Archive - Jun 5, 2014

Haris Theocharis, the Troika-supported general secretary of Greece’s public revenues was forced to resign following press leaks about "government discontent" at his handling of tax issues - most notably the retroactive taxation of gains on Greek government bonds. As KeepTalkingGreece notes, Theocharis was a hardliner, a devoted supporter of the loan agreements and their implementation and kept loading the Greek taxpayers with new burdens and exorbitant fines. However, the resignation of the country's top tax-collector is "a cause of serious concern," according to EU spokespersons.

The most critical asset to be impacted by the ECB - EURUSD - is not reacting and is now actually higher than before Draghi unleashed his mini-LTRO. US Treasury yields are also unchanged - having roundtripped 7bps. But while bonds and FX don't care - Gold and stocks are loving it... Gold is up $10 from pre-ECB and the S&P 500 - at new record highs - is up 7 points.

Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.

Two weeks ago we asked, rhetorically, "Whose Housing Bubble Is Bigger?" and showed the April home price increases in the UK and China.  Today, we have our answer. As the WSJ reports, "U.K. house prices rose at the fastest monthly pace in almost 12 years and to the highest level since before the global credit crisis in May, a survey showed Thursday, as demand for homes continues to outpace supply despite tougher new mortgage rules."

It was interesting this week to watch the media explode in a frenzy of reporting over the "stronger than expected" auto sales. The increase in auto sales to 16.9 million units was certainly a welcome number. However, was it really the "long awaited" sign of economic recovery that it was portrayed to be?

From Ancient Egypt to Modern America …

The ECB was kind enough to give a 204-word explainer on the most unconventional policy ever attempted by the European central bank. In the off chance said exhaustive primer is not sufficient, it was kind enough to refer all questions to this poor soul. 

A mere 2 hours after Mario Draghi unleashed a slew of liquidity providing, currency-war-fighting, inflation-boosting, but not expropriating savers, policy maneuvers, EURUSD has rallied all the way back to 1.36... the level at which it traded before he dropped his tape bomb. Just as we noted in the early morning, absent a full-scale QE it was a disappointment for the 'priced-in' jawboning, "which means the EUR will ultimately move higher after a kneejerk lower as the market forces Super Mario to do even more next time." Sure enough, that is happening...

Having used words and carried a smaller and smaller stick, President Obama - alongside his good buddy David Cameron - is holding a joint press conference to explain the great vengeance and extreme rebukes they are willing to shower on Russia if Putin doesn't bow down before the G-7 in Ukraine... We suspect this week's D-Day celebrations could get a little awkward...

On the day in which the ECB for the first time ever announced negative deposit rates, as in pay the bank holding the deposit, the ex-Goldman head of the ECB, Mario Draghi just confirmed he has a career in comedy when this monetary and political circus finally comes crashing down.

"It's completely wrong to suggest we want to expropriate savers" - Mario Draghi

... We are still laughing.

Former U.S. Attorney Anton Valukas report on GM's SNAFU is proclaimed as "extremely thorough, brutally tough, and deeply troubling," by CEO Mary Barra; but finds no collusion or conspiracy to boost bottom line at the expense of customers' lives. However, the report did find "a pattern of incompetence" and actions must be taken...

• *GM REPORT CONFIRMS BARRA DIDN'T KNOW OF ISSUE PRIOR TO RECALL
• *BARRA SAYS 5 EMPLOYEES DISCIPLINED
• *GM'S BARRA SAYS 15 REMOVED FROM CO FOLLOWING VALUKAS REPORT

Of course, none of this matters as easy credit is fueling the sale of more Kevorkianesque GM cars than ever before...

It was all fun and games until Draghi started speaking... the initial exuberance of what sounded like QE but wasn't really sent EUR to 1.35, stocks higher, and Treasury yields soaring. Then as reality sunk in that it was just not all that much... Gold started to surge, EUR rally back, stocks fade, and Treasurys rally... WTI crude is fading (and Bitcoin is rising) We're gonna need a bigger QE, Mario.

"Mission Accomplished" - We are sure in the world of escape velocities, terminal rates, risk premia, and endless free-money this all makes perfect sense... Irish 10Y bond yields are trading at 2.60% - below the US Treasury yield for the first time since 2007...

The much anticipated additional measures have been revealed:

• DRAGHI UNVEILS PACKAGE OF TARGETED LTROS, WORK TO PREPARE QE
• DRAGHI SAYS INITIAL SIZE OF TARGETED LTRO PLAN IS 400BLN EUROS
• ECB EXTENDS FIXED RATE FULL ALLOTMENT, SUSPENDS SMP STERILIZING
• DRAGHI SAYS PACKAGE INCLUDES PREPARATIONS FOR ABS PURCHASES

In other words, even more actions along what was expected: keep in mind the last time the ECB did €1 trillion in LTROs it did exactly nothing to boost inflation or the "real economy." Furthermore, the ABS purchases aren't activated: just being "prepared." However, what was not revealed was the biggest wildcard: European QE, which as we said repeatedly, won't happen until Europe's deflation is far worse, if ever.