Archive - 2011

On another day of abysmal volume, any and every 'good' news was roundly sold, with risk, the euro and PMs all closing just off the lows.

Since Chinese local governments, unlike the U.S. municipality, do not have the option of filing for bankruptcy, Beijing most likely would need to do a great bailout of local authorities either in installments or at one fell swoop

With everyone and the kitchen sink busy sneaking away from the trading floor or holiday dinner to pen predictions for 2012 that will "hopefully" have a success rate of at least 50%+1 (or in Byron Wien's case, even just 1%), others such as Grant Williams have taken the opposite route, and in his latest Things that Make You Go Hmm, he has writen a retrospective, from the point of view of a man sitting on the edge of the end of the world, namely December 20, 2012, and looking back at the key events of the year. Among the primary "memories" of 2012 was the capitulation of Germany and the full backstop of the ECB of sovereign debt, the departure of Greece, Portugal and Spain from the Eurozone, the attack by the US of the Bushehr nuclear reactor leading to an oil price surge to $188 and $5 gas prices at the pump, the nail-biting electoral win of Hilary Clinton over Michael Bloomberg, the predicted but delayed municipal bond meltdown, the announcement of QE3 with $800 billion of MBS purchases in February followed by QE4 in which the Fed cut the rate on overnight reserves, this time however promptly followed by a spike in inflation, the parallel surge of gold to $2400, especially after the MF Global whistleblower revelation that gold had, after all, been manipulated all those years, the epic collapse of the Chinese housing market and the economy' hard sinking, and much, much more.

The EU is still a massive risk to the global economy but so is political inaction, over- regulated or manipulated markets, high unemployment and geo-political shifts. QE is a concern as central banks abandon inflation targeting and indeed growth to maintain ratings. The EU is still throwing liquidity at a solvency crisis at both sovereign and banking level. EU banks not only have a cash problem, more specifically, as ECB President Mario Draghi says : "hoarding at the ECB signals that the problem afflicting the Euro-zone is not so much about the amount of liquidity but that this liquidity is not circulating around the region's banks". I am not surprised as they all know that each has a similar or worse problem sitting in the vaults.... In the first throes of the new deflationary cycle the Dollar will do well, as the fight intensifies and the US uses the Dollar as a monetary tool and prints more Dollars, it will fall precipitously. Correlations will break this year and many of the “relative value” trades will implode. Gold will break away from being pressured by a strong Dollar as the hunt for alternatives to Fiat currency explode. The likes of the AUD will fall steeply as the global growth story rolls over as we have suggested for a long time. But it is China that holds the key. Hard or soft landing is the question. Can they really have a soft landing if the developed world implodes? No chance.

Yesterday, the fine folks of Tradition Analytics were kind enough to explain (once again) just how it is that the Fed has boxed itself into a corner, where in order to maintain the already outlierish growth rate of monetary supply, the Fed will have no choice but to print (same with the ECB), or else risk a massive economic collapse (thank you Austrian theory). Today, the same group provides an update on what everyone knows has been the status quo's only way of dealing with the deleveraging tsunami since March 18, 2009: currency warfare. In the note below, they provide a recap of the recent history of FX warfare, as well as an update of where we stand currently. Keep in mind, currency warfare only works to a point. Then it escalates into other, more violent forms, first trade wars, then real ones.

Time to redouble our efforts … the tide may be turning, and we have a chance of winning.

Greece as the Davie in David & Goliath: A video tale

First it was Zero Hedge. Then Ron Paul joined in. Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again. Incidentally, O'Driscoll says, "America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here." One thing we can say proudly - it has been noticed loud and clear here...

While the surge in the ECB's balance sheet has been discussed to death on these pages, with a particular emphasis on what we believe the key correlation driver-cum-pissing contest of 2012 will be - namely the relative size of the ECB vs Fed balance sheets - it is often best to see things for oneself. Such as the fact that the balance sheet of the European Central Bank, which has been accused of not printing, has grown at the fastest non-pre apocalypse pace in history for a modern central bank (the only exception is the Fed, whose balance sheet grew from under $1 trillion to over $2.2 trillion in the aftermath of the money market collapse), increasing by EUR800 billion, or over $1 trillion, in six months, to E2.73 trillion (obviously an all time record). Annualized this is an increase of over $2 trillion or more than the Fed did in all of QE1. So, just what happens next year when the banks box Draghi in a corner and the Goldmanite decides to actually... print. Perhaps this is a question, as before, left best to our German readers, who unlike their detached from reality peers in the US, know that hyperinflation is and can be all too real.

Just out from Reuters:

• U.S. FIFTH FLEET SAYS ANY DISRUPTION OF NAVIGATION IN HORMUZ STRAIT "WILL NOT BE TOLERATED"

Compare this statement with what an Iranian navy chief said earlier...

While it is unclear what just spooked the EURUSD, sending it lower by 70 pips in minutes, perhaps a better question is why the EURUSD is not thousands of pips lower to begin with. As a reminder every single large bank is pushing for a lower EURUSD on hopes that a EUR collapse will kill the market and send the ECB scurrying into printing money. The problem there is that the ECB just announced its balance sheet expanded to EUR 2.73 trillion, an expected increase of over EUR 200 billion in one week (since the LTRO), and a whopping EUR 800 billion in 6 months (that's $1.1 trillion... in six months)! As such, good luck selling to the Germans on the ECB board that EUR 1.6 trillion annualized is insufficient. Lastly, and as a reminder, here is the only correlation that matters in 2012.

Think "all is fine" in Europe after today's largely irrelevant Italian bill auction (the auction was for 6 month debt - even Greece can raise that kind of money)? Think again. Here is the Fermentation Committee Chairman explaining why Europe is so hard pressed to create a fake sense of calm, allowing those who know the real story to take advantage of the situation while they still can, and sharing the behind the scenes truth you won't get anywhere else. Certainly not SWIFT.

Throughout this entire crisis (going back to 2007), the governments and central banks have made efforts to “fix” certain things. If LIBOR gets too high, then they take action, that at least temporarily improves LIBOR. Those who look at the “improved” data and think the problem has been fixed have been proven wrong, as the market exposes other holes and eventually even the government and central bank money can’t keep the prices artificial for too long without forever increasing the amount of public money at risk. There may be no better example of that phenomena than the Euro Basis Swaps. To some degree, this rate measures the difficulty that European companies (banks) have when trying to get dollars. The First “globally coordinated” action in September brought the rate back from-110 to -80. That faded until it hit an almost scary -160. The Second “globally coordinated” swap line action got us all the way back to -110 (about the same level that had sparked the first action). We retraced some of those gains, saw fresh gains on the back of LTRO, but again have stabilized at rates that are worse than what the policy makers have targeted. Where would these rates be without intervention? Should we be happy about the improvement, or should we be concerned that in spite of all the intervention, this is the best they could do?

As we said yesterday when Sears decided to very unprudently (if very conveniently) post an update of its revolver in its horrendous preannouncement, the company is about to experience some MF Global style "death shorting" having invited every short from miles around to sniff at just how (un)stable its liquidity is. Judging by the action in the pre-market session, where the stock is another 4% lower, we may have been correct. And just to make the lives of key shareholders Eddie Lampert and Bruce Berkowitz even worse, here is Goldman cutting its price target from $43 to $30, while still maintaining a Sell. Alas, this name is going far lower.

Our friends at Themis Trading, who continue the good, if seemingly futile fight, for a fair and untiered market, refresh on their late 2010 market structure forecast, only to find that with a 1 out of 10 "success" track record, they have the same predictive hit rate as Byron Wien and Joe LaVorgna. Which, incidentally, is not a good thing: it simply means the US stock market is now more broken and corrupt than ever, a development that is not lost on US investors, who later today we will find have redeemed a near record amount of cash from US equity mutual funds in 2011, and have pulled cash for 34 out of 35 weeks in a row, leaving mutual funds with virtually zero cash buffer, massive leverage and dreading that day when the Santa rally coupled with low volume levitation is no longer sufficient to mask the massive capital hole in the heart of the S&P 500.