Archive - Nov 2011 - Story

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!

If the abridged summary from BBC's Hardtalk interview with Kyle Bass that we published yesterday was not enough for those seeking sense, truth, and direction, then (as promised) the full 24'30" interview will quench that desire. Reflecting on the similarities of his subprime perspective, he provides a crucial context for the debt-laden world of sovereign debt that he is now hedging. Shrugging off the somewhat snarky 'nefarious short-sellers' angle of questioning (and insuring the uninsured prod), he simply and elegantly points out how massively asymmetric the European sovereign debt bet was, how the asymmetry in Europe has largely disappeared now, and all the asymmetry now lies in Japan. From the 14-minute mark, Bass describes the demographic disaster, destroys the savings myth of the land of the rising sun, and brings into focus how Italy's rapid demise should be a forewarning for the debt-servicing needs of Japan. Ending up on the Fed's printing and the need for guns and gold, there's a little here for everyone!

"Buying gold is just buying a put against the idiocy of the political cycle. It's That Simple"

Because if we have to deal with constant and increasingly more ridiculous BS out of Europe over and over and over, it is only fair to get an update from the bears, if for no other reason than pure comedic enjoyment now that the world has been taken over by the Banana Onion.

A long, long time ago, back when we could barely rub together 10 visitors a day, we suggested an "Investment idea that gets you point with the ladies" in the form of art conceived by the inimitable Geoffrey Raymond. Judging by market clearing prices, anyone who listened to our advice back then, when a typical Raymond sold for $20-$30K, has generated returns well in excess of either gold or silver - an SAC-blush worthy 50% CAGR! Raymond's latest product has a starting bid of $85,000 and will only go higher. If anyone has some devaluing fiat with Corzine's name written all over it (literally) they can do the barter here. For everyone else, this is your chance to not only annotate it as Raymond will transcribe the wittiest Zero Hedge comments onto the painting, but tell one of the biggest criminals, and we have to add "alleged" for legal purposes but whatevs, of 2011, who will almost certainly never be arrested, not even if he were to pitch a tent in the middle of Zuccoti Park, how you really feel.

The late day collapse in financials (thanks to Fitch's comments that seemed to wake up a sleeping equity market to the reality that credit has been screaming for weeks) helped drag equities (and HY debt) significantly lower. Most notably, amid a much higher than average volume day today, the dislocations of the last few days - that we have highlighted - have converged very rapidly this afternoon. ES significantly underperformed a broad basket of risk assets (CONTEXT) into the close as copper and oil gave back some of the day's gains. TSYs closed at low yields for the day - and 2s10s30s dropped significantly - as we warned it would have to sustain any sell-off as EURUSD tracked back towards its lowest levels of the day dragging DXY up to almost unchanged on the day (+1.7% on the week). On a longer-term basis, HY markets are priced for an S&P around 1190 currently but as HY also collapses wider, we will rapidly see the 'expected' S&P level drop further. Credit Anticipates and Equity Confirms is often cited by old-school credit market professionals - it seems once again that it is true. What is more evident, and discussed by Peter Tchir of TF MArket Advisors, is the morphing of the sovereign crisis into a banking system crisis as TPTB are unable to achieve anything of note.

Too sad for commentary, but here is some math: total US debt has increased by 41.5%, or $4.4 trillion, from $10,626,877,048,913 on January 20, to $15,033,607,255,920, under Obama as president.

While Fitch sees US banks having manageable exposure to the PIIGS markets and having cut their overall exposure, the reality of the contagion of further European banking system stresses (which we have been very vocal about in our discussions) is a concern. We have highlighted again and again that the credit market has not been as comfortable as stocks with the US financial sector for the last few weeks and today it seems reality is starting to sink in as BAC trades with $5 handle and $MS a $14 handle back to one-month lows. XLF is now down over 2% today alone as the broad HY credit market is collapsing this afternoon. Once again credit markets had it right!

Citi's Willem Buiter whose succinct analysis a few weeks ago sealed the coffin of the worthless EFSF, has just come out with another knock out punch this morning after telling Bloomberg TV what everyone else knows is true, but is terrified to say out loud: namely that, "time is running out fast." He adds: " I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging the European banking system and North America with it. So they have to act now." In sum -  a rehash of the Deutsche Bank pitchbook to the ECB we posted earlier, only in Mutually Assured Terms that would make even Hank Paulson blush. At this point Germany has an option: tell Europe to take a hike, or go balls to wall in bailing out 250 million European's early retirement packages. The ball is in Merkel's court, who unlike Citi, JPM, DB, and everyone else, has to worry about this fickle, and potentially pitchfork bearing, thing called "voters."

Remember the DOL's very appropriately named WARN website we noted some time ago which warns investment bankers they are about to be made redundant (at least someone is being honest)? Well, it may be time to refresh, especially if you work at Credit Suisse (and sorrry, no bumping rights - should have thought about that before joining a non-union job).

As I listen to all types of perma-bull talk about how the S&P would be at 1400 if it wasn't for Europe (which is the equivalent of: if my wife was 100 pounds lighter... she'd be a supermodel), I can't help but pulling my hair out.  The situation in Europe is clearly bad, and after reading Michael Lewis' new book... appears almost impossible to be resolved without massive defaults.  However, the other domino in the equation is the Chinese real estate market. The 'global growth engine', China, is running out of steam.  Their policy of placing market orders on anything and everything to inflate stimulate the economy - surprise, surprise - is proving to be unsustainable.

This is just getting ridiculous:

• CALIFORNIA REVENUE MAY TRAIL FORECAST BY $3.7 BLN, ANALYST SAYS
  
• CALIFORNIA REVENUE SHORTFALL MAY MEAN SHORTER SCHOOL YEAR

Who needs to go to school anyway: all we need to know we learn from The Situation and Pauly-D. But yes, M-Dub is off by a month or two on the upcoming tsunami default wave: pesudo-sophist muni experts rejoice! Also rejoice because this news is somehow bullish - probably the EFSF will be expanded to include California, or the FT will break a story at 3 pm that China is about to buy CA, sending the S&P to Uranus.

In 2007 and 2008 the Fed instituted all sorts of programs to enhance liquidity. It was the first time they went beyond simple rate cuts (which they also employed).  In the end it didn't help much.  It ensured that banks could fund the positions they wanted, but it didn't stop the sell-off in assets, because the banks didn't want the risk.  No one wanted the risk. Liquidity concerns and even some capital concerns are driving down Italian and Spanish bonds, but behind that, there are real solvency concerns. There are clearly liquidity problems again, but they are directly tied to solvency.  The Euro basis swap isn't getting worse because US banks don't have money to lend to European banks, they don't want to lend to European banks.  Maybe we should be worried the Fed knows something we don't about how bad it is and are trying this ploy again, because it is one of the few things they can do to help Europe?

JPM, which has been stuck holding on to reflationary assets for months and months expecting a QE3 announcement which keeps on not coming as the market always frontruns it and makes any actual reflationary progress by the Fed impossible, couldn't wait to release today's crude price update following the reversal of the Seaway pipeline. The bottom line: JPM is lifting its WTI forecast to $110/bbl in 2012 and $118/bbl in 2013, and see the Brent-WTI spread narrowing to $5 and $3/bbl in those years, respectively. Previously WTI was seen as hitting $97.4 in 2011 and $114.25 in 2013. Consumers everywhere rejoice as they will have to take even more debt on (never to be repaid of course) in addition to never paying their mortgage payments. As noted earlier, now that WTI is well north of $102, kiss any deflation risks goodbye and with that the announcement of MBS LSAPs. At least until tomorrow's post 3 am European gap down, which will be fully filled and then some in the period between noon and 4pm.