Archive - Nov 17, 2011 - Story

The demand that the ECB becomes the lender of last (and only) resort has reached a crescendo.  Virtually everyone in the world is pleading with Germany to allow the ECB to print money and buy massive amounts of Spanish, Italian, Portuguese, Irish, Belgium, and possibly Austrian debt.  But as far as I can tell, the analysis doesn’t go beyond buy and the problem will be solved.Before taking the step to print, all that we can hope for is that someone will actually do some serious analysis of the potential consequences, beyond the immediate relief rally.It may be the best solution, but until I see some real analysis convincing me the consequences of printing have been thought out, we will remain in the camp that letting some defaults, break-ups, write-downs, is the best longer term solution in spite of short term pain.

In yet another attempt which will backfire miserably, starting about 30 minutes ago the ECB has gone absolutely apeshit in the market and has been buying every single piece of paper it could get its hands on, focusing on BTPs with Spanish bonds in second place. As the chart below shows, following what has been a non stop buying spree, the Italian benchmark 4.75% of 2021 has soared from 84.75 to 86 in one non-stop run. The implicit motive is to get the Spanish Bund spread down from 500 bps which virtually guarantees a margin hike and a collapse into the toxic debt hole. Will they be successful? Of course not: we give this intervention another 10-15 minutes tops before Draghi's bond buyers are exhausted and the selling resumes. In the meantime, the ECB's SMP cumulative total is now well over €200 billion.

• Focus remains on the debt and political turmoil surrounding Spain and Italy, with particular widening observed in the Spanish/German 10-year government bond yield spread. There was market talk of the ECB buying the Spanish and Italian government debt
• Spain had a lackluster bond auction, with the auction yield printing an Euro-era high
• Fitch said that the Euro-zone contagion poses a threat to the US bank rating outlook. Eurodollar and Euribor futures have remained under pressure throughout the European session
• Italian PM Monti said will fully implement the previous government's letter of intent to the EU, and will consider necessity of additional measures
• GBP/USD gained around 30 pips following higher than expected retail sales data from the UK

Now that they have been kicked out of their tents in Zucotti Park, the OWS protesters have congregated at the intersection of Nassau and Pine with speculation that they intend to go to the NYSE after. Naturally that would mean breaching the NYPD barricades which would likely lead to a spike in violence. Watch it live below.

Gold Demand Trends (Q3 2011) released today by the World Gold Council (see commentary) shows that investment and central bank demand for gold were key drivers of total gold demand last quarter. Third quarter gold demand increased 6% year on year to 1,053.9 tonnes with investment demand rising a significant 33% y/y to 468.1T. Virtually all markets saw strong double-digit growth in demand for gold bars and coins. Investment demand in Europe surged 135% due to the deepening sovereign debt crisis.  Significantly, 390.5 tonnes of the 468.1 tonnes of investment demand went into physical bullion in the form of bars and coins. ETF demand was 77 tonnes and nearly 50% of that was from European investors and institutions. The increase in overall investment demand was quiet impressive considering the higher average price in the quarter and the price correction in September but not surprising given the scale of the global economic crisis. A huge and paradigm shifting change in the gold market is central bank buying which rose 556% to 148.4T from 22.6T in Q3 last year. For the past 15 years there has been net selling of around 400 tonnes per annum from central banks. Importantly, the World Gold Council can only identify about 40 to 50 tonnes of the 148.4 tonnes bought by central banks.

Today is a rerun of Tuesday when it was all about the horrible Spanish auction. Well, let's use a different adjective for what came out of Spain today: dreadful, atrocious, awful: all words used not by us but by Wall Street experts to describe what just happened (see below). To summarize: Spain sold €3.56 billion euros of a new ten-year benchmark bond, well below the €4 billion targeted. The average yield on the bond was 6.975 percent, the highest paid since 1997, and almost 2% higher compared to the 5.433% paid on October 20. The highest paid for a ten-year bond this year was on July 21 when it paid 5.986 percent. The bid-to-cover ratio, an indicator of investor demand, was 1.5: this compares to 1.76 a month ago, and 1.95 average of the last 6 10 year auctions. The result: Spain Bund spreads are at a record 499 and about to pass 500 bps: the level at which LCH hiked Italian bond margins, and is resulting in another round of rumor of an imminent Spanish bond margin hiked which in turn would lead to more selling of sovereign bonds both in Spain and everywhere else. The Spanish 2s10s has collapsed and is under triple digits for the first time in years: at this rate it may well invert in days. And speaking of everywhere else, French Bund spreads hit a record 202 earlier, a level which will be promptly taken out; Italian spread tightened modestly after the ECB stepped in with another brief intervention which will be promptly steamrolled. It has gotten so bad, the EFSF spread to Bunds also just hit an all time record - kiss the EFSF goodbye. Lastly, futures are at overnight lows or just over 1220. Looks like we will have another Risk Off day at least until Europe close.

UPDATE 1: Chatter that SMP is in BTPs saving the EUR84.50 level again - rest of sovereigns remain weaker.

UPDATE 2: WTI $103

As traders hold their breaths for what will likely be a 'well-managed' French auction this morning, the sentiment from the late US markets is spilling into Europe as Sovereigns - especially France (record wides at 196bps), Italy, and Spain (record wides at 475bps) are all seeing yields and spreads surge. EFSF spread to Bunds just cracked 190bps for the first time as Italian 10Y spreads are back into the record-breaking zone from 11/9 and the Italian 2s10s curve is bear-flattening further by 13bps. ES managed to sustain a low volume recovery off spike lows after hours and is currently +0.5% (though leaking back) as European credit markets open leaking wider with XOver +13bps and Main +4bps. EUR remains under 1.3475 (and EUR-USD swap spread model is reverting back down towards EURUSD) as JPY strengthens modestly. Oil is diverging (higher - breaking $103!) from the rest of the commodity pack and is the main driver of a CONTEXT-based correlated-risk-basket rally (as TSYs drip back towards day low yields levels) that is mildly supportive of ES. Little sign of the ECB yet, but we suspect they are saving their fire-power for pre-auction shenanigans.

Up until now, fraudclosure and robosigning were both merely civil offenses, and as such the banks were actively doing all they could to bury any and all pending litigation under a large settlement umbrella, wash their hands of the whole affair and move on, with nobody in danger of actually walking the plank and certainly not in danger of going to jail. That has all changed as of now, following a Nevada Grand Jury handing down criminal indictments against two title officers employed by Lender Processing Services Inc. for allegedly directing and supervising a robo-signing scheme, in which documents filed in foreclosure cases were signed without proper legal review, Nevada Attorney General Catherine Cortez Masto said Wednesday. The case which, if won on behalf of the plaintiffs, could easily mean several lifetime sentences for one Linda Green, is likely just the beginning of a wave of criminal charges against the thousands of robosigners involved at every stage of housing bubble, and quite possibly is starting as a midlevel fishing expedition which will see gradual escalation up the ranks as the "robotic" ones rat each other out in succession until the elevator goes to the very top floor. Just which floor that is remains to be see although somehow we have a feeling it will be found in the Bank of America tower.

Physics has the elusive Theory of Everything which consists of several Grand Unified Theories and which represents the holy grail of the science and which "fully explains and links together all known physical phenomena, and predicts the outcome of any experiment that could be carried out in principle." In other words, once proven it would make life boring. We doubt it ever will be. Finance does not have anything like it, for the simple reason that while physics is a deterministic science, finance, predicated to a big extent on assumptions borrowed from the shaman cult known as 'economics' is always and everywhere open ended, and depends just as much on chaotic 'strange attractors' as it does on simple linear relationships. Yet when it comes to presentations, especially of the variety that attempt to explain not only where we are in the world, and how we got there, but also where we are headed, we have yet to see anything as comprehensive as the Investment Strategy guidebook from Pictet's Christophe Donay. If there is indeed a holy grail of presentations, this is it, at least for a few more instants, until something dramatically changes and the whole thing becomes an anachronism. In the meantime learn everything there is to know about global decoupling and the lack thereof, the reality of an over-indebted global regime and its 3 incompatible targets, the outlook for the US and the 30% probability of a hard recession, a recessionary Europe and the five possible outcomes of its crisis, China and its hard landing, and how this all ties into an outlook on where the world is headed together with appropriate investment strategies and proper asset allocation, the fair value of the EURUSD, systemic risk evaluation, cross asset correlation, the impact of central bank intervention, debt redemption profiles, the role of gold and commodities in the new reality, and virtually everything else of importance right here and right now.

The export miracle, that we have been cantankerously remonstrating against the possibility of for much of the last year, appears to be running into a wall of reality. The Economist puts its usual number-centric and acerbic spin on the nonsense that economists spew with regard to everyone exporting their way out of the debt-laden deleveraging quagmire we are in. Economists are constantly urging governments to adopt policies that would reduce global imbalances—which, in crude terms, means that China should slash its current-account surplus and America its deficit. Yet they ignore the biggest imbalance of all: the current-account surplus that planet Earth appears to run with extraterrestrials. The world exported $331 billion more than it imported in 2010!