Archive - Apr 5, 2013

The releveraging deleveraging continues. While US consumers barely dare to touch their credit cards, as they did in February when just $533 million in revolving consumer credit was added, they continue to take advantage of Federal largesse to take out student and car loans for the maximum amount possible, and as expected in February of the $18.1 billion in total credit taken out, a whopping 97% was non-revolving, or mostly student and GM loans (recall that now one can "finance" a car using their shotgun as collateral). To show just how dramatic the shift toward Uncle Sam as bank of only recourse for the US consumer has become, consider that in the past 12 months, of the $158.8 billion in total consumer credit issued, just $6 billion is credit card based. The remainder: debt that will never be repaid because those who take it out use it to finance such things as their education in vocational school (and iPads, tattoos, lap dances, semiautomatic guns and booze of course), as well as various GM cars that amortise by about 100% the second they are driven off the car lot.

You have your fear which might become reality; and you have Godzilla, which IS reality.--Godzilla 1954

Yesterday we reported that the conclusion of the MF Global Trustee's 124 page report is that the collapse of MF Global, and the illegal commingling of billions in customer funds which may or may not have been recovered yet from JPMorgan and others, was all Jon Corzine's fault. Of course, courtesy of his special rank in the Obama administration, Corzine will never go to jail: after all justice in the crony states of America is only for the little people - those who don't bundle millions for the president, and those who don't run Too Big To Prosecute banks, or both at the same time, get a get out of jail card (literally). So if he isn't in minimum security prison, where on earth is Mr. Corzine to be found these days? The WSJ answers.

For six months the Japanese jawboning has seen investors front-running the BoJ, selling JPY and buying whatever risk-asset is the most correlated that day - whether it is the Nikkei 225 or the S&P 500. However, now that words have been replaced by actions, it appears that someone (cough Japanese institutions cough) has decided the 13.4-sigma swing in JGBs last night is just too much and have rotated to US Treasuries. The selling of JPY and buying of EUR (to fund peripheral bond buying) and USD (to fund Treasury buying) is very clear. That means, implicitly, that every ramp higher in JPY (weaker JPY) is simply more bond-buying - which leaves the algos directionless.

In an environment such as this, smart investors are allocating at least some of their capital to Gold and Silver bullion And whatever you do, don’t store it with anyone else. As Cyprus has just shown us, when the Crisis hits… you can’t get access to your money.

Economic conditions in Italy are as depressed as they've been since the end of WWII, the economy is still contracting, Italy's banks are in terrible shape, private sector lending is very strained, and the ECB's policy is not resolving the problems. As is typical in countries enduring this level of economic pain, the political situation is starting to get pretty chaotic. Bersani, the top vote getter in the recent elections, has been unable to form a government, new elections this year are increasingiy likely, and recent polling suggests a dead heat among Bersani, Berlusconi and the anti-establishment party of Grillo. Surge in support for Grillo creates a risk because it is not entirely clear what he would do if he came to power. He has made a clear promise to put the euro to a vote and generally thinks that the European fiscal and monetary policies have been a bad deal for Italy. Obviously, an attempt to revisit those policies by a country as systemically important as Italy could destabilize things fast, and the risk of a radical outcome is growing. And over the past few months there are indications of that risk getting priced in and putting pressure on Italy, particularly on its banking system. Italian banking spreads are up; there has been a modest pullback in banks' wholesale funding, a modest increase in their ECB borrowing and no bond issuance.

Inherited these kinds of problems from the prior generation and shuffling them to the next generation.

The “Marshmallow Test” is a landmark study in child psychology which tests a toddler’s ability to delay gratification in return for the promise of a reward in the future.  Those who can wait 15 minutes unattended to eat a marshmallow are rewarded with a second treat. ConvergEx's Nick Colas, however, notes that more recent work on the topic, however, shatters the notion that innate self-control defines future success.  The real answer is, Colas adds, not surprisingly, trust.  If the child doesn’t believe their environment to be sufficiently predictable, they will be much more likely to gobble up the first treat regardless of any promised reward for waiting.  Since all investing is ultimately a game of delayed gratification, trust plays an under-appreciated role in the success of any macroeconomic policy on long term capital market and economic outcomes. What it essentially says is that you can’t keep whacking away with novel policy programs until one catches hold.  Trust in the system is what keeps the population playing along.  And when that trust erodes, the next iteration of confidence-boosting measures is less effective.  Repeat that cycle a few times and you end up with a population that will take the first marshmallow, gobble it down, and move on.

The Bank of England's Financial Policy Committee (BoEFPC) warns there is "evidence of the re-emergence of... behavior in financial markets not seen since before the financial crisis," citing the increased issuance of synthetic products and added that banks have "little margin for error against a backdrop of low growth in the advanced economies," despite what we are told about their 'fortress balance sheets. Bloomberg Businessweek adds that the BoE were careful not to scare the public, they add, events currently "did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely." This following the Fed's warnings of 'froth' in the credit markets suggests central bans are considerably more concerned at blowing bubbles than they want to admit in public. ECB's Weber recently commented that he feared, "the recent rally in financial markets could be a misleading signal," which appears confirmed by the BoEFPC noting that equity performance since mid-2012, "in part reflected exceptionally accommodative monetary policies by many central banks... But market sentiment may be taking too rosy a view of the underlying stresses."

The savings of the people is going into the government bond. This is defined as the "risk free" asset, but can this really be true? What happens if it is not? This video shows the problem from a different perspective.

A very odd week in Europe. European stock indices dropped 2-3% on the week (though interestingly Italy rebounded quite aggressively off the lows today to end only -0.5%) with financials notably off mid-week highs. Swiss 2Y rates closed at their lows (under -3bps) - almost 3 month lows as safe-havens remain bid. Europe's VIX is notably higher this week. But away from equity weakness and safety flows, Bunds were sold and Italian and Spanish bonds were bought with both hands and feet (biggest 4-day rally in a month). We can only imagine that the devastation overnight in the JGB market combined with the biggest 2-day jump in EURJPY in 5 years has squeezed hedges and liquidations everywhere. Italian bond spreads are 30bps tighter this week!!! Spain -22bps, and Bunds have underperformed Treasuries by 9bps. The other explanation is of course that the Spanish pension fund just allocated the remaining 3% to peripheral bonds.

Pop quiz:

Q. What is the fiscal multiplier on $529 in government stimulus?

A. If you are Fisker Automotive, zero.

While the terminal fate of the federally-subdizied car company was no secret to anyone, there were some questions when this latest example of idiotic government "capital allocation" would get Solyndraed. The answer is now.

As the investigation into unusual loan write-downs and the 'premature' movement of capital away from Cyprus by the elites of that nation progresses, Cyprus Mail reports that the investigators - Alvarez and Marsal (A&M) - have found that the information provided by Bank of Cyprus (BoC) was incomplete and data deleting software were found on the computers of two senior executives. "Our computer forensic technologists have found that the computers of two employees, (former CEO) Mr. (Andreas) Eliades and (senior manager group treasury and private banking) Christakis Patsalides, have had wiping software loaded, which is not part of the standard software installations at the BoC." Investigators found no e-mail files, mailboxes or user documents on Eliades’ desktop computer - "we had significant gaps in the e-mail data received from BoC for the period 2007 to 2010, a key period for our scope of investigation," and no email backups were performed. A&M is looking into how BoC accumulated €2.4bn worth of Greek government bonds (GGBs), later suffering huge losses because of that, and into BoC’s expansion to Romania and Russia. We are sure this is all above board and normal IT protocol for the bank... or not.

How many important (or worse yet, systemically important) banks can fail to disclose pertinent debt info before it becomes evident that the tax payer/depositor/regulators/stress tester realizes they don't know the Irish banking system's true condition?