Archive - Dec 21, 2011 - Story

While the rest of the world enjoys the New Normal, which lately has primarily and mostly negative connotations, when it comes to such "legacy" aspects of life as holiday shopping, we all enjoy the fall back to a simpler time assuming that at least such basic behavior as buying presents for the loved (and not so loved) ones can hardly change much with the years. Alas, even this last bastion of nostalgic simplicity has now been swept away: Nick Colas and his team from ConvergEx, have once again decided to educate us about the folly of assuming the old ways are with us, and has created a useful compilation exposing the finer nuances of the "twelve days of online Christmas" which show that just like everything else, holiday shopping patterns are rapidly changing as well. "This holiday season consumers aren’t quite as concerned with finding “cheap gifts” as in recent years, though traditional luxury items such as jewelry and cashmere sweaters are still losing traction with gift-givers. They’re seeking sales on electronics, becoming increasingly enamored with real vs. artificial Christmas trees, and backing off catering services in favor of home-cooked ham. New York City is the most popular place to spend Christmas and New Years (hey, it’s cheaper than a ski destination), but interest in the Radio City Rockettes and Broadway shows is dwindling. All these observations come courtesy of two of our favorite online gauges of consumer behavior – Google Trends and search engine autofills from Google, Yahoo and Bing. We’ve compiled a collection of 13 visuals (12 for the days of Christmas plus a bonus for Hanukkah) that ultimately show consumer spending patterns are still decidedly cautious."

Keeping track of all the various verticals of instability in Europe, which is now forced to improvise on a day to day basis with a leaking dam wall of increasingly insurmountable problems, and is torn between plugging holes in the EFSF/ESM mechanism, Bank recapitalization, generating an overarching fiscal union and, last but not least, getting the ECB involved, has become virtually impossible. Which is why we are happy to present the latest updated UBS flowchart summarizing Europe's sovereign and bank problems. Because there are many. We hope this makes it clearer.

Yesterday, before today's latest ICI release of the weekly mutual fund flow report, we predicted that "Tomorrow ICI will reaffirm the retail investor boycott of stocks with the 33rd out of 34 equity fund outflows." Sure enough, the report came and, as expected retail investors have pulled money from domestic (and foreign) equity funds for 33 of the past 34 weeks, with last week another $4 billion getting redeemed as mutual funds, now unchanged for the year, somehow have to deal with a $133 billion lower cash balance than at the beginning of the year. Because if anyone thought last year was bad with the flash crash and all, the $98 billion that was pulled in all of 2010 is a pale imitation of what 2011 is setting up to be. And this year we didn't even need a 1000 point DJIA drop.

No, it's not Friday and no, it's not a total joke, but UBS' Stephane Deo takes a retrospective look at what his firm's economists were saying back in 1996 about who should be in and who should not be a part of the Euro 'project'. Given the growth and performance of the 'ins', it seems perhaps we should, as Deo says, always pay attention to economists for a happy and prosperous existence but it is somewhat insightful that as far back as the beginning of this experiment, it was relatively clear (in 1996) that proximity to Maastricht rules, political flexibility, and real economic prospects separated the 17 nations, leaving an at-the-time optimal five (or maybe six) nations. There are many yeah-but comments with this look-back, but for sure, it provides a quick-and-dirty view on what these countries looked like before whatever integration they have now, and maybe what they should revert to once again - it is certainly cathartic to see the peripherals already standing so far from the core. The growth differential for the Euro 17 is huge, unmanageable, and symptomatic of an entirely dysfunctional monetary union. The growth difference for the Euro 6 is steady, modest, and entirely manageable.

With precisely one year left for the world and all of its inhabitants, at least according to the Mayans, not to mention on the day of the Winter Solstice, it is only fitting that US debt, net of all settlements for all already completed bond auctions, is now at precisely $15,182,756,264,288.80. Why is this relevant? Because the latest annualized US GDP, according to the BEA, was $15,180,900,000.00. Which means that, as of today, total US debt to GDP is 100.012%. Congratulations America: you are now in the triple digit "debt to GDP" club!

Rather than focus simply on the actual adjustments in the real effective exchange rates which shows the UK and US as having used monetary policy to devalue/weaken their currencies since the 2008 crisis really took shape, we look at an intriguing chart from Nomura's EEMEA FX research team. Google Trends shows, that in the year since Brazil's finance minister Mantega warned of a currency war's immediacy, a dramatic pickup in searches for both 'Currency Wars' and 'Recession' and we believe, like them, that 2012 will see further engagement of the vicious circle of antagonism around the world (with the EUR the obvious next chapter). Only EUR, USD, and TRY are actually weaker since the 2009 lows with most of the Emerging Market over 16% higher on average. It would appear that whether Europe escalates or US retaliates, gold will eventually benefit from this fiat fiasco and the search patterns set a rather nasty precedent. Simply put, you can't grow fast enough, you can't cut rates, that leaves only one option (call it what you want), currency devaluation.

Anyone seeking joyous holiday greetings and cheerful forecasts for the new year is advised to not listen to the following most recent Mark Faber interview, in which in addition to his predictions for 2012 (led with "more printing" by the dodecatupling +1 down central planners of course, and far less prosperity), we get the following: "I am convinced the whole derivatives market will cease to exit. Will become zero. And when it happens I don't know: you can postpone the problems with monetary measures for a long time but you can't solve them... Greece should have defaulted - it would have sent a message that not all derivatives are equal because it depends on the counterparty." And on the long-term future: "I am ultra bearish. I think most people will be lucky if they still have 50% of their money in 5 years time. You have to have diversification - some real estate in the countryside, some gold and some equities because if you think it through, say Germany 1900 to today, we had WWI, we had hyperinflation, WWII, cash holders and bondholders they lost everything 3 times, but if you owned equities you'd be ok. In equities in general you will not lose it all, it may not be a good investment, unless you put it all in one company and it goes bankrupt." As for gold: "I am worried that one day the government will take it away." As for the one thing he hates the most? No surprise here -government bonds.

Back in June, which now seems like a lifetime ago, we wrote an article titled: "A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage" in which we discussed the weakest link in the Eurozone bailout and in which we warned, rather prophetically as it turns out, "that not only is Bailout #2 in jeopardy of not passing the Greek parliament, but that we may suddenly find ourselves in the biggest "activist" investor drama, in which voluntary restructuring "hold out" hedge funds will settle for Cheapest to Delivery or else demand a trillion pounds of flesh from the ECB in order to keep the eurozone afloat. In other words, the drama is about to get very, very real. And, most ironically, a tiny David is about to flip the scales on the mammoth Goliath of the ECB and hold the entire European experiment hostage..." Why prophetic? Because the FT has just reported that "One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, raising a hurdle to eurozone leaders’ hopes of quickly reducing the country’s debt levels." Well, Vega may not be quite the David we envisioned but it will do. The bottom line is that the weakest link in the Eurozone rescue, precisely the one we predicted over six months ago, has now been exposed. We fully expect other "activist" funds to be buying up or have already bought up the debt of the other PIIGS, and hold the future of the Eurozone ransom for the princely sum of 1 million dollars.... Or realistically, much, much more. Oh, and so much for ISDA's carefully conceived plan of a "voluntary" restructuring - should Vega proceed to indeed sue Greece it is game over for the worst laid plan of mice and corrupt derivatives organizations.

On November 25, Moody's cut Hungary to junk. Now it is S&P's turn: "The downgrade reflects our opinion that the predictability and credibility of Hungary's policy framework continues to weaken. We believe this weakening is due, in part, to official actions that, in our opinion, raise questions about the independence of oversight institutions and complicate the operating environment for investors. In our view, this is likely to have a negative impact on investment and fiscal planning, which we believe will continue to weigh on Hungary's medium-term growth prospects. Moreover, in our opinion, the downside risks to Hungary's creditworthiness have also increased as the global and domestic economic environments have weakened."

To all our German-speaking readers, and particularly our readers in Switzerland, we present an amusing piece out of Swiss NZZ, titled "Angstmacher im Netz." Even a very rudimentary understanding of German is sufficient to grasp the gist...

While part of Merrill Lynch, David Rosenberg was always an outlier, in that he never sugarcoated reality, and could always be relied upon to expose the dirt in the macro and micro picture, no matter how granular or nuanced, and how much it conflicted with other propaganda research to come from the bailed out broker. Then three years ago he moved to Canadian investment firm Gluskin Sheff, transitioning from the sell side to the buy side, yet for all intents and purposes his daily letters, so very appreciated by many, never ceased, in essence making him a buysider with an asterisk - one who daily shares his latest vision with the broader public, in addition to his personal investment team. In one of his last letters of the year, Rosie presents a detailed breakdown of all the key differences between the sell and buyside, at least from his perspective, and also how, now that he manages other people's money, he is investing in the future. To wit: "In my former role as chief economist at Merrill Lynch, I flew all over the world and saw all the legendary portfolio managers from Paul Tudor Jones to Jeremy Grantham to John Paulson to Bill Gross — at least three or four times a year. Now the only PM's I speak to are our PM's. Not that they "have to" agree with all of my calls, but I am here as their economic concierge 24/7. The same holds true for our clients. In my previous life on the "sell side", it was very rare for me to sit down one-on-one with private clients. Today, that takes up a good part of my day — helping our client base make investment decisions that will build their wealth in a prudent manner over time." As for what he likes (and dislikes) we will leave it up to the reader to find out, but will note that Rosie appears to take issue with being labelled a permabear. And why not: he has been far more right than not since the December 2007 start of the Second Great Depression.

Commodity Customer Coalition founder James Koutoulas is requesting that MF Global bankruptcy Judge Martin Glenn investigate three potential legal issues that are said to have occurred in transferring of MF Global assets.  The key issues include the fact that JP Morgan was able to purchase MF Global bonds at a discount without any open bidding process and the assets were apparently sold without disclosure to or approval from the U.S. bankruptcy court or trustees.  The third issue centers on JP Morgan seeking special favors from the Federal Reserve to receive priority treatment over investor segregated fund accounts.

Today's $29 billion 7 Year bond auction, the last of the week and of the year, priced just modestly better than this week's previous 2 and 5 year primary issues, although on the surface it may have been a little weaker, pricing at 1.43%, just wide of the 1.422% When Issued and modestly worse than November's 1.415%. And while the previous weekly auctions were records only to disappoint in their internals, this one was the opposite, with a 2.68 Bid To Cover, above the 2.59 LTM average, and solid Indirect takedown at 42.01%, far better than the 39.88% in November, while Directs declined from 18.85% to 12.95%. This left 45.04% for Dealers to use as immediately repo collateral. And with that, the US just added another $40.8 billion in net new debt, which we believe after today's update on settled debt from last week will finally push total US debt to GDP over 100%, and certainly when one accounts for the historical adjustments to previous GDP following today's epic existing home sales adjustment by the NAR, which will almost certainly bring total US GDP as of September 30, 2011 to under $15 trillion.

Just hitting the tape are these quite perplexing headlines out of Bloomberg:

• EFSF LENDING CAPACITY MAY DROP TO EU293 BLN, CULLINAN SAYS
• EURO RESCUE FUND'S CAPACITY MAY FALL BY A THIRD, CULLINAN SAYS
• EURO RESCUE FUND MAY SHRINK ON FRANCE DOWNGRADE, CULLINAN SAYS
• S&P SOVEREIGN RATINGS DIRECTOR CULLINAN COMMENTS IN E-MAIL

Odd - because it is S&P who would be doing the downgrading. Cue downgrade rumors.