Archive - Apr 2, 2012

As markets crave their next fix of the money-printing elixir, perhaps it is worth noting the ever-decreasing impact that the quantitative easing experiments have had on 'measures' of the real economy. This seems to suggest that either: "we're gonna need a bigger boat" and the ongoing QEs will need to be exponentially larger than the prior in order to enact change in the 'measures' of real economy; or, the Fed has hit its limit as yet another 'multiplier effect' has been proved wrong in the limit and all we get to play with is the unintended consequences of a hidden inflation peering into view. Of course this is typical Keynesian dogma: if at first you don't succeed, do it again but bigger, more global, and with more geopolitical danger.

Bernanke telling the world the Fed will ease any time there is a stock downtick is the 'good cop.' Which means there needs to be a bad cop to pretend that the Fed actually cares about more than just 10-20% red candles in the Russell 2000, and to give the impression of a balanced Fed. Last week it was Plosser (who simply regurgitated his script from March 2010). Today it is Dallas Fed's Fisher. From Bloomberg:

• FED'S FISHER SAYS U.S. ECONOMY IS IMPROVING
• FED'S FISHER SAYS U.S. ECONOMY IS IMPROVING
• FED'S FISHER SAYS LATE 2014 INTEREST RATE PLEDGE WILL NEED TO BE ADJUSTED
• FISHER SAYS FED SHOULD `SIT, WAIT AND WATCH' ON POLICY
• FISHER SEES TIME OF `SURVIVAL OF THE FATTEST' NOT FITTEST
• And finally: FISHER SAYS FED HAS `DONE ENOUGH' IN EASING

All great stuff, and truly Oscar worthy, in the daily Fed theater. Also, all 100% irrelevant.

In my continuing attempt to debunk what the European Union presents as facts; I turn my attention to France. I have already given you the correct debt to GDP ratios for Spain, Italy, Portugal and Germany which follows the exact principles of what any corporation in America or Europe would be mandated to report or suffer the slings and arrows of being held accountable for Fraud. I include contingent liabilities, derivatives, promises to pay, various guarantees and all of the normal accounting practices to be considered on any balance sheet except the sovereign nations of Europe. In the end, of course, it is your decision but at least we can begin any consideration based upon the facts and not based upon a fictitious account. Again, I divide up the liabilities into two categories, their national obligations and their European obligations; the European Union, the European Central Bank and finally for the other European institutions for which they bear some burden. Then I add it all up, divide by their GDP and we arrive at a factual accounting. Nothing complicated here except sleuthing about to get the data which is no easy task as it is hidden in various nooks and crannies.

Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", we said that "because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security."  In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-makewhole take out settlement. Alas, we underestimated the stupidity of the European authorities who in their pursuit of a prompt if messy conclusion to the Greek restructuring, which ended up with a CDS trigger, were left with a tranching of the Greek balance sheet into a ridiculous seven classes, which crammed down the Greek law bonds into yet another separate class, an outcome which will shortly bite the European pre-petition sovereign market (i.e., Portugal, Spain and Italy) in the ass. What we did not however underestimate at all, is the critical value of strong indenture provisions, or, in other words, the willingness of UK-law bondholders to not comply with terms forced down their throat. As reported earlier today by the Greek Ministry of Finance, a whopping 20 of 36 classes of non-Greek law bonds have rejected the nation's attempts to restructure, and now appear set for an epic legal showdown, whose outcome will determine whether or not the UK non-UK law spread will explode, or if the entire European bond market will shoot itself in the foot itself, after all strong indentures appear to be merely a bond prosectus placeholder which will never be honored. Most importantly, we are delighted that UK-law bonds have understood one thing - by being the fulcrum security as we said, they have all the leverage. If Greece thinks it can take them in court and not pay them anything, well that may well be the ballgame for the European bond market.

European cash equities are seen mixed as the market heads into the US session, with the DAX index the only bourse to trade higher at the midpoint of the European session. European markets were seeing some gains following the open after the weekend release of better than expected Chinese manufacturing data, however the main price action of the day occurred after some European press reports that the Bundesbank had stopped accepting sovereign bonds as collateral from Portugal, Ireland and Greece garnered attention, however the Bundesbank were quick to deny reports and state that it continues to accept all Eurozone sovereign bonds. Following the denial, participants witnessed a slight bounceback, but failed to push most markets into the green.  Data releases from Europe so far have been varied, with outperformance seen in the UK Manufacturing PMI, beating expectations and recording its highest reading since May of 2011. However, the French manufacturing PMI came in below expectations, weighing on the CAC index as the session progresses. A further release from the Eurozone has shown February unemployment coming in alongside expectations recording a slight increase from January to 10.8%.

On Thursday morning, President Hu Jintao of China, President Dmitry Medvedev of Russia , President Dilma Rousseff of Brazil, President Jacob Zuma of South Africa and Prime Minister Manmohan Singh of India shook hands at the start of the one day meeting in New Delhi. Top of the agenda was the creation of the grouping's first institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Less noticed and commented upon is the aspirations of the BRIC nations to become less dependent on the global reserve currency, the dollar and to position their own currencies as internationally traded currencies. The leaders of BRIC nations and other emerging market nations have adopted the idea of conducting trade between the five nations in their own currencies. Two agreements, signed among the development banks of Brazil, Russia, India, China and South Africa, say that local currency loans will be made available for trade between these countries. The five fast growing nations participating in local currency trade will allow participants to diversify their foreign exchange reserves, hedging against the growing risk of a euro or dollar crisis. The BRICS want to have easy convertibility of currency to make it easier to use the real, ruble, rupee, renminbi and rand amongst themselves without having to always use the US dollar. Higher intra-Brics trade, conducted in their own currencies would shield their economies from economic dislocations in the west. Left unsaid so far is the possibility that one of the BRICs or the BRICs in unison might peg the value of their respective currencies to the ultimate store of value and money - gold.

• Mixed signals from China's factories in March (Reuters)
• EU wants G20 to boost IMF funds after Eurogroup move (Reuters)
• Euro Leaders Seek Global Help After Firewall Boosted (Bloomberg)
• Euro-Region Unemployment Surges to Highest in More Than 14 Years (Bloomberg)
• Big banks prepare to pay back LTRO loans (FT) ... don't hold your breath
• Coty Inc. Proposes to Acquire Avon Products, Inc. for $23.25 Per Share in Cash (PRnewswire)
• Spain Record Home Price Drop Seen With Bank Pressure (Bloomberg)
• Firm dropped by Visa says under 1.5 million card numbers stolen (Reuters)
• Japan Tankan Stagnates With Yen Seen as Threat (Bloomberg)
• Fed to buy $44 billion Treasuries in April, sell $43 billion (Reuters)

The main event of the past 48 hours: the Chinese "Schrodinger" PMI, which came much weaker or stronger, depending on whether one uses the HSBC or official data (which always has a seasonal jump from February into March) has been forgotten. Any bullish sentiment from a 'hard landing-refuting' PMI (which incidentally means less chance of easing), was erased following a very weak Japanese Tankan sentiment report, which saw exporters fret about a return to Yen strength. Naturally, the market response was to immediately shift hopes and dreams of more easing to the BOJ, if the PBOC is for the time being off the hook. Alas, since the BOJ's actions have traditionally had much less impact on global markets, stocks are not happy. This was followed by a bevy of Eurozone data, where unemployment rose to 10.8% from 10.7%. And while this deterioration was expected, the slide in French PMI was not, dropping from 47.6 to 46.7, on expectations of an unchanged print. The modest bounce in German PMI and especially in the UK from 51.5 to 52.7, where QE is raging, were not enough to offset fears that it is now "France's turn" and that global PMIs are once again showing that the recent $2 trillion in global liquidity equivalent injections have already peaked, in line with expectations: after all the half life of central planning interventions is getting progressively shorter.

More jobs? Go figure!

Europe's nightmare charts

The week ahead will offer significant inputs to our views. ISM and payrolls will likely set the market tone for the next few weeks. Despite the softer signals from regional surveys, Goldman expects the ISM to improve at the margin relative to last month’s print. In contrast, it expects payrolls to grow by 175k, down from last month’s 227k jobs gain. FOMC minutes will likely show that Fed officials had a discussion on further easing but are unlikely to offer strong hints about the likelihood and possible timing of a third round of Quantitative Easing.

The nine bankster propagated myths about gold (and silver) that everyone needs to know.