Archive - Feb 2011 - Story

The most amusing explanation we have read so far for the dramatic spike in punitive MLF borrowing over the past two days is that there has been a "fat finger" from a bank which indicated a too low allocation at the last term MRO. In other words, someone moved the decimal comma and now has to pay an additional 100 basis points of interest (annually) on €16 billion in borrowings. Citi's Jurgen Michels explains it best: "After the strong use of the ECB’s marginal lending facility yesterday by €15bn there is a further increase in the use of the facility to €16bn today. This suggests that some banks have not tapped enough liquidity in the ECB’s Main Refinancing Operation (MRO) on Tuesday, which was allotted on Wednesday. The MRO – which is still provided with full allotment – only had a modest use of €137 bn. Comment: Unless the ECB provides term-liquidity until the end of the running MRO (next Tuesday) we will continue to see a high use of the marginal lending facility." In other words: the ongoing surge in the MLF borrowings is now priced in. And to confirm just how clueless in reading market information CNBC is, the Comcast station looked at flat Euribor as an indication of market calmness. Unfortunately, as European banks have bypassed borrowing from each other (for about a year now) and go straight to the ECB either directly or via collateral pledges, as a lender of first and last resort, Euribor is about as useful as you know what on a nun. We present another stress indicator, which however is much more difficult to replicate: European Commercial Paper, denominated in dollars. And the surge there is unmistakable.

When one insolvent bank buys another insolvent bank, you know things are swell. National Bank of Greece, best known for being bankrupt, has just announced it will buy Greek Alpha Bank best known for also being bankrupt. Remember: when in doubt, use taxpayer capital to become TBTF, even as you have determined billions in bonus payouts (but not in a public filing of ourse). Worked great for John Thain...

• Mergers loom as "flash crash" back in spotlight (Reuters)
• A monetary regime for a multipolar world (FT)
• Split in Economy Keeps Lid on Prices (WSJ)
• Inflow of 'Hot Money' Hits $35.5 Bn (China Daily)
• Bahrain Military Takes Control of Capital (FT)
• Trade Judges See Flaw in China Policies (WSJ)
• German Banks' Debt Downgraded By Moody's on Restructuring Act (Bloomberg)
• Balls Warns King on Bank Credibility (FT)
• Looks Like Banks Lose on Risk Plea (NYT)

In yet another very unsurprising event, Ben Bernanke was speaking at the Banque de France Financial Stability Review Launch Event, where per his prepared remarks he once again defended easy money policies so critical at keeping the S&P a few thousand points above fair value over the past two years. Making it once again clear that Bernanke has no clue about how economics works, the Chairsatan was quoted as saying that "The rest of the world has an interest in the U.S. recovery that my policies are spurring." Of course by pursuing his ZLB/ZIRP policies (see, we can name drop too), the Fed is doing nothing but exporting inflation to those countries least capable of handling it, which tends to lead to such inevitable events as government overthrows and revolutions.

Here is how one offsets the aftereffects of concerns there may be a liquidity crisis in Europe: just make a few completely impossible statements about hiking interest rates and presto: your currency is back to unchanged. The EURUSD has surged by 60 pips in seconds following reports that the ECB's Bini Smaghi was quoted as saying that ECB may raise rates as price pressures mount. While it is great that more central planners are finally acknowledging inflation does exist (cotton is now firmly planted over $2), the probability of this happening is zero to negative, as it would put pressure on the short end, flatten the curve and otherwise pull the rug out from the ponzi "recovery" that has taken foothold in Europe, forcing even more involvement from the Fed to keep the European domino from going down. Elsewhere, Bund futures tumbled as the inflation genie is one step closer to being released from the bottle...

Markets modestly negative again this morning. Reports came out yesterday cited that the Fed ordered U.S. banks to undergo stress tests with unemployment rate at 11% in recession-like conditions. CPI released yesterday increased 0.4% MoM v 0.3%E, lightening expectations of deflation. The move contributed to inflation concerns among G-20 policy makers meeting in Paris this week. Nevertheless the prints gave no sign that the Fed would hike and the curve bull flattened as a result. The rise in LIBOR-OIS to 16.75bp from a BoY base of 12bp causes us some concern when viewed in light of the recent ECB borrowing facility jump. Though rates still feel in their “normal” range, we are definitely suspect of the funding undulations of the past few weeks.

China continues to joust with windmills as its latest attempt to counter inflation, a 50 bps RRR hike, is now history, and will be just as successful as all of its previous RRR, and interest rate hikes at rebuffing gentle Ben's attempt at genociding a few hundred million additional serfs. Luckily for now the "silver for rice" trade continues, keeping a lid on rice prices. Indicatively, as we showed previously, neither interest rate hikes nor RRR have any impact on the Chinese market whatsoever, confirming that the only source of global liquidity that matters resides in the Marriner Eccles building.

The one thing that nobody is conveniently talking about that has suddenly become a big flash red light, the surge in borrowing on the ECB's Marginal Lending Facility which we noted yesterday, continues for the second day in a row, removing all speculation of this being a technical or calendar glitch, and confirming that some financial entity in Europe has entered its death rattle. Today, the ECB announced that after borrowing €15.8 billion in overnight liquidity, the highest since the program's inception in 2009, we got another increase in borrowing, this time at €16 billion in overnight liquidity needs. With expectations that this borrowing surge at a last resort rate of 1.25% would normalize disappearing, we are surprised the reaction in the EUR is not far greater: the EURUSD did contract modestly overnight, but if this is indeed the proverbial first domino we would be very concerned about the long term prospects of the European currency. What is most concerning is that after revelations of check kiting at Irish banks yesterday, which confirms that banks are using a legalized ponzi scheme to literally print each other money, that some bank - any bank - will need to resort to such a high rate source of overnight capital. As European collateral has no quality thresholds, and as the ECB will accept anything, it makes no sense for any bank to pay incremental interest just to transfer borrowing to an overnight facility with a punitive rate - simple as that. If this continues for a third day on Monday, it may well be time to follow Hugh Hendry's advice, and panic.

With no data on the docket, the focus will be on the G20 meeting in Paris…There is of course a POMO today: $5-7 billion of 08/31/2013 – 02/15/2015 bonds.

RANsquawk European Morning Briefing - Stocks, Bonds, FX – 18/02/11

Until now, in our Non Farm Payroll growth forecasts, Zero Hedge had been using 90,000 as the number of monthly jobs the US should be creating each month just to keep up with population growth. However, per the CBO budget released in January, it may be time to revise this estimate. As the chart below shows, according to the traditionally optimistic Congressional Budget Office, the US has to create 121,000 jobs per month in 2011 just to keep pace with population growth. This number declines modestly over the next several years, but still averages 106,000 per month over the next 5 years. And the kicker is that this number does not account for the 3 million people who are not currently in the workforce that the CBO defines as Potential Workforce. Assuming the inflow of this portion of the population into the workforce over the next three years, it adds an additional 83,000 people that have to be incorporated in the work force. This means that in 2011, in the "best" case scenario, the monthly NFP number has to be over 200,000 before the unemployment rate is reduced by even one basis point excluding the impact of the BLS' favorite trick of fudging the labor force participation rate, which we have discussed extensively in the past.

Spot the 3 differences...

There have been numerous reports of bullion shortages in many parts around the world, along with rising premiums. And the two explanations – we’re running out of gold! and, it’s just a manufacturing bottleneck – are at odds with one another. So, who’s right? Yes, there is a bottleneck. But with this recent spike in demand, it appears some mints still aren’t equipped to keep up. Are we nearing a tipping point where in spite of the increased efficiency and preparedness, requests from buyers will outweigh available supply? Imagine demand continuing to accelerate, and you can see where this might be headed. I think this is the side of the equation to watch. Andy Schectman of bullion dealer Miles Franklin told me last summer that, “Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.”

While last week the focus of US naval deployment in the Middle East emphasized securing the Suez Canal in the midst of the Egyptian revolution, this week the developing story is the passage of two Iranian warships through this very canal. Not surprisingly, two US naval groups - an aircraft carrier and a big-deck amphibious warfare ship - are now situated at either end of the Red Sea, where the Iranian flotilla is supposedly located. Will the US presence be enough to prevent escalation? Since we believe that Iran has few alternatives to pulling a "wag the dog" scenario with increasing domestic protests, and an increasingly more troubled ruling class, perhaps the increased US presence in the area is geared more toward dissuading a preemptive engagement by Israel. Regardless, expect posturing to increase as Iran is now stuck in a position from which it can only lose face if it does not at least pursue the symbolic passage of the Suez canal. What happens after is unclear.

Some of you may already be familiar with the economic law called “the tragedy of the commons,” but for those of you who are not, I shall explain it to you. The tragedy of the commons refers to a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource even when it is clear that it is not in anyone’s long-term interest for this to happen. I would argue the tragedy of the commons receives far too little attention as a rational explanation for the cancerous expansion of the State. For what is the State other than people looting each others’ private property in a zero sum game of resource redistribution? The tragedy of the commons gives us a rational basis for the consistent and constant expansion of the coercively funded democratic State and why that expansion always leads to the destruction of society.