Archive - Mar 2013

Well, that was a fun day, eh? Spills and thrills the whole day long.

Importantly, it’s the end of the quarter and performance bonuses are on the line. So any excuse to rally is built in to conditions.

It was only yesterday that we wrote about comparable problems to those which Russian depositors may (or may not be?) suffering in Cyprus right, this time impacting wealthy Americans and their Swiss bank accounts, where as a result of unprecedented DOJ pressure the local banks will soon breach all client confidentiality and expose all US citizens who still have cash in the former tax haven under the assumption that they are all tax evaders and violators. And in the continuum of creeping wealth taxes which first started in Switzerland, then Cyprus, and soon who knows where else, there was just one question: "The question then is: how many of the oligarchs, Russian or otherwise, who avoided a complete wipe out and total capital controls in Cyprus, will wait to find out if the same fate will befall them in Switzerland? Or Luxembourg? Or Lichtenstein? Or Singapore?" Today we got the answer, and yes it was one of the abovementioned usual suspects. The winner is.... Lichtenstein.

Presented with little comment but to note the somewhat exponential exuberance in US cyclical stocks (relative to defensives) that has gradually accelerated since the Fed launched QE3. If ever there was a chart of 'hope' or 'faith', this is it.

Through the centuries – in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today's United States, whose Dollar fiat currency exists primarily in digital form – "money" is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange). But what happens when a society starts doubting the value of its money?  Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face. Unlikely. The reality is, the Federal Reserve is like any other organization. Human. And fallible. For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; we humbly ask you to watch the following...

Overview of implications and consequences of Cyprus 2.0.

Yesterday, we first reported on something very disturbing (at least to Cyprus' citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidated banks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash. Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.  As it turns out, the Russian oligrachs this whole operation was geared to punish, may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

When it comes to popular finance myths, cash hoarding by corporates may be one of the most perpetuated. It's not that the data is wrong; US companies are holding more cash on their balance sheets than at any time in the past, as a report by Moody's this week notes. What's misguided is the narrative, in Citi's view, in particular among equity investors. What they most take issue with is the implication that corporates have lots of cash to return to shareholders. Indeed, there's plenty of data to the contrary that challenges the prevailing notion that corporates are the picture of good health.

It was so easy. Of course they'd save Cyprus somehow and we could all go back to business as usual - and sure enough that's how we opened, stocks at highs, VIX banging lows, bond yields grabbed higher, but behind the scenes a few things were not playing along (US and EU bank equity and credit for one). 1 point from S&P 500 highs. Then #DieselBoom uttered that word - 'template' - and all was let loose as the realization that risk existed suddenly flooded back into investors' minds. S&P 500 futures dropped over 20 points high to low (with downward volume very heavy), when Jeroen tried to jawbone his statement back we dribbled back up to VWAP but couldn't break it and from there (despite spurious JPY-based headlines once again), risk-on assets drifted to the lows. As carry trades were lifted (and everyone shied away from EUR) so JPY jerked 1.4% higher (and fell back a little into the close) but against every thing else the USD was bid. Treasuries banged back to the low yields of last week and despite USD strength, Oil ended above $94.50 as Copper fell 0.5% and Gold and Silver bounced from an earlier spike lower. VIX opened under 12.5%, soared back over 14.5%, and closed +0.25vols at 13.8%. Meanwhile, the big banks in the US are -7% from Cyprus and still expensive to credit.

In the aftermath of this weekend's earth-shattering developments out of Cyprus, in which countless people lost billions in savings, having forgotten their money is nothing more (or less) than a general unsecured liability of an insolvent banking sector which in the absence of the Bernanke and Draghi moral hazard-put are simply easy confiscation targets, it is difficult to conceive that having a massive surplus of deposits was actually a good thing. Ironically, this was precisely the case as recently as 10 months ago, as this May 2012 presentation from the Bank of Cyprus titled "International Banking Services: Strategic Business Crossroad - A Reliable Financial Center" (don't laugh) makes all too clear.

Like Lehman Brothers before it, Cyprus may well come to be seen not so much as the cause of further crisis but as yet another symptom of the ‘long emergency’ that continues to suffocate the western economies. We would describe this emergency as, fundamentally, an inevitable crisis triggered by an unsustainable explosion of credit; western banks and western governments are now like Macbeth’s “…two spent swimmers, that do cling together / And choke their art.” The prime minister of Luxembourg, Jean-Claude Juncker, has provided two clear insights into this world of deceit: “We all know what to do, we just don’t know how to get re-elected after we have done it.” And, “When it becomes serious, you have to lie.” This is what we now have by way of government: a self-serving elite who cannot be trusted, operating to a timetable defined by, and limited to, the electoral cycle.

With stocks holding near all-time highs, exhibiting similar fear-and-greed driven ebbs and flows (more flow than ebb for now), we thought these three charts would provide some interesting analogs. As Citi's Tom Fitzpatrick notes, the current charts for Gold, The USD Index, and USDJPY have some intriguing similarities to (respectively) 2006/7, 1996/7, and 2000/1. If history rhymes, it appears it is time to buy Gold, buy the USD, and prepare for a hiatus in JPY's collapse. With the USD, it is perhaps worth noting that both the (similar) 1981 and 1997 periods followed housing/credit/banking crises. In both instances the Fed eased rates and kept them too low for too long….in the 70’s period leading to a stagflationary environment.

* * * Cue to Diesel-Boom, sitting in his desk, phone ringing: Ring Ring Ring * * *

Diesel-BOOM: "Hello.... Oh Hi Goldman, how are the tentacles hang.."

* * * Interrupted... screaming heard in earpiece * * *

Diesel-BOOM: "You want me to do what... You want me to RETRACT an on the record interview with two major publications... But...But..."

* * * Interrupted again... Long silence... listening intently.... Beads of sweat forming on forehead * * *

Diesel-BOOM: "Oh.... Dear Lord.... I see.... Ok Then.... Done."

* * * Click, fade to black * * *

That thing Diesel-BOOM very, very clearly said earlier? He did not say it. After all, can't have the market getting any ideas that reality may be slowly coming back to the basket case that is Europe:

• EU DIJSSELBLOEM SPOKESWOMAN: DIJSSELBLOEM DIDN'T SAY CYPRUS A TEMPLATE FOR BANK RESTRUCTURINGS - DOW JONES

So not only are European depositors still impairable, because sadly Dijsselbloem was dead serious in his Reuters interview, but the new Eurogroup head pulled a Juncker and confirmed "it is serious" in the process losing all credibility too.

In other words, the ECB’s balance sheet, which backs up the entire EU banking system it essentially a work of fiction. Unless the ECB officials feel like admitting something is an asset or liability, it doesn’t exist.