Archive - May 2012

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Months of hope that the economy could finally start a 'virtuous cycle' were once dashed in a puff of smoke, after the jobs report came and cemented that the economy is now rolling over and picking up speed to the downside. Only this time, in a very ominous development for the permabulls, the MORE QE IS COMING, BUY ON DIPS crowd was nowhere to be seen. Why? Because for QE to be unleashed everything has to tumble first. And in a harbinger of what is coming to the US, just look at Europe: the EuroSTOXX 50 just turned negative for the year.

"In a financed financial system, collateral is money"

Last week we noted how up to 90% of the European banking system's equity market capital (or ultimate risk buffer) would be wiped out if they were forced to transform (and price risk appropriately) their mis-marked asset base. The market itself has already started to adjust for this possibility (just look at Italian and Spanish bank stocks recently) but it is the similarity of Europe's bursting bubble of credit extension and current balance sheet recession that brings Japan to mind, and, as Barclays notes, if European banks follow the same trajectory as Japanese banks did from their peak in 1993 (as Europe has been since their peak in 2006), then Europe's banks market cap as a percentage of the total market is likely to drop from the current 11% to around 6% within the next year. Combine that with reality with Deutsche Bank's note that Spanish and Portuguese banks (and less so Italy for now) appear perilously short of ECB-eligible collateral, and is it any wonder things are shifting from bad to worse over there as bank recap plans are critical.

Say what you will about the massaged and manipulated US unemployment rate, record warm winter stimulated monthly NFP print, composition and (lack of) quality of jobs, at least (and we use the term very loosely as this is only thanks to trillions and trillions in fiscal and monetary stimulus) the cumulative jobs trend is one of increase. In the US. Europe is a different matter. Because while even at 100,000 jobs added every month, as the chart that some have dubbed the "scariest chart in the world" shows, the US is adding jobs - why: look at this chart and all shall be made clear. Yes, adding debt at a breakneck speed is helping, but all this is doing is delaying the inevitable pain at the end, but in a world where everyone is only focused on the here and now, that is all that matters. Which, however is more than can be said for Europe. Sadly, while the US is slowly converting jobs gained (at a 2% GDP growth rate, in exchange for a public debt rising at double+ that pace), Europe is about to see the cumulative job loss number since the GFC slide to the the lowest since the crisis hit, and then go bidless. At that point it will merely be a question of how long until Europe is swept up in one massive revolution as the people say "no more" to prudent fiscal strategy and demand more, more, more of the debt heroin that is making their neighbors across the Atlantic appear so healthy on the surface, if projected to be 75% obese by 2020.

While Larry Kotlikoff was markedly pessimistic in the past (as we noted here just over a year ago), it seems it was a dress-rehearsal to his latest evisceration of what he now calls the US Government's Ponzi Scheme. In a recent VoxEU article on America's "fiscal child abuse", Kotlikoff and two colleagues demolish the idea of sustainability of government finances and how well off younger generations will be compared with their parents. The game is close to over and for today's children, the American dream will be just that - a dream!

Everyone's favorite Chicago-ite, Rick Santelli, once again presents himself as the truth-teller-in-chief on the propaganda channel. This morning's dismal jobs data but utopian reporting of the improvement in the headline unemployment rate appears to have hit a nerve. Santelli takes on just how bad the employment picture really is, how mainstream media practices 'Ostrich Economics', and finally how nothing is deemed important to most politicians except who is to blame. One of Rick's best as perhaps CNBC has been looking at its ratings and realizes investors want the truth not the spin.

US home prices have once again made a post-bubble low in spite of all the artificial intervention and massive bailouts to financial institutions.  The bottom line unfortunately is that US household incomes have been strained for well over a decade.  You can slice it up by nominal or inflation adjusted data but household incomes have been moving in a negative direction during the 00s and continuing into this decade.  Keep in mind there is a massive pipeline of problems still in the housing market with over 5.5 million mortgage holders in some stage of foreclosure or simply not paying on their mortgage.  This is more than a housing crisis but a crisis of quality job growth.

One month later the purge is over: "Norway’s sovereign wealth fund sold all its Irish and Portuguese government bonds after rejecting the Greek debt swap and warned that Europe faces considerable challenges." Wait, what's that? The Eurozone's political strongarming (think Steve Rattner and GM) was unable to force the world's most powerful sovereign wealth fund into agreeing to what was essentially extortion when bank after bank noted how delighted they are to be bent over and take an 80% writedown on their Greek holdings. Stunning. But at least we now know who will be suing Greece shortly in an attempt to recoup par value of their strong law bonds: grab the popcorn - Norway vs Greece will be quite a spectacle. As for their dump of Irish and Portuguese bonds, no surprise there: fool me once (in perpetuity) shame on me, fool me twice, shame on Dan Loeb... who was buying everything Norway was selling. We wonder who ends up right.

UPDATE: We can't help but see the symmetry between the Norwegain Sovereign Weath Fund selling all its Portuguese debt and Dan Loeb's biggest winner in Portuguese bonds as we suspect he was wrappping these purchases in the basis trade.

Portuguese bonds imploded this week with 10Y spreads rising over 70bps, which given its recent performance, got us wondering. For the last few weeks we have commented on the improvements in the Portuguese bond market's yields and spreads - specifically how this seemed much more about the CDS-Bond basis (on cheap carry and renewed confidence in CDS trigger events via ISDA) than simple risk appetite. It was especially surprising given the rest of Europe's sovereign bonds were deteriorating gradually in a somewhat range-bound market. Today we get some insight - courtesy of Dan Loeb's Third Point hedge fund's month-end performance details. The Dapper-Don notes Portuguese Sovereign Bonds as among its top-winners for the month of April - which overall was a poor month for the fund. A quick glance at the chart below tells the story of a Portuguese bond market very much in a world of its own relative to the rest of Europe this last month - and perhaps now we know who was pulling those strings?

Arguably, more millionaire money was made during the Great Depression than at any time in history. Well, if that's true then it looks as if history may be poised to repeat itself. The question is, who will be ready?

Gold is down 1.6% on the week. The gold market has seen peculiar, lack lustre, low volume trading this week punctuated with sudden, oddly timed, very large sell orders. This leads to quick price falls followed either by slow, gradual recovery or a sharp bounce, prior to next bout of strangely timed sudden large sell orders.  

This was clearly seen by the mysterious and massive $1.24 billion ‘Goldfinger’ trade on Monday. 

But the system is gummed up.

Bottom line: financialization and substituting debt for income have run their course. They're not coming back, no matter how hard the Federal Reserve pushes on the string. Both of these interwined trends have traced S-curves and are now in terminal decline: Those hoping the economy is "recovering" on the backs of financial speculation/ legerdemain and ramped up borrowing by the lower 95% will be profoundly disappointed when reality trumps fantasy.