Archive - May 2, 2013

Think frontrunning clients, trading against recommendations, manipulating LIBOR, and slamming gold at the London fixing is all investment bankers do? Wrong. What really happens in banker life is far more exciting and enjoyable (at least for preferred banker clients) as the following story by the WSJ's David Enrich shows. In reality, the activities that bankers seem to spend the most time on, is treating their "preferred clients" with free gambling trips to Las Vegas, skiing in Chamonix, flying wives and girlfriends in helicopters, doing blow in industrial amounts, and, of course, cavorting with strippers and hookers. All paid for by some unwitting clients of course. It is this environment of utter and perfectly permitted, if not encouraged, debauchery that allowed scandals such as the Libor fixing "conspiracy" (first theory, then fact of course), to flourish, and which makes being a banker still the most desired job in the world (contrary to beliefs that it was all about the passion of crunching goalseeked DCFs at 2 am in the morning).

It is just incredible how quick NYC Mayor Michael Bloomberg is to throw a temper tantrum whenever anyone dares question his crusade to rid the nation of its remaining civil liberties.  In this case, his targets are those that criticize his feudalistic and extraordinarily racist "stop and frisk policy."

In what may be a historic first, as part of his answer to the last conference question on whether it is time for the ECB to start onboarding risk on its balance sheet, Draghi had a simple answer:

• DRAGHI SAYS ECB DOESN'T GO AROUND WITH HELICOPTER MONEY

Now... is that just a little chopper envy, bourne out of disdain for the Buba's "just say 9,9,9" position, or is this the start of an actual slamdown between the ECB and the Fed. Surely even Draghi realizes that with the private sector in Europe hibernating with zero or negative loan creation in the past four years, and with the ECB unwilling to inject unsterilized liquidity, there is no hope of actual European growth ever (because sadly we live in a Keynesian world in which economic growth is always and only a function of new money injected into the system). And yes, BOJ and Fed cash will only push stock markets higher for so long before the economic tide goes out, youth unemployment hits 100% and the revolution finally takes place.

The first relatively big bombshell has been dropped:

*DRAGHI SAYS ECB HAS OPEN MIND ON NEGATIVE DEPOSIT RATE
*DRAGHI SAYS WILL COPE WITH NEGATIVE CONSEQUENCES IF WE ACT

This has crashed EURUSD and smashed German 2Y rates into negative territory

Must to the chagrin of our algorithmic friends, no matter how hard they try this morning, the JPY-carry-based momentum ignition is not sparking sustainable gains in US equity futures. EURUSD has about faced from its post-ECB gains and is unch; S&P 500 futures have followed EURUSD's path and are also unchanged now from the ECB decision; but JPY, in a world of its own has smashed 130 pips lower (up to 98.40)...

Mission Accomplished it would seem. Initial claims printed at its lowest since January 2008 at 324k. This is well below expectations of 345k - the biggest beat since September 2011. California and New York dominated the data with over 70,000 claims between them (though both dropped from last week). Michigan added the most from last month's rolls with 'educational service indutrsy' job losses affecting MA, CT, and RI. Emergency Unemployment Claims appears to have shaken off its statistical aberration of 2013 and is down a modest 12k this week.

With the ECB's rate cut decision already wreaking havoc on logic and common sense everywhere, pushing the EUR much higher, and the USd and JPY lower, one can't wait just what non-standard measures Mario Draghi will come up with next to send the EUR to record highs, providing a boon to German IMports. Wait, but the GDP calculation said that net imports are... oh, nevermind. Perhaps Not so super Mario will announce a free Forex trading account for every unemployed European, with half functionality allowing only purchases of EUR, not sales. Look for that, and for further confirmaion from the former Goldmanite that the bailout mechanism at the heart of Europe's "sustainability", the OMT, still does not exist and never will, as it is simply impossible to actually agree on a legal term sheet which will govern it.

• *DRAGHI: CREDIT CONDITIONS FOR SMALL, MEDIUM-SIZED FIRMS TIGHT
• *DRAGHI SAYS ESSENTIAL TO REDUCE FRAGMENTATION FOR TRANSMISSION

One possibility for the markets to reverse has always been some grand event but another is just the economic deterioration that wears away at the markets as current levels cannot be rationally supported. It is not just the Law of Diminishing Returns which is coming into play as the central banks create more money but the effects on the consumer of seriously declining available cash to be used to purchase goods and services.  We have been subject to a massive amount of monetary printing and an unconscionable manipulation of data but the affects of reality cannot be ignored forever because reality forces the consequences as the fantasy gives way over time.

Whoever said the New Normal would be boring, apparently never lived in a world in which one central bank crushing its key rate to a record low, would lead to the appreciation of its currency, and send the main competing currency, the USD, lower. And since we live in just such a world, we expect that when the ECB has to cut its deposit rate to negative next, people will line up around the block to pay the bank money so it can hold their deposits for them. In the meantime, the EURUSD squeeze continues, and the irony is that the move which is supposed to help Europe's export economies and push the currency lower is already resulting in further deterioration in Germany's growth dynamo industries.

While the ECB's refinancing rate cut of 25 bps was very much expected, and just took place pushing the main refi rate to a record low 0.50% (because more liquidity is just what Europe's collapsing economy needs), what was unanticipated was that the Marginal Lending Facility (which last time we checked was used by pretty much nobody) was also cut, from 1.5% to 1.0%. The deposit rate, at 0.00%, was obviously left unchanged.

• The number of bond funds that own stocks has surged to its highest point in at least 18 years (WSJ)
• Clubby London Trading Scene Fostered Libor Rate-Fixing Scandal (WSJ)
• Cheap money bankrolls Wall Street's bet on housing (Reuters)
• Bank of Japan reveals concerns over easing policy (FT)
• iPads and low-end rivals propel higher tablet shipments  (Reuters)
• China Cyberspies Outwit U.S. Stealing Military Secrets (BBG)
• Draghi Fuels Bets on Rate Cut With Risk of Limited Impact (BBG)
• China guides renminbi to fresh high against US dollar (FT)
• Japan is preparing to start up a massive nuclear-fuel reprocessing plant (WSJ)
• Apple’s Ive Seen Risking iOS 7 Delay on Software Overhaul (BBG)
• UBS faces calls for break-up at investor meeting (Reuters)

The Fed may or may not be able to afford schizophrenia regarding the future of its monetary decisions (for now), but the ECB, in charge of a continent mired deep in depression, does not have that luxury. While consensus overwhelmingly expects a 25 bps cut in the main refinancing rate, some have warned that should the ECB not engage in such a cut, the EUR will tumble as the short covering squeeze ends with a thud. What exactly are the individual banks expecting? The following bulletin from Bloomberg summarizes it all.

The overnight macroeconomic news started early with China where the second, HSBC Manufacturing PMI declined from 51.6 to 50.4, below estimates of 50.5, yet another signal of a slowdown in the country (where one can argue the collapse in copper prices is having a far greater impact), and where the Composite closed down 0.17% after its Mayday holiday. China wasn't the only one: India dropped to 51.0 from 52.0 in March, and Taiwan dipped to 50.7 from 51.2, offset however by the bounce in South Korean PMI from 52.0 to 52.6, the best in two years (a number set to tumble as Abenomics steal SK's export thunder). The focus then shifted to Europe, where virtually everyone was once again in contraction mode, as German Mfg PMI declined from 49.0 to 48.1, the lowest since December, if a slight beat to expectations (while VDMA industry body said March Machine orders dropped 15% Y/Y so little optimism on the horizon), France rose modestly to 44.4 from already depressed levels of 44.0, Spain PMI also rose from 44.2 to 44.7, Italy PMI at 45.5 from 44.5, Poland at 46.9 from 48.0, a 45-month low. At least Greece seems to be doing "better" with the Mfg PMI "rising" to 45.0 from 42.1. Across the reports, the biggest decline was in input prices following the recent clobbering in commodities, which in turn is translating into price deflation.