Archive - Feb 2011 - Story

When about six months ago we noted that the European ponzi is in full force, courtesy of banks using any toxic assets as collateral to the ECB, little did we know just to what heights this scheme would reach. Today we get our answer. The Irish Times writes that Irish Banks are issuing billions in bonds to themselves "under the Government guarantee to borrow cheaply from the European
Central Bank and to avoid drawing more heavily on emergency lending from
the Irish Central Bank. Four banks issued bonds worth €17 billion to themselves last month under
the Government’s extended guarantee, the Eligible Liabilities
Guarantee, to use as collateral to borrow from the ECB. “What you have here is micro-quantitative easing, or money printing,”
said Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers.
“The banks are issuing unsecured loans to themselves.” And since this is happening in Ireland, it is most certainly happening everywhere in Europe. And yes - this is the pinnacle of a pyramid scheme - this is about a thousand times worse than what US banks did when they purchased CDO tranches from each other, as the risk in the Irish case is ultimately borne by the European taxpayer. But such is life when the entire financial system continues to be massively insolvent, and only openly Ponzi schemes of this nature allow the system to continue operating on a day to day basis.

Ben Bernanke has started his speech on the Fed's role under Frank-Dodd, and specifically on Bernanke's role as head regulator of everything. His prepared comments were released Tuesday evening. He did not address either the status of the economy or monetary policy. He focused on how the Fed is helping to establish the new Bureau of Consumer Financial Protection (CFPB). The speech and Q&A can be followed here.

The Philly Fed Current Business Outlook Survey came out at a print of 35.9 compared to 19.3 before, and expectations of 21.0. This print is the highest reading since January 2004. Yet the only component metric that matters is, you guessed it, the Prices Paid index, which came at a ridiculous 67.2 from 54.3 previously! The prices paid index, which increased 13 points in February, has now increased 55 points over the past five months. And confirming the crush in margins was the in the prices received index which tacked on a barely notable 3.9 points to 21. The Prices Paid less Prices Received spread is the highest since 1979!  It is time for the sellside clown brigade to start lowering margins with gusto.

We had seen the financial wreckage and losses from the events of 2007 and 2008 as too severe to allow this growth cycle to continue. We were wrong — or at least 75% wrong. What makes us still 25% right is that the next recession, coming sooner than most pundits think, will be precipitated without a significant increase in interest rates, which is totally different than any other post-war cycle. Despite decent economic growth and extreme market optimism, this cycle is crippled as the banking and government issues supporting the monetary expansion necessary for GDP growth have either no capital base or no taxing ability and no further deficit spending power...The strong commodity markets and continuing QE2 should keep the dollar under pressure into June, except possibly in Europe where the shorter cycles are arguing for a euro high in March. As the Republican House of Representatives and the fiscal gridlock in Washington will keep Bernanke and Obama in check, an extension of equity and economic strength beyond June looks very unlikely.

Just in case someone fell for Van Rompuy's earlier joke that "the euro is a stable currency with strong fundamentals", and/or was wondering what the reason for repeating this particular lie once again was (now if we was talking about the CHF, we would certainly believe him), look no further than Portugal. The one story that nobody continues to talk about, and which will come to a head in less than 2 weeks, as Knight Capital made clear previously, continues to get little coverage, and despite hopes and dreams of some miraculous EFSF rescue mechanism (which will prove woefully inadequate once the chips start falling), spreads are leaking. Oddly enough, the ECB has not stepped in yet to shovel another €1 billion worth of decomposing sovereign bonds under the European rug. Perhaps it is time to refresh on that huge surge in borrowings under the Marginal Lending Facility, and for someone at the ECB to explain just why and how this happened.

After nothing happened last night, following Egypt's statement that it had not received a request to allow Iranian warships through the canal, PressTV has just announced that an Iran Navy official says the 2 warships are in fact on their way to the Canal and will pass shortly. Per Reuters, "the Iran state TV says Egypt sees nothing wrong with passage of Iranian warships through Suez Canal." The vessels in question are the Alvand frigate and the Kharg, a supply vessel.

Initial claims jump 410K in the last week, on expectations of 400k, confirming last week's upwardly revised 385K print was "snow" derived. On the inflationary front, CPI jumped 0.4%, higher than expectations of 0.3%, previous 0.5%. The irrelevant CPI ex food and energy was up 0.2%, higher than consensus and the prior print of 0.1%.

Last week, when commenting on cotton's torrid YTD performance, we noted "A retest of the $2 psychological price barrier is now guaranteed and is on next week's docket." This despite the ICE's 25% hike in initial and maintenance margins. Sure enough, as expected, cotton has just passed the $2 price (an all time record obviously). Since our initial observation on cotton's bubbly performance back in September, cotton has now surged by over 100%. But fear not: surely this is a demand phenomenon, as revolutionaries across the world realize they have to be well-dressed for all those cameras...

The World Gold Council reports that the increase in investment demand is a 'global phenomenon', reporting a 19% year-on-year rise across the world in its most recent report this morning. In China alone, gold investment demand jumped 70% last year as Chinese people bought gold as a store of value. Demand is projected to grow a further 40 percent to 50 percent this year and jewelry demand will expand by 8 percent to 10 percent this year. Gold imports by India, the largest buyer of gold in the world, climbed to a record of 918 metric tonnes in 2010, driven by a surge in jewelry demand with Indians continuing to buy jewelry as a store of value. Given the degree of demand for silver in China and internationally the forecast that silver could reach $36 an ounce this year, by Bloomberg analysts, is looking very conservative. Those continuing to calling gold and silver “bubbles” continue to ignore the facts and the many, many extremely important developments in the gold and silver bullion markets.

After the MERS Valentine's Day Massacre, previously reported on Zero Hedge, where Judge Robert Grossman found that MERS has no right to transfer mortgages, the company appears to have proceeded with the logical next step: professional Harakiri. In an announcement sent out to all MERS Members, the company stated that according to a proposed amendment to Membership Rule 8, it will require "members not to foreclose in MERS' name." MERS is seeking comments in a 90-day period, but since this is a directive driven from external judicial decision(s), it is unlikely that MERS members' opinions will matter at all. Basically MERS may have just exited the US mortgage scene, stage left, for good.

Markets down this morning today. Yesterday saw several significant releases, with housing starts at 596K, well ahead of consensus estimates at 539K. PPI rose 0.8% MoM, in line with expectations while industrial production decreased 0.1% v 0.5%E. Fed minutes from the January 25-26 meeting expressed continued disappointment in labor market conditions. FOMC reaffirmed QE2 despite dissent, but did not comment on future actions after the purchases. Overall, the Fed was more optimistic citing an increase in household spending late in 2010. Fed Policymakers also noted that long-term inflation expectations are stable as they had at the December meeting although this month they acknowledged rising commodity prices. Today’s CPI release is expected to show weak inflation numbers with consensus estimates at +0.3% MoM.

• Geithner Says Inaction On Debt Limit Would Harm Recovery (WSJ)
• Now Libya Set for ‘Day of Anger’  (FT)
• Police Break up Bahrain Demonstration, Military Takes Control of Capital (FT)
• Suez cancellation lifts Egypt diplomatic strain (Reuters)
• China Opens More Options for Yuan (WSJ)
• Is Your Job an Endangered Species? (WSJ)
• Germany's ECB Presidency Chances May Fade After Merkel's Bundesbank Choice (Bloomberg)
• Till Debt Do Us Part (American)
• Belgium Weighs New Coalition Proposal (WSJ)
• Osborne Eyes Looser Liquidity Regime (FT)

A lot going on today, beginning with the CPI and claims, followed by the Philly Fed, the index of leading indicators, and mortgage delinquencies, and testimony on implementation of Dodd-Frank and the FY 2012 budget at mid-morning, a few regional Fed presidents from noon into the early afternoon(Lockhart, Evans, Fisher, and Hoenig..not listed separately below), and winding up with the Fed’s latest balance sheet information this afternoon…And, most importantly as always, the Fed will buy 10 Years (05/15/2018 – 02/15/2021) in the amount of $6-8 billion between 10:15 and 11:00 am. Keep an eye on 912828PX2.

After hitting an overnight high of 1.36, the Euro has steadily declined overnight. The reason: a dramatic and unexpected spike in borrowings under the ECB's Marginal (and Punitive) Lending Facility. Over €15.8 billion was borrowed under the facility, the highest since June 2009, and a surge from yesterday's €1.2 billion. With a rate of 1.75%, there is nothing cool or fun about borrowing from the MLF, which is seen just as stigmatizing as borrowing from the Discount Window back when US banks didn't have trillions in excess reserves, and discount window borrowings actually mattered. The WSJ provides some perspectives for the surge: "The ECB declined to give any explanation for the high figure, which generally reflects acute, if mostly short-lived, liquidity problems at one or more banks. Use of the facility had been minimal at the start of the year, but had risen to around a daily average of over €700 million in the past week. The rise in the use of marginal lending by the ECB is all the more surprising as there were no generalized signs of stress in the money market Wednesday. The benchmark overnight rate for euros, Eonia, eased to 0.7% from 0.749% on Tuesday, its lowest fixing in more than a week." According to some traders the spike has to do with a technical error, or the failure of a bank to request enough cash during normal liquidity providing operation, but a €15 billion oversight is just too big. Perhaps one should look at the fresh all time record Portuguese 10 year bond yield for clues why this has happened. Should the MLF lending spike tomorrow as well, someone will have to answer questions.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 17/02/11