Archive - Jun 2012

The big news out of New York City these days is Mayor Mike Bloomberg’s proposed ban on the sale of soda drinks over 16-ounces (about 1/2 liter) at restaurants, movie theaters, sports stadia, street carts, fast food chains, etc. Bloomberg stressed that we have a responsibility to combat obesity, diabetes, and heart disease, and that the government must consequently regulate what people can/cannot put in their bodies. Michelle Obama even came down to applaud the idea.“Excuse me,” I asked, “but who exactly is ‘we’…? I certainly didn’t come into this world born with a burden prevent obesity. And I’m pretty sure nobody else signed up for it either.” ‘We’ is one of the most dangerous words in the English language, particularly when bandied about in Western representative democracy. It’s a term often used when a politician wants to thrust a burden or obligation onto everyone else’s shoulders, but without being too direct about it... Such policies, however, fall on a very slippery slope. When government begins regulating X, the regulation of Y and Z will follow by extension. This is how frogs are brought to a boil– slowly, deliberately, gradually, and grounded in good intentions. The real question is whether you want to be trapped in the same pot as everyone else.

What's the difference between today's global finance system and a Ponzi scheme? This is the question that a 56-year-old veteran Russian financial scammer has been asking his victims. As Bloomberg points out, chillingly, he almost has a point. Sergei Mavrodi is one of the most infamous names in Russia's recent history. Back in February 1994, amid the turmoil of the country's transition to a market economy, the mathematician organized a Ponzi scheme called MMM. Now he's back with an even more audacious endeavor: the honest scam. Last year, he announced the new project, MMM-2011, by stating boldly that it would be another Ponzi scheme. Depositors would be paid solely from funds invested by other depositors. There would be no attempt to generate income in any other way. This, he said, was perfectly all right, and no different than the way some of the largest institutions in global finance operated, from the Russian pension fund to the U.S. Federal Reserve. Perhaps most notably, Bloomberg reports his perspective on "What is money?" he wrote. "Nothing! Nihil. A phantom. … It is backed by nothing at all and printed by the masters in any quantity, at will."

Between Hilsenrath's humoring, Draghi's 'ready-to-act', and Merkel's 'fold', it appears all-is-well once again in the world. European banks are soaring - especially the most recently devastated as the broad European bank index jumps its most in 5 months. Italian and Spanish sovereign bond spreads compress notably, perhaps on hope of a renewed SMP - even as LTRO3 seems to have lost favor with the ECB (effectiveness?). Basis-swaps popped higher (better), Bund yields rose, Swiss 2Y was flat (but low) and Crossover spreads (high-beta credit) are outperforming. It seems that markets are pricing in a best-case scenario. EURUSD is oscillating higher but stocks remain notable underperformers over the last few weeks and frankly this feels more like a short-squeeze bounce than a renewed rally as we know all too well that nothing has been solved (even if Germany is caving on Spanish banks). With the long-weekend and lack of liquidity, it seems markets have simply round-tripped to pre-NFP levels and now it gets interesting - context, as always, is critical.

With all proposed Spanish bank bailout plans so far either shot down, or found to be inadequate, the question always has boiled down to whether Germany, which as we have noted in the past is the true lender of last resort in Europe, not the ECB, will agree to the trade off of preserving the Eurozone, i.e. temporarily ending the latest Spanish risk flare out, in exchange for the risk of political disgrace domestically, where more and more people are against sweeping European bail outs, due to soaring "contingent liabilities" which increasingly more people on the street are realizing are all too real (see: TARGET2). On the other hand, a direct bank bailout request for Spain using traditional European channels, which would fund the government, would result in a deterioration in the Spanish sovereign leverage, and make the country even riskier, thereby putting more pressure on the banks, and so in a toxic loop. It now seems that this dilemma may have been resolved, at least on paper. As Reuters reports, "A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say. While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland."

The PIIGS will pop! I directly & explicitly compared the plights of Greece vs Spain 2 1/2 yrs ago before anyone even publicly admitted Greece would have to default, not to mention Spain!!!

On our current course, there is no other choice for the average American but to say no, regardless of the law, or the threat of its violent enforcement.  Rebellion, in all its forms, is as natural as the cycles of the Earth.  It reoccurs time and again, sometimes suppressed, but not for long.  The horrors of governments gone rogue are no secret.  We have so many examples in history to draw from it is hard to imagine any crime despots have NOT visited upon innocents.  Frankly, if control thirsty elites can refine tyranny down to a science by examining the mistakes of the past, there is nothing stopping us from refining defiance down to an art form as well.  Again, what other choice do we have, but to take heart in the knowledge that though there is no assurance of victory, there is also no assurance of defeat.

Equities, EUR, and Treasury yields have round-tripped from notable falls this morning to 'recouple' with Gold's relative stability but it is Silver that is running the show for now - up over 7.5% from pre-NFP.

While the WSJ article on the Fed paints a picture of controversy enshrining the usual hawk Vs dove sort of frame work ( or is that Hatfields Vs McCoys? Montague Vs Capulet)… what strikes me is the sense of agreement I get in reading this thing. Everyone at the Fed is on the very same page. John Hilsenrath is correct in concluding that there is a policy dilemma, but he does not connect the dots and say that it is a dilemma without much consequence. Yet it is quite clear that even those who would like the Fed to do more, are very disappointed with the results from what they already have done. If you ordered dessert and it was bad would you order more? The Fed would.

'The unbearable harshness of being' a European in the midst of crushing austerity has forced everyone from France to Greece to pick up their pitchforks against those stability-minded and conscientious Germans. As Diapason's Sean Corrigan shows in this clarifying chart, the 0.18% drop in Eurozone Real Government GDP must have been truly devastating; or perhaps, just as we have said again and again, it's all about the flow not the stock and any lack of growth is the death-knell for what is called capitalism.

Sadly the man who thought (with good reason) he was more important than the Chairsatan (until the whole CIO fiasco blew up in his face of course), Jamie Dimon, will not be there (and will thus not be available to provide an update on the CIO's losses to date, which are likely orders of magnitude greater than the $2 billion benchmark previously disclosed, but that does not mean today's Senate hearing on lack of regulatory oversight and massive bank prop losses will be any less interesting. From C-Span: The Senate Banking Committee will hold an oversight hearing on efforts to overhaul the regulation of derivatives. Lawmakers will focus on the steps the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) are taking to implement provisions of the Dodd-Frank Wall Street Reform Act, and their efforts to reduce systemic risk and improve market oversight. The session also will spotlight J.P. Morgan Chase's $2 billion trading loss, which is under investigated by the FBI and the SEC." We, for one, can't wait to find out what the FBI's trained CDS forensic experts discover on this one...

Reflecting on yesterday's monetary-policy-hope-driven rally, UBS' Art Cashin prefers to focus on Richard Fisher's very frank (and succinct) speech on the limits of monetary policy and the importance of fiscal policy.  Urging everyone to read it, and send it to your Congressman and Senators, he reminds us that Fisher is the only Fed policymaker to have been a banker and a money manager, and in the words of Richard Fisher, he worries that: "there is a growing sense that we are unwittingly, or worse, deliberately, monetizing the wayward ways of Congress."

Market Turbulence As Global Economies Falter: The European debt-crisis, the derailing of Chinese economic growth and an underemployed United States all point toward a “global crunch”. 

From Whitney Tilson's just released letter: "It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history." Is that so? May one inquire, in the aftermath of the JPM CIO scandal, does T2 mark the bulk of their positions, which as Zero Hedge disclosed recently are call options, based on market, or based on magical bid/asks, to be made up on the go (as in JPM'scase)? That's right - a hedge fund which "invests" in theta. Is there any wonder why the "hedge fund" with about $200 million in actual stock-based AUM (the balance being calls and warrants), may be the first one with a negative Sharpe ratio? For a visual summary of why LPs (aside from friends and family of course) in T2 are singlehandedly propping up the bottom line of Dramamine, see the chart below.

The headlines are rolling in. From Bloomberg:

• ECB SEES 2012 INFLATION AT 2.3% TO 2.5% VS PREV 2.1% TO 2.7%. - so... counterdisinflation

That's the kicker: ECB sees inflation. Deus Ex Off - forget more easing at this point. Everything else is just filler.