Archive - May 2010 - Story

How much debt is too much? How little growth is too little? No one knows for sure. Economic historians such as Kenneth Rogoff point out that at debt levels of 80-90% of GDP, a country’s real growth becomes stunted, and the sixteen tons become more and more difficult to bear. Greece is well past that standard, which is one of the reasons why lenders are balking at extending a private-market helping hand. When not only government but corporate and household debt is included, the waters become murkier, because historical statistics are less available, and corporations are more multinational than ever before. Common sense observation tells you, though, that the debt super cycle trend in the U.S. shown in the following chart is reaching unsustainable proportions and that the “growth” required to service it if real interest rates were ever to go up instead of down would be insufficient. That is why lenders balked 18 months ago during events surrounding the Lehman liquidity crisis and why they’re beginning to balk once again. Too much debt/too little growth makes for a “three will get you two” moment, and they refuse to extend credit under those circumstances. - Bill Gross

Earlier this week, existing home sales surged, and now new home sales follow through as homebuyers take advantage of the last month to offer a homebuyer tax credit. The April number was 15% higher than the revised March 439K, and soundly beat expectations of 425K units. Alas, as with every other forward push contraption the government has come up with, this only means that May and future home sales, will once again revert to the trendline as the tax credit has now expired (for now). Compare the recent spike in the chart below to that observed in the month Cash for Clunkers ran out: the 1:1 correlation is unmistakable.

The events of the past several days by global central banks have had the primary goal of curbing wholesale asset liquidations. This is confirmed by the Bundesbank's statement earlier today that there is a risk of a debt spiral if "determined action is not taken." Ironically, even as various think tanks are pushing up GDP estimates for Europe, the BBK itself has said that "sovereign debt worries in the Eurozone would likely weigh on EMU growth going forward." By now everyone is used to such contradictions, however. “Without determined counter measures the danger exists — as observed in the case of Greece — of a spiral of rising risk premia and increasing debt, which in turn can be associated with negative effects on growth,” the bank wrote. Either way, with sovereign intervention, the market has managed to pause the constant sell off, which has benefitted one primary asset class. Gold.

Earlier today, Germany conducted a €7 billion Bobl auction, which however filled out the entire order book at a sub 1x Bid To Cover with just €6.12 billion in bids submitted, a €0.9 billion shortfall. In other words, this was a failed auction, with the government having to "retain" €1.555 billion in order to make the BTC seem an acceptable 1:1. Combining this negative news with the disclosure that BBVA may be suffering a commercial paper liquidity crunch, as reported earlier, has resulted in a material spike in demand in today's ECB's 7-Day Dollar auction, which came in at 5.4 billion, compared to 0 a week earlier. Expect the Fed's FX swap lines to increase by a comparable amount when the Fed's updated H.4.1 data is released this Thursday. The euro continues to slide on the negative news, although stocks both in Europe and in the US, continue trading higher as momentum programs once again take control.

More troubles for both Spain and the Commercial Paper market. Spanish top bank BBVA is said to have be unable to renew a $1 billion commercial paper line, according to the WSJ, which touches on the topic we discussed yesterday first about complications developing in the top-tier ECP market. BBVA still has substantial european-based funding and deposits, and another $9 billion in CP, which will likely also soon be pulled. This will certainly put further pressure on CP spreads, as the European liquidity crisis is alive and well. The news has impacted both the EURUSD and the price of European financial firms, which have sagged since this news has come out.

• FT editorial: how to cure the euro's ills (FT)
• How big banks window-dress their debt (WSJ)
• WSJ: Is gold the next bubble? If so, it has about $5,000 more to run before it peaks (WSJ)
• Germany prepared to go it alone to curb speculation (Bloomberg)
• Durable orders in US increased more than forecast (Bloomberg)
• The bank that won't let its customers withdraw less than GBP300 over the counter (DailyMail)
• The Greek secret bailout exit clause follow up by Alphaville (FT)
• North Korea expels South Koreans as Clinton offers olive branch (Bloomberg)
• Jim Cramer interviews Ted Kaufman, mans up, admits he was wrong on HFT, and explains why he changed his tune (MadMoney)

Yesterday we reported a rumor that the Fed and the ECB were set to announce "new liquidity measures." Today, the WSJ's Jon Hilsenrath reports that this development would likely materialize in the form of a lowering of the rate at which the Fed offers Euro-Dollar swaps, currently priced at 100 bps over OIS. This has not gone unnoticed by the market: even with 3M Libor flat from yesterday, the front month Eurodollar has surged from yesterday, on this most recent confirmation that the central banks will drown the world in free liquidity before another session of liquidations has to take place.

• Asia stocks, copper, oil rebound on speculation China's demand to increase.
• Bernanke says central banks must be free from politics to prevent crises.
• China shares flat amid Europe debt woes.
• Durable goods orders, Home sales probably rose as US recovery broadens: survey.
• Euro declines third day on concern European budget cuts will damp growth.
• Geithner to discuss with European finance officials efforts to promote continued economic recovery.
• German consumer confidence down due to unsettled euro.
• Greece discusses privatizations as finance ministry investigates its own for tax evasion.

James Montier's latest white paper on the flaws of modern portfolio theory in general, and traditional asset allocation in particular, is a must read for anyone who manages even one dollar of capital in our increasingly manipulated, centrally planned and inefficient capital markets.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 26/05/10

As with the patrons of any prostitute, sovereigns desirous of those unnatural caresses ministered by the International Monetary Authority must, in exchange, subject themselves to a number of indignities prior to any sort of carnal gratification, much less la petite mort (of their credit rating).  And so it came to pass that Spain condescended to submit its fiscal vessel to violation by an IMF mission.

When all of Europe rushed into its rescue package two weeks ago (first half a trillion, market red, then a full trillion, market green), the one thing that struck us as odd was the conflicting data on the conditionality of the package, with various sources both confirming and denying that the "package" was revocable. It did seem somewhat shortsighted of the Germans, whose political leadership would soon be on the verge of a series of electoral routs, to tie its fate without even one exit hatch, to a country that is a financial toxic spiral. Sure enough, the Telegraph's Evans-Pritchard has uncovered what may be the two loopholes in the European bailout agreement. While the first one is not surprising, the second one explains why the biggest sellers of European government debt (and/or buyers of Euro sovereign CDS), are likely the governments of the distressed, and core, countries themselves.

If BP was a comatose patient on a ventilator, this is where the doctor would say, "enough, better luck next time" and pull the plug. With the firm about to see a lynch mob on its corporate HQ grounds any day now, the last thing the company can afford is news of another oil spill. Enter Murphy's law. Reuters reports: "The Trans-Alaska Pipeline, partly owned by BP, shut down on Tuesday after a crude oil spill, drastically cutting supply out of Alaska's oilfields." The only good news out of this: it is now abundantly clear that actual oil supply and demand are the last things on anyone's mind when determining what the price of crude should be. Kinda like pretty much every other asset in America these days.

With energy, Senate Democrats find themselves between a rock and two hard places. Nonetheless, Sen. John Kerry, D-Mass., and Sen. Joe Lieberman, I-Conn., have introduced their climate and energy bill. Its timing is awful. Its fate is uncertain. Yet its sponsors felt it had to be done now. While the Gulf of Mexico is being damaged by a runaway well, spewing millions of gallons of oil-like bile from hell, any energy bill has the chance that it will be amended to become an anti-energy bill and will fail when hoped-for Republican support evaporates.

Moody's: "If the upward trend in debt ratios and interest costs continues and measures to stabilize them are not taken, the rating could come under downward pressure. The budget deficit for the current fiscal year is tracking to be about the same in nominal terms as last year, although as a percentage of GDP it will decline a bit. Nonetheless, because of the size of the deficit (nearly $900 billion for the first seven months), it is adding to the ratios of debt/GDP and debt/revenue. The latter has more than doubled over the past three years, reaching well over 400%, indicating potential stress on federal government finances in the future." Too bad Moody's will itself have seen a D-rating on Moody's corporate bonds by the time the US debt rating needs to be appropriately readjusted to Default, some time in 2012.