Archive - Oct 2011 - Story

The headline GDP number was apparently enough growth to completely erase all thoughts of any renewed recession. However, most of us know that one quarter is not a trend and that the quarterly numbers are often statistically adjusted beyond something non-statistically meaningful. If we look at the headline numbers in sequence, it certainly seems that the economy is picking up from the weak first half. From these numbers it looks as if the economy slowed in the middle of 2010, hit a bottom in the first quarter of 2011, and has rebounded through the rest of 2011. I have little doubt that the economics profession has assumed a lagged effect from monetary stimulation, meaning the data largely confirms QE’s stated goals. From this interpretation, it looks as if Bernanke and his crew were exactly right to begin just when conditions were deteriorating and we are now set to bask in the successful afterglow of monetary intervention. A funny thing happens, though, when you remove the seasonal adjustments. This data presents an entirely different picture of the economy. From this point of view, GDP growth peaked toward the end of 2010 (just when QE 2.0 was announced) and has been decelerating ever since. The economy’s deceleration matches perfectly the increase in the price index, the BEA’s uneven proxy for inflation. Intuitively this makes far more sense, and from that we can draw far different conclusions about the efficacy of monetary interventions.

While only the market, and no one else, seems to have a grasp on the unknown unknowns in the Eurozone crisis, and has voted two toes up, despite really having no clue what is coming for Europe, here is a report from Exclusive-Analysis that summarizes the known unknowns, and comes up with a bleak conclusion: "We remain very doubtful that the relative optimism that has followed the EU summit will last. Last time, the 10th of October, following a Berlusconi announcement of austerity in the previous week, it took markets only a few days to distinguish between the detail of what was agreed and the more optimistic  principles that were announced." So as everyone scrambles to figure out what is still missing from European bailout plan, perhaps focus on what is already present, because if that is any indication, the Thursday rally is nothing but yet another confirmation of just how broken the market as a discounting mechanism truly is.

The date is October 29, 2018, and Britain faces its darkest hour. On the battlefields of Europe, our Armed Forces have been humiliated. In makeshift prison camps on the continent, thousands of our young men and women sit forlornly, testament to the collapse of our ambitions.From the killing grounds of Belgium to the scarred streets of Athens, a continent continues to bleed. And, in the east, the Russian bear inexorably tightens its grip, an old empire rising from the wreckage of the European dream. Yesterday, after a run of military defeats unequalled in our history, the Prime Minister offered his resignation. There is talk of a National Government, but no one has any illusions of another Churchill waiting in the wings. In suburban streets across Britain, old men and callow teenagers are digging defensive positions in the cold autumn air. But with equipment scarce and ammunition non-existent, the Home Guard would barely last a week. And all the time, across the Channel, enemy forces make their final preparations for the inevitable invasion. Some talk of surrender; no one speaks of victory. Less than ten years ago, millions still believed in a peaceful, united Europe. How did it come to this? When future historians look back on our humiliation, they will surely judge that the turning point was the last week in October 2011. Largely forgotten today, the main event was yet another interminable European summit in Brussels — the 14th attempt to ‘save the euro’ in just 20 months. Hoping to secure German support for a massive one trillion euro rescue package, Chancellor Angela Merkel gave her parliamentarians a chillingly prescient warning. ‘No one should believe that another half century of peace in Europe is a given — it’s not,’ she said. ‘So I say again: if the euro collapses, Europe collapses. That can’t happen.’ At the time, many observers scoffed that she was being absurdly melodramatic. But, seven years on, no one is laughing.

With ex-­?goldmanite ‘super mario’ at the helm of the ECB, expect more money printing, a two tier banking system, and a bigger role for the IMF. After 8 years of Jean-Claude Trichet, the ECB gets a new face: the Italian Mario Draghi. From his recent statements in the press and elsewhere, many assume he will rather be a ‘hawk’ than a ‘dove’, meaning that Draghi will only print little money and will not lower interest rates aggressively. But a look into the past of this man makes us wonder: hawk for whom?

Two days ago we noted that foreigners are selling US paper at a record pace, whether to raise capital in a locked out liquidity environment like French banks, or to make a politicial statement, like China. Today we get the first confirmation to this from Norway's Sovereign Wealth fund, best known for its prediction that it would buy and hold Greek bonds in perpetuity back in September 2010. Just recall: "Norway has taken the view that [Greek bonds] will not [default]. The Greek holdings are particularly interesting because the consensus in the market is that they will at some point restructure or default." Well, about a year later it is now official that the best the Norway SWF can hope for is a 50% recovery. So what does it do? It proceeds to dump US paper. Mortgage Backed Securities first. Because if it announced that a sovereign wealth fund instead of buying into the biggest ponzi ever, we finally defecting from it, then all bets would be of. Bloomberg reports: "Norway’s $570 billion sovereign wealth fund sold all its holdings in U.S. mortgage-backed securities as part of a shift of its fixed-income portfolio.“We’ve reduced our holdings of mortgage-backed securities,” he said. “MBS has been taken out of our internal policy benchmark. This means that we don’t have mortgage-backed securities issued by Freddie Mac and Fannie Mae any longer." The stated reason for the dump: prepayment risk: "The debt was sold primarily because of the refinancing risk, he said. In the U.S., when a borrower refinances a mortgage it can cut short the maturity of the bond backed by the loan and reduce the expected interest over time, so-called prepayment risk." The real reason? Why shoring up capital of course. "The fund held 36 billion kroner ($6.6 billion) in bonds from Fannie Mae at the end of the second quarter and 11.5 billion kroner from Freddie Mac at the start of the year." And with the Fed telling us that almost $100 billion in US bonds and MBS having been sold in the past two months, one can be absolutely certain that i) it is not just MBS and ii) it is not just Norway.

As usual, the most surreal news of the day, perhaps week, is saved for Friday night, when we learn that Germany has magically raised over a quarter of its total EFSF obligation of €211 billion by way of what is essentially magic. The Telegraph reports that "Germany is €55bn richer than it previously thought because of an accounting error at state-owned bank Hypo Real Estate Holding. The mistake at "bad bank" FMS Wertmanagement, happened because collateral for derivatives wasn't netted between the asset and liability side, an FMS spokesman said. As a result, FMS will only contribute about €161bn to Germany's debt this year, down from €216.5bn in 2010." Another way of representing the error is that it is equal to a ridiculous 1% of the country's debt to GDP ratio. "Germany's 2010 debt-to-GDP ratio also drops, to 83.2% from the previous 84.2%, a finance ministry spokesman said." In other words, the modern world, best characterized by the imploding fiat ponzi, has discovered a way to raise capital (electronic, naturally) courtesy of CDS bookmarking errors. And now, we have seen it all.

What do you get when the producer of the world's reserve currency takes on too much debt? Nothing less than the end of the US Treasury-based monetary system. So says Eric Jansen, economic and financial market analyst and proprietor of iTulip.com. In chronicling the decline of the global economy over the past decade, Eric has formulated a framework called the "Ka-POOM" theory, which endeavors to understand how the immense run-up in global debt will be resolved. In short, it looks at the at the credit bubble that began in the early 1980's, started accelerating in 1995, and has now reached epic proportions. The amounts are so staggering at this stage that Eric believes it is too politically undesirable to let natural market adjustments clear them away - the magnitude of the deflationary pain this would create is simply unacceptable for politicians looking to get re-elected. The only other available option left is to service these debts via a dramatically devalued currency. Hence the key role the Fed is playing today. The Fed is at the epicenter of this process, intervening heavily to keep the natural corrective market forces at bay. In this, it has a dual strategy. The first is to keep asset prices high (i.e., fight asset deflation), which it is doing by keeping interest rates historically low. The second is to keep wage and commodity costs under control, which it primarily does via devaluing the currency (maintaining a "weak dollar"). And, of course, through its intervention, the Fed is doing all it can to keep the current financial system in place to perpetuate the process for as long as possible. The end result is a fundamental shift in risk from Wall Street to the taxpayer.

Next time Microsoft offers to buy you, you say yes.

• YAHOO SAID TO LEAN TOWARD DIVIDEND, BUYBACK INSTEAD OF SALE
• YAHOO SAID TO CONSIDER SELLING ASIA ASSETS ALONE

 That's right - another "take under." Sorry to anyone who bought this stock on a take out/13F clone play.

Presented without commentary:

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending." -

Larry Summers, source

Your one stop, comprehensive summary of the main bullish and bearish events in the past week.

FX markets have pretty much trodden water for the last 24 hours with admittedly a small USD bullish bias providing little ammo for any correlation-driven risk-asset moves today. Credit markets did wonder gently up and down but ES was like a Parkinson's patient off his meds as it noisily whipped up and down in a small range generally tracking credit. Into the close HY and ES surged (on nothing except perhaps the EUR futures CoT data) as MF Global's stock price dived but HY managed to hold and close at its highs while ES pulled back modestly. IG didn't play into the late day exuberance and we suspect the HY shift is more index arb as intrinsics actually widened on the day and the index remains cheap. HY is still 'cheap' as a risk asset relative to equities which might explain some of the grab here into the close but with a weekend of uncertainty ahead, why not wait til Monday to add risk? Copper managed to rally from pre-open today as did oil marginally but Silver and Gold were unimpressive as they held gains (much as DXY was holding its losses on the week).

Last week we warned of the possibility for a massive short squeeze melt up purely due to the fact that the most leveragable driver of the stock market, the EURUSD, had barely seen a change in net short positions despite recurring noises that Europe would somehow pull a magic money tree out of the hat and all should be well. Well, they pulled it, and the EURUSD soared over 300 pips. There is one problem, however: as the latest CFTC Commitment of Traders update indicates, there was barely any change in net non-spec EUR bearish bets which remained stubbornly fixed near the 2011 highs, at -76,512 contracts, just off the prior week's -77,720. Granted the USD net long dropped yet again, from 41,751 to 32,110 contracts. But the one all important driver for yet another potential squeeze has hardly budged. The one saving grace: this data is as of October 25, just before the massive rip started. As such it is possible that a substantial portion of these shorts has covered. Alas, we won't know until next Friday. By then, weak hand bears, spooked by merely the possibility of another ramp, will likely continue to cover into any even modest dip. It won't be until this total short position moves materially higher that the chance of any material downtick in the market will reappear.

The Solyndra-gate scandal, which the GOP realizes has the potential to shake the Obama administration to the very top, refuses to go away. Earlier today AP reported that to a republican Subpoena demanding all documents instead of just those selectively produced, "could trigger a claim of executive privilege by the Obama administration and elevate the political stakes. The loan is being investigated by two House committees, which have released Solyndra-related documents from federal agencies including the Energy and Treasury departments and the Office of Management and Budget." The White House has refused a request by the House Energy and Commerce Committee for all internal White House communications about Solyndra. White House Counsel Kathryn Ruemmler said the committee leaders' request has implications for "long-standing and significant institutional executive branch confidentiality interests." Naturally: it would be a big hit to the presidency's interests if it was uncovered that crony capitalist vigilante #1 himself is more than willing to distributed taxpayer capital to the highest bidder. So instead the The White House is ordering a review of loan guarantees made by the Energy Department after a California solar company that got a half-billion-dollar federal loan went bankrupt. There are more than two dozen of these to a variety of clean energy companies." And here is where the latest joke from this president jumps the shark: "[White House chief of staff] Daley said he's tapping a former Treasury official to conduct the review." A former Treasury official... of the Obama administration?

Performance anxiety can, whether you're honest about it or not, cloud your decisions in this market. Do you cave to the relative performance derby in order to retain investors? Its a real issue if you've been on the wrong side of this market or any side for that matter. The volatility has made investors punch drunk. I'm talking about customers that say flat out: "If you don't get more invested, I'm pulling my account". How quickly they forget that 2 weeks ago they were of the opposite mindset. Let me share my story - as I'm sure there are a million like it. I've been receiving daily calls from an investor for the last 3 months (yes, I should have already fired him). We've been in 70% cash, which two months ago - in his words - enabled him to sleep at night. Now he can't sleep and is constantly hyperventilating at all the money he is "losing" by being under-invested. Cramer put him over the edge last night.

One would think that considering that their debt, or rather about 60% of it, was haircut over the past 2 days, the Greeks would be grateful to Germany who not only orchestrated this transaction over the vocal protests of her French vertically challenged counterpart, but effectively has pledged a substantial portion of German GDP to preserve not only the Greek welfare state but soon that of all the other European countries. One would be wrong.