Archive - Jul 22, 2012

Tyler Durden's picture

The Russian Default Scenario As Script For Europe's Next Steps





Russia and the southeast Asian countries are analogs for Greece, Spain, and Cyprus, with no particular association between their references within the timeline.  The timeline runs through the Russian pain; things begin to turn around after the timeline ends. This is meant to serve as a reference point: In retrospect it was clear throughout the late-90s that Russia would default on its debt and spark financial pandemonium, yet there were cheers at many of the fake-out "solution" pivot points.  The Russian issues were structural and therefore immune to halfhearted solutions--the Euro Crisis is no different.  This timeline analog serves as a guide to illustrate to what extent world leaders can delay the inevitable and just how significant "black swan event" probabilities are in times of structural crisis.  It seems that the next step in the unfolding Euro Crisis is for sovereigns to begin to default on their loan payments.  To that effect, Greece must pay its next round of bond redemptions on August 20, and over the weekend the IMF stated that they are suspending Greece's future aid tranches due to lack of reform.  August 20 might be the most important day of the entire summer and very well could turn into the credit event that breaks the camel's back.

 

Tyler Durden's picture

T-30 Days To 10Y Treasuries Yielding Less Than 1%





While many have discussed the extreme analogs of the last few years in equity market performance, few have looked at the relative performance of the most explicitly impacted asset class of Central Bank largesse - the US Treasury bond market. Based on the almost perfect correlation between 2010, 2011, and this year's yield movements over the past few months, traders could be forgiven for considering that the 10-year yield will be below 1% by the end of August - no matter how many times they are told  "but rates cannot fall any more" or this time it's different. One has to wonder just how long the Fed can control this herding of cats (by forcing everyone to front-run it) and what the hyper-inflating solution to asset-deflation expectations will look like this time.

 

Tyler Durden's picture

Key Events In The Coming Week: Stalling Global Q2 GDP Update





The week ahead brings a batch of Q2 GDP prints, which will provide guidance on the strength of activity in that quarter, as well as a bunch of business survey data which will offer insights into the strength of momentum at the start of Q3. Starting with the GDP data, the main attraction is likely to be the print from the US. Goldman expects a below trend print of 1.1%qoq, vs the consensus at 1.5%qoq. The Q2 print from the UK is expected to be negative. While only a few Q2 prints have been published so far, only China has recorded a recovery on Q1. The consensus expects soft prints for the business surveys out this week. The Euroland flash PMIs are expected to be unchanged, leaving them at levels consistent with a continued contraction in activity. The German IFO is expected to fall slightly, as is the Swiss KoF. There are no consensus expectations for the China flash PMI, however if it does not pick up from current levels around 48, questions over the extent/effectiveness of stimulus in China will remain.

 

Tyler Durden's picture

Why A 9-Year Trade-Weighted Low In The Euro Won't Help EU GDP





The euro has depreciated to its lowest level in nearly nine years when measured in trade-weighted terms. Common wisdom is to assume that this might trigger a GDP forecast upgrade for the common currency area. UBS says "no", while at first sight, this 'devaluation' should boost output, the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. Simply put, the currency has depreciated on fear and risk aversion - and economic growth tends to suffer rather than flourish in that environment - and furthermore, the two structural measures that help determine the outlook for the currency - the internal balance (output gap) and the external balance (current account) - point to further weakness.

 

Tyler Durden's picture

Greece's Tsipras Calls For 'Drachmatization' Instead Of TROIKA "Longer Rope To Hang Ourselves"





EURUSD is down over 50 pips from Friday's close, about to test a 1.20 handle for the first time in over 25 months, as headlines pour from the beleaguered disunion. The AP reports of the German vice-chancellor's "more than skeptical" view that Greece can fulfill its obligations; after which "there can be no further payments" seemingly confirms our earlier note on the IMF's reluctance (and dismisses any hope that the IMF's call for more ECB 'assistance' will go unheeded. More worrisome is the Athens News story on Alexis Tsipras (leader of the Greek Syriza party) forecasting that the government will "soon present a return to a national currency (drachma) as a national success." He went on to state rather honestly for a politician that any payment extension (of the already re-negotiated TROIKA deal) is "essentially a longer rope with which to hang ourselves." The elite-perpetuating status-quo-sustaining unreality is summed up perfectly as he notes the Greek finance minister is the definition of a finance minister that the TROIKA would have chosen. Germany's Roesler adds a little fuel to the conflagration by adding that "for many experts,... a Greek exit from the eurozone has long since lost its horror."

 

thetrader's picture

Men in Black to seize Spanish Regions





Spain-Men in Black are here

 

Tyler Durden's picture

Guest Post: Spain's Banking Reform Is A Bailout Of The Status Quo





The latest details on the Spanish financial sector bailout continue to remind us not to underestimate politicians’ readiness to undermine whatever is left of a free market capitalist system. Instead of adopting Economist Juan Ramón Rallo' (as we discussed here), who has suggested a “bail-in” formula to effectively restructure and recapitalize the financial sector in a more transparent and fair manner - which would teach the resulting bank owners to learn the lesson of the dangers involved in placing politicians and ballet dancers on banks’ boards; the actual plan is to cleanse the Spanish banking sector of its toxic assets by means of transferring them into “bad banks” has a new twist: instead of reflecting such assets’ real market value, the idea is to impose a markup (based on an estimated “long-term value”) to minimize losses. In contrast to Rallo’s “bail-in” proposal, the current Spanish banking sector reform is aimed at bailing out and protecting those who have benefited from the practices which caused the problem in the first place: the political class, inefficient regulators, as well as private companies close to the establishment.

 

Tyler Durden's picture

No More Mr. Nice Guy As IMF Set To Kick Out Greece





It appears that following the resignation letter fiasco from Friday, the venerable IMF is trying to regain some level of credibility in the world. In a note obtained by SPIEGEL, senior IMF officials patience has clearly come to an end and has decided that, with Greece likely to go bust by September, it is no longer willing to provide additional Greek aid (we assume in light of the push-backs on the promised cuts that the aid was based upon). Pointing to this now being a euro-zone problem, their cessation of Greek aid is even more critical since both Holland and Finland pledged support because the IMF was involved. August 20th marks an important short-term hurdle as Greece is required to pay back EUR3.8bn to the ECB - and with collateral being withdrawn, we wonder how long before the ECB pulls the plug entirely - even on Greek T-Bills. Whether this is sabre-rattling before the delayed TROIKA visit or the IMF (and the rest of the TROIKA) indeed deciding enough is enough and realizing finally that more debt (or even maturity extensions) does not solve the problem of too much debt - only default will do that!

 

Bruce Krasting's picture

On FX





Gutless? Or smart? We shall see.

 

Tyler Durden's picture

Guest Post: Revolution Is Evolution





All organic structures can be modelled using evolutionary theory and governance, politics and economics, which involve the cooperation of millions of human beings are no exception. Because everyone is more familiar with evolutionary theory being used to model changes in the natural world, we’ll start by looking at examples in the natural world where revolution occurs as part of the process of evolution, demonstrating that revolution is not an artificial human construct but actually quite normal under particular circumstances. Revolution occurs in the natural world when a lifeform becomes extinct because the environment it depends on for survival changes at a faster rate than it can evolve. This can happen in two ways, either the environment is subject to sudden change, as in the case of the dinosaurs or, far more commonly, the environment changes gradually and the lifeform finds itself increasingly ill-adapted before becoming extinct. Because each lifeform has a relationship with other lifeforms there is a knock on effect.

 

ilene's picture

Dead and Deader





Riots, chaos, mayhem—these are not the earmarks of a contented society... But can the stock market go up anyway??

 

Tyler Durden's picture

Lieborgate: Here Come The Arrests





For over four years, virtually everyone in the finance industry knew that Libor was manipulated. The stench of manipulation rose to the very top and thanks to a document release of formerly confidential information, we now know for a fact that even the Fed was in on it - recall that as part of production, the Fed provided a transcript of an April 2008 phone call between a Barclays trader in New York and Fed official Fabiola Ravazzolo, in which the unidentified trader said: "So, we know that we're not posting um, an honest LIBOR." And yet without any tangible, black on white evidence, there was no catalyst for pursuing legal action. That all changed when in a desperate attempt to protect its ass, Barclays decided to rat out everyone by settling with regulators, and "turn state" producing e-mail based evidence, most of it quite visual (after all what is more tangible to the common man that evil bankers sipping on Bollinger), which essentially threw years of quiet cartel cooperation under the bus. As a result, regulators, enforcers, and legal authorities, many of whom were in on this manipulation from the beginning, no longer had an excuse to not pursue civil and criminal charges against perpetrators, who until recently were footing the tabs at various gentlemen's venues and ultra expensive restaurants. And while the imminent waterfall of civil prosecution will force bank litigation reserves to go through the roof, here comes, with a very long delay, the criminal charges. As Reuters reports, here come the arrests.

 

Tyler Durden's picture

The Cost Of Government Regulation: $1.75 Trillion





In their Ten Thousand Commandments 2012 report which was released in June, the CEI estimates the cost of US government regulation at $US 1.75 TRILLION. That is just under half (48 percent) of the budget of the federal government. It is almost ten times the total of all corporate taxes collected and almost double the total collected from individual income taxes. It is also one-third higher than the total of all pre-tax corporate profits. It is the hidden cost of doing business in an interventionist economy. The fact that the cost of complying with these regulations is substantially higher than the total of corporate profits is a stark illustration of the end result of economic intervention. That end result is capital consumption.

 

Tyler Durden's picture

Floodgates Open As Four More Spanish Regions Seek Bailout; German Nürburgring Faces Bankruptcy





Germany's Nürburgring has been the site of Formula One racing in the country for decades.

Even as Europe has become an utterly dysfunctional experiment in everything relating to modern economics and monetary theory, it has one redeeming feature: it has proven that the Defection regime under Game Theory is 100% correct. It says that once the defections from an unstable Nash equilibrium begin, there is no stopping until the entire system collapses under its own weight. This is precisely what has happened in Spain, where first Catalunya, then Valencia on Friday, and now virtually everyone else is set to demand a bailout. From Bloomberg: The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported. Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone."

 

Tyler Durden's picture

Guest Post: The Eminent Domain Mortgage Heist





And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been  sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages. What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer. While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.

 
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