Archive - 2011

It is no surprise that the ECB has been less than overwhelming in its optimism, unlike Messers Barroso, Van Rompuy et al. when discussing the current and future state of the union that is Europe. While not pessimistic per se, the focus on zee stabilitee and lack of bazooka (no we don't see the 3Y LTROs as a magic bullet) is perhaps related to their view of the difficulties faced in addressing the needs of an increasingly disparate gaggle of countries. In their December Financial Stability Review, the ECB points to four key risks: (contagion, funding, macroeconomy, and trade imbalances), they fear "euro area financial stability increased considerably in the second half of 2011, as the sovereign risk crisis and its interplay with the banking sector worsened in an environment of weakening macroeconomic growth prospects". Summarizing into seven charts, the ECB provides a quick-and-dirty perspective on what is increasingly becoming obvious as capital flows and funding needs interplay with one another (for worse rather than better).

The financial crisis of the last few years has created not just a perceived shift in the creditworthiness of our financial entities but a real crack in the foundation of their business model and more importantly any explicit or implicit supports or guarantees. Moody's, in a special report on credit post crisis "The Great Credit Shift" look at the impact of the crisis on every major asset class within the credit space from sovereigns to corporates to structured finance. Noting that this crisis has profoundly changed the credit picture for sovereigns and financials, Moody's note there is some dispersion in the latter as banks have seen systematic downgrades while insurers (for now) remain on par with pre-crisis levels. More interestingly, large US regional banks represent an exception to this broad downgrade but we suspect that the continued low interest rate, low NIM, and high volatility spread environment will cause both insurers (we have long considered proxies for HY portfolios, no matter how well cushioned from vol their business models may be) and US regionals (consolidation will have the opposite effect of TBTF in our view as it will lead to more comfort with more risk-taking and expose them to more current-bank-like volatility) to face more pressure going forward (despite their lower apparent sovereign risk exposure). As BofA and Morgan Stanley trade at extreme 'crisis' levels in both CDS and equity markets, we suspect the raters have further to go and while the systemic shifts are apparent, we would expect less and not more differentiation going forward - especially if we sink into another solvency crisis.

Even a CDO was more collateralised than fiat currency....

While this will hardly come as a surprise to any of our regular readers, occasional visitors may be confused to learn that according to a discovery by the Carolina Journal, North Carolina "Gov. Bev Perdue’s press office has received access to confidential employment data from the U.S. Bureau of Labor Statistics hours if not days before its scheduled release, quite likely in violation of federal law." Once again the rabbit hole, which these days is pretty much everywhere, emerges: "Documents and correspondence obtained by Carolina Journal show that the Division of Employment Security, formerly known as the Employment Security Commission, sent a draft of the press release each month to Perdue’s press office. The governor’s spokesmen typically rewrote the text and added a positive spin, even if the data did not support Perdue’s talking points." And while one may say this is a perfectly innocuous leak of otherwise embargoed data, others may highlight the following facts: "While the operation may sound like a harmless effort to add political spin to the release of jobs data, sharing confidential BLS estimates while they are protected by an embargo violates a federal law barring the early release of employment data. This is no small matter: A conviction for breaching the Confidential Information Protection and Statistical Efficiency Act of 2002 carries a fine of up to $250,000, up to five years in prison, or both." Of course, when it comes to breaking the law, both members of the US banking class, as well as America's politicians, are perfectly immune from any repercussions. But at least the next time the market does its usual pre-NFP acrobats, the only question will be: which particular US politicians i) traded in advance of the embargo lift, and ii) leaked the information to ten of their closest friends, who did the same, who did the same, etc.

To answer the question, do high energy prices cause recessions, I would say with full respect to uncertainty and causality, yes. Eventually, however, the energy transition away from fossil fuels will gather enough momentum that we will interpret high energy prices differently: we will say they forced (helpfully) a necessary transition. But as we are so early in any global transition to alternatives, it would be better for economists, policy makers, and business to consider the Douglas Adams quote that’s in the header of this essay. Trying to prove that black is white may be a noble effort -- in the fullness of epistemology and causality -- but in the short term it could get you run over in a crosswalk. We face a more immediate question: is the global economy headed back into recession in 2012? Almost certainly, I think.

While not quite a "jarring" as the Saxo Bank "outrageous predictions", Bank of America has also put together yet another list of "other" risks for 2012, which as BofA's Martin Mauro says, "have persisted or become worse over the course of the year, but have escaped market attention due to the spotlight on Europe." The risks are as follows: i) Hard landing in China; ii) Currency wars (competitive currency devaluation); iii) Middle East oil supply shock and iv) Municipal default fears. The only thing we would add is that these are not really risks, as the are all developing processes in some stage of deterioration. And, as usually happens, they will likely all strike at the same time, just when the world is most vulnerable, likely minutes after Greece announces it has left the Eurozone, and the Euro is in legal and structural limbo. But luckily we have at least a few weeks to months before that happens. So here is Bank of America's predictive prowess in all its rhetorical glory.

Buying Yield is not an investment strategy - its what guys who sell rental properties do with the proceeds

If you haven’t looked at The New York Times recently, you missed something BIG.

The markets have entered a new round of deflation. The only asset class that has yet to realize this is stocks.

Three years ago, Congress balked at the mere thought of giving Hank Paulson's (so lovingly portrayed in Andrew Ross Sorkin's straight to HBO Too Big To Fail) proposed TARP, which came in an "exhaustive" 3 page term sheet with limited bailout powers however with virtually unlimited waivers and supervision, and voted it down leading to one of the biggest market collapses in history. Curiously, a more careful look through Europe's €500 billion (oddly enough almost the same size as America's $700 billion TARP) European Stability Mechanism or ESM, reveals that in preparing the terms and conditions of the ESM, Europe may have laid precisely the same Easter Egg that Paulson did with TARP, but failed. Because at its core, the ESM is like a TARP... on steroids. It is a potentially unlimited liquidity conduit (only contingent on how much cash Germany wants to allocate to it - which in turn means how much cash Germany is willing to let the ECB print), with no supervisory checks and balances embedded, and even worse with no explicit or implicit liability clauses - in essence it is a carte blanche for its owners to do as they see fit without any form of regulation. As the following brief but must watch video explains, the ESM "is an organization that can sue us, but is immune from any forms of prosecution and whose managers enjoy the same immunity; there are no independent reviewers and no existing laws apply; governments can not take action against it? Europe's national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU? A Europe devoid of sovereign democracies?" Ironically even America's feeble and corrupt Congress stopped a version of TARP that demanded far less from the taxpaying citizens. Yet somehow, Europe has completely let this one slip by. Is it simply to continue the illusion of the insolvent Walfare State for a continent habituated by zombifying socialism, or is Europe by now just too afraid and too tired to say anything against its eurocrat class? One thing is certain: when the people voluntarily give up on democracy, out of sheer laziness or any other reason, the historical outcomes are always all too tragic.

It’s clear that the BRICS cannot be the engine room of global economic growth. Meanwhile, Europe is a complete basket case, and the euro is looking increasingly as though it will be consigned to the dustbin of history. Across the pond, the US is trying to put a brave face on its jobless recovery whilst kicking a $15 trillion debt bomb down the road. Anyone who steps back and looks at the big picture has -got- to recognize the absurdity of this situation. Now… here’s the good news: you and I have a huge advantage. Citi, Deutsche Bank, Unicredit, etc. are sitting on incalculable losses, unrealistic obligations, and worthless paper that will destroy their organizations. They’ve been accumulating these for years and have no way of avoiding the endgame. We do. We, on the other hand, are little guys. If you and I want to cut our exposure to these silly pieces of paper that governments pass off as currency, we can do that easily. We can easily do that by buying gold or productive land overseas. Bank of America, on the other hand, has to hold Tim Geithner’s dirty laundry.

Gallup, which unlike the BLS, does not fudge, Birth/Die, or seasonally adjust its data, has just released its most recent (un)employment data. And it's not pretty: for all those hoping that the Labor Participation Rate fudge that managed to stun the world a few weeks ago with a major drop in the November jobless rate, don't hold your breath. Gallup which constantly pools 30,000 people on a weekly basis, has found that for the past 4 weeks, both underemployment and unemployment have risen for 4 weeks in a row. And while the number of US workers "working part time and wanting full-time work" one of the traditional short cuts to boosting US jobs has risen to almost a 2 year high, it is the Job Creation Index in December which plunged in the last week, confirming that the Initial Claims data out of the BLS has been spurious and is likely to revert back over 400k on short notice. In summary, here is how Gallup debunks the BLS' propganda: "The sharp drop in the government-reported unemployment rate for November and the sharp drop in jobless claims during the most recent reporting week have combined to create the perception that the job market may be improving. Economists are wondering whether this means the economy is stronger than previously estimated. Political observers are wondering how fast and how far the unemployment rate needs to fall to significantly improve the president's re-election prospects. In contrast, Gallup's data suggest little improvement in the jobs situation. December unemployment is up slightly on an unadjusted basis. In fact, the government is likely to report essentially no change in the unemployment rate when it issues its report on December unemployment in the first week of 2012. Of course, this assumes that the labor force doesn't continue to shrink at so rapid a pace that it drives down the unemployment rate, as it did last month. Gallup's most recent weekly job creation numbers also suggest little improvement in the jobs situation. As a result, it may be wise to exercise caution in interpreting the drop in the government's most recent jobless claims numbers." Or, less diplomatically, the BLS is lying like a drunken sailor just as the economy is about to turn. And if BAC continues languishing under $5, it will turn very hard.

As definitive evidence just how fucked up this entire market is, here is what happens to the ES the second the infinite BAC Bid at $5.00 finally gets taken out. This is the ESH2. That's right - the entire market moved tens billions in market cap because the Plunge Protection Team just failed at protecting the "precious" $5.00 level.