Archive - Sep 2011

You are being lied to.   There is currently more than sufficient evidence that indicates that we are either in, or about to be in, a recession.   The last time I made that statement was in December of 2007.   In December of 2008 the National Bureau of Economic Research stated that we were correct.  I don't make statements like that lightly and, honestly, I hope I am wrong as this is a horrible time for the economy to relapse. However, the reason that I bring this up is that there have been numerous analysts and economists stating that the economy cannot be going into recession due to the spread between various sets of interest rates.  (For the purpose of this report we will focus on the spread between the 1-year Treasury bond and the 10-year Treasury note.)  Historically speaking they would be correct and I will explain why.

Rumor time, just as expected:

• EU'S REHN SAYS THERE ARE PLANS TO RECAPITALIZE EUROPEAN BANKS

When the FT fails, drag the viceroy of New Feudal Europe^TM into it. EURUSD shoots from the hip without any regard for logic or math. And here is the math: the combined European banks' (yes, all those banks that virtually all passed the stress test as in they DONT NEED NEW CAPITAL) market cap, in addition to being lower than that of Apple, is about half of what the banks needs to raise to meet Goldman's liquidity needs. In other words, banks will dilute themselves by at least 200% to become viable. And they plan on pulling this off without a mutiny by existing shareholders how again? Oh yes, the word is "nationalization." And that will surely confirm that Europe is stronger than expected. This broken market is now trading only rumor to rumor, each of which is getting more and more desperate and more ridiculous.

We noted earlier that German finance minister Schaeuble said bank recaps were not the ECB's problem and the 2nd Greek bailout needed revisions - little did we know this would be the signal for investors to recognize that raising cash might be the safest thing to do. Since that statement TSYs and Gold/Silver flipped their recently well hedged relationship to one of total liquidation of both - correlation is not causation obviously but we though the timing was of note.

RANsquawk Weekly Wrap - we answer questions that have come to the desk, and we highlight some of next weeks important news and data to look out for.

We have now moved from buying the rumor, to buying the rumor of the rumor. Is this another reason for stocks to bounce?  Or just admitting that EFSF is too confusing in its present form, and cannot do enough, and has so little support that we might as well move to ESM?  Maybe the EU members have decided that if anyone was going to spend more money in Europe, it should be something they control directly and not this super CDO? Maybe they finally realized that the EFSF was supposed to be replaced by ESM in 2013, but EFSF was going to issue 30 year bonds?  Maybe the German approval vote is more questionable than we are being led to believe? Who is this employee who left his briefcase open at a bar with a Bloomberg reporter? Or is someone sending out leaks, waiting to see how the market, responds, and if it's not good enough, they send out another leak?  It sounds bizarre. There is no longer any point watching this.  Those that are bullish will be cheered by each and every step, and believe it is a sign of more to come.  Those that are bearish will view each headline with derision, until something big and real happens one way or another. 

Gold down over $100, and Silver down over 15% - someone is liquidating. Rumors vary from very prominent hedge funds to Central European (as in geographically) central banks. Bottom line is, it is a self-fulfilling prophecy at this point and will continue until every last seller is out, and until the margin calls end.

UPDATE: Silver <$30 -17%

Helpful non-confrontational, non-trade-war, conciliatory comments from China's finance minister Xie speaking at the IMF meetings.

*CHINA SAYS IMF SHOULD STUDY DEFECTS OF WORLD MONETARY SYSTEM

*CHINA SAYS IMF SHOULD DIVERSIFY GLOBAL RESERVE CURRENCIES

*CHINA SEEKS `STABLE VALUE' IN RESERVE CURRENCY SYSTEM

In what is a pathetic attempt at Mutual Assured Destruction only in this case is Virtual Assured Suicide, Athens News reports that Greece, in order to demonstrate just how "serious" its fiscal condition is, will slash its defense spending in the form of support for NATO, thereby destabilizing the region even as Turkey and Syria are already on the verge of way: a development which NATO will surely be delighted by. "Greece will significantly reduce its participation in Nato and EU military missions due to the economic crisis in the country, National Defesce Minister Panos Beglitis announced on the sidelines of an informal EU defence ministers' Council held here on Friday. He said that the ministry was preparing to cut down Greece's participation in the Nato and EU missions in Afghanistan, Kosovo and Somalia, noting that local political forces in Afghanistan and Kosovo were anyway entering the phase where they would gradually take over control." So instead of going ahead and doing any of the austerity stuff Greece promise to enact back in 2010, which has been sacrificially pushed forward from 2015 to 2014, pretty much like what the US will need to do soon to avoid more downgrades when the next debt ceiling hike is due in a year, it will instead pack up and leave, most likely giving Turkey the impression it can do whatever it wants in the region, and why not: after all the third coming of the Ottoman Empire has been long in the making.

Yawn:

• EU PLANS GREEK BUYBACK PROGRAM OPEN TO ALL DEBT, ALL INVESTORS
  
• EU GREEK BUYBACK PLAN FROM DOCUMENT OBTAINED BY BLOOMBERG NEWS

Fade.

Why are the only people smart enough to trick a bank's risk system, so stupid that they lose billions of dollars? The odds that the only rogue traders that exist have phenomenal losses are very small. Some must have small losses, and some must have profits that quickly get converted from "rogue" profits into bonus eligible profits. Why are so many capitalists and "free-market" champions calling for government support? Many of the same people who rant against government regulations and interference, are happy to demand handouts, subsidies, and "helpful" intervention. Can you really be a commucapitalist? I guess if capitalist is redefined as self-serving, this wouldn't be a paradox.

Now we need to step back and objectively, CALMLY, away from the madness of the crowd and simply factor the panic into our fundamental equation.

The unerring belief that powers greater than mere mortals will vanquish the enemy of lack-of-bank-capital this weekend was enough to spur a significant turnaround in European stocks and spreads as they headed towards the close. While optically, the strength in senior financials spreads appears wondrous, we note that subordinated spreads are underperforming seniors significantly (when one would expect them to be outperforming if all was really well) and broad equity indices (and credit indices) only managed to get back to marginally unchanged. Sovereign risk remains notably wider still - which has the smell of a bailout/nationalization risk-transfer to it in our ever so humble opinion.

Of course freedom - as envisioned by the Founding Fathers - and free markets would go a long way towards allowing normal volatility, and thus preventing Black Swan collapses ... but the Chairistan and Thought Police can't have that, now can they?

As predicted:

• SENATE HAS VOTES TO DEFEAT HOUSE SPENDING PLAN; VOTE CONTINUES - BBG

Next up: headline risk and a push for Bernanke to print more. Why? Because when all is said and done the market will have plunged (even more) on the realization there is no fiscal stimulus coming in the next two years, despite the Chairman's clever gambit.

Last night a GOP controlled Congress passed the Continuing Resolution bill which would provide funding for the government past the end of the Sept 30 fiscal year end. To pass it, Boehner invoked clauses which antagonized Democrats even more. Which is why now that the bill is in the Senate, it appears to have hit a dead end. As Goldman explains, today the bill will likely die, which means that with a one week recess coming up from the government next week, government is about to be well and truly shut down.