Archive - Jul 5, 2012

Seven out of the seventeen economies that belong to the European Union that need to be bailed out. This is 41% of the Euro-17 that is in trouble. The second indication of decline is the recessions in Europe. In fact virtually all of Europe is in a recession and while Germany has held its head above the water I think by the third or fourth quarter that she is also mired in an economic decline. Europe is 25% of the global economy and this is beginning to affect the United States as exemplified by the declining revenues and profits of many American corporations that have so far reported out this quarter. The axes of the financial markets are America, Europe and China and with Europe in serious decline and China also contracting the strings are vibrating so that all of the markets are likely to go down. Even without some cataclysmic shock, realization is coming. The debts of Europe are being paid off with ever more debt and the can kicking will find its walls and as the European recession deepens it will be felt in America and then adjustments will have to be made - as fact overbears fantasy.

Fourteen years ago during the Asian financial crisis, Indonesia endured a currency collapse, a severe 2-year recession, and an embarrassing IMF bailout. Western bureaucrats wagged their fingers incessantly at Indonesia, lecturing the country about the dangers of excess and fiscal irresponsibility. How sweet the irony is. In a stunning rags-to-riches story, Indonesia contributed US$1 billion to the IMF last week in order to help bail out bankrupt Western nations. Unlike Japan, the US, and Europe — which all seem to think the answer to an economic bust brought on by a debt-binge is to borrow and spend even more money– Indonesia took its medicine when its economy collapsed back in 1998. Ironically, US President Barack Obama spent some of his childhood in this same suburb of Jakarta. Unfortunately, as he pulls out all stops to cling to power for a second term, the kind of tough decisions that could help the US emerge from its economic malaise have no chance of being made. It’s the ENTIRE system that’s the problem. And that goes for nearly every Western, “free market,” democracy out there.

Several months ago, as John Arnold was terminally unwinding long gas positions into an illiquid market, sending natgas as low as  $1.80, various pundits called for a bidless market in natgas. Today they are silent, because 3 months later, nat gas is 60% higher, and is on the verge of crossing the $3.00 psychological barrier, and going unchanged on the year, in the process pushing Chesapeake energy above $20 for the first time since the vendetta-like Reuters battery of negative articles allowed such activists as Carl Icahn and Dan Loeb, not to mention Zero Hedge readers, to accumulate a position in the name in the mid-teens.

The only reason the real wage and salary growth has improved at all this year (a real growth rate of 1.1%) is because inflation has been declining since January as TrimTabs' Madeline Schnapp notes specifically "the price of gasoline has dropped sixty cents a gallon since April giving consumers about $60 billion in extra cash to save or spend". While good news, it is hardly sustainable and acts as a much weaker boost to the economy where balance sheets are still crammed with trillions of dollars of mal-investments left from the real estate bubble that have not been marked-to-market. These non-performing assets are like a ball-and-chain around the neck of the economy and the quicker they are liquidated the quicker the economy can get back on its feet. Schnapp sees lower job growth than consensus for June and while her pre-July-4th ebullience is clear, her less-than-sanguine view on the economy and the "purging of mal-investments - destroying wealth and contracting credit" means wage-and-salary growth will be anemic at best.

Why Is the Libor Scandal So Important to You?

For those Americans earning between $34,500 and $106,000, the real-world middle class tax burden in high-tax locales is 15% + 25% + 5% + 15% + 15% = 75%. Yes, 75%. Before you start listing the innumerable caveats and quibbles raised by any discussion of taxes, please hear me out first. Let's start by defining "taxes" as any fee that is mandated by law or legal necessity. In other words, taxes are what is not optional.  If we include all taxes, the real-world tax rate is much higher than the "official" income tax rate.

Earlier, we noted that Obama is about to take the trade war with China on car duties to a whole new level, be decrying "unfair" Chinese trade duties (which in turn were implemented only in response to US tire tariffs imposed in 2009 but you won 't hear about that). Now watch the president live from Ohio, telling his unionized voters precisely what they want to hear.

Central Banks came, stood and delivered… just not much more, although the (nightly) POBC cut (1 YRS by 31 to 6% and deposits by 25bp to 3%) had not really been foreseen. Second Chinese cut in as many month, the last one having been on 07 Jun (as well just ahead of the ECB meeting, then by 25 basis points to 3.25% and 6.31%). The Chinese move was good for a small uptick, rapidly squashed by the European serving.

ECB quarter cut and BoE GBP 50bn additional QE to GBP 375bn both already in the valuation ramp-out of late.

Hmmm… Non-event.

Then came the ECB press conference…

Despite the easing of collateral standards, ECB Margin Calls surged last week by their most in over 9 months (ex-Greece). As yields rose (and prices fell) pre-summit, so the collateral that European banks have lodged with the ECB fell in value and thus, the banks had to find cash to cover those margin calls. The rally from Friday may have eased that strain a little but today's give-back of all those gains (and in fact to a worse level) suggests that these margin calls will continue to rise and put further liquidity stress on cash-strapped European banks. Most critically, the ECB (while extending some of its collateral) reduced banks' ability to self-reference and post ponzi-bonds as collateral (i.e. a Spanish bank cannot get a government guaranteed issue off and then turn round and pledge it with the ECB). Between negative Swiss interest rates (and Denmark), stressed basis-swaps, and now rising ECB margin calls, things are going from bad to worse behind the scenes in Europe - no matter what reflexive perspective an equity market rally is telling you. Yet another unintended consequence of the LTRO/MROs as the most-stressed banks come under more liquidity stress - as evidenced by today's biggest deterioration in EUR-USD basis swaps in 7 months.

In Ohio today, President Obama will announce the latest World Trade Organization suit against China, this time addressing "unfairly" imposed duties on U.S. auto exports.  The Administration will argue that these duties violate international trade rules. Whether or not China will reply that buying US 10 year paper at 1.6% is also unfair remains to be seen. But at least someone is happy. As reported earlier, ADP reported just 4,000 manufacturing jobs were added in the US in the last month: these are the same people who are supposed to be doubling US exports in Obama's latest 5 year plan. Good luck. Anyway, here is the take of the Alliance for American Manufacturing to this simplistic attempt to trade union for long-term stability with America's largest trading partner.

The last two weeks have seen the largest drop in mortgage refinancings in over 7 months. While refis are trending generally higher as mortgage rates drop to all-time-record-lows, there is an odd reaction evident in the data. Each time interest rates tick up even modestly, the rate of refinancings plunges violently. In a sane world of rational actors, we would expect a rush of refinancings at the first sign of a rise in interest rates as they scramble to lock-in the last best deal. However, in our surreal world of extreme balance sheet inflation and seemingly infinite zero-interest rates from the Fed, the crowd (instead of seeing a blip up in rates as a signal to act) decides to hold off from refinancing as they await rates to continue trending down/lower (as per The Fed). So, does the Fed need to signal that rates will be rising soon, and lift its easing pedal to remove the perverse incentive that ZIRP has enabled, in order to improve the housing market (or household balance sheets)?

The post-EU-Summit exuberance has entirely worn off in everything that mattered to the EU-Summit 'bulls' as EURUSD and both Italian and Spanish bond spreads are now back wider than pre-Summit. However, there is one market that remains ignorant of anything aside from algo-driven VWAP reversion and the incessant hope for another round of central bank largesse. Can you guess which one?

Following today's two better than expected employment data points, it was only natural that the world's fastest revising bank would go ahead and promptly revise their forecast for tomorrow's NFP higher. Sure enough... "We are upgrading our forecast for tomorrow’s nonfarm payroll report to +125k, from +75k previously."

A few days ago we noted that the ECB may well be contemplating the monetary neutron bomb, which would see it lower rates to below zero, ushering in a Negative Interest Rate Policy. Today, Mario Draghi cut such speculation short promising the ECB has not discussed this. Yet one bank which certainly has is the Danish Central Bank, which just lowered its Discount Rate to 0%, joining China, England, the ECB, and, of course, Kenya in easing, but also went one step further and cut its deposit rate to negative 0.2%. Keep a note of this: NIRP is coming to a central bank, and shortly thereafter to a bank deposit branch, near you very soon.

Print, print, print as they may, central bankers will make no leeway until the true problem falls sway... ©2009-2012 the Lyrical Reggie Reg...