Archive - Apr 2012

Eurostat just updated their statistics for government debt to GDP for 2011, so here is an updated graph over Belgium, Italy, Greece, Portugal, Ireland, Spain, France, UK, Netherlands, Germany and Sweden and the development of their gross government debt to GDP from 1996 to 2011. Countries not matching the new Merkozy-limit of a maximum of 3% budget deficit were Greece, Ireland, Portugal, Spain and... France. But we can forget the old euro convergence criteria of 2% deficit and at most 60% debt to GDP as instead of working back to the green 'safe' quadrant, the PIGS are heading in the exact opposite direction missing both deficit and debt convergence criteria.

Government On the Verge – Yet Again – of Doing Something Which Causes More Harm Than Good

Practice saying "Quadrillion" a few times every day.  

Just in case one is wondering what is a greater crime in America: vaporizing $1.5 billion in client money or having the temerity to downgrade the US (twice), JP Morgan and Morgan Stanley, here is the SEC with the answer:

• SEC SUES EGAN-JONES, SEAN EGAN ON ALLEGED MISREPRESENTATIONS

Somewhere Jon Corzine is cackling like a mad cow.

UPDATE: via Bloomberg:

*MEAT FROM ANIMAL DID NOT ENTER FOOD CHAIN, USDA SAYS

*COW WITH MAD-COW DISEASE CONFIRMED IN CALIFORNIA, USDA SAYS

Rumors of the return of bovine spongiform encephalopathy - or mad cow disease - in the US as the USDA conducts a conference to discuss the potential find of an infected animal has sent Live and Feeder Cattle futures limit-down and back to almost 8 month lows prices. The find has been confirmed, according to The Farmer-Stockman. Now, where is that zombie survival chart?

Modern investing offers the promise that investors who "do their homework" and use data more intelligently than the herd can gain a valuable edge. But what if the underlying data available to the investing public is fundamentally flawed?

Presented with little comment except to give some context for the current weakness in what was the world's largest market cap stock a few days ago. In the last 11 days, Apple has dropped over 12.5% - the largest such drop since January 2009 - as today sees the stock's fall continue to yesterday's lows down over 2.7%. With just a few hours to the event-horizon, options traders are active and stock volume run-rates are high as selling pressure dominates.

"Please advise us regarding a reliable procedure whereby the appropriate foreclosing party can be situated in the matter such that we can proceed to judgment of sale"

We have discussed the exuberance and dysphoria that is exhibited by economists in the context of extrapolating trends many times and nowhere is that more clearly pictured than in Citigroup's Economic Surprise Index which tracks the rise and fall of both misses and beats as well as better or worse data. For the first time in over six months, macro data for the G-10 has turned negative (with Europe having been there for a while and the US getting very close) indicating significant weakness. When this data turned from positive to negative in July 2010 it pre-empted the 'rescue' of the global economy via QE2 and each time it has dropped below its 200DMA (which it also just did) we have seen notable deterioration in equity prices soon after. What is more worrisome perhaps is the rate of deterioration over the last two months or so. Four of the last five times we dropped this rapidly we saw significant drops in stock prices soon after (Dec 2008, August 2010, and June 2011). Europe and the US are now trending lower in macro data 'surprises' as decoupling disappears but the US remains a little less bad for those looking for silver-linings - for now.

Just because try hard as it may, the Chairman's printer simply can't issue infinite electronic equivalents of the 79 proton element, newspapers with a circulation of 435,000 (same as the Chicago Tribune) on this side of the Ganges will hardly ever be allowed to show the following anti-patriotic advertisement. 

Equity and credit markets in Europe followed the same-old-same-old path of a successful short-dated auction means buy-buy-buy and ended the day in the green today. A few things of note however stand out to us. First, the ramp in stocks/credit this time around is much less than last week's post-auction bliss which was also less than the prior week's post-auction squeeze higher. Second, there was a very notable dispersion between senior financials and subordinated financials credit today - with the spread between the two at almost 3 month wides. Third, Italy notably underperformed Spain today - by the largest in six weeks as the spread between these two is now back at 18bps, six-week tights and dramatically lower than the almost 50bps just a week ago. So while all may look rosy at the surface, we remain wider in spreads on the week and lower in stocks with all the real event risk ahead of us still.

It's easy to expand the money supply and difficult to expand the actual production of real goods in the real world. Expanding the money supply and issuing debt that lacks collateral is just like printing quatloos on the desert island: you can print a million quatloos but that doesn't create a single additional coconut. If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish. This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods. We can anticipate that silver and gold will soon enter the barter as means of exchange that can't be counterfeited or printed by wise-guys (central bankers).This is what happens when abstract representations, i.e. "money," vanish into thin air. Alternative systems of exchanging goods and services arise: actual goods are exchanged via barter, tangible concentrations of value that cannot be counterfeited such as gold and silver are used as a means of exchange, letters of credit or equivalent are traded and settled with tangible goods or gold/silver, and eventually, a means of exchange ("money") that is backed by tangible goods in the real world that can be trusted to actually represent the value being traded might enter the market. That which is phantom will vanish into thin air, while the real goods and services remain to be traded in the real world.

On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.

The EFSF 'firewall' issued EUR3 billion 7-year bonds this morning. It seems any time any European entity actually manages to issue debt, it is proclaimed as miraculous evidence of investor demand and comfort with these risks. In this case, we are told, via Bloomberg, that:

• *EFSF SAYS BOND ISSUE MET WITH STRONG DEMAND
• *EFSF SAYS SUPPORT FROM ASIA, CENTRAL BANKS, SOVEREIGN WEALTH

So the self-dealing continues to grow the ponzi ever bigger. However, what few will mention is that 10Y EFSF spreads (the risk premium over Bunds to hold these government-guaranteed exposed-to-Europe's-entrails) broke above 150bps today for the first time in over four months and are now over 35% higher than at the start of April. Success Indeed.

Are y'all ready to dump your hard earned recession cash into that heavily Goldman recommended, high growth social networking stock? Can't 'ya just taste those IPO profits, pre-Euro bubble burst???