Archive - Dec 9, 2012

Christmas Greetings from EURO-land

And we thought last month's delayed foodstamp data was bad. The just reported foodstamp number for September was a doozy, with 607,544 new Americans becoming eligible for foodstamps, as a record 47.7 million Americans are now living in poverty at least according to the USDA. The monthly increase was the highest since May 2011, and with August's 421K new impoverished America, over 1 million Americans made the EBT card their new best friend. It is unclear just which atmospheric phenomenon will get the blame for this unprecedented surge in poverty, which comes at a time when the pre-election economic data euphoria was adamant that the US economy was on an escape velocity to utopia. Instead what we do know is that in August and September, over three times as many foodstamp recipients were add to the economy as jobs (324,000). We also know that with the imminent impact of Sandy, which will send foodstamp recipients soaring, it is now looking quite possible that the US may end 2012 with just over a mindboggling 50 million Americans living in absolute poverty and collecting the $134.29 average monthly benefit per person, instead of working. Welcome to the recovery indeed.

In France, Minister for Energy and Environment Delphine Batho recently proposed a light curfew to pertain to “in and outside shops, offices, and public buildings” between 1 a.m. and 7 a.m. beginning next July. Some merchants are up in arms as the rule adds to existing bans such as the forced closing of stores on Sunday and night shopping in general. If enacted, the illumination ban will quickly disperse Paris’s reputation as the “City of Light.” France’s Commercial Council is criticizing the decision as being anti-business and economically damaging. However, the fact that these assumed defenders of free enterprise are surprised at such a proposal is the real puzzle. In a country run by a government that is happily bloodletting the productive capacity of the people through a hike on the income tax and a tax on financial transactions, this latest nanny-state resolve should be fully expected. It is not a power grab but a mere reassertion of the authority the central state has over the private affairs of society. The “lights out” edict is just another piece of evidence of a disturbing truth: the road to serfdom is not ahead of the West; we have already reached its end.

Add extreme selling by corporate insiders to last week's list of worries.

The upcoming week is comparatively less loaded with policy events, though the ongoing fiscal cliff negotiations in the US remain one of the key developments to follow. Important is also the FOMC meeting on Wednesday, where Goldman and everyone else now expect the Fed to increase their monthly asset purchase target under the QE3 program to $85bn per month, up from $45bn per month; this will keep the pace of asset purchases constant after the Operation Twist expires at the end of December, as Zero Hedge predicted the day QE3 was announced. There are is a handful of other central bank meetings in emerging economies (Russia, Indonesia, South-Korea, Philippines, Chile) although consensus expects no change to the base-rate in most cases. On the data front industrial production numbers for October will be released around the world including in the Euro-area, US and China. We also get the US retail sales number and December flash PMIs for the Euro-area and China.

Well, my fellow Slope-a-Dopes, although this will undoubtedly be a dreadful decidedly devastating disappointment to many of you, I have chosen to put away my almighty artistically asinine alliteration pen for this Sunday's super significant spectacularly special EP.  Instead of dazzling you with my proficient pathetically putrid pitiful prose, I will focus my alertly astute attention on a stupefyingly serious subject.

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.

"what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.... Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis."

The Political Foundation of the status quo in America is based on a Grand Bargain of Complicity between the top 25% who pay approximately 90% of the taxes, and the bottom 50% who draw on the benefits that come from government. James Madison in the "Federalist Papers" outlined this complicity in the "Tyranny of the Majority". What is becoming painfully evident is that the political elite in America have falsely over-promised on the entitlements that can be delivered, which is now surfacing in the political turmoil of the Fiscal Cliff negotiations and has the potential to quickly lead towards a constitutional crisis. The frayng of our social compact or Grand Bargain and much more discussed in this excellent clip.

The personal freedom to indulge in 32 ounces of sugary corn-syrup-filled fizzy drinks left New Yorkers with a nasty libertarian taste in their mouths. Now, a few months later, as The Telegraph reports that UK council officials are cracking down on the freedom to choose how your burger is done, warning restaurants not to offer them rare or even medium-rare. Of course, this is proposed to be in the best interests of the eating public focused on "making sure customers are eating meat that is a not a threat to their health." This policy, set to the subject of a legal ruling shortly, leavs some to suggest it could destroy the gourmet burger industry (by mandating lengthy cooking times): "Not only that but you’re opening a Pandora’s box, because where do you finish? Steak tartare, runny eggs … the list is endless." Soylent Green anyone?

For those who think any documented presentation of the physical gold held by the world's oldest central bank usually takes place on a movie set in Burbank, CA here is a video featuring University of Nottingham's chemistry professor Professor Martyn Poliakoff (of all people) from within the bowels of the world's second largest gold repository supposedly disproving this (whose comment "one's first reaction is that it can't possibly be real" may be far more accurate than he can possibly imagine). Why the BOE would change its long held tradition of keeping its gold miles away from the public's eye (very much the same way Bob Pisani's dramatic descent into the GLD vault was a straight-to-DVD B-grade thriller) is anyone's guess, especially now that Goldman is about to take the helm of this most venerable of money-printing institutions. But we are delighted they have: we are confident with this precedent set, that the New York Fed will promptly grant some US chemistry professor the right to inspect and "document" the hundreds of tons of flood-resistant gold it too holds safely 80 feet underground, it not a member of the German parliament of course. Finally, if anyone can see Bundesbank's gold bars, please raise your hand.

As in any other Ponzi scheme, when the weakest link breaks, the chain breaks. The risk of such a break-up, applied to economics, is known as systemic risk or “correlation going to 1”. As the weakest link (i.e. the Euro zone) was coupled to the chain of the Fed, global systemic risk (or correlation) dropped. Apparently, those managing a correlation trade in IG9 (i.e. investment grade credit index series 9) for a well-known global bank did not understand this. But it would be misguided to conclude that the concept has now been understood, because there are too many analysts and fund managers who still interpret this coupling as a success at eliminating or decreasing tail risk. No such thing could be farther from the truth. What they call tail risk, namely the break-up of the Euro zone is not a “tail” risk. It is the logical consequence of the institutional structure of the European Monetary Union, which lacks fiscal union and a common balance sheet.... And to think that because corporations and banks in the Euro zone now have access to cheap US dollar funding, the recession will not bring defaults, will be a very costly mistake. Those potential defaults are not a tail risk either: If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults. The fact that they shall be addressed with even more US dollars coming from the Fed in no way justifies complacency.

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

The markets are holding up on hopes of additional stimulus from the Central Banks. Some bulls are even calling for QE 4 at the upcoming Fed meeting, despite the fact that QE 3 was launched a mere three months ago and was open-ended (meaning it would not end until the Fed deemed it time).