Archive - Sep 18, 2011

FX markets opened first and gapped down 100pips in EURUSD only to retrace back to fill the gap and then drop all the way back down again - all within the first hour. European credit markets (early CDS runs) are trading very marginally wide of their European closing levels from Friday and that is where US equity futures have pulled back to - 11/12am ET Friday levels - extinguishing the late-day hopium-inspired melt-up. We noted Friday that the late-day jump higher in stocks was not supported by any other asset class and sure enough, ES has retraced it all.

While the trope of US "short-termism" has been significantly discussed in recent months, in an attempt to explain why the capital markets no longer align with the 7-11 year duration of the business cycle, but with the duration of the elected term of the US president or of various congressional and senatorial critters, and in many cases, with the lock up period at various prominent hedge funds (nowadays as short as 1 month), little has been said about the comparison between the "political imperatives" that define Europe's economic growth dynamo: Germany. And as last week demonstrated, when it comes to the US attempting to impose its "imperatives" on Europe (read Germany) in the form of the one and only "solution" available to the US (namely print, print, print) any such venture ends in mockery, ridicule and general disparagement of TurboTax experts. So just what is it about Europe that makes the two regimes so incompatible? Well, for one thing the fact that unlike the US, Germany has already suffered through a period of hyperinflation, seen the disastrous impact of central planning in the form of a totalitarian regime and it subsequent dissolution with the fall of the Berlin Wall, and experienced an economic "miracle" or the period between 1948 and 1955, in which Germany denied central planning and unleashed a golden age predicated by free and fair capital markets, and the abolition of all rules and regulations established by the occupying powers. But that is not all: aside from the purely empirical perspective that Americans so acutely lack, Germany also has a vastly different political system which explains why the prerogatives behind the German ruling party are so vastly different than those for the US, and why Europe will almost certainly never embark upon a path comparable to that of the US. The Privateer's Bill Buckler does the perfect comparison of the "political imperatives" that shape, define and most importantly, distinguish the US from Germany, and which we believe should receive far greater attention in the mainstream media than they currently do.

Tomorrow at 10:30 am Obama will present the balance of the details from his latest tax hike proposal, which obviously has no chance in hell of passing, but which will provide for substantial theater and hopefully deflect from the fact that Europe is closing an hour later. Courtesy of Reuters, here are some of the tax measures Obama has either already proposed, or may be looking at, to raise more tax revenue to help reduce the deficit, according to analysts, and what he will likely focus on tomorrow.

The result, for now, is that Greece’s dreaded appointment with the Ghost of Default Future has been postponed. The cycle of austerity, protests, bondholder angst, and threats of default, followed by another round of bailouts, continues.

Same Sunday, Different Day. As the FX market opens, the accrued rumors from this weekend, once again focusing squarely on Greece have come to a fore. The immediate result: a EURUSD which is down 100 pips from the Friday close. Gold and ES opens in 2 hours, Asia in 4, the European bailout rumor mill shortly thereater, the central bank global liquidity pumpathon just after that, and so on. We have seen this all play out before and frankly it is getting boring.

Funny how all it takes for people to tell the truth is to no longer be part of the status quo. Yesterday, former UK PM and gold trader extraordinaire Gordon Brown said the 2011 financial crisis is worse than that of 2008, and now we have the man who until 5 months ago was head (it just never gets old) of the IMF, saying that Greece is finished.

• STRAUSS-KAHN SAYS GREECE CAN'T PAY BACK ITS DEBTS
  
• STRAUSS-KAHN SAYS EVERYONE MUST ACCEPT LOSSES ON GREECE

Think Ron Paul is the only person asking questions about the actual gold supposedly backing the currency in circulation. Think again: the "ask your central banker where his gold is" tour just went global after the Dutch the Dutch Socialists Party (SP)’s spokesman for financial affairs, Mr. Ewout Irrgang, asked the Dutch Secretary of the Treasury 10 detailed questions about the gold supposedly held by the Dutch Central Bank. Questions vary from: where is the gold? why are gold and gold receivables one line item? how much gold is loaned out? As Dutch website Vrijspreker.nl points out, "This is potentially a big breakthrough for global awareness on how central banks hide crucial info from the public and the disastrous effects central banks have on society." Is Belgium next to ask the same question in a vain attempt to understand just how much of its gold is permanently "lent out"? And after Belgium, everyone else with a central bank perhaps?

Sean Corrigan, of Diapason Commodities Management, outdoes himself this week. At one fell swoop, and in his usual eloquent manner, he dismantles Krugman's Keynesian war-mongering, Bernanke's bafflement at a lack of recovery, Trichet's stable instability, and Hildebrand's god-like control of markets. Along the way he destroys every six-year old girl's (and sell-side/academic economist's) dreams - quite a read for a Sunday afternoon.

This it NOT what you would expect from a traditional valedictorian speech. Hopefully people, especially young people, are starting to wake up to just how corrupt and broken at its core, the US educational system is. Alas, tangentially, as the following data from Stone McCarthy indicates, there is little danger that the revelations captured in this video are anywhere near widespread, courtesy of record after record rise in the next big bubble: student loan debt, which is nothing but even more voluntary indentured servitude in hopes that the latest piece of paper certifying one is "smart" will make one's resume more attractive to potential employers. Alas, if they only knew...

Remember when the IMF said Europe will need $200 billion to recap itself, only for the DSK successor to promptly reneg on what she said after Europe shrieked with terror that someone in power dared to tell the truth (as opposed to marginal fringe blogs), or remember when Goldman said the real bottom line will be more like $1 trillion? We can now add FAZ and the DIW to the list of unpatriotic organizations who dare to tell the truth. From Frankfurter Allgemeine by way of Reuters: "Germany's 10 biggest banks need 127 billion euros ($175 billion) of additional capital, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW. The paper on Sunday cited Dorothea Schaefer, research director for financial markets at DIW, as saying the ratio of banks' equity capital to balance sheet total needs to rise to at least 5 percent. A source said this month that the International Monetary Fund has estimated European banks overall could face a capital shortfall of 200 billion euros." That's ok: when the pirates take charge in a few months we are certain the creditors will promptly relinquish all claims against debtor banks, or else walking the plank will become a distinct possibility.

The Republican presidential candidate whom everyone (at least in the mainstream media, on both the right and left, as they are, after all, funded by the status quo to preserve the status quo) has written off, has won his latest landslide victory, this time in a straw poll in California during its 2011 Fall Convention in downtown LA JW Marriott. The LA Times details what transpired: "One presidential candidate, Minnesota Rep. Michele Bachmann, spoke at a dinner on Friday night, and Saturday morning's breakfast featured two more contenders: Michigan Rep. Thaddeus McCotter and Texas Rep. Ron Paul. Paul's fans were out in force both outside the hotel -- awaiting his arrival -- and inside the ticketed Lincoln Clubs Breakfast. He spoke last and was late, allowing McCotter to add a question-and-answer period to his prepared remarks." There was nothing substantially new in Paul's speech which can be summarized as follows: '"You ought to have a right to work hard, and you ought to have a right to keep what you earn." As for the straw poll, "Saturday at the convention also featured a straw poll, conducted between the hours of 9 a.m. and 5 p.m. Pacific, with results announced during an evening banquet. Considering the large numbers of Paul fans who made their way to the Marriott, it's not surprising that he won the poll by a handy margin over second-place finisher Perry. But after the two Texans, the percentages drop precipitously, with Bachmann only managing fourth despite her convention appearance." Something tells us that nothing prevents "large numbers" of other candidate fans from making their way to the Marriott. The results: "Congressman Ron Paul (374, 44.9%); Governor Rick Perry (244, 29.3%); Mitt Romney (74, 8.8%); Congresswoman Michele Bachmann (64, 7.7%); Jon Huntsman (17, 2.0%)."

Just when you thought the news couldn't get any more bizare, we get this from Bloomberg;

   GERMAN PIRATE PARTY TAKES 9% IN BERLIN, ZDF EXIT POLL SHOWS
   MERKEL'S CDU TAKES 23% IN BERLIN, ZDF EXIT POLL SHOWS
   GERMAN SPD TAKES 28.5% IN BERLIN, ZDF EXIT POLL SHOWS
   ZDF EXIT POLL SHOWS POSSIBLE SPD-GREENS COALITION IN BERLIN

This is just a guess, but when almost 10% of Germans want the pirates to be in charge, you may have a political problem on your hands.

With Europe set to open in a little over 12 hours, and with rumors of Greek default once again flying around in their private taxpayer funded jets (only to turn back to their point of origin shortly after take off), we wish to remind readers that a chart is worth a thousand words. In this case a few charts, courtesy of Reuters, which has created the ultimate in interactive data presentations on the Euro crisis. The exposure aggregates across public debt, bank and non-bank private sectors. Note that the charts (based on BIS data) only include external-looking debt held on the books, and not debt since repoed back to the ECB, for which the intermediary exposure is back to domestic banks, and the final is to Europe's taxpayers themselves.

For those wondering just how UBS is planning on scapegoating its horrible quarterly loss on one, single, solitary trader, here is the update, and contrary to rumors and speculation, no EURCHF trades were harmed in the creation of this farce. To wit: "The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits."  Basically this is nothing but Kerviel 102, only this time with the added benefit of it being a non-recurring item to pretend that UBS will actually have had a profit instead of a loss in the quarter. We wonder just what the deposit account "offset" in an offshore Cayman account for Kabuki Owed Lo (obviously an anagram of the beneficiary) will be when he gets out of prison in 18-24 months?

It is seemingly clearer and clearer that with the current structure and membership, the Euro does not work. The market seems to be driving the change in the direction of membership changes (via restructurings and temporary devaluations - e.g. GRE CDS and W.I. Drachma) while the euro-zone-'management' seem prone to structural changes (i.e. EFSF umbrella, Euro-bonds, and fiscal union). While the cost of either approach is likely extremely high, some research from early Summer by ESCP Europe suggests a non-trivial approach that reduces aggregate debt for the European sovereign complex by almost 64% is possible. The solution:- bi- & tri-lateral netting, and free-trading.

The bottom line for us that while breaking up the Euro will be extremely expensive and potentially dramatically destabilizing from more than a simple market-perspective (as monetary-union disruptions have historically tended to end in civil hostility), this study provides a simple way to see how a fiscally-joined and central Treasury-based system 'could' come out stronger. However, the path to that 'potential' strength will be littered with the bodies of financial and non-financial equity holders, senior- & sub-debtholders, CDS traders, and FX jockeys thanks to risk-free rate re-adjustments, subordination, ringfencings, forced recapitalizations, and implicit austerity.