Archive - Sep 1, 2012

The BOE's Andrew Haldane is shocked SHOCKED, that over the past 30 years banks have done nothing but baffle with bullshit; and he has something to say about it. Quite a bit to say about it in fact, in his latest missive entitled "The Dog and The Frisbee" which was presented at J-Hole today, as he looks at 'why less is more - except in finance where 'more is more'', 'ignorance is bliss', and most importantly, 'the costs of cognition'. His conclusion is the following very sensible statement... "Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity." ...and yet, coming from a central bank, we feel this statement may be a little disingenuous; because while fire and complexity apparently comply with logic and common sense (as far as not being able to fight it with itself), debt is in a category of its own.

September has arrived which means for Europe reality can, mercifully, return. First on the agenda: moments ago the French government suddenly announced the nationalization of troubled mortgage lender Credit Immobilier de France, which is also the country's second lagrest mortgage specialist after an attempt to find a buyer for the company failed. "To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee," Finance Minister Pierre Moscovici said according to Reuters. What he really meant was that in order to avoid a bank run following the realization that the housing crisis has finally come home, his boss, socialist Hollande, has decided to renege on his core campaign promise, and bail out an "evil, evil" bank. Sadly, while the nationalization was predicted by us long ago, the reality is that the French government waited too long with the sale, which prompted the Moody's downgrade of CIF by 3 notches earlier this week, which in turn was the catalyst that made any delay in the nationalization inevitable. The alternative: fears that one of the key players in the French mortgage house of cards was effectively insolvent would spread like wildfire, leading to disastrous consequences for the banking system. End result: congratulations France: your Fannie/Freddie-Dexia moment has finally arrived, and the score, naturally: bankers 1 - taxpayers 0.

In the lead up weekend to the RNC convention, Tampa, Florida was awash in political electricity. The ideal of democratic participation, the feeling of rejuvenation and community, joining the ranks of one’s ideological brethren to charge into intellectual combat for the future of our nation. Unfortunately, some were well aware that the Republican convention was a farce, and knew full well what the end result would be for the Ron Paul campaign. It has become clear that Benton and others have been “handling” Ron Paul for a considerable portion of his campaign and attempting to divorce him from the elements of the movement which are seen as “extreme” or anti-establishment, even though these are the same elements that catapulted Ron Paul into the minds of average Americans. Sadly, this is the ultimate weakness of the political ideal. The cold hard fact is; some men are not men.  Some men are monsters, and reason is the last thing that will ever sway them… All in all, it is not a bad time to be a champion of the Constitutional philosophy, and the existence of such a movement gives me enduring optimism.  I do not “think” we will prevail; I KNOW we will prevail. It is time to take matters into our own hands.

Only 17% of credit managers (real or leveraged) expect notable widening in spreads (a rise in risk) by year-end, according to Citigroup's most recent client survey. This increasingly extreme bullish sentiment seems dominated by the trend of inflows into real-money accounts (which have chased high-beta, high-yield, and peripheral exposure) whereas hedge funds have used this most recent rally to reduce exposure to the peripheral, notably limited their HY exposure, increased their leveraged loan (secured credit) positioning, and increased core exposure. There remains an over-arching belief that the trend in flows will continue and that these flows will dominate market movements - however, the divergence between European bank and high-yield credit exposures (real-money getting longer, leveraged money reducing/getting short) is as dramatic as it as ever been. The last time we saw such a bull/bear divergence between real- and leveraged-money was at the bottom in Q1 2009 (but that time real-money was short and hedgies were adding longs - and were right!) Although most will say "being bearish about September is so consensus", we doubt that many are positioned that way.

While many claim that inflation is at historic lows, those who spend a large share of their income on necessities might disagree. Inflation for those who spend a large proportion of their income on things like medical services, food, transport, clothing and energy never really went away. And that was also true during the mid 2000s — while headline inflation levels remained low, these numbers masked significant increases in necessities; certainly never to the extent of the 1970s, but not as slight as the CPI rate — pushed downward by deflation in things like consumer electronics imports from Asia — suggested. This biflationary (or polyflationary?) reality is totally ignored by a single CPI figure. To get a true comprehension of the shape of prices, we must look at a much broader set of data.

Facts, figures, lies and to many chiefs and not enough Indians...

We won't waste our readers' time with the details of all the 56 documented instances of hyperinflation in the modern, and not so modern, world. They can do so on their own by reading the attached CATO working paper by Hanke and Krus titled simply enough "World Hyperinflations." Those who do read it will discover the details of how it happened to be that in post World War 2 Hungary the equivalent daily inflation rate of 207%, the highest ever recorded, led to a price doubling every 15 hours, certainly one upping such well-known instance of CTRL-P abandon as Zimbabwe (24.7 hours) and Weimar Germany (a tortoise-like 3.70 days). This and much more. What we will point is that at no time in recorded history did a monetary regime end in "hyperdeflation." In fact there is not one hyperdeflationary episode of note. Although, we are quite certain, that virtually all of the 56 and counting hyperinflations in the world, were at one point borderline hyperdeflationary. All it took was central planner stupidity to get the table below, and a paper with the abovementioned title instead of "World Hyperdeflations." 

Just when all hope was gone that the market has lost all connection with newsflow, discounting, or fundamentals, and all that mattered was how loudly this or that head of printing could jaw(or finger)bone stocks up, here comes that patron saint of all contrarian indicators, the Barron's cover, and "Tough as Teflon." Or at least this was before central planning. Nowadays, every downtick is a catalyst to buy, as it has become a well known fact that even a 0.1% drop in the market is not only a catalyst for widespread panic, but also grounds for immediate promises of endless easing by any and all Goldman affiliated central banks (that would be all of them).

Several days ago we reported that Spanish financial institutions suffered the largest deposit outflow on record in the month of July when a whopping EUR74 billion, or 5% of the country's entire asset base, picked up and left, the bulk of it most likely taking the well-known path of least resistance to the safety of Swiss and German bank vaults. We showed how this looks visually, and as the chart below confirms it can be summarized in one word only: waterfall. And while in isolation this news was bad enough, a far more troubling implication arises when one considers that in Europe's financial Ice-9 world, in which the interbank market has been dead for over a year, and where the ECB is the shadow lender of only resort, providing funding via various repo channels to local banks to fund Spain's deficit by purchasing sovereign bonds in the primary market. To wit: since the entire financial system's liabilities (deposits) just declined by a record EUR74 in one month, since the consolidated balance sheet has to balance, either Spain's (thoroughly insolvent) banks had to generate EUR74 billion in shareholder equity in one month, i.e. profits - a prospect which is rather amusing considering Spain's banking system recently officially demanded a European bailout, or banks had to sell a like amount of assets in order to fund this outflow. Naturally, they chose the latter. The problem is that the security they sold is the one which only the banks have been buying recently in order to preserve the illusion that Spain is solvent. It was Spanish sovereign bonds.