Archive - Sep 2011

It is unclear what just spooked the market, but whatever it is, stocks have had enough fun for the day. After the ECB just announced that it had monetized a whopping E13.3 billion in the past week, nearly double expectations, and a total of E134 billion since the SMP program's inception, the market took one quick look at just how effective this program has been, shuddered, and plunged realizing that neither ECB intervention, nor the shorting halt is doing anything at all. As a result, ES is now down 21, EURUSD just dropped below 1.41 (Chinabot is about to give up), and rolling halt of Italian banks have started, with Intessa, Mediaset and Impreglio all halted. We expect UniCredit to follow suit as usual.

I think we are entering a new crucial phase in the problems in Europe as quarter end reports will drive a notional reduction. During parts of 2007 and 2008, CEO's of banks and other financial institutions, did not want to show any exposure to sub-prime, or to certain banks, or to leveraged loans, etc. The CEO's in particular were convinced that they needed to show ZERO net exposure to the asset classes most in question. As part of the "window dressing", their risk management departments were told to be short and told to reduce notional exposures. It was no longer just an economic decision it had become a "what's best for the share price" decision. The reality, is making money is best for the share price, but that notion gets thrown out the window once CEO's panic. I believe we are there, and there are some real repercussions from that. The main problem is that we will see credit curves flatten and possibly invert. As short dated paper to the current "culprits" (sovereigns and financials) matures, the lenders will not want to roll over the positions.

Gold’s London AM fix this morning was USD 1,896.50, EUR 1,341.13, and GBP 1,174.67 per ounce. The gold fix was higher than Friday’s in all currencies (USD 1,854.00, EUR 1,301.23, and GBP 1,143.81 per ounce). Despite continuing denial, a recession in the U.S. is inevitable; the question is only with regard to how deep the recession is and to the nature of the recession – inflationary, stagflationary, hyperinflationary or deflationary. The consensus, especially amongst Keynesians, is that deflation is most likely. However, given the degree of currency debasement being seen internationally stagflation is also a risk. Hyperinflation, as being experienced in Belarus today, is the macroeconomic and monetary ‘black swan’. There are growing concerns that the Eurozone crisis might degenerate again soon due to the Greek debt crisis and risk of default. Over the weekend talks between Greece, the IMF and ECB representatives over new bailout funds broke down. The euro has fallen and the German local elections have added to concerns over Greece.

Despite some better-than-expected macro data overnight (admittedly marginal), investors continue to retreat from any European exposure as sovereign stress leads to financial stress and drags non-financials into an austerity-driven slowdown. The snaps wider in credit markets are very reminiscent of crises past when being hedged at any cost was more important than any short-term trade opportunity.

Frictions in the mortgage market have restricted the ability of tens of millions of borrowers from refinancing their mortgages, hampering monetary policy, slowing the economic recovery, and leading to excessive numbers of foreclosures. We propose a streamlined refinancing program that may benefit up to 30 million borrowers...

All you need to know.

The return of the Black Swan.

I used to think like a statist, and I used to agree with them. It's appealing to redistribute wealth, especially when it's not fairly achieved. But what I've realized is that the solution to creating distortions in the market is not to create more distortions by attacking the symptoms. What ends up happening when you do that is that you create a hugely complex set of rules and regulations that hinder the market, make it inefficient and most importantly makes it ripe for abuse via regulation in favor of those who make the right campaign donations to the right politicians. This is the situation we find ourselves in now: A very broken market setup to benefit those who've made the right political moves. On the other hand, you can simply end the sole cause of the problem to begin with. That sole problem is bad monetary policy. You might say that we should replace everyone in charge of the Federal Reserve with the "right" people. But even if you were able to do that, it's really a temporary fix. So how do we fix this? Sound money, debt forgiveness and a truly free market that isn't guided by the hand of the government and is instead determined by what the aggregate investor pool thinks is the right direction. Gordon Gecko was wrong overall, but he was right that greed is good. The profit motive is the key to good decisions and long-term thinking. That doesn't mean we need to be miserly dickheads who only care about ourselves, but self-enrichment and the unfettered ability to be as successful as possible is the only route to a truly higher standard of living.

As is well-known by now, following America's collapse in the first Great Depression back in 1929, one of the first decisions undertaken by president FDR, not even a month following the first of four inaugural speeches (in which he notably said that "the only thing we have to fear is fear itself") was to respond to the rolling bank runs and shutdowns, by doing something unprecedented: confiscating the gold of American citizens. And then he logically followed up by doing the only thing that insolvent governments know how to do: he debased the US Dollar overnight by 40% by changing the official exchange ratio of the USD to gold from $20.67 per ounce to $35.00 per troy ounce. Alas, since exchanging such gold would be impossible until 40 years later, nobody could take advantage of this generous offer. It is this point in history that to William Buckler of the famous Privateer newsletter marks the transition of American government from republican (on behalf of the people) to being authoritarian (in control of the people). It also begs the question: what did FDR offer in return for gold confiscation - after all if gold confiscation is not "something to be feared" then there is a quid pro quo. Why he gave us Social Security and the Welfare state. The same "welfare" state whose unfunded obligations amount to roughly $80 trillion, and whose increasingly tangible insolvency is precisely the reason why ever more capital is shifting right back to, you guessed it, gold. Perhaps FDR should have added that in addition to fear itself, the one other thing everyone should fear is governments believing they they know what they are doing when transitioning to central planning an an authoritarian regime based on nothing but faith.

Nothing surprising in the premarket action with ES open for trading despite Labor Day, down about 9 points at its worst, following weekend concerns of yet another European apocalypse. Elsewhere, gold is enjoying the fact that the only bearish downside is potentially a technically overbought formation and is surging right off the bat passing $1890 on the kneejerk then reconfirming slowly. As a reminder, a nervous Japan arrives on the scene in 2 hours, followed by an insolvent Europe, and no US-based HFT available to rescue the world tomorrow.

Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.--Abraham Lincoln

As we have been writing for a while now, it is not in the arcania of shadow banking that one needs to look to find increasing signs of the collapse in interbank lending. No: something as simple as Libor, especially its USD variant, which is so crucial to USD-crunched European banks, is more than sufficient to determine that not just Greece, or the PIIGS, but now the entire Eurozone is becoming completely dependent on the dollar generosity of the ECB, and the various other regional central banks. This by implication means that the Fed will once again be forced to step in, "in size" and bail out the world, only this time it is far more debatable if the world believes that even the Fed alone is sufficient to prevent a rising global insolvency tsunami. And confirming how bad it is, we now have none other than ABN AMRO's CEO on the tape, complaining loudly about liquidity: this is and always has been a move of total desperation as the last thing a bank wants to do is give any indication of funding weakness. Furthermore, since ABN Amro is not a USD LIBOR reporting bank, we can safely say that the dollar liquidity crunch has spread far and wide from the 18 BBA member banks, where it is hardly any easier to procure the former reserve currency.

And it's not pretty. Furthermore, without US vacuum tubes to step in tomorrow and fix what appears set to be a major overnight rout, the next 48 hours could be very interesting indeed.

That Zero Hedge has a jaded outlook on the world is pretty much clear by now. But even our cynicism is amateur hour compared to that exhibited by some of our readers. Below we present one outlook by reader Joseph, on how the FHFA "lawsuit" against the banks, a development that as we noted before stinks to high heaven from a purely (lack of ) logical standpoint, could be nothing less than Res Judicata in sheep's clothing, whose purpose is simply to facilitate the case for QE (banks tumble), then settlement of the settlement (banks soar), but not before the crony communists have built up a solid equity position in the names, QE3 is firmly in place, and Obama is seen as the crusader against the hated banks. Is it possible? Who knows. We will find out as the affidavits start trickling in.