Archive - Jun 2012

Just because there aren't enough traumatizing events in the next week to look forward to, the market has already set its sights on the next "big" (let down) event in Europe - the EU summit on June 28/29, which will only benefit just one class - Belgian caterers. But for some odd reason there is hope that Europe will, miraculously and magically, after years of failing at this, come to some understanding over either Eurobonds, a fiscal union, a deposit insurance, banking union, or some or all of the above (expect many daily rumors regarding any of the above to incite small but violent EUR and ES short covering rallies). However, as we have been observing for the past 3 years, and as David Einhorn summarized visually, nothing will come out of this latest summit. JPM explains why the one thing that can save Europe is a non-starter, and will be for years.

• How original: Syria prints new money as deficit grows (Reuters)- America is not Syria
• Former SNB head Hildebrand to become BlackRock vice chairman (FT)
• Osborne says Greece may have to quit euro (Reuters)
• Osborne Risks the Wrath of Merkel (FT)
• China second-quarter GDP growth may dip below 7 percent - government adviser (Reuters)
• Italian Borrowing Costs Surge at Auction of 1-Year Bills (Bloomberg)
• Greeks withdraw cash ahead of cliffhanger vote (Reuters)
• Merkel’s Choice Pits European Fate Against German Voter Interest (Bloomberg)
• Italy Tax Increases Backfire as Monti Tightens Belts (Bloomberg)
• Dimon says JPMorgan failed to rein in traders (Reuters)

All you can read.

If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:

• Schaeuble Rejects European Redemption Fund: Stern Magazine
• German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine

Testimony of Jamie Dimon: "Listen up you morons..."

The Euro Takes the Road Well Traveled: Paths emerge. The EU has options. Yet they continually choose the well-beaten road of fiscal suicide.

With all the buzz about the 'Fiscal Cliff' – that toxic combination of tax increases and spending cuts due to take hold in a few months – the subject of ongoing Federal budget deficits has fallen by the wayside.  ConvergEx's Nic Colas believes that’s a temporary phenomenon, for Congress will have to hammer out agreements to raise the debt ceiling right alongside its negotiations over the 'Cliff' items.  His back-of-the-envelope attempt to quantify how much a multi-year debt limit increase would run to take this burdensome legislative issue off the Congressional docket for 5, 10 or even 20 years is worrisome at best with a $3.4 trillion for the 5-year runway, but this assumes a high level of incremental taxation. The number could be as high as $4.5 trillion.  As for the longer time horizon debt runways, think in terms of an incremental $6.5 -9.5 billion for a 10 and 20 year horizon. And without significant changes to taxes and/or spending, more.  Much more. We cannot help but think about Paul Krugman as we ponder these numbers.  His recent book, End this Depression Now, proposes that “A quick, strong recovery is just one step away, if our leaders can find the intellectual clarity and political will to end this depression now.”  This “One step” is deficit spending that is orders of magnitude greater than anything spent already.  We have no idea if he really believes any of this, since it is politically impossible, but he does have a Nobel (though so did the guys at LTCM).

While it will come as no surprise to ZeroHedge readers (as we discussed why LTRO3 is not coming here and here), it would appear that the ability to turn worthless assets into useful liquidity via a raft of collateralized lending operations with the ECB is at an end. As Fitch's, MD of financial institutions Bridget Gandy just confirmed: "Some of the European banks are becoming short on collateral to pledge with the ECB, unless they can delever and sell some of their assets, which is difficult." Of course this means the banks that need the facilities the most are now in dire need to sell assets and delever further exaggerating the vicious circle in Europe's symbiotic banking-sovereign relationship. Without postable collateral, there can be no more help from the ECB to the banks and thus any further banking system help will further subordinate the sovereign (hence our call to swap into non-local law bonds) since it will necessarily need to be funneled through them (a la Spain). Once more the ball ends up in Bernanke's lap.

Presenting JPMorgan's CEO Jamie Dimon's prepared remarks for tomorrow's debacle: The truth, the whole truth, and nothing but the totally unvarnished version of the truth that will fulfill Jamie Dimon's obligations to sit through a few hours of snide remarks, condescension, and bating. It does seem however that our initial perspective on this being a systemic risk hedge (i.e. a 'delta-hedged' senior tranche position as opposed to some easily managed and understood pairs trade) that rapidly grew out of control due to risk control inadequacies, is absolutely correct - though we suspect that is as close to the real truth anyone will ever get.

News & headlines from the day

The Spanish Lesson

We are just about 16 hours away from Jamie Dimon's sworn testimony before the Senate Banking Committee, which even has the theatrical name: "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" Will anyone learn anything? Of course not: Jamie Dimon has been well-schooled in not disclosing critical trading information, and will certainly use the "proprietary position" and "more shareholder losses" excuse for any directed question asking how big the JPM CIO loss has become. Because while the hearing could have been productive, if indeed its purpose was to seek to prevent future massive losses of scale such as the suffered by the JPM prop trading unit and its hundreds of billions in CDS notional position, the last thing anyone will care about tomorrow is market efficiency and actual regulation. First and foremost: grandstanding and posturing, in the case of the politicians, and not disclosing anything, without saying too many "I don't recall"s in the case of Dimon. Which is why we have little hope to get anything out of tomorrow's formulaic 2 hours of largely meaningless droning. That said, considering we have already covered the topic of the JPM loss from a mechanistic standpoint more than any other media outlet, there is one more chart we would like to share with readers.

"We live in interesting times" is the understated introduction to one of Charles Biderman (of TrimTabs) more concerning and stunned rants. With the value of all stocks still around double the 2009 lows yet today's incomes are barely growing, and realistically - with all the headwinds we face - there is no hope for rapid growth in wages & salaries anytime soon, the avuncular analyst feels the need to warn all that "stock prices are due to plunge". Following a little stock market history, Charles notes that while wages and salaries in the US have quadrupled over the past 30 years, the value of all US stocks has risen 18 times. In 1982, stocks relative to wages & salaries were 0.6-to-1 and now the ratio is north of 2.6-to-1. This is explained by an interesting discussion of the excess wage growth over spending argument (once basic human needs are met - and a bigger house) which prompts a brief interlude on wages & salaries as 'the' trim-tab (marginal mover) for stocks. Implicitly then, "How can stock markets be this high if the real economy is barely growing?" - the obvious answer is Central banks are tying to solve all the world's problems via the printing press and as the Bay-Area bad-boy notes, the central banks may be the largest market participant but they are not the only one and in the end "they will get what they deserve" as stocks drop to 2009 lows.