Archive - Jul 26, 2012

When the Lieborgate scandal broke out and the Bank of England trace became publicly known, some of the more conspiratorially inclined elements saw in this epic shakedown at the English central bank nothing but an opportunity for the world's dominant investment bank, Goldman Sachs, to capitalize on the scandal and the succession panic now that Paul Tucker is obviously out of succession rotation, and to appoint its own tentacles to the head of this most important central bank that is currently squid free. In fact, on July 3 we said:"now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs:  Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.)" We wonder if this speculation can be upgraded from conspiracy theory to conspiracy fact, now that Bloomberg itself has written a major article discussing just this suddenly very likely outcome.

With the Olympics about to kick off in all its glorious celebration, the sad reality of UK's GDP shrinking 0.7% as the empire drops further into a double-dip. As Bloomberg Brief notes, this came along with a 5.2% plunge in construction output as the IMF estimates austerity has cut 2.5% off GDP. What is most concerning is that GDP has fallen for five of the last seven quarters and is now 4.5% below pre-crisis levels. The level of disbelief is palpable though since the BoE sees only a 10% chance of this recession lasting into 2013 and while it estimates that it will take until 2014 before the UK gets back to the 2008 level (magically), we note that that is already longer than it took during The Great Depression.

Wondering what Draghi really meant this morning when he spoke at an informal Investment Conference? Apparently nothing just as we said first thing this morning: IMF SAYS DRAGHI'S REMARKS ARE A WELCOME REITERATION OF ECB'S WELL-KNOWN COMMITMENT TO DO WHAT IS NECESSARY. So now the talking down of expectations, or in this case today's iteration of "baffle with bullshit" begins. Yet surely there is some additional agenda. For the best interpretation of what the ECB head said, we go to his former employer, Goldman Sachs, which is always ready to tell its clients to do the opposite of what its own prop desk is doing.

While some have talked of the 'credit-easing' possibility a la Bank of England (which Goldman notes is unlikely due to low costs of funding for banks already, significant current backing for mortgage lending, and bank aversion to holding hands with the government again), there remains a plethora of options available for the Fed. From ZIRP extensions, lower IOER, direct monetization of fiscal policy needs, all the way to explicit USD devaluation (relative to Gold); BofAML lays out the choices, impacts, and probabilities in this handy pocket-size cheat-sheet that every FOMC member will be carrying with them next week.

Readers know that Zero Hedge boycotts manipulated NAR data, which, just like Libor, is not only meaningless, and set by "insiders" who have skin in the game, but is also always totally wrong. Today we will make an exception, not so much because the just released pending home sales miss (-1.4% on expectations of +0.3%) confirmed what most people know: namely that the housing "recovery" has the same credibility as saying ZNGA has bottomed, and follows misses in New and Existing home sales, but because the below video of Larry Yun is a pure theatrical masterpiece and worth the price of admission alone.

Curious why Germany by way of Angela Merkel, has not yet responded officially to Mario's promises to break Article 123 if needed, in order to preserve the Goldman bonus pool, even if it means flooding Germany with inflation - something that historically has taken her at most a few hours? Better yet, curious why Mario Draghi picked exactly today to go ahead and defy Germany knowing full well there would be no official response for quite a while? Here's why.

The major problem with daily jawboning by central bankers, such as Draghi today, and the Fed via Hilsenrath on Tuesday, is that it "achieves" to price in QE without QE actually being implemented: in essence the various central banks try to run up assets on the rumor, knowing well that with every incremental "news" event, the news will be sold ever faster, and ever more forcefully. Which then begs the question: how much QE is currently priced in, in order to determine how much more "rumor" there is to buy. According to Bank of America: not much, as a full 65% of QE 3, or the NEW QE, to use the proper iNomenclature, is by now priced in.

As panties are being thrown at the feet of Mario Draghi all around Europe, and his comments are being heralded as 'confirmation' of Nowotny's restatement of absolutely nothing yesterday, we thought some context would be useful before we all cheer that all is well. Spanish and Italian 10Y bond spreads are still notably wider than the pre-EU-Summit 'panic' levels and dramatically wider than the post-EU-Summit best levels. Spain 2s10s, having flattened from 220bps to 60bps in a week has squeezed back up to 128bps as we can only imagine the bath-salting that caused a few people. The point is that this kneejerk reaction in an incredibly illiquid market at the front-end of the Spanish curve is nothing to rest your hat on yet. In fact, if there are more hints dropped of ECB restarting SMP then we suspect European asset managers will run to sell down their Spanish bonds to try and front-run the subordination this implies at the inevitable restructuring (as game-theoretically they know everyone else will also do the same).

In Hong Kong they are completing work on its largest gold vault due to open in September which can hold 22% of the gold that is in the US facility Fort Knox.   The new secure storage facility will compete with services set up by the Airport Authority Hong Kong in 2009 that serviced governments, commodity exchanges, bullion banks, refiners, wealthy individuals and exchange-traded funds. The new facility is within the international airport compound and its capacity is 1,000 metric tons. This signals the growing interest from China currently the world’s second largest consumer of gold in owning physical gold bullion.  

Here are the initial claims prints in the past 3 weeks: 376K, 352K, 388K, 353K (with the last week number naturally revised higher as always). Why the volatility? Same reason as the plunge two weeks ago: "onetime factors such as fewer auto-sector layoffs than normal likely caused the sharp decline." Naturally, this week's headline will say, 35K improvement in initial claims, and Wall Street will be (un)happy because we had a beat of consensus of 380K, which likely means QE is a little bit further. Looking at the other data point today will provide no help: headline June Durable Goods soared by 1.6%, on expectations of 0.3%, with the previous revised from 1.1% to 1.6%. But the number ex-volatile transports plunged from 0.8% to -1.1%, far below expectations of -0.8%, while Capital Goods orders ex air collapsed from a revised 2.7% to -1.4%. Which number is relevant? Probably the one which can be goalseeked to prolong the EURUSD jawboning rally started at 6 am this morning by Draghi, in which as we already showed, he said nothing new by regurgitating his open ended options, and merely awaits the refutation by Merkel et al who over the past 6 months has become the true European paymaster.

The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics.

European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress. In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.

For those stunned that the market is reacting as euphorically as it is to remarks which are basically a rehash of prior Draghi statements and are nothing new, or that bond yields are ripping in on the implicit threat that Draghi may reactivate the SMP, in the process further subordinating bondholders and cramming them down forcing even more selling, here is a sampling of previous Draghi statements explaining what he can do, and more importantly, what he is allowed to do under the existing European framework. Which is why we find it not very surprising that Draghi waited until all usual German suspects are on vacation and are thus unable to immediately issue a press release as to the structural limitations of what Draghi can do. Because when in doubt, ask this: does export-heavy Germany want a strong or a weak euro?

The kneejerk short covering reaction to Draghi's remark that he will do "anything to preserve the euro" (this must be news because yesterday the ECB would not do anything to preserve the euro supposedly) is over. Now the analysis begins of what was actually said. The realization is... nothing.