Archive - Jun 2012

The business cycle shifted into the Contraction phase of Goldman's 'Swirlogram' framework that we introduced here three weeks ago. The latest observations in their Global Leading Indicator (GLI) as well as the way we entered this Contraction phase suggest this could be a much more severe downturn. In their own words: "We do not yet see clear reasons for optimism in the data, and our GLI framework still suggests that the current phase of the cycle is in a challenging one." Forward S&P 500 returns are definitely biased to the downside given the angle of entry into this contraction and as Goldman notes: "We think that the macro data are providing a clear signal. And hence, we think a negative bias remains warranted."

First it Egan-Jones (of course). Then S&P. Now Fitch (which sees the Spanish bank recap burden between €60 and a massive €100 billion!) joins the downgrade party of rating agencies that have Spain at a sub-A rating. Only Moody's is left. What happens when Moody's also cuts Spain from its current cuspy A3 rating to sub-A? Bad things: as we explained on April 30, when everyone has Spain at BBB or less...

One of the great absurdities of our modern financial system is that a nation living within its means, i.e. spending less than what it confiscates in tax revenue, is no longer the norm. Living within your means is now considered ‘austerity’. And unfair. Whether in the UK, Europe, or North America, many voters have become so accustomed to the government’s massive role in the economy, they can’t begin to imagine how it could be scaled back. The more insolvent governments become, the more they’re going to be forced to axe all the things they can’t afford. We’re already starting to see this in places from California to England that can no longer hide from their fiscal reality. With the government monopoly out of the way, the private sector will mop up every service that it can turn a profit on– trash collection, security, fire, prisons, libraries, etc. This forces competition, higher quality service, and lower prices for everyone. The people who protest against austerity, or think it’s a tragedy when a courthouse closes down due to budget constraints, are really missing the larger point: the sooner this corrupt house of cards collapses, the better off we’ll all be.

Swiss National Bank currency reserves just topped CHF300bn in May for the first time on record. As SocGen notes this jump from a mere CHF66bn in April is the second largest rise since August last year - right before the SNB put in place the 1.20 cap in EURCHF. The increase in reserves is not a major surprise after EURUSD plummeted over eight big figures last month and the SNB was left with no choice but to step up its EUR purchases in order to defend the cap. However, the size of the increase may cause fresh political consternation as the cost of unlimited foreign currency purchases continues to climb and a definitive resolution of the euro crisis is still remote. What worries us more is the market's 'hedging' of a tail-risk event in Europe has driven risk-reversals in EURCHF (a way of understanding the bullish/bearish bias in FX options prices) that implies a 1.10 level for EURCHF which is somewhat incredibly supported by an analysis of the variation in ECB and SNB balance sheet changes. As the threat of capital controls looms large and Swiss 2Y rates press back towards -30bps, we wonder how long until a new 'equilibrium' cap is adjusted down to 1.10.

It would appear that the asset-class most sensitive to the next round of renewed money-printing by the Fed - that implicitly seems to provide stock investors with some belief that their USD-numeraire priced holdings should go up in price - is dropping fast and pricing out hope of a 'New QE' anytime soon. As The Bernank speaks and offers nothing more than a Draghi-reinforcing check-to-the-government around the poker table of global macro, Gold is plunging. The biggest beneficiary of the Bernanke soliloquy so far is China, which has managed to get a new cheaper entry point on Bernanke's latest attempt to talk down Gold while keeping stocks up (because rising input costs courtesy of oil apparently only impact the gold bottom line). After importing 100 tons in physical gold (not GLD) in April, the country will be even happier to buy far more at lower, not higher prices.

China Cut Their Rates for First Time Since '08 & we all know what happened in 2008, right? As the momentum drivenvtrades ramped markets I placed Armageddon put (way OTM, material time value) puts on throughout the morning - for literally pennies

Capitalism can be subverted by either an Elite or the majority. Marx traced out how Capital (wealth) naturally consolidates into monopolies or cartels (shared monopolies). These concentrations of wealth then buy political influence via campaign contributions, armies of lobbyists and the full spectrum of cronyism: sweetheart deals, envelopes of cash, revolving doors between the cartels and their regulators, plum jobs for lazy nephews and so on. This base corruption of the Central State, which is now the dominant force in the economy, allows Elites to change the rules rather than accept failure (also known as losses). Thus we have Crony Capitalism: profits are private and yours to keep, losses are transferred to the taxpaying public. This mechanism is well known and catches most of the attention. But M.M. highlighted the way the democratic majority can subvert capitalism. This is generally ignored for the simple reason that most commentators are part of the majority subverting capitalism to benefit their own self-interest.

This leads to a terminal state of self-delusion and self-justification

Dispel this farce...

Less than an hour ago Zero Hedge was happy to point out the glaringly obvious.

Bernanke speech will have nothing in it

— zerohedge (@zerohedge) June 7, 2012

Shortly thereafter, Bernanke confirmed it. Now it is Wall Street's turn to join in.

With Bernanke's speech dominated by the word 'Fiscal', is it any wonder that Fitch comes over-the-top with a warning, via Reuters and Bloomberg:

• *FITCH SAYS WOULD CUT US AAA RATING IF THERE IS NO CREDIBLE FISCAL CONSOLIDATION PLAN IN 2013
• *UK, FRANCE ,GERMANY, OTHER AAA NATIONS HAVE CREDIBLE PLANS:FITCH

Are the world's central bankers now checking back to the governments? Well we know how that will end. With the Fed's implicit tightening (as the balance sheet rolls down) and the fiscal cliff, it seems headwinds are mounting.

At the rate the market has soared in the past 3 days, one would think Bernanke has already formally announced QE. Instead we have had a rumor, a hint, and a headline. All of this was sufficient to push the DJIA up 500 points. Problem is there has been nothing official from the Fed. Which is why everyone will be looking for the Chairman to leak something at the 10am hearing before the Joint Economic Committee. Otherwise, if nothing comes now, and nothing comes on June 20, we may be looking at another deja vu event from 2011: namely the August 2011 market crash.

The pending three-day rally that has seen European and US markets soar smacks of a short-covering squeeze, notes UBS' Art Cashin, as some of the biggest percentage gains came in the most heavily shorted stocks. While this is hardly surprising in this increasingly schizophrenic economy market, it is the long-term consistency and prophetic consternation of Margaret Thatcher's view of the Euro as "perhaps the greatest folly of the modern era" that sits uncomfortably with the Merkel comment-driven rally of this morning (for now).

Update 2: In her own words - dispelling rumors of new instruments: "In view of the current difficulties, it’s important to emphasize that we have created the instruments of support in the euro zone, that Germany is ready to work with these instruments whenever that is necessary and that this is an expression of our firm desire to keep the euro area stable,”

Update: here is the counterrumor, just as expected courtesy of the summer and fall of 2011: Merkel willing to back use of EXISTING Euro-area instruments... Where Euro-Bonds just happen not to figure.

Just out from Bloomberg:

• MERKEL SAYS GERMANY READY TO BACK USE OF EURO-AREA INSTRUMENTS

Ignore that it is unclear what instrument is mentioned (not Euro Bonds as Merkel made very clear 48 hours ago), she probably just is referring to the Redemption Pact, which she would of course be in favor of, as noted before, and where Europe funds its loan-loss exposure with gold. We look forward to the PIIGS agreeing to hand over their gold to Das Deutsche Pawn Shop.

In preparation for what we are about to receive from the Charmain of the Fed, may we be truly grateful, Jim Grant offered CNBC's Maria B the forthright advice last night "prepare for platitudes but watch what they are doing not what they are saying". The ever outspoken Grant notes that the Fed's balance sheet has been contracting (unlike Maria's mainstream perspective); for the past three months the Fed's balance sheet has contracted at an annualized rate of 10% - even as Fed-head after Fed-head talk up QE and so on. So unless they continue buying securities - since the short-dated positions will continue to roll off - the Fed's balance sheet will continue to contract and therefore the stimulative effect will fall. Grant does expect QE3 since it is the fun-drug that we have been using for 4 or 5 years and that Bernanke will need little pushing to continue the Grand Manipulation. He ends on a rather interesting note that the Wisconsin win and the potential for an Obama loss in November may be more of a positive driver for stocks since markets begin to revert to a free market once again - we suspect this is not the case given the donors/beneficiaries under Romney's wing. But rest assured - the bespectacled bear ends on the chilling note that 'the long-term implications are bad' for the ongoing manipulation that is now the status quo.

While it is a number which nobody will care about today, especially if it is better than expected, initial claims printed at 377K on expectations of 378K, the first beat of expectations in 5 weeks. Of course, the claims number next week will be revised to over 380K. Why? Because, as now happens every single week, last week's initial claims number was revised higher from 383K to 389K. As a reminder, last week this number was expected to print at 370K. So only a 19K miss when all is said and done. But at least the mainstream media has its bullish for general consumption headline: "Initial Claims drop by 12,000" even as market participants realize this is still QE-promoting. Continuing claims printed at 3,293K, missing expectations of 3,250K, and down from an upward, of course, revised 3,259K. But the most disturbing observation is that in one week alone, a whopping 104,600 people hit the 99-week cliff, and stopped collecting extended unemployment benefits, the most since December 2011, as those on EUCs dropped by -45,808 while those on Extended benefits dropped by a astounding -58,829. As a reminder, Zero Hedge first noted that shortly 700,000 people will no longer be collecting any unemployment benefits. Here is to hoping those off the dole, are at least collecting disability in the USSA as otherwise these are tens of billions in lost purchasing power.