the recent brief push higher was, well, transitory. Printing at -7.72, on expectations of 0.00, down from -3.76, the first diffusion index of the month just saw a third consecutive contractionary print in a row, setting the stage for much more ugliness in August. The summary was succint: "Business conditions continue to deteriorate: "The general business conditions index fell four points to -7.7. The new orders index also fell, inching down to -7.8; the negative reading—the third in a row—indicated that orders had declined. The shipments index held steady at 3.0, a sign that shipments were slightly higher over the month. The unfilled orders index continued to drift down, falling three points to -15.2. The delivery time index was little changed at 0.0. The inventories index dropped two points to -7.6, suggesting that inventory levels were down slightly." What is surprising is not that the current outlook is deteriorating, but that for the first time, the future index finally cracked as the hopium has finally ran out: "The future general business conditions index fell twenty-four points to 8.7, its lowest level since February 2009. The future new orders and shipments indexes dropped to their lowest levels since September 2001." I.e., hope is no more. And there is nothing to take its place.

Markets remained volatile during the European session amid thin trade owing to a European public holiday, together with indecision regarding the issuance of Eurobonds to help troubled Eurozone nations. During the weekend several German newspapers reported that in their upcoming meeting tomorrow, Chancellor Merkel and President Sarkozy may discuss the issue of Eurobonds, which observed some appetite for risk during early trade. However, as the session progressed both the German and French governments denied the news, saying that the issue of Eurobonds is not on the agenda, which weighed on the EUR and equities, thereby providing support to Bunds. Elsewhere, GBP received a boost following comments from BoE's Miles, who said this is not the right time for more asset purchases. Moving into the North American open, the economic calendar remains thin, however markets look ahead to Empire manufacturing and TIC flows data from the US later in the session.

• World Bank president Zoellick: "Markets heading to new danger zone" (Reuters)
• Treasury yields testing bank limits (FT)
• Three steps to resolving the eurozone crisis (FT)
• Singapore Prime Minister: Global Recession Is 'A Possibility' (WSJ)
• A helpless SNB leaks even more disinformation: CHF should be linked to € (Manager Magazin)
• Japan’s GDP shrinks less than expected (FT)
• SNB, Swiss Government in Talks Over Franc Target, SonntagsZeitung Reports (Bloomberg)
• Japan’s Noda Warns of Further Intervention as Yen Again Nears Postwar High (Bloomberg)

Monthly international capital flows for June, The Empire State index and homebuilder sentiment for August.

After it was disclosed that Bank of America's firesale of its China Construction Bank is not going as well as expected, Moynihan's company, which was trounced by the market in the past week, continues to shed assets, this time offloading its $8.6 billion Canadian credit card portfolio to TD Bank for an unknown amount, a deal about which all BAC said was that the "transaction is expected to have a positive impact on the company's Tier 1 common and tangible common equity and the respective ratios." So it may also have a negative impact? That's encouraging. This news follows earlier disclosure that BAC has sold its UK and Ireland credit card business. Unfortunately for BAC shareholders, as long as the CFC bad bank is not nationalized by the Fed (sending its tracking CDS to parity with US default risk) such incremental asset sales will continue. Which also means that as BAC retains the non-performing assets, it is forced to sell its cash-generating trophies. At what point will there be nothing left of BAC but a husk that promises to everyone that going forward its Tier 1 ratio will be over 6% for real this time. And how long until the next Reps and Warranties lawsuit against BAC's mortgage handling practices?

Why did Google just pay a 60% premium for MMI? One word: iPhone - "Motorola Mobility's total commitment to Android has created a natural fit for our two companies. Together, we will create amazing user experiences that supercharge the entire Android ecosystem for the benefit of consumers, partners and developers. I look forward to welcoming Motorolans to our family of Googlers....We expect that this combination will enable us to break new ground for the Android ecosystem. However, our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices."

Sov:

• BERLUSCONI: -17
• ZAPETERO: -13
• COELHO: -15
• G-PAP: unch
• LETERME: -16
• SARKOSY: -2
• FAYMAN: -7
• CAMERON: -3
• GUINNESS: -40

A day after the US downgrade to AA+, Warren Buffett (who elsewhere continues his op-ed uber-campaign in hypocrisy by writing in the NYT that the government should "Stop Coddling the Super-Rich") said that in his book the US is AAAA. Amusingly, hours later S&P downgraded Berkshire to pari with the US. Judging by the record near surge in volatility in the ensuing days, the market was not too convinced with the octogenarian of Omaha's latest orations. What it was more convinced by, judging by market results, was the fact that Bank of America upgraded something totally different to an AAAA rating: gold, with a $2000 12 month target. To wit: "High commodity prices have now created a terms-of-trade shock for importers, feeding into current accounts, the financial sector and, ultimately, sovereign debt. How will these imbalances unwind? Physical gold is the ultimate collateral because it has no credit risk, so EM Central Banks have been diversifying their foreign exchange reserves into gold and other non-dollar, non-euro assets in recent quarters. Looking ahead, the deterioration in credit quality in Europe and the US coupled with an increased probability of QE3 means these pressures will continue. As a result, we revise our 12-month gold target to $2000/oz." Basically everything that Zero Hedge has been saying for about two and a half years now. Naturally, this coming from Bank of America, should set of contrarian call alarm bells everywhere. Regardless, here is BofA's Michael Widmer explaining his call, as well as the full upgrade report from BAC, which lately has far, far greater problems than getting its commodities call right or wrong.

Some time ago we predicted that for Germany the calculus on the bailout of Europe is simple: at some point the costs, in the form of contingent liabilities as a % of GDP, from backstopping an insolvent Europe will become simply too high and offset the benefit of keeping the EUR (a currency which more than anything boosts the German export sector courtesy of a peg that equates German "strength" with that of the weakest members of the Eurozone). Granted, should the EFSF be launched in its peak formation at €3.5 trillion, and be coupled with a eurobond, the direct and indirect Europe bailout costs to Germany become simply so high to where they will be politically untenable. Yesterday we also said that we anticipate any talk of support for a Eurobond would be promptly refuted by German government officials. Both of these happened late yesterday, when German Finance Minister told Spiegel that Germany is willing to help out... to a point. And yes, the report by Die Welt which said that the German authorities are actually considering the implementation of a Eurobond, that received so much press and was noted on Zero Hedge, was immediately denied by officials. Here is Goldman's Dirk Schumacher with a complete summary of the rapidly changing events.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.