Archive - Mar 30, 2013

I to want you to take you, to Funky Bunny Town...

We have shown the endless hockey-stick-like charts of hope that are the coming margin expansion, dramatic earnings growth, and revenue increases (all juxtaposed against the reality of a labor-destroying cost-cutting and growth-disabled global economy) but perhaps nowhere is the 'hope' in the US more evident when compared to the rest of the world. Around the world, analysts and strategists are comfortable marking down expectations for British, European, Asian, and Emerging Market nations but not the good ol' USofA. We cannot help but believe that while momentum in US equity markets dominates all sense and rationality, it would appear the US will struggle to realize these 'hopeful' expectations if the rest of the world is collapsing... unless of course, Mars does indeed start importing Fords and GMs.

Amidst the debacles, fiascos, and nightmares is a scrappy industry that uses ingenuity and the right amount of hops to beat Wall-Street-engineered giants.

The sound and fury of a European leadership denying the template-nature of Cyprus was deafening last week following D-Boom's comments and while we suspect the Cyprus deal was from unique and exceptional, it is clear, as Citi's Matt King notes that Cyprus’ significance was always going to stem more from the precedent it created than from its size. In choosing a relatively conventional good bank, bad bank model, the authorities have done much to alleviate the damage that would have been caused by an arbitrary tax on uninsured depositors. But the very “success” of the solution now being adopted seems likely to lead to its replication elsewhere. While arguably good news for the sovereigns and for longer-term growth prospects (though the chasm to be crossed to that growth is treacherous), its negative repercussions for senior bank bondholders still seem far from being priced in. The Cyprus model has three key features, which highlight the effective elimination of many of bondholders’ supposed protections: hasty implementation under national legislation, application to all bonds by statute, and extremely low recoveries. Against this, of course, is the argument - noisily voiced by the authorities - that Cyprus is unique. We, like King, disagree.

"The world is a very risky place right now for an investor," is the cautious manner in which Grant Williams (of Things That Make You Go Hhmm infamy) begins this excellent presentation, even though he notes that "the general perception is that there is very little risk," as all markets from equities to bonds (and even risk itself) are priced as though 2007/8 never happened. It appears, Williams notes, given the market's perceptions that, "all the problems are behind us." He chides, "Nothing could be further from the truth." Williams focuses on the corruption of traditional price signals by Central Banks' ZIRP (and LSAP) policies, financial repression, and the possibility that the gold leasing market is about to fall apart - because one of these days, someone is going to ask for their gold back and be told they can't have it.

Elon Musk - "megalomanical promoter". Ben Bernake - "befuddled academic". Janet Yellen - "career policy apparatchik". Paul Krugman - "fibber". Fred Mishkin - "preposterous".

Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe's profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that 'stabilitee' based on one nation's shoulders, the following chart suggests Europe's Atlas is about to shrug. For the last six months, non-German Europe has seen its economies collapse with PMI New Orders pushing new lows now - after some brief episode of hope at the start of the year. Germany, in the meantime has been surging back as expectations of recovery have led sentiment higher and hopes for a European green shoot renaissance. That is until recently. In the last month, Germany's economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the 'financial' economy), Europe is back in the crosshairs.

It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not 'safe' places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, 'hide-the-truth'-like statement on Monte dei Paschi's website, the CEO admits to, "the withdrawal of several billion in deposits." Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on "reputational damage" from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank's third bailout, and that the prior two bailouts did not result in such an outflow of unsecured liabilities (at least not to the public's knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March. Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013; no wonder given the bank just doubled its expectations for bad loans and the 'Cypriot Solution' dangling over uninsured depositor hordes.

There are many lessons and implications from the Cypriot crisis (we list 25 here). Among the most important is that conditionality is back, energetically, which is very important when considering the circumstances under which other, bigger, countries might access ESM or OMT. We believe, like BNP's James Mortimer-Lee, that the market has been too complacent, seeing OMT and “whatever it takes” as unconditional – that’s wrong. A second lesson is that a harsher line is being taken by the core. This partly reflects more effective firewalls, so that core countries are more willing to “burn” the private sector, where doing so does not represent a serious systemic risk. Cyprus may not be a template, but we have seen enough to glimpse what the new pan eurozone bank resolution system could look like. Risk for certain classes of stakeholders in banks has risen. We are a long way from seeing the eurozone crisis resolved.

A few days ago, when news hit that Cyprus has begun investigating who the people were who had managed to pull cash out of nation's insolvent banks, both during the capital control "blackout" period and previously, we asked "how much longer will the rule of law remain in Cyprus once full blown class warfare is unleashed, and the 99% are generously handed the list of the 1% who were "informed" enough to pull their money from the flaming sovereign equivalent of Bernie Madoff, while every other uninsured depositor is facing losses of up to 80%, and soon 100%?" We may get the answer much sooner than expected, as the first iteration of this list: one naming the beneficiaries of millions of loans written off by the now insolvent Cyprus banks and therefore indirectly responsible for the "impairment" of the banks' depositors, was released yesterday by Greece's daily Ethnos newspaper. But what virtually assures substantial political fallout is that among the people listed is Cyprus' former president, George Vassiliou.

With aggressive monetary easing policies now being pursued in almost every major Developed Market economy, the world has clearly been pushed into a "currency war" and while this term was 'coined' by Brazil's Guido Mantega in 2010, the last 200 years or so are rife with different exchange rate regimes, all of which ended in currency crises shaping the next regime. The following chart shows these crises and regimes and given the current 'non-cooperative way forward', global preferences for a weaker currency will do nothing but generate more instability in FX markets as the fight against deflation flares everywhere.

Was the Real Purpose of the Iraq War to Restrict Oil ... So As to Raise Oil Prices?

Suddenly it should be dawning on a lot of Europeans that deposit-guarantee limits matter. In Slovenia, the maximum is 100,000 euros per depositor, the same as in Cyprus. (Deposit- insurance programs vary among the 17 countries that use the euro.) For a few days last week, it looked as if customers at Laiki and Bank of Cyprus would lose even some of their insured deposits, which would have been a sacrilege. That plan was scrapped, but could resurface elsewhere for all we know should some genius at the German Finance Ministry insist upon it. The one constant among bailouts of euro-area countries is that there is no rhyme or reason, much less fairness, in the way many details get worked out... So far, there have been no signs of a mass exodus in countries such as Italy or Spain. But deposit migrations can happen slowly, with lots of time passing before they appear in official statistics. Or maybe little will change and most bank customers will go on believing “it can’t happen here,” until one day it does.

The smart money is selling Hong Kong and Singapore property. This implies real estate prices may be topping out, with far-reaching consequences.

It's not just Cyprus, and no - it's not just Canada either. I'm preparing a list of specific banks that I have 1st hand knowledge that would prevent me from keeping my money in them. Get "Cyprus'd"!!!