Archive - Jul 2012

UPDATE: Disturbing video of the bloody reality on Saudi streets tonight

Remember Qatif - the "weakest" Saudi authoritarian link, whose daily protests, many of them violent, threatened to topple the government last spring when soaring global food inflation set the MENA region on fire and led to the overthrow of numerous regimes in the Mediterranean rim? It's back, only this time not based on food price concerns, but inflamed religious tensions, arising from the arrest, and shooting, of a senior religious opposition figure, Shia cleric Ayatollah Al-Neme. As of minutes ago, Redha Al-boori reports on Twitter, that there have been at least two casuualties as a result of confrontation between Saudi forces using live ammo and protesting Shiites.

When on Friday news broke that German regulator BAFIN (which is just like the SEC except that it also regulates, investigates and actually prosecutes, instead of just watching porn all day) was launching a probe of the biggest bank in Europe, and actually, make that the world, Germany's Deutsche Bank, the shares took a quick, brisk hit, sliding 5% with everyone anxiously expecting to find out just which bank will follow Barclays into the scapegoat abattoir (because nobody had any clue Liebor manipulation was going on until a week ago). Yet while external inquiry into banks is to be expected (everywhere but in the US of course, because in the US no banks manipulated anything. Ever) as a proactive act on behalf of regulators to cover their back, things get a little more tricky when the bank itself admits there was an obvious supervision problem. From Reuters: "Two Deutsche Bank employees have been suspended after it used external auditors to examine whether staff were involved in manipulating interbank lending rates, German magazine Der Spiegel reported, citing no sources." Now what can possibly go wrong if the biggest bank in the world, with just shy of $3 trillion in "assets", which just happens to have a 1.68% Core Tier 1 ratio, is suddenly thrust smack in the middle of the scandal that the Economist just aptly named the finance industry's "tobacco moment"?

And now for something completely different. Instead of scary tales of horrifying Math 101 (soon to be banned in one of the many upcoming Eurosummits), which confirms that no matter how it is spun, the global reality is ugly and getting worse (and ever more diluted in paper format), courtesy of Spiegel we present a photographic journey through Vogelsang: formerly one of the biggest Soviet military garrisons housing nuclear weapons and numerous nuclear launch pads, home of the 25th tank division protecting the USSR's most prized external asset, located in the forest near Berlin and housing over 15,000 people. It is now a surreal ghost town, and as haunted as any of the "cities" one can find deep in China.

You can already see the collateral damage stemming from anemia in LIeBORgate banks... Capital Account's Lauren Lyster stimulates the conversation.

By now we can only hope (pun intended) that everyone has seen the David Einhorn chart showing the circularity of the European "summit-based" decisionmaking process - somewhat relevant since we have had 21 summits since 2008 and Europe has never been in a condition quite as bad as last week when a historic move by the ECB to lower the deposit rate to zero and the refi rate below the critical threshold of 1.00%... and nothing happened. (that's not quite true: JPM, Goldman and Blackrock all made it quite clear European money markets are now officially dead). However, as the following empirical analysis from Credit Suisse shows, the "Einhorn" chart is not just a conversation piece at cocktail parties: there is an actual trade pattern which has made traders lots of money, and which makes Eurocrats the best friends of not only Belgian caterers, but short-sellers everywhere: go long into a summit when the clueless algos read headlines and send risk soaring, only to short the inevitable fizzles days if not hours later.

More of the same is not working, and it just may require lower equity prices for investors to get what they really wish for.

One of the few things that we do know - for certain - about the future is that actions have consequences. In the world studied by the physical sciences of inanimate matter, it is possible to predict the future with certainty. That is because the entities being studied ARE inanimate. They have no power to initiate an action so they have no power to vary their reaction to a force which is applied to them. In the field of the study of HUMAN action, the situation is fundamentally different. No “stimulus” will ever produce the same response on entities which have the power of thought and the power of choice.

In summary, this is how Germans feel about continued ongoing bailouts of Germany's liquid(ity) crack-addicted neighbors:

In simple terms, we’re getting many signals that the US economy may in fact be slipping into a second recession in the context of a greater DE-pression.

What's in the "Print" today? Not these issues.

Big Banks Are Rotten to the Core

Just when you thought the debt issue had reached its peak, the United Nations has come knocking on the door with their hand out.

A generation of market participants has grown up knowing only the era of central bankers and the 'Great Moderation' of (most of) the last two decades elevated their status significantly. While central bankers are generally very well aware of the limits of their own power, financial markets seem inclined to overstress the direct scope of monetary policy in the real world.

If markets fall, investors need only to run to central bankers, and Ben Bernanke and his ilk will put on a sticking plaster and offer a liquidity lollipop to the investment community for being such brave little soldiers in the face of adversity

Monetary policy impacts the real economy because it is transmitted to the real economy through the money transmission mechanism. This has become particularly important in the current environment, where, as UBS' Paul Donovan notes, some aspects of that transmission mechanism have become damaged in some economies. Simplifying the monetary transmission mechanism into four very broad categories: the cost of capital; the willingness to lend; the willingness to save; and the foreign exchange rate; UBS finds strains in each that negate some or all of a central bank's stimulus efforts. In the current climate, it may well be that the state of the monetary transmission mechanism is even more important than monetary policy decisions themselves. Some monetary policy makers may be at the limits of their influence.

While not being cool enough to warrant instant-QE, the June employment report reinforced the sense that US growth has slowed further and that the labor market recovery remains sluggish. Besides the underwhelming employment report, this week’s releases offered more signs of slowing in the US manufacturing sector. The ISM manufacturing index falling below the symbolic 50 threshold for the first time since JUL09 and hard data on manufacturing activity, such as factory orders, have also cooled. Goldman's Zach Pandl notes that deteriorating external (Europe and China) demand is likely one factor behind the slowdown (with ISM new export orders index -11.5 points between APR and JUN) but suspects domestic factors could be at work as well. In particular, the slower growth in the US manufacturing sector could simply be that activity has already rebounded substantially since the recession (dominated by the channel-stuffing, China-dependent Autos sector). If the relatively fast growth in the manufacturing sector over the last few years reflected a “catch-up” from exceptional weakness in 2008-09, then this tailwind should gradually diminish and this led them to lower their Q2 GDP estimate to +1.5% as we face another sluggish summer.

All 3 Libor Arguments Fail