Archive - Jan 24, 2012

Just Smile ... It Will Protect You from All Radiation!

The biggest market-moving event so far this year is undeniably the positive (so far) aftershock from Germany's capitulation on monetary expansion and as Michael Cembalest of JPMorgan goes on to note that the ECB, directly and indirectly, is giving its governments and its banks the money that the rest of the world has been taking away. Between the ECB's LTRO largesse and its 'crisis management' initiatives (for example: collateral standards, watered down Basel III, lower bank reserve requirements), it seems clear that the resignation of the German contingency (Stark and Weber) from the ECB last year was a signal of the laying-down-of-arms by the Germans relative to the Periphery (perhaps for fear of the 'powerful backlash' that Monti among other has warned about). While the JPMorgan CIO understands the market's positive reaction (as Armageddon risk is reduced/delayed) he remains a skeptic broadly given the structural reforms and any expectations of growth among most euro-zone economies this year. He reminds investors that it should not be lost on anyone that first prize in the Central Bank balance sheet expansion race is not necessarily one you want to win and we wonder just how aware the German press and public are that this is happening under their watchful (if not frustrated) gaze.

With over 150 million registered users, the file sharing site MegaUpload.com is one of the most popular on the Internet. At least, it was.  The site has now been seized by the US government and its homepage converted to an FBI anti-piracy warning. Its founder, a high tech entrepreneur named Kim Dotcom (yes, he had it legally changed), was arrested in New Zealand after his homes were raided and assets seized. These actions were all at the behest of the US government. And it's just the latest example of Big Brother overextending its authority across the entire world. Last week, we discussed the grassroots efforts to stop passage of the SOPA/PIPA legislation that would give the US government jurisdiction over the Internet. Wikipedia blacked out its English language pages to raise awareness of the issue, and people went completely nuts. Congress subsequently withdrew the bills amid popular outcry, and the public rejoiced that their efforts successfully thwarted further encroachment on their liberty. Or so they thought. On the exact same day that everyone was celebrating victory over SOPA/PIPA, the US government simply used another set of regulations to nab Dotcom and seize his assets. The fact that SOPA was scrapped turned out to be completely irrelevant, they just found other rules to apply (or break).

The “Transmission Mechanism” Is Broken. As the Fed debates what form of QE to launch on the world and whatever new communication strategies they are going to employ, maybe they should sit back and figure out why their policies seem to be doing so little. The Fed is clearly trying to stimulate the economy.  As much as we disagree with many of their policies, we do believe their intentions were to boost the economy and not just help banks make easy money.  In spite of their intentions, they have failed and we think it is because they are clinging to two flawed assumptions - the wealth effect and the fact that low rates for banks means low rates for banks' customers. The Fed should be going back and figuring out how to address the failure of the stock market wealth effect and of the bottleneck of the banks.

With the Fed expected to at least extend the period of guaranteed ZIRP from 2013 to 2014 tomorrow, it is no surprise that the just priced $35 billion in 2 year bonds did so very uneventfully, and at a high yield of 0.25% (38.96% allotted), in line with the When Issued, the note priced like what is was: an issue explicitly guaranteed by the Fed, and a yield reflecting it. The pricing was uneventful in the headline, and in the internals, with the Directs taking down 8.27% (quite lower than the TTM 13.05%), Indirects in line with average at 32.89% and Primary Dealers as usual accounting for more than a majority, or 58.84%. The Bid To Cover was a solid 3.75 if not a record. And now the Dealers will promptly reverse repo the bond back to the as nobody can do anything with a 0.25% yield in an environment in which investors demand double digits ROEs. Most importantly, however, was that this was merely the latest bond auction concluding even with the US debt ceiling still not getting an extension, and even more plundering from the G-fund. Once the ceiling is finally lifted, total US debt will move the maximum $15.2 trillion to well over $15.3 trillion overnight, maybe higher, just as it did back in August.

Earlier today, the IMF tongue-in-cheekly attempted to make a serious case that Europe and the US could, for the first time since the formation of the Eurozone, decouple, with a worst-case scenario seeing European growth dropping 4% below baseline, or roughly -5% in late 2012 merely as an attempt to stoke Europeans to finally agree to fiscal easing, even as America grew contently on its merry way of monetary easing. While any hopes of a European "spriteness" are a guaranteed dead end, as confirmed by the Luxembourg finance minister who told Spiegel that "Merkel's Fiscal Pact a 'Waste of Time and Energy'", the bigger question remains what happens to the US, once i) Europe does not react aggressively to the threat of the biggest recession since 2008, and ii) its GDP does contract by 4% or more. We don't know. What we do know, courtesy of StreetTalk Advisors, is that whereever the US GDP goes, so does the Eurozone. And vice versa. Think the US won't experience a full blown recession if European growth implodes? Think again.

Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro. In three short sentences, the Peterson Institute for International Economics' (PIIE) Simon Johnson introduces the clear and present danger that Europe has become in a comprehensive article on the deepening European crisis. The circular nature of the realization of sovereign credit risk realities and the subsequent effective insolvency of banks exacerbates a credit crunch and exaggerates problems in the real economy - most specifically in the periphery. Johnson outlines five measures that are needed to enable the euro area to survive but the big bazooka of up to EUR5tn just for the PIIGS is what the PIIE senior fellow fears as the ECB is pushed down a dangerous path. The coordination of 17 disaparate nations leaves the former IMF man greatly concerned as the unique nature of this crisis leaves "four economic, social, and political events as possible causes of systemic collapse with each at risk of occurring in the next weeks, months, or years and these risks will not disappear quickly." As European sovereign bonds are now deeply subordinated claims on recessionary economies, it is no surprise that Johnson ends by noting that Europe's economy remains in a dangerous state.

Even with rigged electronic voting, media manipulation, and political co-option, I feel our efforts this year will resonate for many decades to come.  Whether we are able to take back social power for regular citizens is not as important as making them aware that they have allowed themselves to lose that power in the first place.  The elections of 2012, ultimately, should be treated as a vehicle for enlightenment, and this enlightenment begins when we are able to recognize the lies we live, and the men who sell them to us…

This is neither here nor there, but is, for all intents and purposes, the best take down of the utter and complete hypocrisy that now reigns supreme in the GOP primary process. Thank you Jon Stewart for doing the thinking that so many other Americans seem utterly incapable of any longer.

This is the scariest chart out of the IMF's World Economic Outlook report released today. Naturally it was purely included in there to emphasize the IMF's Mutual Assured Destruction point that Europe has to immediately proceed with fiscal easing (something which Germany will not agree to until it is too late, if then), or else this is what happens. And since this is Europe, and no fiscal resolution will come (but many, many, many summits are in store before the world figures this out), this is precisely the sad reality in store for Europe, and thus for the US and China, as 2012 will be the first year since the Second Great Depression in which official statistics will represent a global economic contraction. As for Europe's 4% decline relative to baseline: good luck.

I warned on Greece 2 years ago, and it seems to have come to fruition. This is who's next....

The latest IMF Global Financial Stability Report is out and it is not pretty. The IMF now sees:

• 2012 world growth outlook cut to 3.3% from 4.0%, 2013 growth revised lower to 3.9% from 4.5%
• 2012 US growth of 1.8%, 2013 at 2.2%
• 2012 UK growth of 0.6%, down from 1.6%
• 2012 China growth of 8.2%, down from 9.0%
• Eurozone to enter "mild" recession, whatever that is, with -0.5% economic growth, to grow again in 2013 by 0.8%. Unclear just how with all the deleveraging...

IMF also adds that without action, the debt crisis may force a 4% Euro-area contraction, in line with what the World Bank, controlled by a former Goldmanite, said. Lastly, the IMF says that Europe needs a larger firewall and bank deleveraging limits. Well there is always that €X trillion February 29 LTRO.

Where did all the bears go?  We cannot find more than one person willing to be outright bearish.  What is particularly strange is that the reasons most people are bullish seem to have little, if anything to do with fundamentals – either macro or micro.  The reason for being long that is closest to being “fundamental” is that Europe is muddling through.  We're not sure Europe is muddling through, but in any case, wasn’t the bullish case for US stocks that we were decoupling?  Conspicuously absent as a reason to be long is earnings. It seems as though everyone is reasonably long (though not fully committed), but thinks everyone else is underweight.  It really feels like the “consensus” is that everyone else is underweight so you better be long for when that money comes into the market. The conversations are far more bearish than the positioning.