Archive - Jun 17, 2011 - Story

The latest quarterly slidedeck from Damien Cleusix' Global Tactical Asset Analysis is out and as always it is replete with insightful and exciting observations, outlooks and charts. His thesis summary: "Markets seems to be in the typically slow and frustrating cyclical top formation process. Our cyclical models are giving sell signals one after the other while leverage is reaching levels typical of cyclical market turns. It would be imprudent to bury the Bull too soon but It seems to be in bad hape. A contra-trend rally is to beexpected so on and the behavior of the markets (participants, internals) during this rebound should be carefully analyzed to decide if we can send the Bulls obituary (a waterfall decline without intermitting rebound would settle the case)."

Here is a simple summary of the Greek bailout math explained with just 2 numbers. First, the country has to do the impossible. As Citi's Jurgen Michels summarizes: "Once the whole new cabinet is announced, parliamentary discussions ahead of the vote of confidence will probably  start on Sunday, with the vote actually taking place next week on Tuesday evening. Even if the new government manages to pass the vote of confidence, it will still have to submit to Parliament the new austerity package for approval, probably sometime later next week or the week thereafter. This will be key for the smooth disbursement of the next tranche of EU/IMF loans, of €12bn." In other words, the Greek government has to pass 2 near-Sysiphean tasks before it can even hope to sniff the IMF's €12 billion in rescue funding. That's number 1. Number 2 comes from the chart below, which shows the debt and interest payments through August. This number is €18.2 billion. This number does not include the billions in deficit spending that will also have to be funded somehow over and above debt paydown. Ergo, the math for a viable Greece is as follows: €12BN > €18.2BN  + X. Simply said, unless somehow Greece discovers how to tax its citizens and actually record net revenue in July, the best the ECB can hope for before it has to mark its tens of billions in Greek bonds to about 45 cents on the dollar, is one month. So will someone please explain to us why again the EUR is up today? Actually the only possible reason is that Europe is now pricing in the fact that China will be the de facto owner of at least 2 European countries by this time next year, however not in an Asset Purchase Transaction but Stock, whereby China also acquires the liabilities. Which in turn may explain why Russia's just announced minutes ago that China may turn into "zone of risk" for the global economy.

Bizarro time is here, now that we have another market surge based on another economic indicator miss, in this case the uber-irrelevant UMichigan confidence, which came at 71.8 on expectations of 74, and a drop from May's 74.3. Granted the only reason stocks are rising is not on any fundamentals, but purely due to the clobbering the USD just took, which sent the EUR surging, and pushed the Dow into triple digit territory. To whoever continues to trade this centrally planned farce, our condolences. The only relevant data in the index was that the 5 year inflation expectations jumped from 2.9% to 3.0%, the second highest in 2011, and only below March's 3.2%. Time for the Fed to panic once again, now that Operation Twist 2 is just matter of months if not weeks.

In what could be the oddest development in the precious metals market in a long time, the World Gold Council has just unveiled an initiative whose sole purpose if to combat "conflict gold." From the just released notice: "The World Gold Council today announces that, working together with its member companies and the leading gold refiners, it has produced a draft framework of standards designed to combat gold that enables, fuels or finances armed conflict. The draft standards represent a significant, industry-led response to this challenge and are designed to enable miners to produce a stream of newly-mined gold which is certified as ‘conflict free’ on a global basis." While we are confused what exactly is being pursued with this action, aside from the creation of a black market for gold of course, it does seem that the logical end result will be a decline in the total supply of "certified" gold. On the other hand, it will also afford the WGC or any prevailing authority the ability to brand any country it so chooses (Indonesia?) a sourcer of "conflict gold" and effectively clamp down on the production of the yellow metal. Additionally, what better way to deprive a gold sourcing country of massive export revenues than to effectively make their product unsellable in the "legitimate" market. Which then would lead to a surge in fair market value due to supply considerations. Which begs the question: is this the preparation for the "golden" endgame?

In the past we have repeatedly observed that in order to get an instantaneous appreciation of which direction all too critical Greek bank deposits held by the public are headed (hint: out), instead of waiting for delayed NBG data, one needs to only look at the EURCHF. As the chart below shows, the correlation between the two is essentially one. Which means that should this pair continue dropping to parity, in addition to making life for Swiss exporters a living hell and for Hungarian mortgage holders unbearable, that Greek banks will literally become hollow shells whose only lifeblood - depositor cash - is no longer there. And the more severe the lack of confidence in the outcome, the greater the outflow, the higher the likelihood of a disastrous bank run that wipes out the Greek banking system. Welcome to Catch 22 for the centrally planned, monetary union generation.

It is rare to find a market where the technical evidence is so compelling for a strong rally yet the fundamental basis for such a rally so lacking. Exactly where do Bulls think the growth and rising profits are going to come from? The answer for the past few years has been massive Federal Reserve/Federal intervention and stimulus, and a weakening U.S. dollar that boosted overseas profits via the legerdemaine of currency devaluation. But three years of these policies have accomplished nothing but load the taxpayer with staggering amounts of debt: none of the causes of the 2008 implosion have been fixed or even addressed. As Armstrong notes, the massive interventions did not shorten the crisis, they have prolonged it. This reality has filtered down to the political swamp, and now the politicos are hesitant to bet their own futures on additional trillions in stimulus and quantitative easing. For the first time in memory, the Federal Reserve is on the defensive. Simply put, its policies have failed to accomplish anything except prop up a rotten, insolvent banking sector that needs to be declared bankrupt and swept into the dustbin of history.

• And the truth keeps coming out: Evacuation urged for radioactive hot spots in Japan beyond 20km zone (Japan Times)
• Germany's Merkel: Europe and Euro Tightly Bound Together (WSJ)
• Hardline IMF forced Germany to guarantee Greek bailout (Guardian)
• Hunt for ‘Holy Grail’ Hunt Pits ECB Against Naked Banks (Bloomberg)
• Default by Greece ‘Almost Certain’: Greenspan (Bloomberg)
• SEC could file Civil Fraud charges against some Raters (Reuters)
• Merkel’s Greek Bondholder Gambit Tested as Sarkozy Visits Berlin (Bloomberg)
• Biggest banks face capital clampdown (FT)
• Too Big to Fail Ends With Wave of a Magic Wand (Bloomberg)
• Biden Talks Aimed at $4 Trillion in Cuts Over 10 Years (WSJ)
• California's Brown vetoes fellow Democrats' budget (Reuters)
• U.S. Confidence Out of Sync With Stock Gains (Bloomberg)

• Market talk that a new Greek aid package could be worth as much as EUR 150bln against a previous estimate of EUR 120bln
• German Chancellor Merkel and French President Sarkozy demonstrated a united front in their approach to tackle the Greek problem
• German chancellor Merkel said she wants involvement of private creditors on a voluntary basis, and wants to work with the ECB on investors’ role in Greece
• French President Sarkozy said that we have found an agreement on the private sector involvement on Greece, in line with the Vienna initiative

Congressman Ron Paul, the Republican presidential candidate who is chairman of the U.S. House Financial Services subcommittee and chairs the House's Subcommittee on Domestic Monetary Policy plans to question U.S. Treasury officials next Thursday (June 23) about the U.S. gold reserves and get them to testify regarding the authenticity of the nation’s gold reserves. This is an important question given the increasingly precarious state of the U.S.’ finances and is important to the gold market as the unaudited U.S. gold reserves are the largest holdings of gold bullion in the world. Paul has introduced legislation that would require an independent audit of the 5,000 plus tons of gold bullion that is believed to stored in the Fort Knox, Kentucky vault. The audit would include other U.S. gold reserves held in government facilities in Denver, West Point and the New York Federal Reserve Bank in lower Manhattan. Paul is also calling for some of the bars to be assayed and tested by a laboratory in order to prove that it is investment grade gold bullion as the U.S. Treasury Department says. There have been unconfirmed reports that the Chinese received a shipment of large gold bullion bars from the U.S. that contained tungsten. Last August Paul said that "if there was no question about the gold being there, you think they would be anxious to prove gold is there." He has been pressing the point since the early 1980s, when he was a member of the U.S. Gold Commission.

Today we get two very circular resonance amplifiers in the form of Consumer Sentiment and the Index of Leading Indicators. When markets go up, these go up, pushing the market higher. When the market goes down, these go down, and push the market lower. In other words, the only relevant thing, correlating at 1.000 and leading the market, will once again be the EURUSD which is the only chart one needs these days, while one can trace the critical fate of Greek bank deposits by looking at the EURCHF.

Previously we disclosed that FRA-OIS spreads in both the US and Europe have been on a tear as a result of ongoing concerns that European liquidity may be frozen. Then following the previous post we decided to check in on Chinese liquidity. To our lack of surprise we find Chinese availability of unsecured interbank lending has quietly dropped to the second worst of 2011, now that the rate on 7 Day SHIBOR has hit 7.4%, the highest since the spike in early January, and a range that goes back all the way to the August 2007 quant market crash. Keep a close eye on this should Chinese vital interests become impaired and China is forced to dump trillions of money formerly reserved for US Treasurys (and currently held in US-denominated reserves, thus forcing a selling of USD and buying of EUR), to buy European debt, once the next two dominoes, Italy and Spain, fall.

The country which has so far been doubling down on its losses in European bond exposure, much to the amusement of cynical onlookers, has finally disclosed that Europe is the locus of Chinese vital self interests, and that should Europe go down, one very major domino would be the implosion of China itself. Per Reuters: "China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner. At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade..."Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said. "China has consistently been quite concerned with the state of the European economy," she said." And just like every time before when China has tripled and quadrupled, and now quintupled, on Greek, Portuguese and other debt, so this time will be no different as merely loading up an insolvent entity with even more leverage does nothing but shorten the half life of each additional "bailout." When Greece blows up, forget the other European countries: keep a close eye on China.

In a completely irrelevant move, which will do nothing to help the government pass the much hated mid-term fiscal plan, or diffuse the social anger, this morning as expected George Papandreou picked outgoing Defence Minister Evangelos Venizelos as new finance minister, jettisoning George Papaconstantinou, architect of a belt-tightening programme that has stoked violent unrest and a revolt in his Socialist Party. Reuters correctly observes that the move seemed likely to buy time for the embattled prime minister but did little to dilute scepticism that Greece would be able to implement a new round of deeply painful reforms... Papaconstantinou becomes environment minister in
the reshuffle.The new cabinet is expected to be sworn in later on Friday
and a confidence vote is due by Tuesday night. Rather than giving new
impetus to the reforms, analysts said, the reshuffle was aimed primarily
at quelling dissent in the Socialist Party by moving the unpopular
Papaconstantinou and appointing the prime minister's main party rival
Venizelos." All this means is that instead of Sunday being the critical decision day when the vote of no confidence will be held, it will now be Tuesday, as Europe is now struggling to exist day to day, and push back the inevitable by 24 hours one day at a time. "The move failed to impress markets and the cost of
insuring Greek debt against default hit a fresh record above 2,000
basis points on Friday."

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