Archive - Jun 19, 2012

America is spending more today drone-striking American citizens in Yemen, drone-surveilling Mexican drug lords and “turning our attention to the vast potential of the Asia-Pacific region“ than she was during the cold war when a hostile superpower had thousands of nukes pointing at her. Military contractors have nothing to fear. Whether it is the Pacific buildup to contain Chinese ambition, or drone strikes in the horn of Africa or Pakistan, or the completely-failed drug war, or using the ghost of Kony to establish a toehold in Africa to compete with China for African minerals, or an attempted deposition of Bashar Assad or Egypt’s new Islamist regime, or bombing Iran’s uranium-enrichment facilities, or a conflict over mineral rights in the Arctic, or (as Paul Krugman desires — and what the heck, it’s 2012, why not?) an alien invasion, or a new global conflict arising out of a global economic reset, it’s springtime for the military contractors. It’s everyone else who should be worried.

Nobody could have possibly foreseen that the Guardian was literally pulling BS out of its ass:

• GERMAN GOVERNMENT OFFICIAL SAYS THERE WAS NO DISCUSSION TO BUY BONDS OF CRISIS HIT MEMBERS AT THE G-20 MEETING - RTRS
  

Have fun with this lunatic, patently fake news driven shitshow that the "market" has become. We are out.

Is a fiscal union possible? Is it possible to credibly remove risk from the market and enforce budgetary and deficit targets? As Barclays notes, it appears that, given the apparently deepening divide among euro area politicians, any credible solution will be difficult to attain.

As expected, absolutely nothing new was disclosed in today's latest Jamie Dimon dog and pony show. To summarize what we did learn:

• "JPM is not too big to fail, but it is not at risk of failing unless the earth is hit by the moon"
• "We make CDS for the benefit of veterans, retirees, orphans and widows"
• "We only bought Bear's assets in a firesale while the Fed backstopped its liabilities, because the US government made us"
• "VaR can be made to show anything. We have a closet full of models"
• "Gambling is not investing"

Finally, Jamie Dimon once again refused to disclose the to-date losses on the CIO trade, but promises the firm will be profitable. Which only leaves one question open: how much "profit" from "reserve release" and "DVA", aka blowing out in JPM CDS, will the firm need to take to mask the CIO losses?

The relationship between two measures of risk-aversion, VIX (forward expectations of equity volatility) and Gold (forward expectations of central bank largesse), are diverging in a very pro-printing manner over the last few days. Emprically, it appears we see a rotation through three phases: a perfectly anti-correlated 'liquidation' plunge in gold prices on dramatic rises in VIX (or risk); a highly correlated period of VIX and Gold movements (as uncertainty over the binary print-and-be-saved or don't-print-and-peril process evolves); and a hopeful period of anti-correlation where Gold rises and VIX plunges on the back of further printing to the rescue. We find ourselves in the latter phase currently. It appears that VIX at a 17 handle is pricing rather notably more QE (and its implied vol compression) relative to Gold at only $1620.

And from pure rumor, whereby the ECB's SMP which is not used due to Germany's stern disapproval, gets somehow replaced with the ESM, which does not exist, we go to fact, whereby we find that LCH, just as expected earlier, has hiked Spanish margins.

• LCH SAYS CHANGE IN SPANISH MARGINS EFFECTIVE FROM CLOSE JUNE 21
• LCH RAISES MARGIN COSTS FOR TRADING MOST SPANISH BONDS

It has been a while since the Guardian came up with a European "bailout" rumor. Time to change that. In a nutshell: Germany will somehow allow a fund, the ESM, which does not yet even exist, overturn the primary principle of the Eurozone, the no sovereign bailout clause, and use money which has not been funded, to subordinate bondholders across the entire continent (because ESM is priming) and serve as an additional secured lender in addition to the ECB... In other words, the ESM will take place of the ECB's SMP. With the only difference that the ECB can print money, while the unfunded ESM will at best rely on the murky details of repo lending. Same subordination either way, of course.

Recently, there has been an intense debate in Europe on the TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2), which is the joint gross clearing system of the eurozone the interpretation of this system and its balances has provoked divergent opinions. Some economists, most prominently Hans-Werner Sinn, have argued that TARGET2 amounts to a bailout system. Others have vehemently denied that. Philipp Bagus adresses the question of whether this 'mysterious' system, that we have been so vociferously discussing, simply amounts to an undercover bailout system for unsustainable living standards in the periphery? Concluding by comparing TARGET2, Eurobonds, and the ESM, he notes that all three 'devices' serve as a bailout system and form a tranfer union but governments prefer to hide the losses on taxpayers as long as possible and prefer the ECB to aliment deficits in the meantime.

The rating agencies have lots of problems, but they are not to blame for the financial crisis.  The regulators and investors are the ones who deserve the blame.  The agencies have too much influence, but it’s been given to them by the regulators. Clearly Europe is trying to get rid of rating agencies to be aggressive, but the situation has to change.  For too long, laziness has driven regulatory policy.  Too much emphasis has been put on ratings, and the safety at the high end has been dramatically exaggerated.  One thing virtually every banking crisis has in common, is when a previously “safe” or AAA asset, that carried minimal capital charges deteriorates.  The sub-prime mortgage market and European Sovereign debt are just two of the most recent examples. We need a realistic regulatory framework like the one we discuss in regulatory-capital-size-and-how-you-use-it-both-matter. What the EU is doing is probably even worse than the existing framework, but the idea of diminishing the role of rating agencies is a good one.

Imagine a ship with 100 passengers and crew drifting down a river that eventually cascades over a 1,000 foot waterfall. It's easy to plot the ship's course and the waterfall ahead. You might think 100% of those onboard would agree that something drastic must be done to either reverse course or abandon ship, but before we jump to any conclusion we must first identify what each of the 100 people perceive as serving their self-interest. If life onboard is good for 55 of the 100, they may well rationalize away the waterfall dead ahead. Indeed, they might vote to maintain the current course, thus dooming the 45 others who can hear the thundering cascade ahead but who are powerless to change course in a democracy. This is the "tyranny of the majority" feared by some of the American Founding Fathers. I cannot locate reliable statistics on what percentage of the Greek population is dependent on the State for a paycheck, entitlement, retirement, disability, unemployment, etc., but I suspect the number exceeds the full-time private payroll of that nation. It seems likely that the number of voters in Greece who draw a check or benefit from the State exceeds the number of privately employed voters whose perception of self-interest is radically at odds with continuing State borrowing to fund the Status Quo. If 55% of the voting public is dependent on government spending, then they will vote to continue that spending regardless of its unsustainability.

As Michael Cembalest of JPMorgan notes, Spanish unemployment is 24% despite the highest levels of labor shortages in Germany in 25 years - what kind of monetary union is this?

The BLS April JOLTS survey was released earlier and it was ugly - of particular attention was the number of "job opening" which collapsed from 3.741MM to 3.416MM, a drop of 325,000, which just happens to be the biggest decline since May 2010. It is also the 6th largest drop in history as the second chart below from John Lohman shows. Adding to the dire jobs picture was the New Hires number which dropped by 160,000, the biggest sequential drop since April 2011, and finally separations, which after months of increases (remember: more separations is a good thing supposedly, meaning people are confident they can find better paying jobs elsewhere), had their biggest drop by 81,000, also the most since April 2011.

Why are we not surprised? The EU has just voted to scrap the use of ratings agencies in the next step on the road to a ban of all policy criticism. Via Bloomberg,

• *EU LAWMAKERS APPROVE AMENDMENT TO END USE OF CREDIT RATINGS

It seems just a few years ago, when these very same ratings agencies were raising ratings and supporting banking systems, mortgage provision, and sovereign-inclusions-into-monetary-unions, that the political elite could not showing off their bronzed statues of AAA/AA-ness.

And in the most bizarre of twists, they would prefer if they were allowed to rate themselves:

• *LAWMAKERS CALL FOR EU TO ISSUE SOVEREIGN CREDIT RATINGS :MCO US

The hopes and prayers of a legion of long-only managers, stock-brokers, retiring boomers, and TV personalities rest heavily on the shoulders of one Ben Bernanke and just as into the last FOMC meeting in April, equity markets are surging on self-delusion (amid fading volumes and plunging average trade size) - while Treasury markets remain far less sanguine. Will it be different this time?

What the MSM is missing is that Spain's failings make this real. Spain is big enough to bring down the whole shebang, right now, and its banks cannot be salvaged with just a hundred billion or so.