Archive - Apr 23, 2012

Juxtaposing the market's recent movements, Nigel Farage's 'when-not-if' perspective on the end of the Euro, Weidmann's concerns, and now ECB's Noyer stunning self-delusion that, as Bloomberg notes:

*NOYER SAYS STEPS TO EXIT EURO CRISIS BEGINNING TO BEAR FRUIT
*NOYER: BANK FUNDING, MONEY MARKET CONDITIONS ARE MUCH BETTER
*NOYER: RECENT EXCEPTIONAL STEPS LET BANKS, GOV'TS STRENGTHEN
*WEIDMANN: RENEGOTIATION OF AUSTERITY A 'BLOW TO CREDIBILITY'

is more than some can bear. As Mr.Farage notes, in the face of the rapidly deteriorating situation in Europe, Barroso and his colleague's ever-smiling perspective on the Euro, "look ridiculous". With Spanish yields over 6%, banks trading at near record high levels of funding costs, Italian risk elevating, political event risk becoming critical, and now macro data turning even worse perhaps Noyer's comments that "delaying fiscal consolidation may lead to greater risks" are spot on - and yet nation after nation rises-up votes to 'deny' austerity.

One scene from the movie Titanic depicts a lounge in one of the upper class quarters of the ship as it slowly sinks beneath the waves. Notwithstanding the vessel listing alarmingly, a motley band of toff revelers are determined to go out in the finest style. Some continue to play at cards with a fatalistic resolve while others determinedly quaff spirits direct from the bottle. Having considered for some time the most appropriate metaphor for the current market environment, we think this may be it: one may be doomed, but one can still party on. Having already hit the iceberg, one major problem we see is the common perspective for both investors and the asset management industry to view debt and equity as the entire universe of investor choices available. Having long exhausted the armory of conventional policies to keep the unsustainably indebted show on the road, increasingly desperate politicians are doing increasingly desperate things, be that gifting money to the IMF in a brazen display of fiscal denial that we can ill afford (US, UK) or simply stealing from other sovereigns (Argentina). The ironic triumph of the Keynesians means that, in trying to save the economy, our central bank may end up destroying it completely by means of the printing press; as a consequence, we now get to experience some of the full-on horror of the Japanese malaise.

Frankly, by now the topic of US student debt has been discussed to death, and like every other bubble, it will keep growing, as the very fungible proceeds are used to purchase such mission critical "student" addenda as iPads and booze, until it bursts. Yet is it really that bad? And how does it look compared to some other countries' bubbles. Like that of the UK? Courtesy of Bloomberg we now know how a similar bubble is blowing across the Atlantic:  “In this country, we will be on an order of magnitude ahead of the U.S.,” Lampl said in an interview. “We’re loading up these kids with debt. The whole thing is an absolute disgrace.”

In thy orfices, Banksta pimps!

As we noted this morning, the perfect 'reality-check' storm hit Europe this morning and with Draghi dismissing hope for more printing and nationalism raising its ugly specter, broad European equity markets made nearly their largest drop in five months. With the BE500 (Europe's S&P 500 equivalent) at three-month lows and Spain's IBEX within a few points of the March 2009 lows, things are becoming critical once again. Spanish yields jumped back over 6% but Italian spreads actually underperformed on the day +14bps vs Spain +12bps as Holland 5Y CDS blew past 130bps to near crisis-peak levels - leaving GDP-weighted European sovereign risk at three-month highs. The LTRO Stigma has broken above 150bps for the first time since before the LTRO as the realization of the implicit subordination of LTRO-encumbered banks is crushing unsecured bond-holders (on average trading at 350bps near four-month wides). EUR-USD basis swaps deteriorated a little remaining near their worst levels in three months but EURUSD remains miraculously just above 1.31 (though almost 100 pips off Friday's close) as repatriation flows are not helping correlation-driven algos in the US anymore.

This spells MAJOR trouble for Spain and the rest of the EU. Unlike Greece, (which has its own elections, which could go very wrong for the EU, on May 6^th by the way), Spain is too big to bail out.  Indeed, the Spanish banking system is a toxic sewer of bad mortgage debt: over half of all mortgages were generated and owned by the unregulated cajas. If you're unfamiliar with the caja banking system, let me give you a little background...

There are those who think that Currency Wars are a brand new thing. They are not. More importantly, we now have finally moved on to the real deal:

• EU SAID TO PLAN WTO COMPLAINT AGAINST ARGENTINE IMPORT CURBS - BBG

This perfectly objective and otherwise impartial decision has nothing to do with recent collectivist decisions of what is for the greater good... At least one's greater good that is, which just happens to be the biggest problem with central planning at the global level.

So far, so good as far as euphoric stock bubbles are concerned... but now what?

I don't how the future will unfold, not just because I'm an idiot but because it's unknowable. Though we cannot know the future, we do know two very important things: 1) that which is unsustainable will implode, and 2) the present Status Quo is unsustainable. That ultimately leaves us with a single question: what are we going to do about it? In my view, it's not important that we agree on solutions--agreement would in fact be a catastrophe, for dissent and decentralization are the essential characteristics of any sustainable "solution." What is important is that we realize the future boils down to a simple choice: do we passively comply with the Status Quo feudalism or do we resist?....  That is the false choice provided by the Status Quo: do you want to buy/sell/drink sugar water or saccharine? There is another choice: do we want to passively self-destruct in servitude to the Status Quo or do we want to join those with a positive vision for the future? Every act is a choice, and the future is in our hands.

As reported first thing this morning when we discussed the perfect storm in Europe, the Dutch government was expected to resign en masse in the aftermath of this weekend's auterity fiasco. Sure enough, that resignation is now fact.

Who beleves the Euro-Depression will really just stop at Greece? Here's tons of supporting evidence that the biggest financial disruption & largest wealth accumulation opportunity of this lifetime is nigh upon us. Remember how the robber barons from the US depression era got started?

Presented with little comment aside from a slight Schadenfreude as the European equity market collapses back in line with the credit market's much less sanguine view of the sad reality that is European social, economic, and political life. Meanwhile, German 10Y yields just broke to record low yields as EUR-USD basis swaps deteriorate, LTRO Stigma leaks to its widest in over 4 months as Spanish 10Y yields hold above 6% once again and Dutch CDS snap wider to their 3rd highest level ever on resignations. But apart from that LTRO was a success, Europe is stable, and Spain is not Greece...

Europe's overnight reality check is weighing on stocks broadly but two names standout. Apple is down once again, and below its 50DMA for the first time in four months but it is Wal-Mart that is struggling under the weight of the Mexican debacle. Walmex is down over 25% at the open and WMT opened down over 5% on huge volume. Apple and Wal-Mart bounced out of the gate off those lows but are leaking back now - both below their VWAP.