Archive - Dec 2011 - Story

Update: Steve Liesman with the party spoiler: "Imf official denies 600b aid rumor." Yet idiots still bidding stocks.

With just 20 minutes left, today the rumor comes not form the FT but the Nikkei:

• G-20 CONSIDERING IMF LENDING PROGRAM FOR EUROPE:NIKKEI;
• G-20 CONSIDERING $600B IMF LENDING PROGRAM FOR EUROPE: NIKKEI

Apparently the fact that before this rumor we had news that the IMF is short $120 billion in cash for already proposed credit facilities is completely irrelevant. Idiotic momentum algos rule!

It seems that popular anger at the banker minority will no longer be confined to tent-based vigils in public parks. In Germany, someone just escalated a bit to quite a bit. The irony, in this case, is that the package was addressed from the ECB. If it weren't for a potentially sensitive topic, the amusing implications could be severe. From Reuters: "A suspected parcel bomb addressed to Deutsche Bank chief executive Josef Ackermann was intercepted at a Deutsche office in Frankfurt on Wednesday, a senior U.S. law enforcement official said. The package was discovered around 1 p.m. Frankfurt time (7 a.m. EST/1200 GMT) in a mailroom, the official said. Initial analyses by investigators confirmed that it contained explosives and extra shrapnel, he told Reuters. A spokesman for Deutsche Bank in New York declined to comment. After receiving reports about the package, the New York Police Department stepped up security around Deutsche Bank's offices in New York and also notified corporate security executives around the city, the law enforcement official said. The official said the suspected bomb carried a return address from the European Central Bank, which is also headquartered in Frankfurt."

At first blush today's consumer credit report was simply gorgeous: an increase of $7.7 billion total on expectations of $7 billion. Just what the Keynesian voodoo doctor ordered right? Wrong. The problem is that of the $7.7 billion, just $0.3 billion was the "good" kind of credit - revolving. Everything else was either auto or student loan, or non-revolving credit. And what is worse, when looking at the breakdown (on a non seasonally adjusted basis), the monthly increase which was $4.2 billion was primarily a function of the now traditional ceaseless government lending, which rose by $3.8 billion, or 90% of the total. As can be seen on chart 3, since the start of the depression, government lending has grown by 317%, while private credit has declined by 16%. Central planning: from the government, by the government, for the government.

Not sure why the market is surprised by this, but it is.

• S&P PLACES LARGE BANK GROUPS ACROSS EUROZONE ON WATCH NEG - BNP, SocGen, Commerzbank, Intesa, Deutsche... pretty much everyone.
• EUROPEAN UNION'S AAA RATING MAY BE CUT BY S&P - you KNOW Barroso, Juncker and Gollum are going to take this very personally
• In short: Commerzbank AG, Natixis S.A., Credit Agricole S.A., Eurohypo, Deutsche Bank L-T counterparty credit rating, Deutsche Postbank AG, Intesa Sanpaolo,Societe Generale L-T counterparty credit, UniCredit SpA, Credit Du Nord L-T counterparty credit, Comapgnie Europeenne de Garanties et Cautions, Credit Foncier de France, Locindus S.A., Rabobank Nederland, CACEIS, Banca IMI SpA, Ulster Bank, Banque Kolb, Bank Polska Kasa Opieki S.A. ratings may be cut by S&P.

Basically, S&P just told Europe it has two days to get the continent in order or else. Said otherwise, it just called Europe's bluff. The problem is Europe is holding 2-7 offsuit...

A week ago, the reputation of legacy carrier American Airlines as being the only one to avoid bankruptcy is not the only thing that went pop. Along with it went the fervent optimism of high yield debt investors that moral hazard spreads not only to insolvent countries and insolvent banks, but to all insolvent corporates. On Wall Street, there is actually a technical name for perspective on insolvency optimism when viewed through the prism of CDS, where it is known as "Jump Risk", or the likelihood of a company to file tomorrow as opposed to a year from now. Until AMR, jump risk was not an issue. Now, it has come back with a vengeance. As Bloomberg LevFin magazine reports, "AMR’s bankruptcy is taking the corporate debt market by surprise, with investors losing 25 percent on bets in junk-bond derivatives that there wouldn’t be a jump in defaults this year. The Chapter 11 filing from the parent of American Airlines is helping to fuel a plunge in the value of credit-default swaps that  take outsized losses when companies in a benchmark index fail. The contracts, which back the debt of borrowers including ResCap and Radian, plunged to 64 percent of face value as of yesterday from 85 percent on Nov. 8. The derivatives were three weeks away from expiring with gains on Nov. 29, when AMR filed for protection." Oops. Alas, that's what happens every time unfounded optimism gets away from reality, especially when one is dealing with "junk", literally, which as the name implies is one TBTF if it is 99% unionized.

Most of human history conforms to established patterns, forming the basis of modern statistical analysis. Random walk extrapolation from any data series seems to hold up in the face of reality because the data series is extracted from the pattern itself, a sort of logical fallacy. Models constructed in this way “behave” rather well until the pattern and paradigm shifts. At that point, models should be recalibrated to the new pattern in order to maintain any kind of usefulness (or simply scrapped). This is especially true if the model failed to see the paradigm shift coming, a predictive capacity that is almost built-in since inflection points are not really points at all; they are an eventual slide into the new pattern. During the inflection “period”, models conditioned by the old pattern will increasingly look out of sync and render confusing results to their practitioners. But, due to human nature intruding into this “scientific” process, all too often these human practitioners look to rationalize and fit the wider world into their models, rather than see the paradigm shift for what it is. Combining this willful blindness with the simplifications that models have to incorporate just to function, the fact that they rarely see inflections is not at all surprising.

Proving once again that when it comes to fudging numbers, Japan (which previously was best known for changing the minimum legal radiation absorption dose on a daily basis following the Fukushima disaster, anyone remember that?) is leaps and bounds ahead of even China and the US, the Nikkei reports that the Japanese government will change the method it uses to calculate GDP, and the result will be an "increase" in the country's economic output by JPY 5-10 trillion. As a reminder, Japanese GDP is currently JPY 540 trillion, so in essence the math fudge could add about 2% to Japanese "growth." Accordingly, the main difference is inclusion of interest rate spread earned by financial institutions: we were wondering how long until blowing out CDS spreads would add to sovereign GDP. We now know. The new method will be applied to figures to be announced Friday. At least Japan has not yet adjusted its GDP pro forma for foreign currency gains vis-a-vis the dollar (there is time). And that's how things are done in a Keynesian world in which everything is now fraud, lies and relentless number fudging. Furthermore, we are 100% certain no analyst will look at the number on an apples to apples basis, and the result will be a miraculous Japanese golden age. Expect this experiment in excel spreadsheet modelling to come to a developed banana republic near you very soon.

There was a pop in risk minutes ago after a headline hit that margins on Italian bonds had been cut by CC&G. Enthusiasm will likely be muted however, upon the realization that CC&G is an Italian clearing house, is not LCH Clearnet in any of its two variants, and is tantamount to (French) Fitch upgrading France in terms of relevance, especially when considering that the bulk of Italian bonds clear elsewhere. That said, this will likely be taken by the market as a hint that LCH may go ahead and lower margins next, although with Italian bonds trading back above 6%, the case may be a problematic one. Of particular note in the CC&G announcement is that the margin for bonds between 7 and 10 years was lowered from 11.65% as of November 9, to 8.15%. As for whether this is a harbinger for more margin cuts, we will likely find out soon.

Some late-day covering as traders flattened out added a little lipstick to a pig-like day for European equities and sovereign credit as non-sovereign credit outperformed (but hides a few under-currents). Markets opened gap-up with credit notably ahead of equities - another ugly jump tighter in everything for all those option traders - but that was the best of the day as XOver (high-yield European corporate debt) and senior & subordinated financial credit tumbled all day. Main (investment grade credit in Europe) outperformed as investors sought the safety of this up-in-quality trade but most notably we suspect was the decompression trades in XOver-Main (i.e. traders positioning for a bearish spread widening between investment grade and high yield spreads). Financials ended wider, following their sovereign's very notable deterioration today, as the banks swung very notably from high to low. Liquidity measures improved but that seems very clearly driven by the Fed swap lines as opposed to improved conditions and we note that as Europe closed, ES managed to scramble back up to VWAP - and is trading a little ahead of broad risk assets.

In yet another confirmation of just who is driving policy in Europe, Handelsblatt has broken news that 3 years after Hank Paulson "forced" US banks to take cash, Germany will follow suit next, and "bailout" the German banking sector by stuffing it to the gills with cash soon to be made even more worthless courtesy of persistent and relentless devaluation as it is used for no productive purposes but merely stave off the inevitable collapse of a financial system so broken it now requires not monthly but weekly bailouts. From the German publication: "the German bank rescue fund Soffin will force ailing banks to recapitalize next year. That's at least out of the draft bill, to be released by the Handelsblatt (Thursday edition), and the Cabinet is to decide the next week. Finance Minister Wolfgang Schäuble (CDU) is following the U.S. example: The US distressed banks were temporarily distressed during the 2008 financial crisis. The banks have since there is significantly more stable than the euro-zone in which the institutions were saved only at their own request the European Banking Eba by the banks of the euro-zone by mid-2012 its core capital to nine percent increase. Institutions that make this not your own to get guarantees from the Soffin." Simply said, because it worked (courtesy of an additional $1.6 trillion in excess reserves used fungibly by banks to plug capitalization holes) in the US, the forced bailout will work in Germany, where unlike the US, the top banks account for about 200% of German GDP. In other words, Germany is about to proceed with an implicit nationalization of its banking sector. Which means that while we thought yesterday that the German AAA-rating is the safest of all in the Eurozone, following this development we will certainly reevaluate.

Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task. The immediate question for most people is What should I do?  We break down the intelligent responses into three big buckets: financial, physical, and emotional. In this report, I detail the financial steps that everyone should undertake right now to manage future risks using the framework that I use to assess and understand the financial world and markets. My approach is founded as faithfully as possible on facts and data. But my views on how the markets operate are formed from personal experience, observation, and connecting a few dots that rely on opinions and sometimes beliefs. Therefore, this financial and investing framework is something that you should only accept if it works for you -- and reject if it does not.

It seems everywhere we look, talking heads are arguing that they expect a positive resolution to the EU debacle and yet market positioning does not suggest this is the case at all. Of course we have seen snap-back rallies and sell-offs but the dissonance between the seeming consensus of unbridled optimism that European policy-makers 'get it' and the market's anxiety should be very worrisome - especially for the 'money-where-your-mouth-is' crowd. Morgan Stanley put it best recently as they noted their sense that most investors assume there will be some solution found (or put another way, very few assume that the alternative - a catastrophe of disorderly banking and sovereign defaults - is a base case) but few investors seem willing now to position for that benign outcome (most evidently seen in European Sovereign debt markets currently).

Deutsche's Jim Reid, like us, is less optimistic and notes the same disconnect as he argues that at this point: "Who can honestly say they know exactly what rescue plans the EU governments are still discussing...". Investors are rightly confused and we agree with Reid that we don't think there is any chance of a quick fix to all of this. Furthermore, we fear that any belief in a reversion to pre-crisis levels of sovereign risk on the back of a solution is a pipe-dream as it is clear that risk premia are embedded now (like skews in options prices post 1987) and it is far more likely that Europe stabilizes at much wider levels - more like other leveraged regions.

The stock and bond markets are gearing up to celebrate the EU's approval this Friday of "fiscal union," the necessary surrender of sovereignty that's needed to seal the bondage of the EU's hapless citizenry to the banks and the lapdog bureaucrats slavishly devoted to their dominance. "Fiscal union" is the code-phrase for the EU nation agreeing to automatic sanctions (penalties) should their borrowing exceed what is deemed prudent. In this sense, it's little different from the 3% deficit limit that the member states agreed to via the initial treaty but conveniently ignored. The "teeth" of automatic sanctions is supposed to force nations to "tighten up" their fiscal and tax policies (including collection)--"austerity" at the fundamental economic and governmental levels. In other words, "Oops, we borrowed too much, default looms, let's paper over the insolvency by really really really promising to borrow less from now on." The mechanisms of the overborrowing--overleveraged, politically dominant banks and the euro--are left untouched. Why? For the "obvious" reasons the mechanisms of EU governance has been captured by the banks and their apparatchiks, and as a result of the quasi-religious devotion of the Eurocrats to the single currency, a catastrophically wrong-headed fantasy that they cannot give up without losing face.