Archive - Nov 8, 2011 - Story

There are several moving parts in the drama that is Italian credit markets. Unfortunately no matter which measure a trader or PM looks at (unless you are Blackrock's un-MtM-able book or MS's Level 5 assets), it seems increasingly clear that the Italian funding situation is rapidly shifting to a low-confidence/default-equilibrium and jumping the chasm to high-confidence/no-default seems further and further away. Unintended consequences, as we have discussed at length, from the EU Summit (exemption of official-sector holdings from haircuts, non-triggering CDS logistics, and an EFSF unable to cope with a sovereign like Italy) leaves traders/managers with a binary decision on investment. While yields may seem attractive, the size of systemic risk being engaged being long BTPs is huge compared to a GGB 'bet' and unless the ECB steps in with an unlimited bazooka, no amount of yield support will cover the MtM losses managers will face as they 'im'patiently wait for reform.

In lieu of the period of unbridled peace and prosperity that was supposed to be ushered once the European summit ended, we have more chaos, more uncertainty, and record blow ups in all Euro-sovereign paper. Which means only one thing: the long-awaited moment of coordinated and endless central planner printing is getting ever closer. And once again, gold has figured this out albeit with a slight delay, having left the $1700 handle behind. Once the general public notices the most recent break out in the yellow metal expect yet another manic phase higher, coupled with the now traditional margin hike buffoonery (or wait, maybe this time the CME will lower margins to, gasp, make sure there is no liquidity stress).

Earlier today, in no uncertain terms, members of the Eurozone made it clear that unless Greece signs a commitment to implement the economic reforms (read: collect taxes) agreed upon as part of the October 26 bailout agreement, it would not receive "one cent." Well, just like last week when G-Pap threatened to blow up the carefully laid plans of mice and eurocrats by demanding a referendum, only to arrange a seemingly peaceful transition in power to his, and the Fed's, and the ECB's puppet L-Pap, so it is now the turn of his opponent to put the entire Greek rescue in jeopardy, and with it the future of the euro, eurozone, all the banks that are "perfectly hedged" to Europe, etc, etc.  Because it appears that the leader of the main opposition party, New Democracy Antonis Samaras, has "just said no." According to Kathimerini: "There is such a thing as national dignity. I have repeatedly explained that, in order to protect the Greek economy and the euro, the implementation of the October 26 agreement is inevitable," Samaras said in the statement, referring to a new EU debt deal hammered out for Greece by EU leaders. "I won't allow anyone to question the statements I have made."

Like a full-blown alcoholic, the people and governments of the U.S. and Europe stagger from debt source to debt source, weaving drunkenly between "stashes" of new debt in the Fed, Treasury and private sector markets. Despite the abject failure of the magical-thinking "fix" of becoming solvent by exponentially expanding debt, we see the same pathetic pattern repeating in Europe, where the apologists for the alcoholic debt-binge continue to claim the risk of systemic failure and collapse of asset values is low. While everyone is focused on the drunk being pulled from the pool--Europe's sovereign debt--another drunk is teetering on the edge: public and private pension plans. Here's the reality in a nutshell: pension plans only work if they earn average returns of around 8% per year, basically forever. Gripped by the mono-maniacal desperation of an addict who sees no other path but another hit, central banks have lowered interest rates to near-zero to "spark growth." Unfortunately the only thing being goosed is the future cost of servicing the additional debt. How do you earn 8% on money which yields at best 3%? You can't. How do you reap a gain on bonds when interest rates have already hit bottom and can't fall any lower? You can't.

We usually mock Neel "get me a napkin" Kashkari. This is not going to be one of those times, because in one of the better essay written on the topic, the Pimco equity strategist and former Hank Paulson right hand (fall)guy makes a mockery out of anyone and everyone who tries to predict the future, wth an emphasis on CNBC (not surprisingly considering the relentless barrage that the Comcast fin-comedy channel has unleashed toward Bill Gross in the past year) and that seer of seers, prognosticator of prognosticators: A. Joseph Cohen. Kashkari's take home: "In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.... If we’re right – and neither PIMCO, nor anyone else, can accurately predict the level of the stock market at a certain date in one week, one month or one year – why do so many sell-side analysts (and a few investment managers) make such predictions? And why do we pay any attention?  I will answer my question with a question: Why do millions of people watch professional wrestling, “The Real Housewives” or “Jersey Shore?” It makes for entertaining television." And the stab right at CNBC's conflicted little heart: "My hope from this piece is not that you stop watching business television. I certainly watch regularly and I also participate, sharing PIMCO’s views. I think it is a unique medium in which to follow markets and quickly hear a variety of perspectives on important topics. My hope is that it becomes a little easier to distinguish thoughtful commentators discussing knowable economic topics from entertainers throwing darts." Congratulations sell-side Wall Street, and their number one media venue to present senseless permbullish biased forecasts - you have just been Punk'd.

We had a feeling that the modest upward blip in Greek August deposits by corporations and households, to the tune of €1.4 billion, was a "transitory" event. It was. According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs. Look for this number to continue dropping month after month as more and more Greeks move their cash offshore. Additionally, the ECB announced that financing to Greek banks in September was €77.8 billion while Greek reliance on the "temporary" Emergency Liquidity Assistance program hit €26.6 billion according to Bloomberg. With every additional deposit outflow, expect ever more money to be needed to keep the Greek sham of a banking system afloat, and more and more Germans to follow in Jens Weidmann's footsteps and start getting very, very angry.

Everyone hoping the ECB would step in today and buy Italian bonds... has been disappointed. Has Draghi finally decided to make a political statement and kick Berlusconi out by send the 10 year to new all time lows? So it would appear: the 10 Year price just dropped below 87 for the first time, and the Bund-BTP spread rapidly approaching the LCH margin hike-inducing level, last at 490 bps.

Trust the Germans in the ECB (those who have not yet resigned that is) in this case Jesn Weidmann, to come in and spoil the party:

• Weidmann, speaking in Berlin, says hyperinflation shows why monetizing debt wrong
• Prohibition on monetary financing an important achievement.
• Euro treaty rightly forbids monetary financing
• Stable prices should be key goal of ECB
• Leveraging EFSF with currency reserves prohibited
• Says monetary analysis may gain importance at ECB

And for all our MMT friends:

• "One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press:” Weidmann
• Pohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and "specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I"

Meet the new boss: same as the old boss:

• ITALIAN PARLIAMENT VOTING ON BUDGET MEASURE
• ITALY'S BERLUSCONI WINS BUDGET VOTE AFTER OPPOSITION ABSTAINS WITH 308 VOTES IN 630 SEAT PARLIAMENT
• BERLUSCONI WINS BUDGET VOTE WITHOUT ABSOLUTE MAJORITY
• BERLUSCONI WINS VOTE BUDGET VOTE

What is notable is that Berlusconi has now lost his majority. Sure enough:

• ITALY'S BERSANI CALLS ON BERLUSCONI TO RESIGN

What this means is not quite clear but the EURUSD is not too happy for now.

As was noted previously (here and here), today's Italian parliament vote on the 2010 Italian budget (yes, like the US they are almost up to date with real time running budgets) will be of notable significance for Berlusconi, Italy, its sovereign bonds and Europe. And the vote has just been open by the Assemblea speaker.. Also attached is the roll call of the key players and potential Berlusconi successors should the billionaire PM step down.

What does over $200 billion in intervention money get you these days? Not much: a half-life of 7 days as it turns out. Following a series of disastrous interventions by the Japanese Central Bank in the past two years, the latest and greatest, aka the Halloween shorts massacre, has now retraced 50% of the move to the USDJPY highs, which appears to be a notable stop loss barrier, and which the Japanese FinMin and central bank will defend at all costs. It would not surprise us if the BOJ were forced to throw far more good money after bad to pretend it has things under control, if the 77.60 barrier is taken out. And after all, all those USD and EUR purchased with the intervention proceeds were a boon to Europe: after all Japan (in the complete absence of China) bought a whopping... €300 million of the latest €3 billion EFSF issue. We expect to see market conventional wisdom to switch from China to Japan as being Europe's secret bailout Santa in a few short minutes.

Sean Egan, of Egan Jones, appeared on CNBC's Squawk Box this morning to pay penance for his truthiness and daring to open investor's eyes to the reality we are facing. The two main topics of discussion were the European crisis and, of course, Jefferies. Egan hushes the CNBCers when he describes the three solutions for Europe's problems - which really boils down to one of restructuring and/or printing when faced with reality - and points to a EUR2.5tn hole that needs to be filled at least. Of course, the discussion of Europe's sovereign shackles led to demands from the Kernan, Sorkin, and MCC for their pound of flesh over Egan's call on JEF but the rater defended his call with simple logic as another guest host questioned how Egan expects JEF's business model to be viable at lower than 13x leverage - great question.

One can always rely on Art Cashin and the Friends Of The Fermentation (FoF) to provide a novel perspective on pretty much everything.

This is not news, and was already broken over the weekend, but at least now it is official.

• GREEK PRESIDENT TOLD THAT PAPADEMOS TO HEAD GOVERNMENT- BBG quotes SKAI

That said, while the EURUSD is obviously delighted that the ECB has just placed its first proxy to head a sovereign nation, perhaps PM is not quite the right title: how about Federal Reserve Viceroy for the Aegeo-Turkish region; or Annexation Tzar for the ECB. As a reminder, L-Pap's profile can be found here.