Archive - 2012

In his typical forthright manner, the moustachioed maestro appeared on Bloomberg TV today discussing Europe's crisis and the US economy. While we (ZH) wonder what (or who) the 'we' El-Erian is speaking for, he notes that the Fed "doesn't have enough policy instruments to deal with the challenges facing the economy" and that QE3 will not work (a possibility we discussed last week). From investing in a fat-tailed environment to the Fed's liquidity trap and why Europe needs to 'refound' the euro-zone, his fragile hope is that crises remain 'contained' yet prefers the USD's 'safety' for now and worries on the US stocks 'cleanest dirty shirt' bullish argument, suggesting defense is the better play currently.

Ben Bernanke's zero-interest rate policy (ZIRP) and command-economy efforts to maintain mispricing of risk, debt and assets are destroying capital and capitalism. No wonder his policies have failed so miserably. Bernanke's policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market's discipline and transparent pricing of risk, debt and assets, Bernanke has explicitly set out to re-inflate a destructive, massively unproductive credit bubble. This is why Bernanke has failed so completely, and why he will continue to fail. He is not engaged in capitalism, he is engaged in the destruction of capital, investment discipline and the open pricing of risk, debt and assets.

Against this highly deflationary backdrop, the one primary prop for the markets is hope of more juice/credit from the world Central Banks. However, even that prop is losing its strength: the gains of the last coordinated Central Bank intervention lasted just a few weeks.

As Greek standards of living nose-dive, loans to households and businesses shrink still further, and Troika-imposed PSI discussions continue, there is one segment of the country's infrastructure that is holding up well. In a story on Zeit Online, the details of the multi-billion Euro new arms contracts are exposed as the European reach-around would be complete with IMF (US) and Europe-provided Greek bailout cash doing a full-circle into American Apache helicopters, French frigates, and German U-Boats. As the unnamed source in the article notes: "If Greece gets paid in March the next tranche of funding (€ 80 billion is expected), there is a real opportunity to conclude new arms contracts." With the country's doctors only treating emergencies, bus drivers on strike, and a dire lack of school textbooks and the country teetering on the brink of Drachmatization, perhaps our previous concerns over military coups was not so far-fetched as after the Portuguese (another obviously stressed nation), the Greeks are the largest buyers of German war weapons.  It seems debt crisis talks perhaps had more quid pro quo than many expected as Euro Fighter commitments were also discussed and Greek foreign minister Droutsas points out:"Whether we like it or not, Greece is obliged to have a strong military".

Poor, poor Federal Reserve.

While nearly three months after the MF Global bankruptcy nobody still has any idea where the billion + in commingled client money has gone, nor why Corzine is still out and about walking freely, the former CEO of both Goldman, MF Global and New Jersey is rumored to be looking for office space at 40 Wall. Reports the WSJ: " Jon S. Corzine, who resigned as chief executive of MF Global Holdings Ltd. shortly after the securities firm collapsed in October, recently has been looking for office space in Manhattan, according to people familiar with the situation. One of the locations he seems interested in: brokerage firm John Carris Investments, at 40 Wall St., around the corner from the New York Stock Exchange, these people said. Employees at the small firm have been told that the former Goldman Sachs Group Inc. chairman and New Jersey governor might drop by, one person familiar with the situation said." Ostensibly, the space would be in the form of a sublet from John Carris. Which is great: finally all those thousands of people who still have no recourse to their cash will know precisely where to find Jon and express their gratitude and his pillaging of their investments in a failed attempt to cover up his stupidity.

10Y Italian bonds (BTPs) ended the day at their second-widest closing spread to Bunds ever (at 533bps). Only November 9th saw a wider closing print and of course we saw margin hikes at LCH CC&G. 10Y yields are at 7.16%, their highest since just after Thanksgiving but we do note that 2Y yields have stabilized at around 5.00% yields (having peaked near 8% during thin Thanksgiving trading). It seems apparent that perhaps traders front-running LTRO's impact have compressed the 2s10s term structure but much clearer to us is Mr. Market's obvious desire for more money-printing now as BTPs are pushed to unsustainable levels once again - and the banking-to-sovereign vicious circle transmission of insolvency cranks up.

While headlines are reeling with the almost-50% drop (and 8 halts today alone!) in UniCredit's stock price since the start of the year (as it tried and 'succeeded' to raise capital from clearly risk-averse investors), the rest of the Italian banking sector is now 'crashing'. With bank stocks down 12-20% year to date across the board, the clear fear is that the cost of raising real equity capital (not finding some short-term funding crisis solution) remains extremely high and as we tweeted last week, if the EUR7.5bn capital raise caused a 40% sell-off in UniCredit, how is the market going to cope with the EUR115bn more that is needed? Good Luck.

While hardly news to those who have been following our coverage of the shadow banking system over the past two years, today Reuters has a curious angle on the European "repo" problem: namely, it appears that over the past several months the primary marginal source of cash in the ultra-short term secured market in Europe are not banks, the traditional "lender" of cash (for which banks receive a nominal interest payment in exchange for haircut, hopefully, collateral) but the companies themselves, which have inverted the flow of money and are now lending cash out to banks (with assorted collateral as a pledge - probably such as Italian and Greek bonds), cash which in turn makes its way to none other than the ECB (recall that as of today a record amount of cash was deposited by European "banks" with Mario Draghi). From Reuters: "Blue-chip names like Johnson & Johnson, Pfizer and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders. One source with knowledge of the so-called repo deals or short-term secured lending, said the two U.S. pharmaceutical groups and French carmaker were the latest to sign up for them." Which intuitively makes sense: as has been well known for years, companies are stuck holding on to record amounts of cash, although what has not been clear is why? Now we know, and it is precisely for this reason: corporate treasurers have known very well that sooner or later the deleveraging wave will leave banks cashless, and corporates themselves will have to become lenders of last resort, especially in a continent in which the central bank is still rather concerned about sparking inflationary concerns.

I'm not talking about Al Gore ... I'm talking about the guys who actually invented the Internet

A confirmation on this could come shortly. My thoughts if it should come to pass.

Just when we thought we may go through one full day without some escalation out of the greater Iran region, here comes the WSJ to inform us that Iran has decided to shove the MAD ball right back into America's court with news that Iran has sentenced alleged CIA spy, 28 year old Amir Hekmati, to death. "Amir Mirzaei Hekmati, born in Arizona to Iranian parents and raised in Michigan, was accused of Moharebe--or being the enemy of God-- the highest crime in Islamic law that carries the death penalty in countries where Sharia law is practiced. The prosecutor's indictment against Hekmati, read in court, said he was guilty of waging a war against God, spying on the Islamic Republic of Iran for the CIA and working for an enemy government, according to Iranian media reports." Needless to say, "the case, the first recent death penalty for an American in Iran, will likely increase tensions between the U.S. and Iran. The State Department has called for Iran to release Hekmati and give the Swiss embassy--the protectorate of U.S. interest in Iran--access to him." It appears Iran has decided not to proceed with those particular instructions.

Thrust upon a middle class bleary, they were plundered, while weak and weary, Over many a tainted and spurious document came a forger’s reward.

As many have been suspecting all along, the political game involving the ouster of now former SNB president Philipp Hildebrand has been nothing more than a game of "pin the tail on the scapegoat" for bad monetary policy by the SNB, read the EURCHF 1.20 peg. In other words, it is quite likely that alongside the burgeoning SNB balance sheet, the bank had also accumulated quite a few losses, which the Swiss public will not be too happy with, and a change at the top was required. So what happens next: will the SNB relent and allow the peg to expire as the scramble for a (now much more diluted) CHF resumes ahead of the European D-Day in March, or will the peg be forced to be pushed even higher, at the expense of even greater balance sheet losses? Here is what SocGen thinks will be the next steps.