Archive - Jun 10, 2012

While the short-term benefits can be weighed against any long-term solution a number of ways, Nigel Farage provides not just the most colorful summation of situation but also the most succinct when he refers to the 'madness' of 'intervention to keep the Euro alive' as "reinforcement of failure". The better, and braver, in his opinion, thing to do, is to recognize that those Mediterranean countries should never have joined the Euro in the first place. As we have stated again and again, by kicking-the-can once again to prop up the euro-zone with bailout-after-bailout, all we are doing is prolonging the misery. The discussion on Sky News digs into the collateral-damage 'strawman' - which will happen anyway - and then 'Red' Ken Livingstone (an infamously socialist-leaning British politician who advocated for Britain's joining the Euro when it was formed) now somewhat notably agrees with Nigel that we are "locking Europe into a decade of permanent economic malaise" adding that once the smaller countries were added to the core, "it was doomed to fail". The two 'odd fellows' continue on to discuss the analogy of the USA to a United States of Europe noting that it took a civil war and a century before a common monetary and fiscal policy was accepted, adding simply that Europe's "nations will not give up their sovereignty".

You can’t watch the mainstream media propaganda channels for more than ten minutes without a talking head breathlessly announcing that gas prices have dropped for the 24th day in a row and are now back to $3.55 a gallon. Wall Street oil analysts, who are paid hundreds of thousands of dollars per year to tell us why prices rose or fell after the fact, are paraded on CNBC to proclaim the huge consumer windfall from the drop in price. This is just another episode of a never ending reality show, designed to keep the average American sedated so they’ll continue to spend money they don’t have buying crap they don’t need. The brainless twits that pass for journalists in the corporate mainstream media never give the viewer or reader any historical context to judge the true impact of the price increase or decrease. The government agencies promoting the storyline of those in power extrapolate the current trend and ignore the basic facts of supply, demand, price and peak oil. The EIA is now predicting further drops in prices. Two months ago they predicted steadily rising prices through the summer. What would we do without these government drones guiding us?

It would be nicer to have seen greater extremes in bearish sentiment at the bottom as this leads to stronger future returns.

Discord, the endlessly rising costs of keeping it alive, and threats of extortion.

As US equity futures open up 15pts or so (stalled at post April NFP and Greek Election open levels from May 6th), it seems EURUSD's initial 130pip spike from Friday's close merely jogged it back up to Friday's late day ramp close in equities (just above Thursday's highs for the major FX cross). Of course it was a see-saw weekend for Spain - they got all the money they wanted (and probably some ponies and unicorns) but only managed a tie against Italy in Euro 2012. Given the short-interest, as we noted in our widely read analysis of #Spailout yesterday (Item 5 here), it is little surprise that we are seeing EURUSD rally. EURUSD is still around 200 pips shy of its swap-spread-implied rate (which seems to be the common level to revert to after 'stress' liquidity hits the EUR and is then 'fixed'). We won't be surprised to see other risk assets levitate on this and while some traders will resist the urge to fade, we suspect that by the time Europe opens things will look a little different as Spanish sovereigns bondholders realize what just happened. The USD is weak against all the majors except JPY as risk-on carry trades hold it practically unch against the USD. Gold has opened modestly higher (in line with USD -0.8% weakness) but Silver is its high beta self +1.9%. Treasury futures are open (cash not yet) but imply a 10-12bps jump in yields for now (which is just normalizing them to ES from Friday's close). WTI just opened 2.3% higher at $86 (so much for that tax-break?) 

"The importance of an artist is to be determined by the number of new signs he introduces into the language of art."--Matisse

Over the past 24 hours, Zero Hedge covered the various key provisions, and open questions, of the Spanish bank bailout. There is, however, much more when one digs into the details. Below, courtesy of Deutsche Bank's Gilles Moec is a far more nuanced analysis of what just happened, as well as a model looking at the future of the pro forma Spanish debt load with the now-priming ESM debt, which may very well hit 100% quite soon as we predicted earlier. Furthermore, since the following comprehensive walk-thru appeared in the DB literature on Friday, before the formal announcement, it is quite clear that none other than Deutsche Bank, whose "walk-thru" has been adhered to by the Spanish government and Europe to the dot, was instrumental in defining a "rescue" of Spain's banks, which had it contaged, would have impacted the biggest banking edifice in Europe by orders of magnitude: Deutsche Bank itself.

Here is the conclusion of a US study of computer-generated trading recently concluded: “Financial markets are alive, but a model, however beautiful, is an artifice. ...To confuse the model with the world is to embrace future disaster driven by the belief that humans obey mathematical rules.” The powers that be have been embracing future disaster on this belief in a manner which goes far beyond financial markets. But in that shrunken context, individuals everywhere have already abandoned that belief. Wall Street and its global counterparts have been trying to do that too, but their problem is that they have nothing to replace it with. The “belief” that humans can be managed by obeying arbitrary rules of any kind is the last bastion of our rulers. It is waning on the financial markets, just as it is everywhere else, with results that no computer program can predict. That’s why the “market model” no longer “works”.

Gradually, the key open items from yesterday's Spanish bailout are getting some closure. First, we learned that Ireland, as speculated, will demand a comparable retroactive bailout renegotiation, an act which also puts the Greek elections a week from today in play. Then, we got definitive confirmation that the Spanish loan, coming at ~3% or half Spanish GGBs, is a priming loan, subordinating existing creditors. Finally, we learn that the ESM - the bailout mechanism at the heart of all current and future European bailout plans, and which still has not been ratified by Germany, is in danger of being scuttled by none other than the German opposition. The reason? According to a Reuters report, "A [Spiegel] report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact... The Social Democrats (SPD) and Greens are insisting on a plan for a transaction tax and measures to boost growth."

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.

I believe this is Germany’s final push for EU control. If this fails and Germany ceases to offer additional bailout funds in some form then the EU will collapse (as noted earlier, the ECB, IMF, and US Fed cannot prop the EU up nor will the ESM mega bailout fund work). Spain’s literally on the verge of seeing a bank holiday. Germany is the only one who might have the funds to prop it up. And Germany wants gold. In plain terms, the EU will likely not last through the summer. It’s literally GAME OVER time. Various proposals will crop up (such as Germany’s “cash for Gold” program), but no one (not even Germany) actually has the funds to support the avalanche of banking failures that is coming.

Subordination is a four letter word to bondholders.

While details are largely missing in the aftermath of yesterday's historic announcement from Spain, the one thing that we did catch inbetween the various conferences and announcements, and probably the most important thing, is that the ESM/EFSF funded bailout loan, whose use of proceeds will go to fund the FROB, not one which will rank pari passu with the FROB, will have "terms better than market" - always a code word for priming and cramdown of other debt classes. Today, we learn that this is precisely the case, and the worst case outcome from Spain's pre-primed sovereign creditors.

All that debt Obama acquired, and all the stimulus did work to redistribute wealth and income — it worked to redistribute wealth and income toward the well-connected crony capitalist groups that funded Obama into office. Obama can talk all he likes about cutting taxes for the middle class; the data shows who Obama’s redistribution policies have overwhelmingly favoured. Of course, leftists and statists often end up favouring the super-rich. That’s been the underlying reality of communism — politburos, bureaucrats, technocrats, party members all benefit at the expense of everyone else (in spite of all that proletarian rhetoric). Inviting the state to carve up national income and redistribute it is an invitation to corruption, and graft. Obama talks an updated version of the old communist rhetoric about redistributing wealth to the working class — he even adopted Stalin’s slogan “forward” — yet just like Stalin the reality of his policies is more wealth for the richest and most well-connected. What a surprise.