Archive - Jul 6, 2012

For the last several days, I’ve been weaving between northern Italy and Switzerland checking out great places to bank, new places to store gold, and taking in these gorgeous lake views. Every single time I’ve crossed the border, I’ve been met by rather snarly police on both sides; they’re stopping cars, turning people’s trunks inside out, and causing major traffic problems. A friend of mine who came up on the train from Florence to meet me for lunch in Lugano said he was stopped at the border for nearly an hour as thuggish customs agents randomly questioned train passengers and demanded to see their IDs. So much for Europe’s 26-country ‘borderless area.’ Based on Europe’s 1985 Schengen Treaty and 1997 Amsterdam Treaty, you’re supposed to be able to drive from Tallinn, Estonia to Lisbon, Portgual without so much as slowing down at the border. This is not dissimilar from driving between states in the US or provinces in Canada. Yet as Europe descends into greater financial and social chaos, leaders are starting to ignore these agreements which guarantee freedom of movement across the continent.

Zero Hedge readers know that we have long followed channel stuffing trends at GM, whose month-end dealer inventory hit a record (for the post-reorg company which is completely different from the pre-bankruptcy entity) of 713K cars stuck in various dealer "channels" at the end of March 2012, and since then has been stagnant at just about 700K, with the most recent June number coming at 701K, an increase of 6K over May. It would be great to assume that the company has given up on cheap ways to cheat investors and the taxpaying public into believing it is doing better. It would also be wrong. As it turns out, GM has merely turned to more backdoor methods of stuffing channels, and getting money from its biggest shareholders, which still happens to be Joe Sixpack (and "superpriority" labor unions of course) by way of the US Treasury, with 32% of the common stock.

Japan Inc. is still trying, but now protests erupt in the streets.

For a while now we have suggested that, based on the relationship between the Federal Reserve balance sheet and the ECB's, a 'fair' value for EURUSD is around 1.20. The difference, we felt, was inspired by hope for a sizable (~$700bn 'pure' NEW QE). The last month or so has seen that hope fade (as well as European stress rising as ECB rates align with the Fed's ZIRP) as EURUSD now implies the probability of NEW QE now at only 25% (and falling).

European credit markets - sovereign, financial, and corporate - have all slumped dramatically in the last two days - massivley underperforming the ever-hopeful equity markets. Even though broadly European stocks (the BE500 or STOXX) are only retraced by around 25% off their post-summit highs, individual markets (and especially financials) have retraced almost 100% of the gains with Spain's IBEX seeing its biggest 2-day drop in 7 months and closing unch anged from pre-Summit levels. EURUSD is the story though as it plunges to two-year lows  at 1.2266 - over 400pips from its post-summit euphoria highs as QE3 hopes are dashed by muddling through US data. The disconnect between US and European equity indices and the rest of the world's more idiosyncratic risk markets remains unsustainable and as we have said before again and again "credit anticipates and equity confirms".

So where does this leave us, knowing that despite all the exuberant highs and depressed lows, we had ended the previous week pretty much in unchanged matter?

Well, after a 10-day period that had not one but 2 bail-outs announced, a EU summit that initially seemed to good to be true, results-wise, and then ended up just being that, and a triplet of Central Bank cuts cum QE supportive measures, things don’t look much better…

And the hits just keep on coming. Just as we said when it first broke, the Lieborgate scandal has considerably more play here and the latest and greatest is, via Bloomberg:

Germany’s Bafin Holding Libor Inquiry on Deutsche Bank: Reuters

The Deutsche Bank ADR has plunged by around 5% so far. Following 'news' this morning that RBC didn't 'collude' but no denial of the actual submission 'efforts' it would not surprise us to see the entire spectrum of LIBOR submitters 'probed'.

It seems IT professionals around the world are #failing as the 'glitch' that affected millions of account holders in the UK has leaped the channel and spread across Europe to infect Sberbank - which just happens to be the largest Russian bank. Via Bloomberg:

• *SBERBANK CARDS NOT WORKING IN RUSSIA, ABROAD, COMPANY SAYS
• *SBERBANK SAYS WORKING TO RESOLVE TECHNICAL MALFUNCTION :SBER RU

and from Interfax:

RUSSIA-SBERBANK-CARDS-MALFUNCTION MOSCOW. July 6. (Interfax) – Sberbank of Russia (RTS: SBER) has suspended credit and debit card operations due to a technical malfunction, the bank told Interfax. “All cards are not being serviced,” it said.

How many times did these glitches occur among the world's largest and likely highest paid IT services groups before the European financial crisis pulled back the curtain and showed the proximity of the liquidty cliff for so many of the 'biggest' banks in the world?

Shots for "fairness", "duty", "fault" and any other crowdsourced suggestions. No shots for "Solyndra", "Choom gang", "Eric Holder" or "record part-time jobs." If recent history is any indication, look for the S&P to slide.

Every government entity that reckoned it was moated from the market economy will be snapped back to "discover" risk and consequence. Let's lay out the dynamic:

1. Every government can only spend what its economy generates in surplus.
2. Every government transfers risk and consequence from itself, its employees and its favored vested interests to the citizenry and taxpayers.
3. Every government collects and distributes the surplus of its private sector to its employees, favored constituencies and vested interests.
4. Since the government (State) promises guaranteed salaries, benefits and entitlements to its employees and favored constituencies, these individuals believe they are living in a risk-free Wonderland that is completely protected from the market economy.
5. Risk cannot be repealed or eliminated, it can only be masked or transferred to others.

... continued

As politicians have become more and addicted to the campaign contributions of 'special interest' groups, or as Charles Biderman of TrimTabs analogizes: "The pusher owns the user", so the representatives-of-the-people are no longer. The only solution Charles sees is to change our representative form of government as we "no longer have a government of the people, for the people, by the people". In a July-4th-week inspired rant, Biderman extends from the Gettysburg address to constitutional expectations (and representative law-driven rule as opposed to military force) concluding what many know and yet are afraid to lean against: our government is "of the special interest groups, for the special interest groups, and by the special interest groups".

With today's payroll print hardly bad enough to prompt instantaneous QE (as evidenced by the weakness in gold for now) and increasing truth coming out of Europe which confirms our non-game-changing EU-Summit calls; it seems S&P 500 futures remain confident about something since they have only retraced 38% of the EU-Summit hope rally, while EURUSD is over 100% retraced, European Sovereign bond yields have retraced over 100% of the gains, Italian banks stocks have given up between 75 and 100% of their gains and across all European banks equity prices have given up 50% of their gains. So what is there left for ES? Earnings? (not so much with the number of negative pre-announcements) Housing? (hhm don't think so) Election cycle?

And in the meantime, not a peep about any bank in the US, which is ironic considering JPM, Citi and BofA are BBA member banks, and had among the lowest fixing rates during the period in question, and as Bob Diamond himself said, "everyone did it." One may almost get the impression that US regulators and politicians, gasp, have a motive to not investigate banks for not only criminal but civil malfeasance. And why should they: after all there is unlimited taxpayer money. And if that ends, the US can just print some more.

The chart below is a representation of the Establishment Survey (B.1)showing workers in the Construction of Buildings Space, aka those who, as the name implies, build buildings. At 1,213,500 workers, this was not only the lowest number of 2012, but the lowest since May 2011, and is just 2100 workers above the last decade lows. Perhaps instead of relying on the NAR's self-promotional brochures and Housing Starts data which capture if and when a shovel has met the earth, one should perhaps track how much actual demand there is for building construction workers and how many jobs this critical component of the economy creates. Sadly, as the chart below shows, not much.