Archive - Aug 31, 2011

Remember the 15 sigma move (yes, the move was 15 standard deviations) in Greek financial stocks on the failed attempt by the country to create its very own TBTBF bank with some Petrodollar support? Here is a quick update of how that ended up.

Compare these two statements: first from Reuters- "Greece's debt has run out of control and government policies are failing to restore finances, an independent parliamentary committee of experts wrote in a report released on Wednesday." And second, from Bloomberg: "Greece’s debt is on a “durable declining path” and new projections will show that the second rescue program reduces net  liabilities, European Union Economic and Monetary Commissioner Olli Rehn said." Sorry Europe: your credibility, whatever was left of it, just ran out. When the indirect object of your bail out effort (the direct one being naturally your central bank and your various local banking oligarchy of course) says in your face that you are full of excrement, it is time to put a fork in it.

Yesterday Zero Hedge contributor Bruce Krasting had some very insightful and very prophetic words when he asked rhetorically if a "Government investment disaster in the works??" The company in question is (now former) massively subsidized solar energy company Solyndra. Solyndra filed for bankruptcy less than 24 hours after Bruce proposed that the company is nothing but a stimulus black hole. We congratulate him on his investigative efforts. Alas, being private, there was no way to short it and capitalize on this investigative coup de grace. And while there are no winners, there are plenty of losers? Who - why US taxpayers of course. Why? Because as some may recall, Solyndra is one of the "shining examples" of Obama's $787 billion American Recovery and Reinvestment Act. After all none other than president Obama said that Solyndra is "leading the way toward a brighter and more prosperous future.” He also cited it as a success story from the government’s $787 billion economic stimulus package." Alas Solyndra has now become a less than shining example of the complete catastrophe this latest exercise in pointless Keynesianism has been, all on the backs of US taxpayers. But don't worry, Obama is about to bring us a fresh new such fiscal stimulus catastrohpe any minute. This time it will be different.

What exactly do we have left after several decades of frenzied spending and mindless consumption? I’ll tell you what we have left. We have our rituals and dogma, and soon enough not much more.

Yesterday it was Evans saying explicitly it was QE3 or bust. Today it is Lockhart's turn to stop just short of reiterating what is now getting prices in every single day: "As you know, the FOMC stated after its last meeting the intention to keep the policy rate at near zero for two more years. Also, the current policy is to maintain the Fed's balance sheet scale for the foreseeable future. I support this position. Given the weak data we've seen recently and considering the rising concern about chronic slow growth or worse, I don't think any policy option can be ruled out at the moment. However, it is important that monetary policy not be seen as a panacea. The kinds of structural adjustments I've been discussing today take time, and I am acutely aware that pushing beyond what monetary policy can plausibly deliver runs the risk of creating new distortions and imbalances." He is aware, yet he will gladly vote for it when the time comes. And the time will come very soon because as he just said during his speech Q&A, "slow growth is now a bigger problem than inflation"... which as we showed yesterday is 4%, and "that we have a jobs crisis." Net net: one more dove doing what he does best - beg for more inkjet cartridges.

Well the second Greek bailout lasted all of... 5 weeks. Time for Bailout #3?

• EC PRESIDENT BARROSO SAYS WORKING ON NEW GREEK PROGRAM
• BARROSO SAYS EC REVIEWING WITH ECB AND IMF GREEK FIN. ASSIST

In the meantime, we learn that while two broke Greek banks just merged to create a bigger broke bank, the country's 4th largest bank admitted to resorting to the last ditch liquidity program discussed on Zero Hedge a week ago.

Yesterday we had the first case study of what happens in a hyperinflation, when we noted that the local central bank had just hiked interest rates from 22% to 27%. Net result for the economy? Zero. Today is case study #2 where we learn what happens to an imploding economy which happens to be surrounded by friendly neighbors who just happen to find themselves in a massive arbitrage courtesy of a currency that is losing multiples of its value on a monthly if not daily basis. Per Bloomberg: "Belarus’s supermarkets are running out of meat as Russians take advantage of a currency crisis that a devaluation and the world’s highest borrowing costs have failed to stem. “All meat has gone to Russia,” Alexander Andreyevich, an 82-year-old former tractor-plant worker, said Aug. 25 in Minsk, the capital. “My relatives near the Russian border called me a few days ago and said the shops are empty."..."Private stall owners simply go and buy meat from state- owned vendors and sell it a couple of steps away for a hefty profit,"Deputy Agriculture and Food Minister Vasily Pavlovsky told reporters in Minsk Aug. 24. The government banned individuals in June from taking basic consumer goods such as home appliances, food and gasoline out of the country. Russians, buoyed by the removal of border checkpoints July 1 as part of a customs union, have circumvented the restrictions." Funny- if the locals had preserved their purchasing power by holding their money in gold, they would not find themselves in a position where those who still have a stable fiat exchange rate (for the time being) can literally steal products from under their noses for a paltry sum as sellers scramble to converts products into some currency before it is devalued even more tomorrow.

Marx predicted a crisis of advanced Capitalism based on the rising imbalance of capital and labor in finance-dominated Capitalism. The basic Marxist context is history, not morality, and so the Marxist critique is light on blaming the rich for Capitalism's core ills and heavy on the inevitability of larger historic forces. In other words, what's wrong with advanced Capitalism cannot be fixed by taxing the super-wealthy at the same rate we self-employed pay (40% basic Federal rate), though that would certainly be a fair and just step in the right direction. Advanced Capitalism's ills run much deeper than superficial "class warfare" models in which the "solution" is to redistribute wealth from the top down the pyramid. This redistributive "socialist" flavor of advanced Capitalism has bought time--the crisis of the 1930s was staved off for 70 years--but now redistribution as a saving strategy has reached its limits... That gambit has run out of steam as the labor force is now shrinking for structural reasons. Though the system is eager to put Grandpa to work as a Wal-Mart greeter and Grandma to work as a retail clerk, the total number of jobs is declining, and so older workers are simply displacing younger workers. The gambit of expanding the workforce to keep finance-based Capitalism going has entered the final end-game. Moving the pawns of tax rates and fiscal stimulus around may be distracting, but neither will fix advanced finance-based Capitalism's basic ills.

Two weeks ago when expanding its debt monetizing vehicle, the SMP, to include the debt of Spain and Italy, one of the few appeasements offered to the public by "Europe" was the resolute demand that a transaction tax, aka Tobin, be enacted immediately if not sooner. Today, about two weeks later, the same behemoths of European structural stability, Germany and France, hoping the general public has largely forgotten all that was said in mid-August, has come out with the generous announcement that... they will propose a financial transaction tax. It is unclear if sometime between the first proposal and today's, Merkozy dropped the demand for Tobin Taxation, in order for it to be priced in once again as an indication of the fiscal prudence of the European leaders. And if so, will the market respond like it did last time around and plunge by 5-10%?

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

As we learn of plans for President Obama to address a joint session of Congress next Wednesday night it is worth noting that a single picture is worth billions of borrowed dollars. But this time really really will be different.

A complicted story. I'm looking for clues to the future.

QE 3 won’t solve this mess (assuming it even arrives). Neither will the European bailout fund. We’re already in the Second Round of the Great Crisis which will see the EU broken up, the US economy implode, and a market collapse that will make 2008 look like a joke.

"What we view today as "normal" I argue is simply not normal. Just think about if you wanted to go to town 120 years ago. If you wanted to go to town you actually had to go out and hook up a horse. That horse had to eat something, which means you had to have a patch of grass somewhere to feed that horse which meant you had to take care of some perennial in order to feed that horse in order to go to town. And so throughout history, you had these kinds of what I call ‘inherent boundaries’ or brakes on how much a single human could abuse the ecology. And today, during this period of cheap energy, we’ve been able to extricate ourselves from that entire umbilical, if you will, and just run willy-nilly as if there is no constraint or restraint. And now we are starting to see some of the outcome of that boundless, untied progression. And so the chances are, the way to bet, is that in the future we are going to see more food localization, we are going to see more energy localization, we are going to see more personal responsibility in ecological lifestyle decisions because it's going to be forced on us to survive economically. We are going to have to start taking some accounting of these ecological principles."

While there are those financial publications who have realized that reliance on shadow markets for unsecured repo and otherwise lending may be troublesome in the short-, medium- and long-run, something we warned back in March 2010, a far more tangible threat is not what is happening in the already largely contracting shadow banking realm, but in real, non-shadow markets. Because for shadow to be impaired, these traditional liquidity conduits would have to be shut down first. Alas, while stocks resolutely continue to ignore anything but both good and bad headlines, all of which justify either QE3 or a surging economy (nothing new - as we have said this will occur most likely through the end of the year in a carbon copy of 2010), liquidity in non-shadow markets is the most impaired it has been in a long time, with 3M USD Libor rising again to 0.327% from 0.326%, although the story as usual lying below the headlines. As the charts below show not only are European banks seeing their LIBOR rates increasing (in as much as any of this is even remotely credible), with SocGen and Barclays the two most troubled banks from a self-reported liquidity standpoint, but also that the spread between the lowest and highest reported LIBOR is now the widest it has been in all of 2011. A few more days in which European funding markets completely ignore what is going on with US stocks (the same as US bonds incidentally), and the time to talk about shadow banking repo halts may indeed be nigh.