Archive - May 2013

Given the global central banker's determination to stop prices falling, worries that the outlook is deflationary are unlikely to be realised. In the main this is the view of neoclassical economists, Keynesians and monetarists, who generally foresee a 1930s-style slump unless the economy is stimulated out of it. So successful was the Fed leading other central banks to save the world in 2009 that the precedent is established: if things take a turn for the worse or a systemically important financial institution looks like failing, Superman Ben and his cohort of central bankers will save us all again. Call it kryptonite, or failing animal spirits if you like. It is closer to the truth to understand we are witnessing the early stages of erosion of confidence in government and ultimately its paper money. Ordinary people are finally beginning to suspect this, signalled by the world-wide rush into precious metals last month.

As the IMF delivers its first 'health check' on Greece since 2009, the beleaguered nation's finance minister proudly proclaims, "the worst is over," and the country had reached its economic trough. However, while the finance minister appears unaware of the people living in caves, the record youth unemployment (that is rising still), and the accelerating non-performing loans (no green shoots there), the IMF remains a little less confident, "Greece's debt remains much too high". As the Sydney Morning Herald reports, Stournaras added that ''in May 2014, the loan installments will come to an end and the country has to be in a position where it can go on its own to the markets.'' We can't wait (with GGBs under 10% yield to see which greater fool snaps up those beauties). The IMF is a little less sanguine warning Greece of its "insufficient structural reforms," and worries of the "socially painful recession." The last jab, in line with the new normal 'template' (that is not a template but really is), "very little progress has been made in tackling Greece’s notorious tax evasion," as the IMF demands, "the rich and self-employed are simply not paying their fair share."

The attached chart is sufficiently self-explanatory that not even career economists will need assistance to grasp it.

S&P futures volume was the lowest (ex-holidays) since October today and the intraday range was in stocks was practically its lowest all year. However, that did nothing to hamper the inexorable rise of stocks - though today was different. FX carry markets (JPY-based) were not supportive (especially AUD) as the main theme of the equity markets today appeared to be rotation - from defensives to aggressives. Correlations across asset classes were quite high as Treasury yields continued to push higher post-NFP (30Y +15bps holding at 2.99% since then). The credit fade from Friday gave way as HY especially snapped tighter in spreads catching up to stocks. Draghi's comments snapped EUR lower which provided the USD strength (but AUD also helped with its weakness). Gold ended unchanged as oil prices tested up to multi-month highs (Brent Vigilantes) before fading back a little.

Moments ago, Bank of America and MBIA both formally announced the earlier leaked settlement that sees the bank pay the monoline a long-overdue $1.6 billion in cash plus the issuance of MBIA warrants to buy 9.94 million shares, or 4.9%, of MBI stock at an exercise prices of $9.59/share, which may be exercised at any time prior to May 2018. It is perhaps worth point out that the settlement took place with nearly half of the second quarter already in the books. In addition, BAC will also provide a $500MM credit facility to MBIA. End result: a $1.6 billion pretax charge for Bank of America. And yet, none of this settlement will impact any Bank of America Q2 numbers. Why? The press release explains.

On an unweighted average basis, European shadow economies are 22.1% of total economic activity or around $3.55 trillion (as large as Germany's whole economy). A report by Tax Research, suggests that Austria and Luxemburg have the smallest shadow economies in the euro area at 9.7% of GDP, while Bulgaria at 35.3% and Romania at 32.6% top the list. Of the major economies, Germany clocks in at 16%, France at 15%, Italy at 27% and Spain 22.5%. Stunningly, in terms of tax revenues lost, the shadow economy translates into an estimated €864bn or just over 7% of euro area GDP and, in context, accounts for 105.8% of the enture healthcare spending of the EU. It appears that more and more Europeans have no choice but to shift to a shadow economy (as taxes rise among other things), and this is the biggest threat to the entire economy. This is likely one reason the 'austerity' actions have not been successful since far less taxes are being paid via the conventional channels.

Sadly, we are not making this up: as part of the BEA's latest revision to the way it calculates GDP, the government will no longer count the amount of pension funding that is actually allocated to retirement accounts (counted as wages in the GDP calculation): i.e., an actual cash outlay. Instead, what the Bureau of Economic Analysis will count are corporate promises of how much companies will (may? might?) pay... eventually. The bigger the lie and the promise, the higher the GDP. And presto.

Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...

When it comes to the deep hole of lies and inconsistencies that US foreign policy is vis-a-vis Syria, it has two options: stop digging or double down. Following the earlier report by the UN that outright rejected the full blown White House propaganda push to make it seem that it was Assad's regime that was using chemical weapons as a front to stage a military incursion against a very unappealing despot, that it was the Al-Qaeda assisted and potentially US-armed rebels who had in fact been using toxic sarin gas, there was some hope that the digging would stop. Instead, the doubling down began.

QUESTION: Why do idiot shareholders think Jamie Dimon deserves to continue in the dual role of Chairman and CEO? ANSWER: "Because I am richer than you are!"

Just in case conventional wisdom thought there was some limit beyond which financial crime and fraud in the US would or could not cross, here comes the city of Harrisburg, bankrupt for nearly two years, proving everyone wrong as usual. 'The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated." Of course, if one is sinking, might as well take down as many as possible with it, because in the long-run, etc... right Keynesian fanatics?

While the memories of the gold and silver price collapse of April 12/15 are still strong in the cognitively biased members of the business media, few have managed to notice that the last 3 weeks have seen the best run in 21 months for Gold and a complete retracement of the Monday drop (and Fib 61.8% retracement of the entire Fri/Mon drop). It appears the paper-to-physical 'great rotation' continues to gain momentum...

Most of the SAREB's loans are linked to finished properties, for which it might be easier to find a buyer, but 4.3 percent are for unfinished developments and nearly 10 percent are for empty lots, for which there is little or no demand. Nearly all of the foreclosed properties in its portfolio are empty, including apartment blocks far outside big cities. Only 6,000 of nearly 83,000 housing units have tenants.

The seemingly endless MBIA saga, in which the mortgage insurer sued Bank of America and where a settlement has been overdue for some two years (see here), is finally coming to an end. Moments ago Dow Jones reported what the final settlement may look like: $1.6 billion in cash as well as a $500 million line of credit. Just as notable, BAC will buy a 5% equity stake in the name. MBIA was briefly halted as a circuit breaker was triggered, and has continued to surge following the unhalt. As a reminder, a settlement in this case may push the company into the $20 handle realm. Finally, our report from September 2011 on MBIA's potential to be the next Volkswagen courtesy of its massive short interest as a percent of float can be found here.

A Blast from the Past ...