Archive - Dec 11, 2012

There are five distinct stages in the life cycle of sovereign nations. These life cycle stages map to generational cycles and to Long Cycles such as the Kondratieff Cycle. Since these cycles are fundamentally behavioral shifts, they consequentially take the nations economic and political process with it. Democracies become exposed and borderline ungovernable in Stage V. This is a result of the electorate's expectations, entitlements and James Madison's "Complicity from the Tyranny of the Majority", as outlined in the "Federalist Papers". Success breeds complacency and complacency breeds leverage. Fiat currency enables a late stage country to delay the realization that it is no longer rich, but not avoid it. In a period of major Global Imbalances, which the world presently faces, this will make democratic policy setting extremely difficult and in fact will show democracies to be borderline ungovernable. In cases of grossly distorted expectations, such as the US, it will be found to be ungovernable.

It was all going so well. In general the cone of silence was working. Stops had been run, hope was among us once again and while no-one had a clue why stocks were rallying (apart from Johnny 5), the interpretation was that - well the market must believe a deal is being done... until Harry Reid opened his mouth....*REID: REPUBLICANS HOLDING MIDDLE CLASS TAX CUTS 'HOSTAGE' *REID SAYS REPUBLICANS HAVE OFFERED NO SPECIFICS ON WANTS and S&P 500 futures dropped 5 points - halving the day's gains.

Today's rally marks the fifth of the last six pre-FOMC days with a strong performance for stocks (the one sell-off into an FOMC meeting this year was when consensus did not expect anything - post QE3 and pre-election). The current differential between Treasuries and stocks is as wide (and expectantly hopeful) as it was when we were 'gifted' QE3 - and that marked the top in stocks for the year so far. It seems heading into this meeting, consensus expects the QE4 Treasury-based fill-'er-up that we discussed the day QE3 was announced and given the crush in earnings expectations, the broad market's current year-highs in P/E valuations just looks remarkably over-optimistic. With today's heavy block size seen at the highs as the short-stops were run, one can't help but see this as professionals lightening up into retail hope as opposed to looking to extend the rally.

American Military Starts Assassinating Children

It is oddly ironic that on the day the US bailout of AIG is complete, and with a "profit" at that, the spin goes, even if the spin ignores that the "profit" was only purchased at the expense of trillions in sovereign debt issuance and near immediate monetization by the Fed, which has onboarded a mindbogling amount of duration risk (from under $500MM in DV01 in 2008 to over $2.5 billion currently, but nobody will discuss this issue as few if any grasp just how much risk exposure the Fed has shifted away from entities such as AIG), that we learn just how far the abuse of virtually free taxpayer funds goes. Only instead of some US government apparatchiks blowing through billions in some concrete government building in downtown D.C., we go to the birthplace of Mozart, in Salzburg, Austria to learn that a "civil servant gambled hundreds of millions of euros of taxpayers' money on high-risk derivatives."

The drums roll. The cadence quickens. We are a scant three weeks away from the fiscal cliff. The markets react to each breath taken by people on both sides of the aisle. Rumor fuels rumor and the media is abuzz with the testosterone levels of each key player. Swords and shields are brandished with equal repartee and, to date, we are nowhere close to any resolution. As an American, as one person with a small semblance of a public voice, we find it depressing to watch our nation’s leaders squander their time and my money and yours. We have somehow lost not just any leadership in our country but we have lost our common sense. The basic truth is that we have passed social programs and welfare plans that can no longer be paid for by the people who are paying. The capacity has been exceeded and the spending must stop. Elections have come and gone and now is the time, now must be the time, to bring common sense back to our President and back to our Congress as we remind everyone in Washington that one plus one still equals two and that the bastardization of that principle is no longer acceptable.

A rather curious result in today's just completed 3 Year $32 billion bond auction, which concluded on surprisingly weak terms, despite the High Yield coming at 0.327% or precisely where the When Issued expected it would, which also happens to be the lowest yield in the history of the auction. So far so good - where things got thorny is in the internals, first the Bid to Cover which printed at a surprisingly low 3.356, the lowest since February 2012, but a bigger surprise was the Indirect Take Down, which as validated by the recent trend, just dipped to 21.9% of the issue, the lowest Indirect Takedown since 2007! It also saw the Direct allocation surpassing the Indirect for the first time in history. Just as surprising is that the Indirect tender into the auction was a meager $9 billion, leading to a very high 77.3% hit rate. Obviously America's foreign lenders have better thing to do than to lock up cash with Uncle Sam even for 3 years, despite Ben's guarantee that there will be no volatility in the throutg "mid-2015." Or perhaps due to. Finally, it also means that ever more Fed monetization will have to take place to rotate bonds from PDs back to the Fed, and also means that with the Fed already monetizing 100% of all long-dated issuance, he will have to move ever further left.

Former BP engineer Kurt Mix is being charged by federal prosecutors with obstructing the law. They believe that he deleted thousands of emails and text messages tied to the company’s efforts to measure the size of the underwater leak. The emails that Mix’s lawyer is set to release in February will supposedly prove his innocence by showing that he deleted nothing, and at the same time show that BP in fact knew about the size of the flow rate long before they advised the US authorities. BP always claimed that they didn’t learn of the spills full extent until after April, when in fact they knew almost immediately. The emails show that just two days after the explosion occurred Mix sent in an estimation of the flow rate to his supervisor of between 62,000 and 146,000 barrels a day. BP executives told the coast guard that their best estimates held the leak at 1,000 barrels a day.

Ass seen on natural habitat...

All the extraordinary measures deployed since 2008 to jumpstart the U.S. economy are one-offs: either they cannot be repeated or they have lost their effectiveness. As a result, we now have an extraordinarily fragile one-off economy that is dependent on "emergency" measures that cannot be withdrawn even as their utility in the real economy dwindles by the day. These two dynamics--declining effectiveness and unrepeatability--have created a uniquely fragile economy. Once you become dependent on extraordinary fiscal and monetary stimulus, withdrawing the stimulus will trigger a recessionary cascade. But continuing the stimulus cannot duplicate its initial effectiveness, as malinvestment and unintended consequences degrade the initial boost.

Update: ES moves down a whopping 1 pt when Boehner says "we are broke."

Update 2: Boehner ends about 3 minutes in, nothing notable to report: the GOP is waiting for a proposal from the White House, which in turn is waiting for a proposal from the GOP. And so on.

If the past few days' silence from D.C.was supposed to indicate progress in Fiscal Cliff talks between the GOP and democrats, then will today's impromptu press conference by Boehner be spun as even more indicative of progress? This may be complicated when he admits, once more, there has been none to talk of. Luckily, Boehner has long since served his duty, with his November 16 conference when he and Pelosi single-handedly stopped the market from plunging to 2012 lows, and AAPL from getting a 4 handle. All his subsequent appearances have been quite superfluous. Watch him live below.

Equity markets have pulled away from the rest of risk in a wonderfully dramatic manner this morning as they set their sights on the pre-election highs and the running of the stops. We are now back at Bernanke QE3 spike levels - which we are sure makes perfect sense to someone - anyone, Bueller? For now, it seems like we auctioned up to clear out any last remaining weak hand shorts given the lack of support for this from any other market.

Relative to interest rates (and swap spread differentials), the EURUSD is at almost its most 'expensive' in 15 months. It appears support for a 'strong' EUR is waning; as the swap rate tends to signal, even ECB President Draghi - as Bloomberg Briefs notes - suggested support on the Governing Council for a reduction of the main policy rate has increased appearing to have used the downward revision to the Eurosystem staff GDP forecasts as an excuse to soften his tone. Between Spain's auctions hitting a wall of 'virtual intervention limits' and Italy's political turmoil, it appears (at least fundamentally) that the EUR should be weaker (we suepct currently aided by incessant repatriation flows). Options markets are pricing in expectations of further weakness but it appears the EURUSD rate remains bound by the Fed-to-ECB expectations of a wholesale Spanish bailout (increase in ECB balance sheet) and the Fed's expansion via QE4. For now, positioning is not indicating any squeeze with the net speculative shorts at the lowest level since September 11 - coincidentally the last time EURUSD was so rich to swap spreads.

Reuters has disclosed the outcome of the Greek debt buyback, citing a Eurozone official, which while completed at €32 billion, has missed it hard goal by €450 million, and as a result the completely unbelievable Greek 2020 debt/GDP target will be 126.6% instead of 124%. Reuters also reports that the average price on the buyback was 33.5 cents on the euro. As a result of the higher price paid for the buyback, the outcome is that Greek debt/GDP will be reduced by 9.5%, or less than the 11% targeted. Earlier, it was also reported that with virtually all Greek banks having sold out of their Greek bond exposure, all Greek private debt is now in foreign hands. It is unclear how holdouts will be dealt with, and what, if any, rights they will have following the transaction. Finally, as to the 2020 debt/GDP target, one can only hope that the Greek GDP, which is a rather critical component of the debt/GDP calculation, will now rise in a straight diagonal line up and to the right as the Troika expects it to do. Sadly, it won't.