Archive - Jun 2012

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.

Morgan Stanley's *hilarious* comic strip on our *hilarious* credit markets.

The spigot is schtuck!

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.  Banks began lending money at a faster rate than the global economy grew, and we're now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to. Once borrowers start eschewing rather than seeking debt, asset prices begin to fall -- which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices.

Well that didn't take long. The ink on the #Spailout is not dry yet (well technically there is no ink, because none of the actual details of the Spanish banking system rescue are even remotely known, and likely won't be because when it comes to answering where the money comes from there simply is no answer) and we already have an answer to one of our questions. Recall that mere hours ago we asked: "We also wonder how will Ireland feel knowing that it has to suffer under backbreaking austerity in exchange for Troika generosity, while Spain gets away scott free." We now know. From the AFP: "Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday." And with Ireland on the renegotiation train, next comes Greece. Only with Greece the wheels for a bailout overhaul are already in motion and are called a "vote of Syriza on June 17." And remember how everyone was threatening the Greeks with the 10th circle of hell if they dare to renegotiate the memorandum? Well, Spain just showed that a condition-free bailout is an option. Which means Syriza will get all the votes it needs and then some with promises of a consequence free bailout renegotiation. In other words Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election.

"We already knew the ESFS and ESM would lend Spain money, the question is in what manner?"

Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%.  This announcement comes despite his previous warnings over the enormous increase in Canadian private debt.  But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only.  Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation.   Carney won’t admit this though.  Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences. He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death. Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality.  The malinvestments will continue to accumulate and will have to be liquidated at another date.  What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road.  He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press. 

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