Archive - May 2010 - Story

And so we get one step closer to the end. Look for bond yields in Europe, and especially the Bund, to roll over and accelerate to infinity as investors realize what monetary prudence capitulation is. Amusingly, the KomIntern won - comrades Lenin, Stalin, Marx, Engels, and all others who grace the dark pages of US historybooks, would have been celebrating if only they were alive today: May 9, in addition to "victory over fascism" day, is now also "victory over capitalism and free markets day." Rejoice comrades!

The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.

Just plain insanity - EURJPY goes from session highs to session lows, a 100 pip swing, in 2 minutes. Same with EURUSD. And as for the EU conference, don't expect it to happen until a leak finally drives the EUR up for at least 5 minutes straight. We may be at 1 trillion before the night is over.

More flags, more fun - 500 billion flags! A 50 pip move in an FX pair in a week is big. A 50 pip move in an FX pair in a minute is a several hundred sigma event. As all correlation algos are near unity, we believe the risk of Thursday's 2:40 pm festivities to recur in the afterhours session (either up or down) is frighteningly high.

Germany proposed on Sunday evening the establishment of a comprehensive plan of financial aid can be used for countries in the euro area, totaling 500 billion euros and involves the IMF, told AFP European diplomatic source. "Germany has put on the table a proposal of 500 billion euros," she said. It would include 60 billion euros in loans from the European Commission, he was in the last day, and 440 billion would accrue if necessary, the euro zone countries and the International Monetary Fund. This envelope would be established "bilateral loans, collateral for loans and lines of credit from the IMF," the source said. It would be in scale, if the subject of an agreement, an assistance plan is unprecedented in history.

Uhm, we have one simple question - where will the money come from? The EUR is surging currently on the kneejerk, although for all those who realize that the next step in this now entirely Federal Reserve mandated playbook is debt monetization, it provides just a good re-shorting opportunity. Of course, before our own Maestro Junior finds a new and improved way to pummel the greenback.

Courtesy of ShadowCap contributor Logan Schuler.

With less than 2 hours before Asia opens, the EU is scrambling - on net, the newsflow this weekend has been far more negative than Europe had hoped, with just the token minimum provided so far by the IMF (thank you Joe Sixpack) which the political situation in the UK and Germany deteriorating substantially. The live webcast from the Counsil of the European Union, the Extraordinary meeting of finance ministers - press conference is starting imminently at the following link.

First posted 17 November 2008, this column's analysis is more relevant than ever. It asks why investors rush to government securities when the US was at the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they address financial reform. - Carmen Reinhart and Vince Reinhart

Political doctrine - meet Newton's third law. Headline from Reuters. This will serve as a huge setback to a consolidated European rescue of not only Greece but all PIIGS (and then all of Europe itself). Polls are now closed and the first preliminary read is as follows: 34.5 CDU, SPD 34.5, 12.5 Green, FDP 6.5 Left 5.5.And the biggest losers from this, aside from the line of willing bailout recipients may be German public utility: as Bloomberg notes: "Chancellor Angela Merkel’s parliamentary spokesman for economy and energy, Joachim Pfeiffer, said that the German government may not have to get approval from the federal parliament’s upper chamber to extend the operating life of nuclear power plants." EON, RWE and other utilities may not appricate their 10 year ultimatum in tomorrow's DAX.

The reason given by Reuters why the FinMin is in the hospital is due to an adverse reaction to a new medicine. While we wish Schaeuble all the best, his the timing could not possibly have been worse: the whole world is watching with baited breath to see what happens in Europe before 6pm eastern tonight. Anything less than an "ironclad" bailout program will result in a total market wipeout tomorrow.

The story of financial markets in the past twelve months has not been one of organic growth. It has been a central bank accommodated liquidity story. This melt up will end in melt down when unsustainable liquidity policy is insufficient to address deleveraging and default. Macro trade positioning needs functional measures of liquidity. As has been said before, liquidity will always be around until you need it.
Given the explosion of financial product innovation, international capital flows, and leverage some measures of liquidity are not as informative as they once were. New ones are needed. Further, thinking through liquidity phenomena to their essence is really about understanding connections to market-maker and/or seller distress, manifested in the bid-ask. So measures that exhibit a myopic view on credit risk of market players in some ways serve as a function liquidity measures.

Yes, it is really happening. After years and years and years of market manipulation, JPMorgan is about to realize there is only so far you can push your luck against the criminal envelope.In other news, when silver doubles shortly, Andrew Maguire is about to become a patron saint to generations of long-suffering gold and silver "bugs" the world throughout.

Greek blog DosePasa has released several smoking gun documents in which Boston-based Hayman Private Equity (no relation to the Kyle Bass firm, at least none that we can find), discloses it intention to offer a E20 billion loan through a non-binding Memorandum of Understanding to Greece at roughly LIBOR+125bps in February 2010. If the documents are proven legitimate, and with a plethora of executive-level signatures it appears they would be difficult to forge, Athens will likely now demand G-Pap's head on a platter, or at least a coherent explanation why he refused to do this transaction at massively beneficial to Greece terms, which most importantly, did not involve the IMF's austerity measures, which have been the source of so much consternation to date, not to mention a proximal cause for the biggest market drop in history.

While none of the below information will come as news to regular Zero Hedge readers, as we have been discussing the European debt maturity cliff for over 5 months, here is a simplified representation of why anything and everything that the EU, ECB and the IMF can do now is simply delay the inevitable disintegration of the eurozone and the upcoming eventual debt payment moratorium.

Call it Lehman 2.0, sovereign risk flare up, or plain old money run, the liquidity crunch from last week almost killed the US equity market, has generated an unprecedented swing in FX pairs, and is starting to move into key credit indicators and spreads. The "big bail out" from the weekend has come and gone (unless Trichet is preparing to release something at 5:59pm Eastern tomorrow), and if Goldman is correct will have no material impact on markets... Which means that the downward path of least resistance will continue. And with equity markets not only decoupling from the rest of the world, but from the credit market as well, as they migrate to a plane of existence of their own, replete with unicorns, rainbows and spittoons full of hopium, keeping an eye out on early stress indicators from the credit markets is critical - credit is and has always been a far better early warning of market health, or lack thereof, than the HFT controlled, rebate-driven trading action in the shares of C, FNM, FRE, AIG, and other bankrupt pennystocks which account for up to 40% of daily trading volume. Earlier today, we touched upon some of the key early warning indicators to watch for in determining if the European contagion is going airborne. Below, we share a presentation from Morgan Stanley's Jim Caron, Measuring Risk: Extracting Market Sentiment from the Interest Rate Markets, in which the credit strategist provides a much more detailed framework of what critical credit signals are and how to interpret them. We recommend that all those still trading, either with their own, or other people's money, familiarize themselves with this 27-page overview.