Archive - Jun 2010 - Story

Even as most investors are focusing on Europe, Libor, Euribor, Ted Spreads, the ECB, etc, many have noticed that over the past 10 days China's seven-day interbank rates have doubled from 1.8% to 3.2%. Is this latest episode of liquidity turmoil indicative that the PBoC is becoming less successful at communicating an "all clear" to the domestic (and international) markets? Or are there more troubling undercurrents in the sea of (previously) excess Chinese liquidity?

Adding to the already tense and riskoffish environment heading into Monday, is the news from Reuters that North Korea's parliament will hold a "rare second annual session on Monday." While the reason for the extra session is unknown, "analysts said the North could use the extra session of the Supreme People's Assembly to make a major announcement on personnel changes or power succession, or to issue a hardline response to sanctions imposed by the South over the ship sinking." With China still pending in its firm response toward the recent North Korean provocation, will this be the enablement signal that allows Pyongyang to test just how much further it can push the international community? The quandary of dealing with Korea was best recapped by Robert Gates, who was earlier quoted by Yonhap: "As long as the regime doesn't care about what the outside world thinks
of it, as long as it doesn't care about the well-being of its people,
there is not a lot you can do about it, to be quite frank, unless you
are willing at some point to use military force. And nobody wants to do that." The main problem with Gates' argument is that in attempting to explain the behaviour of an irrational actor he assumes North Korea will come to the rational conclusion. The world may know within 24 hours if he is in fact wrong.

On one hand you have the EURUSD telling you things are horrible and getting worse, on the other you have Goldman's Erik Nielsen. Here is the latest hilarious confirmation that Goldman managing directors are just plain clueless when the ponzi pulls a Madoff: "I don’t get the FX market these days. While I understand the technical and position-based arguments for the FX levels, on fundamentals, I don’t know why the Euro has remained overvalued for so long. That said, the triggers for moves are amazing: On Thursday, markets basically ignored the man with the world’s single biggest portfolio, Chinese central bank governor Zhou Xiaochuan, when he expressed full trust in Europe’s ability to deal with its debt crisis, while going into a virtual panic sending EUR/USD below 1.20 for the first time since March 2006 when the wire services botched the simple job of translating French PM Fillon’s statement on the FX. But here is the most fundamental of questions: How can one be bearish on both the Euro and on Euro-zone growth? Beats me – I assume you know which camp I am in."

All is not quiet on the Eastern and soon to be Western front: freefall in the Yen, Dollar and Aussie crosses. Complete global wipeout for the carry traders. Where is Paulson's bazooka when you really need it. It's ok though, Bernanke has things under control - in fact he is meeting to discuss raising the discount rate tomorrow.

By now everyone is aware that the G20 meeting failed to come to a consensus vis-a-vis strategic rescue approaches on the global bailout, with Tim Geithner pushing for uber-Keynesianism, while a far more prudent Europe saying enough to record deficits, and in essence potentially putting the end to the avalanche of endless bailouts and the Bernanke Uber-Put. At least such is the case until tomorrow when Europe's bureaucrats wake up and see a EURUSD at a level that rounds down to 1.10. The reason: Der Spiegel reports that Germany's high court is considering blocking Germany's participation in the European rescue package, a development which if it were to come to pass, would send the euro plunging to parity not with the dollar but with zero.

One of the most recurring and troubling topics on Zero Hedge is the imminent US Debt to GDP parity: even as the US economy is starting to roll over from a temporary sugar high into a double dip, the hangover effect of $2.1 trillion in debt incurred since March 2009 will linger for a long, long time. Total US debt is currently just under $13.1 trillion, and is rising at a rate of about $150-200 billion per month, meaning that US GDP of about $14.4 trillion will soon hit parity with the Federal debt, likely in under one year. Luckily, this critical topic is starting to get far more greater prominence: Bloomberg's chart of the day focuses precisely on this issue. Garfield Reynolds and Wes Goodman note: "President Barack Obama is poised to increase the U.S. debt to a level that exceeds the value of the nation’s annual economic output, a step toward what Bill Gross called a “debt super cycle." We hope the president will finally address this untenable collision course during one of his daily TV appearances in the upcoming weeks, instead of ruminating on last week's terrific(ally bad) NFP report.

With the market now down for the year, and high beta HY bonds getting blown up left and right, not every risk asset is following through in the liquidation race. Case in point: ABX and CMBX, which one can say are the worst of the worst in risk assets. The charts below of the AAA-rated tranche of the various vintages of ABX Subprime (incidentally, are any readers aware of ABX Prime markets yet? It appears after much hoopla by MarkIt, nobody is trading in the Prime version as of yet) and CMBX indicate that while there has been a notable swoon in closing prices of both ABX and CMBX, there is long way to go before either of these hit not only early 2010 levels, but their fair values, somewhere about 50% lower from current prices, which are based on nothing but continued hope of government bailouts of holders of these assets, the bulk of which are the TBTF banks themselves. Should this last recourse of the Bernanke Put mentality crash, look for the broader market to start purchasing Dow 9,000 hats very soon.

These days, it appears the Fed's favorite closed session topic is the Discount Rate. After first bringing this matter up for discussion on April 26, Bernanke's henchmen will once again plot how to keep ever more vocal Fed hawks like Hoenig and Fisher quiet, even as ZIRP persists well into the thirtieth century. According to a "Notice of Meeting under Expedited Procedure" tomorrow, the Fed will once again review whether or not to hike the Discount rate. Obviously, any tightening outcome as a result of this meeting (which is the second on the issue in under two months) will send markets into an even worse tailspin.

Remember those 3 nuclear-armed subs we wrote about, that Israel had positioned off the coast of Iran, a development which promptly got lost in news about the whole flotilla incident? Well, they may be getting some more press time soon. Jerusalem Post reports that in the latest escalation step, Iran has offered to provide military protection in the form of warship escorts for Gaza activist ships. Needless to say, this introduces another huge variable into the game theoretical stability equation: not a single party has "cooperated" yet, even as more and more parties decide to defect. We are increasingly concerned that this will not have a favorable outcome, as all it takes is one stray button or trigger getting pushed for events to get beyond the point of no return.

Love them or hate them, they sure know how to pick nice, and soon to be insolvent, resorts. After meeting in Vouliagmeni, Greece in 2009, 6 months before it was uncovered the country is glaringly bankrupt, the Bilderberg group is doing its annual resort camp out in the Barcelona resort town of Sitges this weekend. Regardless of one's opinions of the Logan Act, any meeting that will probably see Tim Geithner and Ben Bernanke as its attendees should likely have much more press exposure. Either way, if the Greece "study" is any case in point to the near-term consequences of what one can expect, it may be time to really load up on Spain CDS. And not only - the least subtle headline of the day comes courtesy of the Telegraph, that the "Euro will be dead in five years", and goes on to say: "The single currency is in its death throes and may not survive in its current membership for a week, let alone the next five years, according to a selection of responses to the survey – the first major wide-ranging litmus test of economic opinion in the City since the election." Secret meeting lore aside, one can be certain that the primary topic of discussion in Sitges' Dolce hotel will be what to do with the euro. We would be very wary of whatever kneejerk reaction is provoked in the market come late afternoon when the EURUSD starts trading again.

The Telegraph does a good job of separating the Bilderberg fact from fiction in the following article, and RT has a good video clip summary of this weekend's events for the reading challenged.

Goldman recently confirmed it has lost the magic touch when it joined the momentum brigade in anticipating a blow out 600,000 NFP number, revising its prior estimate by +100,000 on Thursday, even as the real NFP came out as a miserable dud 24 hours later. Which is why we urge readers to take the following note from Goldman's Sven Jari Stehn, even though conceptually we are in full agreement with its message, with a big grain of salt: "Despite normalization of valuations, we expect excess supply, high delinquencies and the fading boost from housing policies to push down house prices somewhat further in 2010 and 2011." And just like earlier we pointed out the discrepancy between the opinions of two BofA strategists on the EURUSD, and the huge implications from this divergence, so here we observe the inconsistency between Sven's bearish view on the oh so critical to the US economy housing segment, and David Kostin's hope for an S&P at 1,250 by the end of the year (and 1,300 by June 30).

First Goldman came out with a "favorite tactical short" of the EURUSD, targeting a 1.18 rate several days ago, now BofA is out with the latest hit job on the European currency: the bailed out bank's John Shin has said that he is lowering his "forecast for the euro, pushing down the year-end 2010 target to 1.15 from 1.28 and the year-end 2011 target to 1.10 from 1.20." He continues, "the evolution of the crisis has not only been a near-term negative for the euro, but signals poorly for its medium and longer-term future." Now this is very ironic, because as we pointed out two short days ago, the very same firm's European strategist, Hans Mikkelsen, espoused a much different optimistic point of view: "While we continue to view funding pressures as contained due to the
ECB/Fed currency swap lines, the main risk to our tactical long credit
positions remains any disorderly declines in the Euro as that would
undermine the credibility of the ECB to contain the sovereign crisis." Presumably the take home here is that as long as the decline from 1.20 to 1.10 is orderly all shall be well? Because as has been repeatedly demonstrated, hedge funds always align calmly, in single file,  when the Central Bank theater is burning, happy to see their sell EUR orders executed if and only if RBS, BofA, Barclays and GS so desire... We eagerly await Mikkelsen's positive spin to Shin's note, as otherwise those defending Europe's less than rosy liquidity situation may be down one more advocate.

It was only a matter of time before the administration converted the Gulf spill tragedy into the latest unemployment stimulus program. The Unified Command in Mobile, Alabama announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort. There is no conformation yet whether any of these "unemployed" will be quintuple BLS-counted census workers, or just what death (birth, not so much) adjustment to crustacean wildlife the Department of Labor will apply in order to avoid a comparable overpromise/underdeliver gaffe as this Friday's NFP. And since the oilspill will likely reach Maine relatively soon, we expect the entire Eastern seabord to see at least half a million monthly pick up in temporary workers by the time there is no water left in the Oiltlantic Ocean, some time in September.

The NYT has a pretty good article about the "mystery" of Europe mega toxic loans, which amount to $2.6 trillion just to Greece, Spain and Portugal, in that all attempts to find out just who is on the hook for all this debt have apparently yielded no results. We disagree: this is a topic that has been beaten to death before on ZH, and it is all too well known that France and Germany will go bust overnight if PIIGS debt is allowed to be marked even halfway to market pro forma for governmental bailouts, on the banks' balance sheets. Throw in Austria and Italy if the Hungarian crisis (amusingly, the Hungarian government is now scrambling to undo the harm it caused with its fast and loose words of caution last week, but too late - it has now lost all credibility) spreads to Eastern Europe, and the mystery is solved. But at least the NYT has some pretty charts.

Last week was the fifth consecutive week of HY mutual fund outflows, which while smaller than the prior week's $1.4 billion, was still a material $759 million. With that the five consecutive weeks of HY outflows now stand at $4.3 billion, which is the second largest 5 week sequential outflow from HY funds in history, only better compared to the $4.9 billion in August of 2003. With the disappointing end of week performance in stocks last week, we anticipate that next week Lipper/AMG will announce another huge outflow. With this week's HY outflow, YTD flows are now just barely positive at $898 million. Yet the HY action was nothing compared to the unprecedented, if not record, outflow in domestic equities: ICI reports that the week ended May 26 had $13.4 billion in domestic equity outflows: a number the likes of which we don't recall even in the post-Lehman days. Curiously, even as flows out of all risky assets picked up, money market had yet another outflow of $11.5 billion, bringing total YTD money market outflows to $414 billion, or -12.9% of total money market assets. Ironically, the only asset class (aside from gold) outperforming this year is the dollar. Instead of keeping capital invested in cash, Americans have shifted nearly half a trillion out of the best performing asset in 2010.