Archive - Apr 2013

With every passing day, it becomes clearer and clearer the Cyprus deposit confiscation "news" was the most unsurprising outcome for the nation's financial system and was known by virtually everyone on the ground days and weeks in advance: first it was disclosed that Russians had been pulling their  money, then it was suggested the president himself had made sure some €21 million of his family's money was parked safely in London, then we showed a massive surge in Cyprus deposit outflows in February, and now the latest news is that a list of 132 companies and individuals has emerged who withdrew their €-denominated deposits in the two weeks from March 1 to March 15, among which the previously noted company Loutsios & Sons which is alleged to have ties with the current Cypriot president Anastasiadis.

The paper studied the non-linear relationships between Italy sovereign risk as gauged by CDS and the liquidity levels in the secondary bond market, using Bid/Ask Spreads as the gauge for liquidity in an attempt to determine the viability of the ECB's OMT & LTRO interventions.

Long-term growth conditions in Spain, Italy and France are as weak as they have been (other than during wartime) in over a century. The chart below tells the story. As JPMorgan's Michael Cembalest notes, while European sovereign debt spreads have rallied across the board, European bank lending to households and businesses is still declining, and the cost of small business loans in Italy and Spain is higher than both real and nominal growth. With ECB policy now clearly useless given Europe's fragmentation, and with Germany's forward expectations rolling over, it is hard to see how, absent wholesale devaluation and/or inflation (or as Cembalest notes destruction & rebuilding), Europe will recover from this.

The 'relative' innocence of the depositors in Cyprus who saw their savings crushed by the hammer-blow of Germany's reality last week is, it seems, not the only hardship that the European people are suffering. In Spain, thanks to their FROB restructuring, shareholders and bondholders (including hundreds of thousands of unsophisticated 'retail' investors who were sold 'fail-safe' and 'high-return' investments) face losses (haircuts) from 96% (equity) to 36% (subordinated debt) and 61% (preference shares) following the 'bailout' of Spain's dodgiest cajas (or savings banks). As The Economist notes, clients infamously included Alzheimer’s sufferers and at least one customer who signed by dipping a finger in ink; shareholders should know the risks but the vast number of Spaniards who bought preference shares and complex subordinated debt from their cajas often did not. While these investor losses pave the way for bank recapitalizations; they confirm the old adage that there is no such thing as a free 'yield' lunch (especially in the new normal ZIRP world in which we live).

Anglo Irish Bank/IBRC bondholders will actually get some of their money back! April Fools!!! Ireland makes the Cyprus deal look downright generous in comparison.

David Stockman’s New York Times Op-Ed has ruffled a lot of feathers. Paul Krugman dislikes it, saying Stockman sounds like a cranky old man, and criticising Stockman for throwing out a load of meaningless numbers that sound kind of scary, but are less scary in context. What Krugman overlooks is Stockman’s excellent criticism of crony capitalism, financialisation, systemic rot and Wall Street corruption of Washington, something Stockman has seen from the inside as part of the Reagan administration. There are plenty of other writers who have pointed to this problem of propping up casino finance, including myself. But very few of them are doing so on the pages of the New York Times. In the long run, I think it will become patently clear that throwing liquidity at the financial system won’t solve anything other than immediate liquidity concerns. The rot was too deep. The financial sector needed real reform in 2008. It still needs it today.

From a January 2nd price of $13.16, the price of a Bitcoin in USD had risen to $46 on March 16th - right before the Cyprus 'solution' was announced. Since then, in two short weeks, the price of a Bitcoin has more than doubled, reaching $101 today. This 'exuberance' in non-fiat currency, should perhaps warrant caution as we noted here, the US is now not only actively monitoring but has commenced regulating the Bitcoin market and those who participate should be well aware that when uncle Sam is involved, things tend to have an unhappy ending.

Typically, when the ISM-leading Chicago PMI has a horrible print as it did last week, the subsequent ISM response in a "baffle with BS" centrally planned regime is one of a stunning beat just to make sure all vacuum tubes are kept on their binary toes, and the bad news is good news, good news is better news meme continues propagating. Not this time: moments ago, the March ISM printed at 51.3, the biggest miss to expectations (of 54.0) in 13 months, in fact below the lowest estimate, driven by a collapse in New Orders which tumbled from 57.8 to 51.4, as the rapid deceleration in the US economy is confirmed in virtually every recent metric. The good news, and what will be used to spin the market back into green following its epic 0.2% selloff on the news, is that the Employment Index rose from 52.6 to 54.2, the highest since June 2012. Elsewhere, the 1.2% increase in construction spending came in better than estimated... on a seasonally adjusted basis. Unadjusted it had its biggest drop since July 2011 but who cares: we all live in a seasonally-adjusted "reality" in which only the daily record S&P prints matter. And now, with yet another economic miss in tow, we resume your regularly scheduled no-volume Federal Reserve mandated "stock market" levitation.

I disagree with the “addiction” metaphor because it implies that the markets/ addict could potentially become healthy if the dealer stopped dishing out the drugs. This ties in with Bernanke’s claims that everything is under control and that he can remove the excess liquidity anytime he wants to.

Our April Fool's wish: someone in the inner circle of power would finally tell the truth. In an unprecedented abandonment of his carefully scripted responses to Congressional questions, Federal Reserve Chairman Ben Bernanke unleashed what appeared to be a heart-felt and spontaneous disavowal of the financial and political systems of the United States.

Mission Accomplished? When have we heard that before?

According to the updated NYSE Q2 circuit breaker levels, it will take a 4,350 point drop in the NYSE for an all day trading halt. Of course, if the DJIA tumbles by 30% intraday, whether to close the several hundred shares trading on the NYSE will be the last thing on people's minds.

The head of Greece's National Confederation of Greek Commerce has slammed the Troika and the European leaders for their treatment of Cyprus as the first wave of contagion begins. "The tragic situation.. will have immediate effects on the Greek market," he noted as at least 1600 Greek businesses will suffer from the Cyprus deal - with the haircuts and capital controls expected to dramatically impact the EUR1bn of Greek exports to Cyprus. The so-called "German Plan" will "cripple" Cyprus, he added, and "sentences" Cyprus to a long period of recession and debt.

We showed this chart over the weekend, but it bears repeating simply because in this case, one chart does indeed speak a thousand words. Presenting: unemployment in Iceland and Greece - pick the "just say no to the status quo" winner out.

Summary of key US events in the week ahead.