Archive - Nov 10, 2011 - Story

Ben Bernanke is speaking in Texas to some soldiers and ther families in what is mostly a boilerplate presentation: he mourns the bubble economy, protects his policies and tries to deflect focus away from the Fed, just like the ECB, to the legislative. To wit: "it doesn't feel like the recession ever ended. The unemployment rate remains painfully high, and more than two-fifths of the unemployed have been out of work for longer than six months, by far the highest ratio since World War II. These problems are very serious, and we at the Federal Reserve have been focusing intently on supporting job creation. Supporting job creation is half of our marching orders, so to speak; the other half is controlling inflation." On Congress: "the Federal Reserve was never intended to shoulder the entire burden of promoting economic prosperity. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector." Most interesting is Bernanke's attempt to get quite cozy with men and women in uniform: "soldiers who had taken the course were more likely to make smart financial choices, such as comparison shopping for major purchases, saving for retirement, and educating themselves about money management. They were less likely to make questionable financial decisions, like paying overdraft fees, taking out car title loans, and continually running credit card balances. Making good, well-thought-out financial decisions can make all the difference to your financial future." Like saving, yes? But with 0.001% deposit rates, just why should these brave men and women do anything "smart" choices: can't they simply do what the banks do every day and make dumb choices, instead knowing full well that you will bail them out. Will you bail out the soldiers of this country who follow in the banks' footsteps? Or do they need more weapons before they become too big to fail?

Having tracked each other almost tick-for-tick for much of the last few weeks, WTI crude has disconnected dramatically this week from the rest of the commodity complex. We mentioned the disconnect yesterday and see three potential reasons: 1) Unwinds from long EU risk hedges due to margin calls, 2) the escalation in the Iran-Israel shenanigans, and/or 3) the weakness of the IAEA report. It seems that after last night's dismal macro data from Europe that this is not the sign of growth that so many would like it to be - but has all the consumption-deflationary impetus we have become accustomed to.

A wonderfully orchestrated 1Y Bill auction in Italy and some clear 'help' from the ECB early on was enough to shift a heavy BTP market in a positive direction for the first time in a week. However, while headlines will be writ large with the 40bps compression in 10Y BTP spreads to bunds, the action in the last few hours of the day in French bonds, European financials, and higher beta credit were much more symptomatic of risk aversion than buyers coming back. Record wides in OATs and EFSF spreads as senior and subordinated financial credit is dramatically wider on the week. In the same way as yesterday, ES was exactly 'balanced' as Europe closed, having shifted back to VWAP as broad risk assets leave a slight positive bias though the selloffs in gold, silver, and copper (and AAPL) suggest some liquidation was underway - even as the dollar leaked lower a little from overnight highs.

Just out via S&P:

As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P's Global Credit Portal suggesting that France's credit rating had been changed. This is not the case: the ratings on Republic of France remain 'AAA/A-1+' with a stable outlook, and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error. Media Contact: Martin Winn, London (44) 20-7176-3740;

At least they did not find €55.5 trillion in the couch. In other news, it is good to see that now a hacker can singlehandedly wreak havoc to a $60 trillion bond market by finding a back door entry to the S&P turboserver. But at least we now know that the next time S&P downgrades someone we will first have to ask if the release was preapproved by Norton AntiVirus...

While Europe stubbornly refuses to get off the pedestal of daily "risk On-Off" headline news disinformation, the time has come to shift our attention to the epic misnomer which is the US supercommittee, or the unelected sub-branch of the legislative body which is supposed to find $1.2 trillion in cuts to enact the debt ceiling hike that Obama passed in August so that America can spend itself into the drunken sailor coma. Incidentally, the country has already issued $700 billion in debt since then, and by the end of the week, total US debt will be just shy of $15.1 trillion. So at least the "benefit" of the debt ceiling, pardon, debt target hike has been implemented, if not any of the mandated budget cuts that are supposed to offset this. Unfortunately, they won't, because as the attached supercommittee trading cards created by JPM's Michael Cembalest demonstrate, as well as the associated Q&A from Goldman explaining all one needs to know about the supercommittee, hell has a better chance of freezing over than these 6 republicans and 6 democrats coming to some agreement.

Wait, what's that? CEO leaving after his CDS-(non) triggering determination practices brought down the Eurozone? What a stunner:

• ISDA CEO STEPPING DOWN
• ISDA SAYS VOLDSTAD WILL BE REPLACED AS CEO BY PICKEL

Luckily, since this is a voluntary action, no CDS written on Voldstad will be triggered and thus no severance will be due and payable. Right? In all seriousness, this means that the idiotic no-trigger determination will be reversed right? We can't wait for the snarky post on the ISDA blog explaining this debacle.

If we scrape away the ever-hopeful headlines predicting a new figurehead lackey or another vote will magically fix Greece, Italy, the euro, Europe's crumbling banks, etc., the global stock markets can be distilled down to one chart. And here it is: a see-saw with the U.S. dollar on one end and the euro and equities on the other. I know the mind rebels at such simplicity, and so does the entire buy-side Wall Street edifice: if it all boils down to this, then there really isn't much value added by the endless reams of fancy reports and analysis, is there?

So much for the half life of the latest European recovery rally. After the ECB is rumored to have bought €1.7 billion in Italian (70%), Spanish and Portuguese bonds this morning, spreads across the continent stabilized... however briefly. Since then, confirmed speculation of an Austrian downgrade and an unconfirmed rumor that Egan Jones and/or other rating agencies will put France on downgrade review has just sent the French(OAT)-Bund spread to new record highs. And so, the ECB just used up even more firepower to achieve absolutely nothing, especially since the market will now expect Draghi to buy double or €3.4 billion tomorrow, or else it will get very, very angry. In the meantime, we urge the ECB to promptly buy all French bonds it can. Wait, what's that, the ECB can't buy French bonds (yet)? Oh... Oops.

The EURUSD is heading lower once again (back under 1.36), OATs are back near the wides of the day at 161bps, and BTP spreads to Bunds are 15bps off their best levels of the day as the Bundesbank jabs a stick in the spokes of the print-fest that seems to be the meme-du-jour for risk assets.

*BUNDESBANK SEES NO SIGNS OF CREDIT CRUNCH IN GERMANY

*BUNDESBANK SPOKESMAN SAYS NO ECB CRISIS MEETING TODAY, TOMORROW

Not exactly the talk we would expect from the ECB-proxy about to embark of regime-changing transactions.

Remember Austria: that "other" AAA-rated country, whose megabank Erste recently made headlines for covering up its sovereign CDS exposure? It appears that AAA rating, which means Austria is still eligible to fund the EFSF, may soon be cut, putting even more pressure on Germany and, of course, France, and thus concerns for ratings downgrades there, to bear the brunt of what is an increasingly impossible bail out plan for Europe. It also means that the market will now be fearing not only a kneejerk reaction to the perpetual French downgrade terror threat courtesy of S&P and Moody's, but can now add not only Hungary and Belgium but also Austria to the list of countries due for some inverse rating agency love trim. As for the catalyst: "In two weeks, Moody's analysts to come to Vienna to assess the situation on the ground. Felderer considers it possible that Austria would put on negative outlook in this review." Alas, it appears that the Grinch is about to steal AAAustria's vaunted rating for Christmas, and push the direction of contagion into a whole new direction.

For anyone who thinks that the ECB is some pristine virgin which has barely been touched in that special monetary printing place, we, or rather JP Morgan's Michael Cembalest, has some news for you: "To-date, that’s what the ECB has done: of the 1.1 trillion Euros extended to European banks and governments (through sovereign/covered bond purchases and repo), 970 billion has been given by the ECB." So anyone demanding that the ECB print even more outright (which incidentally we are certain will eventually happen - our thoughts are identical to those of Dylan Grice from two months ago: "ECBCTRL+P: The Next Steps In The European Implosion") should probably keep this in mind. It will also explain why German members of the ECB are dropping like flies, and why Germany, which better than anyone else, most certainly proponents of modern reincarnations of failed Keynesianism, knows what happens when central banks have gone wild, is certain that the ECB proceeding to move from €1 to many, many more trillions of explicit monetary support, will mean nothing short of hyperinflation.

The miracle that is a global economy in which everyone is looking for export growth has been discussed here at length along with the simple math that makes it nonsense. Today's 'wonderfully' positive improvement in the trade deficit data for the US - which will be extrapolated into a spike in GDP growth and why the S&P should be at 1500 by month's end - does seem a little odd given all the uncertainty. Sure enough, thanks to Sean Corrigan of Diapason Securities, we have our answer. A massive spike in Exports to - drum roll please - Hong Kong!!A 76% rise in exports to this once glorious colony. The US trade deficit fell by $1.8bn thanks to a $2.5bn rise in exports (of which $2.03bn was to Hong Kong). Has Hong Kong become the channel-stuffing center of the world? It appears so since China's exports to Hong Kong have remained extremely high.

The failure of the Eurozone and the European monetary union looks increasingly likely. This has incredible political, economic and monetary implications for the world and could lead to shockwaves akin to or surpassing that seen after the collapse of the Soviet Union. Given the scale of the crisis, we continue to amazed at the lack of animal spirits in the gold market – both from media coverage and from public participation. The majority have no idea of the ramifications of these momentous geopolitical developments. The public knows the developments are negative but most are resigned to their fate and many are like deer in the headlights failing to join the dots and realize the ramifications for their investments, savings and financial wellbeing. While demand in Asia has fallen from the very strong levels seen recently - demand continues and Chinese New Year should see Chinese demand pick up again in the coming weeks. Western investment demand continues as seen in increasing allocations to the SPDR trust.

• Former ECB vice president Papademos will be the interim Greek PM. Meanwhile, media reported that the Italian PM Berlusconi may step down by Sunday
• Market talk that the ECB is buying in the Italian and Spanish government bonds. Also, market talk that in an emergency meeting today, the ECB may decide to purchase the Italian government debt in unlimited amount
• News emerged that the ESM may not be operational in mid-2012 as Germany and France clashed on bond loss provisions
• ECB's Knot said that the ECB can keep buying bonds as long as sterilization works, adding that the central bank can speed up bond purchases. He further said that the ECB can keep purchased bonds until maturity. However, he also said that the ECB should only buy bonds when markets are panicking