Archive - Oct 2012

And Monday, it became official.

To those familiar with Algebra, we suggest that the Ponzi scheme we live in is actually an overdetermined system, because there is no solution that will simultaneously cover all the financial and non-financial imbalances of practically any currency zone on the planet. Precisely this limitation is the driver of the many growing confrontations we see: In the Middle East, in the South China Sea, in Europe and soon too, in North America. That these tensions further develop into full-fledged war is not a tail risk. The tail risk is indeed the reverse: The tail risk is that these confrontations do not further develop into wars, given the overdetermination of the system! We have noticed of late that there’s a debate on whether or not the US dollar zone will end in hyperinflation and whether or not the world can again embrace the gold standard. The fact that we are still in the early chapters of this story does not allow us to state that hyperinflation is only a tail risk. The tail risk is (again) the reverse: That all the steps central banks took since 2008 won’t lead to spiraling quasi-fiscal deficits.

The U.S. tri-party repo market is one of the most important components of the financial system - that noone has ever heard of (though not ZH readers: Tri-party repo has been a core topic of several of our 2009 posts exploring the nuances of the Lehman collapse - initially here and here and then multiple times as we discuss the backbone of the shadow banking system). The 2007-09 financial crisis exposed weaknesses in the design of the U.S. tri-party repo market that could rapidly elevate and propagate systemic risk. We have long-discussed the importance of the collateral and hypothecation markets and a recent study of the market identifies the collateral allocation and unwind processes as two key mechanics contributing to the market’s fragility. While the topic is relatively specialized, it is critical to understanding the reality behind the curtain and the paper below provides clarification of the bilateral and tri-party repo markets (The Fed, Bank of NY, and JPM - who in effect have first refusal on any collateral in the system), dealers' intervention, and its potential as a source of financial systemic risk.

Serfdom has simply been pushed too far.  Globally.  What we are about to witness, incredibly, is not just a change in the way that one or two countries or even a specific region of the world operates.  No, what we are about to witness is a complete transformation globally, a change that we believe will be incredibly positive and will ultimately free us from the shackles upon the minds of humanity as a species. Whether it was the intention from the outset or not, what globalization has created is a very small class of incredibly wealthy people that are extraordinarily corrupt as a group and also above the law. The writing is on the wall folks.  The global economy is headed back down into depths that will prove worse than 2008, and this time no amount of money printing and propaganda will be enough to hold things together.  TPTB know this. What we have today is not Socialism or Capitalism, it is Ponzism.

In what could easily be a Friday Humor post, Reuters reports that the Aussie government's statisticians, taking a page out of the German's 'creative' accounting book, have found an additional $338bn of assets for the nation. 'Cheers' all around as the Australian Bureau of Statistics (and Lies) revised household wealth up by AUD14,380 for every one of the country's 22.6 million people - as new estimates of unlisted shares and other equity pushed the nation's total financial assets to AUD3.1tn (compared to an originally reported AUD2.77tn. As the miners from down-under continue to struggle against a fading China, this miraculous 'find' has dropped the ratio of debt to liquid assets from a worrisome 170.1% to a meager 129.1%. Rumors are circulating that the ABS is now looking for the ark of the covenant, the philosopher's stone, and Shangri-La.

Today's Zero Hedge Articles in Audio Summary. "50,000 Downloads Don't Lie!" Everyday 8-9pm @ New York Time.

There's a belief among certain economists – and the wider population – that if the government takes a more active role in the economy, the social outcome can be improved. Dr. Lacy Hunt, executive VP of Hoisington Investment Management Company (HIMCO), says it's a false belief… and he has proof to back it up. An unprecedented buildup of debt, he shows, can only lead to one outcome: a drop in Americans' standard of living. Must watch!

NY Attorney General Eric Schneiderman is suing JPMorgan over "multiple fraudulent and deceptive acts" in selling mortgage-backed securities causing losses of over $20bn. The suit appears to be related to conduct at Bear Stearns and is on the back of the monoline insurer lawsuits, and whistleblower affidavits such as the following:

In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007- 1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT” and a “shit breather.”

While we hope this would effectuate some real change, the likelihood is that it will at best result in a $300mm civil-lawsuit slap-on-the-wrists and brownie points for Schneiderman while nothing changes.

We have presented many charts over the last few weeks showing the collapse in retail sales in Spain, along with surging unemployment, bankruptcies and non-performing bank loans. But to do justice to the situation, you’ve got to put it in context of the last 150 years, and JPMorgan's Michael Cembalest provides just such context. Spain’s adventure in the Eurozone has sent it into an economic tailspin the likes of which have not been seen, with the exception of the Spanish Civil War, since the 19th century. At that time, the Spanish empire was at the tail end of its colonial decline, and was an under-regulated, agrarian, closed economy subject to frequent crises. The chart shows the details, highlighting the economic declines during revolutions, depressions and agricultural epidemics. Spain’s recent decline has now matched them.

Even now, after the Chinese economy has consistently disappointed everyone, we still get the impression from market participants that it will all be fine in the end, because the Chinese government know what they are doing, and all they need is to let the floodgate of money open. Whenever a bad data point comes out, the market interprets that as more easing ahead, and it will most certainly save the economy. If only running the Chinese economy is that easy. Every growth engine of the Chinese economy is failing, and there is only one thing which can sustain these failing engines for longer, which is government stimulus, and whether the government is actually willing to deploy massive stimulus that is questionable.

The yield on MBS has been crushed over the last few weeks (front-running from before QEternity and then afterwards as every manager with a balance sheet warehoused as much as possible to sell back to the Fed). This rally has reduced the spread between 'risky' MBS and supposedly risk-free US Treasuries to practically nothing as the Current Coupon 30Y MBS trades around 1.67%. However, where the real differential has occurred is in the spread between the risky wholesale rate that Main Street is charged on their mortgage and the government-sponsored wholesale rate they finance this debt at. The spread between wholesale and retail mortgage rates has never been higher (in absolute and ratio terms) providing a new ATM for all those banks and mortgage originators trying so hard to scrape by these days. We just assume the Fed's policy transmission-channel had modeled this trickle-down of mortgage banker bonuses (and taxes) into local Ferrari dealerships and Lafite wholesalers.

From the knee-jerk spike after the ISM data, US equity markets sold off relatively calmly for the rest of the day. Headlines will crow of a gain to start the quarter and what that means empirically, the real stories are under the surface: AAPL dropped 3% from its early-day highs to end at one-month lows; VIX jumped 0.6 vols to 16.3%; HYG, the high-yield credit ETF, was weaker all day and dumped into the close on huge volume; Treasuries were bid into the close ending the day down 1-2bps; and FX carry slid all afternoon as the USD rallied from -0.4% to -0.1% at the close. Commodities were juiced by Evans' dovishness (and Iranian fears) but the spikes in Silver (and less so gold) were retraced - though they all ended outperforming USD's implied strength. Tech and Discretionary underperformed as Staples and Healthcare were the winners. Not exactly the herd of performance-chasing monkeys everyone expected eh?

There is something very wrong with this story. Two months ago, the world's most legendary race track, Germany's Nürburgring filed for bankruptcy. As AP wrote then: "Germany's legendary Nürburgring racetrack and entertainment complex is effectively bankrupt. The circuit—which hosted Formula One's German Grand Prix last year—is to launch insolvency proceedings amid fears that it could run out of cash while the European Commission considers planned government aid. The state government in Rhineland-Palatinate, which owns the financially troubled Nuerburgring GmbH, decided on the move on Wednesday, the dapd news agency reported.... A state subsidy had been in place since a disastrous development plan left the 'Ring organization saddled with more than 350 million euros in debt. While the Nordschleife—the circuit's famous “North Loop” which covers more than 13 miles—generates healthy operating profits, the income does not cover the interest payments on the enormous debt incurred when the state entered into the plan with two developers, Kai Richter and Jorg Lindner." Sadly such is life in a world in which not everyone is bailed out by the government, and when it comes to the "fairness for everyone, bankruptcy for no one" doctrine, Germany has still not jumped on the bandwagon. One country which has is the country which many say is alive only due to German generosity, is Greece. And in what may be the biggest slap in the face to Germany, and its recently defunct race track, is the news that Greece is now "unblocking a subsidy" (a subsidy which came from Germany) for €29 billion to, get this, build a Formula 1 racetrack. The same type of racetrack that just went belly up in Germany and cost countless jobs.

Cats can now walk on the ceiling...

There have been a few nations in the world over the last decade or so that have garnered somewhat mind-blowingly negative attention and have been forced to restructure, take losses, or default (semantics) on their debt (or financial system). Three of the best known are Argentina, Iceland, and most recently Greece. The following chart of GDP growth may have a lesson for every investor around the world (especially those in sovereign bonds) - and maybe more importantly for the Greek (and European) leadership. Is there something different about the post-restructuring growth in Greece that did not occur in the other two nations? Perhaps taking your medicine is indeed the right way to go - and enables growth to once again re-emerge - and the constant use of the M.A.D. argument is pure bluff.