Archive - Sep 2012

"Do not play with the feelings of the Catalans" is the totally unveiled threat after Catalonia's beggars-can-be-choosers demand for an unconditional bailout fell on deaf ears. The traditionally separatist-minded province has decided, according to ANSAmed, has decided to pull a Greece - and escalate with a move to secession. A resolution, on the right of the Catalan people to cut off ties with the Spanish state, will be voted on Thursday by the regional parliament. This statement of "the will of Catalan people to vote on the bond with the State of Spain" opens the way for forthcoming elections on November 25 to become a referendum on the sovereignty of Catalonia. The Spanish military are not taking this lying down with the counter-threat that these 'separatists' and their 'inappropriate and unacceptable' threat to break-up Spain shall be, according to El Economista, charged with high treason. We are sure Draghi has a 'grand plan' for this.

As we noted on several occasions in the past ten days, as a result of QE3 and its imminent transformation to QE4, which will merely be the current monetization configuration but without the sterilization of new long-term bond purchases, the Fed's balance sheet is expected to grow by over $2 trillion in the next two years. This also means that the matched liability on the Fed's balance sheet, reserves and deposits, will grow by a like amount. So far so good. However, as Bank of America points out today, there may be a small glitch: as a reminder on December 31, 2012 expires the FDIC's unlimited insurance on noninterest-bearing transaction accounts at which point it will revert back to $250,000. Currently there is about $1.6 trillion in deposits that fall under this umbrella, or essentially the entire amount in new deposit liabilities that will have to be created as a result of QEternity. The question is what those account holders will do, and how will the exit of deposits, once those holding them realize they no longer are government credit risk and instead are unsecured bank credit risk, impact the need to ramp up deposit building. One very possible consequence: negative bill rates as far as the eye can see.

It is always amazing to observe how people become less risk averse after risk has markedly increased and more risk averse after it has markedly decreased. The stock market is held to be 'safe' after it has risen for many weeks or months, while it is considered 'risky' after it has declined. The bigger the rally, the safer the waters are deemed to be, and the opposite holds for declines. One term that is associated in peoples' minds with rising prices is 'certainty'. For some reason, rising prices are held to indicate a more 'certain' future, which one can look forward to with more 'confidence'. 'Uncertainty' by contrast is associated with downside volatility in stocks. In reality, the future is always uncertain. Most people seem to regard accidental participation in a bull market cycle with as a kind of guarantee of a bright future, when all that really happened is that they got temporarily lucky. Perma-bullish analysts like Laszlo Birinyi or Abby Joseph Cohen can be sure that they will be right 66% of the time by simply staying bullish no matter what happens. This utter disregard of the risk-reward equation can occasionally lead to costly experiences for their followers when the markets decline.

All we can say is that the need for the Derek Zoolander Center For Kids Who Can't Read Good And Wanna Learn To Do Other Stuff Good Too has never been greater. At least the data below explains why the Chairsatan will soon monetize SAT scores and his infatuation with morer, greaterest QEternity+1...

Never try to teach a pig to sing, advised Robert Heinlein. It wastes your time and it annoys the pig. Similarly, never try to convince a central banker that his policies are destructive. After five years of enduring crisis, market prices are no longer determined by the considered assessment of independent investors acting rationally (if indeed they ever were), but simply by expectations of further monetary stimulus. So far, those expectations have not been disappointed. The Fed, the ECB and lately even the BoJ have gone “all- in” in their fight to ensure that after a grotesque explosion in credit, insolvent governments and private sector banks will be defended to the very last taxpayer. Conventional wisdom is that such moves are justified during this period of economic slowdown, as everyone agrees that the market is ’deleveraging’.  But as the consistently excellent Doug Noland points out, this idea of deleveraging (i.e. reduction of available credit) in the US is a myth.

In a little under four minutes, CNBC's Gary Kaminsky provides a voice of reason amid the 'Gold-and-Bonds-are-in-a-bubble-but-Apple-is-awesome' meme. Reflecting on some of the mind-blowingly crazy statistics of this market's recent inexorable rise, central bank balance sheet eruptions, and valuations; Kaminsky (an ex-PM as opposed to 'reporter') provides six clarifying words: "We know this will end ugly!" From the lack of credibility of any Fed exit, to the explosion of the monetary base, Gary moves back and forth from Japan as an ever-more-obvious template for our path past the Keynesian endpoint. Finally, he concludes that: "Bernanke is a kamikaze pilot... experimenting [in monetary policy] and is destined to fail."

Uninspiring day. Light ROff, but nothing major.

In absence of hard data, subject to rumours and sentiment. 

Rainy.

Global economic fundamentals are awful, bearish divergences are occurring everywhere, investor sentiment is nearing bullish extremes, political risks remain high and last week's market performance can be summed up in four words - 'lack of follow through'. As Gluskin Sheff's David Rosenberg explains, more than two-thirds of the rally points the stock market has enjoyed since the summer-time lows occurred around central bank policy announcements. So the market is really a one-trick pony here, breathing in the fumes of central bank liquidity. What was supposed to happen, as the elites told us, was that the lagging hedge funds were going to throw in the towel and chase this market. Everyone expects this to be a major source of buying power. At the same time, what if the bulls who lucked out this year because they hung onto Ben Bernanke's arm decide to take profits or at the least lock in their gains? CRitically, as Rosie details, QE3 is occurring at a different point in the cycle this time and insomuch as it helps invogorate already rising 'animal spirits' we suspect it has missed the baot.

Meanwhile, pretty much all of Europe is in recession now, including Germany. True, the ESM bailout fund has been ratified… but the question remains who actually has funds to support it (Spain and Italy are meant to supply 30% of its funding… and they’re the ones who will be requesting a bailout!).

While the stock market in the US continues to surge (if not so much in China where the composite is back to 2009 lows) as the relentless liquidity tsunami makes its way into stocks, and other Fed frontrunning instruments, and only there, reality for everyone else refuses to wait. Last week we saw reality striking in Greece, where a section of Athens literally shut down after it ran out of all cash. Today, reality comes to the US, and specifically its poorest city, Camden, which is a twofer, doubling down also as America's deadliest city. It turns out Camden is about to become even deadliest-er, as its police force is set to be disbanded following a budget crisis in this effectively insolvent city.

"We have decided to focus on return... we need a certain level of return no matter how the market condition is" is how the general manager of Japan's Teachers' Mutual Aid pension fund justifies their plan to push JPY100bn (of their JPY600bn) into riskier assets from J-REITs to hedge funds. As Bloomberg notes, the firm is adopting a new strategy designed to counter a decline in the value of traditional equity and bond asset classes. Notably, following last week's Illinois pension-fund target return markdown, the Japanese fund targets only 3-5% thanks to QE8 and two decades of repression and stumble through. Even achieving these targets means throwing out the 'risk' side of the equation as they push into foreign bonds (cue next European sovereign bond rumor) and chase momentum in Tokyo real estate (TSEREIT up 19% YTD). Haven't we seen this picture before - and it didn't end well?

In a system that depends on lies and the credulity of the citizenry, the greatest lie is that the Federal Reserve's "quantitative easing" bailouts of the banks somehow help our citizens and communities. To clarify this, ask yourself this question: what else could we have bought with the $29 trillion the Fed loaned or backstopped to the banks?  If you enjoy quibbling about the total sum of Fed support, be my guest; the Levy Institute came up with $29 trillion after poring over all the data, while the Government Accountability Office’s (GAO) tally topped $16 trillion. That's 100% of the nation's GDP and roughly 100% of the $16 trillion national debt. While we're asking about opportunity costs, let's ask what else we could have bought with the $10 trillion that the Federal government has borrowed and blown in the past 11.7 years. The national debt was $5.727 trillion when G.W. Bush was sworn into office on January 20, 2001. It had risen to $10.626 trillion when President Obama was sworn into office in January, 2009. It is now $16.016 trillion, an increase of $5 trillion in less than four years in "debt held by the public" (i.e. the Chinese central bank, the Japanese central bank, the Federal Reserve, etc.)

Curious what geopolitical developments traders are looking at? Here is a complete summary, in under 30 seconds, courtesy of the Chairman of the Fermentation committee.

In the spirit of the European Bank Stress Tests and in the continuum of the Ring around the Rosie concocted by Brussels we are about to be handed another slew of numbers that will show that Spain is fine, prospering and running along just with no difficulties at all; thank you. This data is being prepared by the German firm Oliver Wyman, the German consulting firm. You may recall that we were supposed to have audited financials by the end of September, which was promised by Spain, however that was apparently canceled and there is no such audit underway. So much for the promises of Spain. We can tell you now, with surety, that the evaluation that we will be handed by Oliver Wyman will have all of the value of the paper found in the 'banos' of any restaurant in Madrid.

Shortly after posting the latest "balance sheet" of the US consumer we received requests to show how this looks in a global context, in other words, what do the balance sheets of the global households outside of the US look like. We show what this look like below, courtesy of the Bank of Japan, which presents the distribution of household financial assets in context then (5 years ago) and now. It also shows why whereas to Joe Sixpack the level of the S&P is the most important, with 32% of total assets in stocks, in Japan and in Europe, the average person could not care less where the stock market is, with just 6.5% and 14.7% of assets held in equities. The US E-Trade baby: keeping the Ponzi dream alive.