Archive - Jul 26, 2012

The 200 Pip move was purely based on speculation or a hope that Draghi’s statement would render the same affect as the Calvary riding in to save the day. That’s just not how these things work. Draghi will have to put his money where his mouth is in order to see a move like this sustain itself in the long-term.

Load your EURO Bullshit...

On one hand we have Mario Draghi promising he has a magic wand (not a printer - remember the keys to that are now held by Angela Merkel who is on vacation) and to "believe him" that the EUR will survive. On the other we have Greece which is a poster child of everything that is wrong in Europe. And that we summarize as follows: i) an epic and now relentless deposit outflow from Greek banks which continues as all trust in the local banking system is now gone, as €7 billion in deposits or the second biggest amount ever, is pulled and 20% of the entire corporate and household deposit base has vaporized in the past year, and ii) an economy in which it is every man for himself and where nobody pays any taxes any more, period. Good luck Super Mario.

Not seeing many fiscal developments that would prompt significant bullish action...

There is no point in recapping the ongoing vendetta between former SIGTARP Neil Barofsky and former head of the NY Fed, and current Treasury secretary and resident TurboTax expert Tim Geithner. One need but follow the former on Twitter for a quick and concise sampling of the sentiments harbored vis-a-vis the latter. However, in the following interview Barfosky does touch on some points which in the context of the recent Liborgate, should be brought front and center, especially since the increasingly apathetic US audience seems to not care about one bit (as opposed to their distant cousins across the Atlantic for whom Lieborgate has become a daily distraction). Namely, what Barofsky says is that Geithner and other regulators who allowed Lieborgate to proceed should not only lose their job but we should "see [Geithner] in handcuffs."  Sadly that will never happen as it would actually be a deterrent to future crime among the highest echelons of America: something which is just not allowed to happen in a system whose very survival is increasingly reliant on rampant criminality.

Every day we are told how this recovery is the slowest since WWII and that nothing is working. Well, we think we can trump that for dysphoria. Not only is this the slowest recovery since WWII, it is even slower than the average 'stagnation'. Based on Goldman's analysis of 93 stagnations the US GDP per capita is growing even more stagnantly than ever (and dramatically worse than during Japan's 'lost decade').

Given the anticipation that is now built-in for next week's ECB meeting, we hope that Draghi has a little more up his sleeve than reviving the Treaty-testing, bondholder-subordinating SMP. Presented with little comment is the market's reaction during the last two periods of buying as it seems that Italian and Spanish bondholders are more than happy to know that there will always be a buyer no matter how much they keep selling their exposure down.

Did you know that Chinese government officials are all corrupt? Did you know that many of Chinese statistics look either weird or totally unreliable to a point that even the Vice Premier can’t help admitting it? People outside of China have never really trusted the Chinese Communist Party as far as politics are concerned, and probably never will. However, the seemingly unstoppable growth engine of China has produced a remarkable level of complacency among investors that China is going to do well. While recent economic data from China are mixed at best, the market consensus is unanimously biased towards believing that the second quarter is the bottom. We do not understand the reasons behind the faith in the Chinese leadership as far as running the economy is concerned.  Here are a few reasons why you should just stop believing in the Chinese leadership when it comes to running the economy.

Earlier we heard Goldman's talk down of Draghi's comments, which we will not tire of saying, were absolutely nothing new. Now here is Citi's Jurgen Michel throwing cold water in the face of all those who believe that the ECB (which can't really do more LTROs unless it is willing to accept Zynga's virtual farms as collateral) will save the day with more direct intervention. To wit: "in our view, such action is only likely to be taken after governments have taken action first, i.e. by activating the bond market support facility for Spain and Italy." In other words, nobody believes Draghi, despite his stern warning to "believe" him - everyone wants action out of the ECB head, not talk.

With the heat-wave in Southern Europe, the missing Monsoon, and the earth-cracking drought in the US, it is no surprise that corn, wheat, and soymeal prices are soaring as crop yields plunge. The level of inventories were already low going in and as Bloomberg notes, consumers around the world will feel the effect of higher food prices as the worst drought in 50 years impact the world's largest exporter of corn and wheat (and 3rd largest of soymeal). Within Asia, Korea and Malaysia will be most adversely affected, considering direct effects referenced in per capita and GDP terms. Indonesia and Japan are Asia’s largest importers of wheat, both importing roughly 5.7 million metric tons on average. China is by a wide margin the region’s largest importer of soy, with average imports of 49.9 million in the last five years. The impact on headline inflation in Asia will be stronger for the economies with lower per capita incomes — Vietnam, India, the Philippines and Indonesia — where food and food products account for a larger share of the typical consumption basket. Even in places where incomes are high, such as Singapore, food accounts for 22 percent of the consumer price index.

As prescient as he was, Huxley could not have foreseen the power of electronic media hypnosis/addiction as a conditioning mechanism for passivity and self-absorption. We are only beginning to understand the immense addictive/conditioning powers of 24/7 social and "news" media. What would we say about a drug that caused people to forego sex to check their Facebook page? What would we say about a drug that caused young men to stay glued to a computer for 40+ hours straight, an obsession so acute that some actually die? We would declare that drug to be far too powerful and dangerous to be widely available, yet the Web is now ubiquitous. Servitude comes in many gradations and forms. Relying on the Federal Reserve to constantly prop up our pension and mutual funds lest reality cause them to collapse is a form of servitude; we end up worshipping the Fed's every word and act as mendicants worship their financial saviors. That the Fed is unelected and impervious to democracy or the will of the people is forgotten; all that matters is that we love our servitude to it.

UPDATE: 7 of the last 8 moves in Spanish spreads of this magnitude were followed by a more dramatic selloff within 2-3 days.

It was a good day; of that there is no doubt. Equity, FX, credit, and sovereign bond markets all retraced  recent weakness in a hurry - extending some of the gains from yesterday's Nowotny nonsense. With Merkel away on vacation and unable to fade this exuberance - though the IMF did their best reality impression. We don't mean to steal the jam out of anyone's donut here but in the case of EURUSD, 2Y Spain, 10Y Spain, Italian bonds, and Italy and Spain's equity indices - today's 'game-changer' merely reverted us back to Friday's close - filling that gap. In most cases this still leaves the levels notably weaker than pre-EU-Summit - in spite of how much certain CNBC hosts 'believe'. Bt we would be unfair if we did not note the moves: IBEX/FTSEMIB +5.5%; Euro Stoxx +3.9%; Spain 2Y -87bps, 10Y -45bps; EURUSD +136pips - pegged at 1.23; Italy 2Y -89bps, 10Y -37bps; Europe's VIX dropped 1.7vols to 25.4%. The charts say it all for context here.

I’ve spent the last six months digging as deep as I can into the financial system to find the unquantifiable risks that aren’t being discussed by the financial industry. I’ve found them. And they are worse than anything I expected to find. Indeed, what I’ve discovered is more horrifying than I’d care to admit.