Archive - Mar 2013

When the market briefly surged yesterday, following the cryptic note from the ECB that it would "provide liquidity within existing rules" we urged to ignore the kneejerk algorithmic exuberance (although with only algos left trading that was obviously self-defeating) which interpreted this as an indication the ECB would provide unconditional liquidity now and forever, and that this was hardly a bullish sign because "the last thing the ECB wants is to appear weak, and fold letting every other broke deadbeat country to demand the same equitable treatment and diluting Germany's political might." Today, Reuters has picked up on this coming out with its own analysis that the "The European Central Bank is prepared to cut off funding to Cyprus and let the Mediterranean island succumb to financial meltdown if it has to, confident it has unlimited firepower to protect the rest of the euro zone."

The shorter FOMC preview: the green smoke rising from the Marriner Eccles building is not because a new Fed pope was picked. For the longer FOMC preview: here is Goldman Sachs...

There is a lot of strangeness out there today - though that in itself is not so strange anymore. Spanish and Italian (and Portuguese) bond spreads rallied back to only +12bps on the week (but Spain's equity market is rolling over (down 2.5%) into the close. The S&P, Dow, and Nasdaq are all pushing unchanged on the week (ignoring Cyprus) but the Dow Transports is plunging (as FedEx is smashed lower on the biggest volume in 6 months). 2Y Swiss rates have dropped to their most negative in 2 months as safety is chased and we suspect the EUR strength (a 100 pip pop on yesterday's US close) is much more repatriation flows than risk-on confidence flows. US homebuilders are bid (+2.2% on the week) as hope springs eternal for high-beta chasing and a UK housing bailout. European credit markets have not recovered from Cyprus, while stocks... have.

Lightening does not strike twice in the same place very often, especially in Washington.

The following Wall Street Journal article deserves to be read in its entirety...

Wearing the disguise of austerity, the euro has emerged as the gatekeeper of what is fast becoming a debtors’ prison.

Monetary union, the vehicle to bring about peace and prosperity, has become the lash that tears at the fabric of the poorest of nations. In the case of Cyprus, it could easily push that nation into the arms of Russia and abandonment of the euro - the exact opposite result of what the single currency was designed to do.

Meet the Troika Follies!

We can only hope that nobody will be shocked that the greatly overhyped Friday Cyprus bank reopen has been postponed.

• CYPRUS BANKS EXPECTED TO REMAIN CLOSED THROUGH END OF WEEK:CYBC

And since March 25, Monday, is another Cyprus bank holiday, "Greek Independence Day" (from whom? Certainly not the Troika), it means Cypriot banks will now remain closed at least until next Tuesday and likely far longer. In the meantime, since TV cameras can't show lines of people at their freindly neighborhood bank, which will have been closed for over a week, the propaganda machine will blast full bore how because the market is pushed higher by the Fed, any fears of bank runs can be forgotten. Actually instead of "can", replace with "must."

These photos illustrate the fundamentally arbitrary nature of fiat (paper) money. Why do we prefer the $100 greenback over the $100 trillion note issued by the Reserve Bank of Zimbabwe? The purchasing power of the Benjamin far exceeds the purchasing power of the $100 trillion bill. But the Benjamin is not immune to inflation; the dollar has lost about 95% of its 1900 purchasing power.  If 95% of households are experiencing a loss of purchasing power and most of the new money and credit are flowing to the top 5%, you get asset bubbles, not demand-driven inflation. When 95% of the households are poorer in terms of purchasing power and financial wealth, where can demand-driven inflation arise in a global economy of massive manufacturing and labor over-capacity? The rise in costs within industries controlled by cartels (healthcare, higher education, defense, etc.) may look like demand-driven inflation, but are actually transfers of wealth and purchasing power from households to the government-protected cartels.

Oh wait... Nevermind

In the last two days, Spot Copper prices have broken below a three-year up-trend line and as Stone McCarthy notes, continue to extend their worrisome divergence from stocks, "this has been one of the primary pieces of evidence [they've] been using to make [their] case that the U.S. equity market is in the final stages of an impulsive rally off of the November '12 lows." They go on to note that, "Due to the fact that copper so closely measures the "pulse" of global economic activity, the tendency for copper to lead equities at market tops and bottoms is something we've covered many times in our writings over the years. This time around, unprecedented efforts to stimulate the domestic economy have left many uninformed investors blind to the weakness that is being experienced in what is seen an important engine of global growth, emerging markets." Every market cycle is different, with leading divergences by copper prices lasting anywhere from a couple of months to several years. The last time the divergence between copper prices and the S&P 500 was as long lasting as the current cycle was prior to the S&P's 2007 price top...

Yesterday, at the close, the most lucrative "strategist" in the history of FX, Goldman's Tom Stolper, moments after he was closed out on his EURGBP long reco with a 2.8% loss in one week, came out with a new note, refuting his previous long-held view that in the long run the EURUSD is going much higher, specifically saying the following: "Once again we face rapidly rising uncertainty with regards to the next leg in the never-ending Eurozone crisis. Many of the features, including the unpredictability of the next headline during the final days of a bailout negotiation have been seen before, many times in fact. Short EUR positioning is not stretched yet and the EUR still looks like the natural hedge in case the situation in Europe derails more systemically. Although EUR/$ implied volatility has risen, it remains at levels that are well below those seen in past periods of stress, so options are not prohibitively expensive. The Euro has already responded and this move has pushed us beyond the stop loss in our long EUR/GBP recommendation. Moreover very near-term risks are once again skewed to the downside and a move to EUR/$ 1.25 or even lower remains entirely possible depending on the progression of the negotiations and the flow of headlines. The lack of clear majorities in the Italian parliament and the inability of the Greek government to deliver the agreed reduction in public sector payrolls all add to tactical downside risks here." We promptly took the hint and the second the note hit the tape, we advised on what is the only logical trade.

The simple fact remains that politicians proposed stealing savings deposits from the people in order to fund a bank bailout. You can dress this idea up however you like, calling it a “levy” or “tax” but taking someone’s personal property without their permission is theft plain and simple.

It is not just that there is a monetary union without a fiscal union, but European monetary union itself is incomplete.

We present readers with a pop quiz: the chart below show the ratio of total financial assets to host nation GDP. The tragic cases of Cyprus and Iceland are well-known, as per Reuters, and highlighted on the chart. We urge readers to guess what the supposedly very stable countries X and Y are on the chart, whose total financial system assets to GDP are approaching those of Cyprus, especially since depositors in their banking systems may be due for a very unpleasant surprise next if indeed Iceland and now Cyprus are the case studies.

As part of its 2013 budget, the UK announced something quite dramatic - a government-funded housing subsidy. The government will to commit GBP 3.5 billion of capital spending over the next three years to shared equity loans. The Loans will be up to 20% of the value of a new-build home. The government will also offer mortgage guarantee to lenders to help them provide more loans to people who can’t afford big deposits. Guarantees will be sufficient to support GBP130b of mortgages, Osborne says. "These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending,” Osborne says.