October 8th, 2011
The recent brief uptick in economic high frequency indicators got you up? Feeling like suddenly the recession can be avoided because train traffic, whose sole goal is to stock up on even more soon to be liquidated inventory, hasn't yet collapsed? Happy by the beat in Non-farm payrolls, even though the beat was primarily a function of a one-time Verizon-strike boost, even as tax witholdings have hit an inflection point and are now declining? Amazed by the surge in car purchases, funded entirely by GM-targeted subprime loans issued by Uncle Sam, which have now declined for the first time in a year? Don't be silly, warns Goldman's Jan Hatzius, and presents a list why while the C-grade commentators out there may be caught off guard by the brief pick up in economic activity and proclaim the period of inverse economic growth over, it is all, quite, pardon the pun, "transitory."
The topic of the European "Ice-nine"phenomenon is nothing new to regular Zero Hedge readers: every day we point out the increasing freeze in European interbank lending (in both the traditional and shadow formats), in various money markets, in commercial paper, in broad fixed income issuance, and in the overall collapse in market liquidity, so deftly masked for now by daily political and central bank rhetoric, which for all its market kneejerk reaction glory is merely unsubstantiated innuendo and lies - keep in mind that the last time the incoherent and disorganized Troika came to an actual decision was July 21, with the second Greek bailout, and even that has not yet been implemented! So while hopes still percolates faintly on the surface, the riptide just below it has grown to record proportions. Presenting the chart that everyone who has an opinion on Europe, one way or the other, has to see. Here, courtesy of Diapason's Sean Corrigan, is the epic "Fear and Loathing" in the European banking system, in all its $1.3 trillion glory, or nearly double where it was when Lehman filed for bankruptcy. Banks may say they trust each other, they may promise the system is viable, they may even submit bogus (if increasing) Libor indications to the collusive organization that is the BBA, but the truth is, in vivid color, presented below. Never before have European banks parked as much of their hard earned cash with the only two remaining pillars of "stability", the Fed and the ECB. And with Dexia about to be nationalized, and an unpredictable, and highly contagious, waterfall chain of events about to be unleashed on Europe all over again, will the worst case scenario transpire and the ECB's credibility be swept away? If so, prepare for all the money in the world to funnel into the binary number-based safety deposit box located in the servers of 33 Liberty street. Then the two ultimate questions become: how long before the Fed's own viability is questioned by the global vigilantes (who have finally started asking the right questions), and who will bail out the central bank tasked with bailing out the world?
Last week, a fund rumored to be on deathwatch, was Toronto-based, gold and energy-focused hedge fund Salida Capital (whose gold exposure, in addition to Paulson's, were both factors in the rapid drop in the price of gold last week, following concerns that it was being liquidated in the open market - for more on Salida's gold exposure, read the attached letter). The fund promptly came out and refuted said rumors, however upon review of its monthly P&L, we are somewhat skeptical about its survival chances, even if, in principle, we agree with the fund's investment philosophy. The reason for our skepticism is that Salida was down a whopping 37.2% in September, and 49.4% YTD, a collapse which only compares to that of Paulson's Advantage Plus, and demonstrates vividly just how much of a misnomer the name "hedge" can be when applied to members of the asset management industry. What is worse, however, is that the reason attributed for this epic collapse is amateur hour 101, and any LPs should be far more concerned by the explanation provided for this underperformance than the actual underperformance itself.
A few days ago we suggested that based on ongoing losses in the portfolio of Paulson & Co, the biggest fund of the firm, Advantage Plus, is down a massive 50% YTD. A few hours ago, Absolute Return confirmed that the firm which has stepped on virtually every single possible landmine year to date, has had its AUM cut if not exactly in half, then surely close enough for Keynesian work at -47%. And with that the speculations of an imminent terminal redemption event coupled with liquidations of the firm's gold share class (its GLD holdings) will resume, although the one thing unclear is whether Paulson has already sold off the bulk of his winners. We are confident we will learn the answer as soon as Monday.
The best politicians money can buy
He was completely right back then. He is even more right now. And yes, when Wall Street Pro takes to the streets, only then will it be on.
Given the complete and utter disaster that awaits us once the curtain is finally drawn back in Europe, it’s important to consider whether or not the crisis we currently face is nothing but another downturn or is it in fact another game-changing, punctuated equilibrium moment? I firmly believe it is the latter. I’ll spare the audience the laundry list of challenges we face as a global economy - unsustainable debt loads, ghost cities, peak oil, climate change, over $700tr in notional derivative exposure, etc. - it’s a long list. In the final analysis, it’s hard to conclude anything other than the system we’ve known since 1971 is about to implode. The powers that be know this and they are very afraid. Every piece of chewing gum they’ve tried to use to glue their global economic model back together again has failed. Humpty Dumpty has had a great fall but the cracking-up isn’t over yet. Indeed, we have arrived again at one of the great turning points in economic history. However, the current destination is the one that the 1% hate so much. This is the moment where some of the 1% lose their grasp on power and money and witness first-hand Schumpeter’s creative destruction. Historically, these are the times when pitchforks are carried and torches lit. Think about how wealthy, powerful Brits felt when news of the original Tea Party made its way to London. Think about how a rich plantation owner in the South felt when news of Lee’s defeat at Gettysburg filtered down. Think about how a New York investment banker felt in 1933 when Glass-Steagall was passed. They were very likely afraid, very afraid. The edifice of their power and wealth was crumbling down around them.
In order to keep the ongoing class warfare waged by the administration in perspective, today the CBO was kind enough to score the revenue impact of the proposed and much debated Buffett Tax, now appearing in non-populist literature as "Surtax on Millionaires." According to the Budget Office, said tax which is the source of substantial consternation among the population, would generate, over the next decade, a grand total of... drum roll... $453 billion. Why the drum roll? Because as we pointed out a few days ago, the US closed the 2011 fiscal year having added $1.23 trillion in debt (a number which would have been $1.4 trillion absent some year end settlement gimmickry). In other words, last year the US government had on average a $100+ billion deficit each month. In yet more other words, the great populist gimmick that is the Buffett Tax will have the great benefit of generating, between 2011 and 2021 enough money to plug a debt hole, at the rate America currently spends money, of 4 months.
Financials were the day's worst performers as already-priced-in downgrades from Europe, and absolutely not-priced-in talk of worrying liquidity upsets in RMBS markets, staggered them -3.5% pulling back to very fractionally above unchanged on the week. S&P futures managed a small loss on the second lowest volume day since 9/20 with some 'inhuman-looking' moves especially towards the close where ES ripped 20pts (with no support from risk) only to give it all back even quicker. FX also traded in very gappy mode today with some rips and dips - especially after Europe closed as the USD ended the day higher but down marginally lower on the week. TSYs weakened into the close with 30Y outperforming (and 7Y underperforming) post NFP this morning. Credit remained stubbornly weak into the close even as equities burst higher which is similar to commodities and oils in the last few hours as they dropped from their earlier highs and stabilized.
Here comes the Cavalry!
To all those who bought Belgium CDS as per our compression trade suggested earlier today, congratulations. Oh and the part in the Moody's announcement where it says that a main driver of the review is "The uncertainty around the impact on the already pressured balance sheet of the government of additional bank support measures which are likely to be needed" means that anyone harboring even the smallest hope that France will be within 100 parsecs of Dexia when the broke bank is nationalized, may be slightly disappointed.
Our hedge fund readers will find 100% of this cartoon is correct 100% of the time.
Since 9/23, we have not had a close to close change in the Dow with an absolute magnitude less than 100 points - until today. This is only the 13th day with such a 'small' close to close change in the last 49 days (since 8/2/11). Nothing to see here, move along, as the 20pt up and down swing in the S&P futures over the last few minutes on no news whatsoever makes perfect sense to every talking head on TV.
Congressional Research Service Finds US Exposure To Europe At $640 Billion And "Could Be Considerably Higher"Submitted by Tyler Durden on 10/07/2011 15:43 -0400
If there is one thing that matches John Paulson's dramatic conversion to the anti-Midas of our times, it is Tim Geithner's uncanny ability to say something only to be proven to be a pathological liar within months if not weeks (who can possibly forget: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?” "No risk of that."). Now we can add hours. Because it was only yesterday that in testimony to Congress, he said in an attempt to be the latest to defend Morgan Stanley, that "The direct exposure of the U.S. financial system to the countries under the most pressure in Europe is very modest." Really? That's funny because none other than the Congressional Research Service said that U.S. bank exposure to the European debt crisis is estimated at $640 billion, according to Dow Jones. Wait, that is impossible: even Morgan Stanley, the bank that stands to see a bear raid if the CRS' conclusion is valid, said that its net exposure is negligible. And none other than CNBC confirmed that gross exposure is irrelevant, regardless that AIG taught us that in a state of insolvency contagion net becomes gross, and bilateral netting can be thrown out of the window (what happens when that counterparty you hedged your exposure with... goes bankrupt? Ask Hank Paulson, Lloyd Blankfein and Joe Cassano, they know). But wait there's more: "The CRS says, however, there are two other factors that could cause a dramatic reassessment. The estimate doesn't include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn't account for euro-zone assets held by money market, pension, and insurance funds. "Depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher." So... someone is lying you say?
The consumer credit number just released and was dreadfully bad. Little revision to last month's number, it printed -$9.5bn against an expectation of +$8bn and prior over $12bn. This is the biggest drop MoM since April 2010. More surprising is that we just saw the first drop in non-revolving credit in a year: since this is credit that goes out for car purchases and school loans, is either of these two bubbles (student loans and GM subprime loans) about to pop?