Archive - Jun 2011 - Story

While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs. Dylan Grice's latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package. This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government's balance sheet. The reason why this is actually a much bigger deal than perceived is that as Grice notes, a "bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008." In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares... Or more specifically, those who have long held a very bearish view on China, should certainly care, as what happened is that the unwind catalyst, so critical for most China bearish theses, was just pushed back by several years. And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

Expect the usual: more promises of Marshall Plans, more FX liquidity swaps, more US taxpayer commitments to keep Europe afloat and the Greek retirement age under 60, etc.

Is the Fed telegraphing that today's 3:45pm speech, expected by many to presage some form of monetary easing preannouncement by the Chairman, will leave many disappointed? That could well be the case based on the just disclosed data from the Fed's mouthpiece, Jon Hilsenrath, who spoke to Chicago Fed's Evans. In the interview, we find that the Fed president decided to cut its outlook (long overdue), but more importantly, Evans, a diehard dove and a big fan of additional easing, announced that he "doesn’t want to add to [QE]." In other words, as we have been warning, the S&P will have to drop at least another 25% before the "high threshold" for more money printing is reached. Ironically, for the first time, discounting even near certain future events does not work, courtesy of Central Planning, which needs the market to act in a centrally planned way and drop despite the inevitable Zimbabwe reaction.

In another direct stab at the last remnant of truly independent (if often times quite incompetent) media, the New Jersey Supreme Court has just found that people posting opinions online don't have the same protections for sources as mainstream journalists. According to our secret sources at the AP, (also known as Copy and Paste), "The court ruled Tuesday that New Jersey's shield law for journalists does not apply to online message boards. The case involved a New Jersey-based software company named Too Much Media. It sued a Washington state blogger for defamation and wanted her to reveal sources she cited on message board posts." It is sad that the legislative has decided to invoke a tiering in the media world, which will most certainly backfire and bring even more eyeballs to the blogosphere, where while the bulk of the information comes in the form of CTRL+V information exchange, it does serve a critical role of being a non-conflicted (corporate advertising) source of much needed information. In the meantime, ever more blogs will find it necessary to offshore their operations (Iceland and Sweden are quite friendly in that regard) in order to avoid the encroaching US police state.

Contrary to ongoing wideranging skepticism, Saudi Arabia continues to posture that not only does it have substantial excess capacity, but that it will bring it online any... minute...now. After all, Saudi owes the US a big favor (i.e., lower gas prices) in exchange for America's (or rather its Fifth Fleet) continued presence in Bahrain, which even those living in a cave know has been under a full media blackout to keep the ongoing religious tensions under wraps and keep the Saudi-Bahrain border safe (not to mention the Ghawar oil field). So even as Saudi had promised to hike its output as Libyian production went offline only for it to be discovered that the country had in fact lowered production, so now too the song and dance has hit fever pitch. Reuters reports that "Saudi Arabia is planning to lift oil output sharply in June, whatever policy OPEC adopts this week, in an effort to rein in high fuel prices. Riyadh expects to lift production by more than 500,000 barrels a day in June to its highest for three years, a senior Gulf industry official familiar with Saudi oil policy told Reuters." We can't wait to hear how Saudi's unilateral plan to boost Obama's reelection chances is met by other OPEC members such as Iran, Venezuela, Iraq and Libya. "Worried about the impact on economic growth of
inflated energy costs, Saudi will act alone if necessary to keep a lid
on prices now at $114 a barrel for benchmark Brent crude." Wait, isn't OPEC a "cartel", or a place where unilateral decisions are not allowed, for precisely this reason? Of course, at the end of the day, with recent Wikileaks disclosure that Saudi Arabia admitted it has overstated its reserves by some 300 billion barrels, or 40% of total, this latest ploy to push gasoline prices lower into the summer season will have a half life that is shorter than the SNB's FX intervention attempts.

Unlike many of his colleagues at MarketWatch, Paul Farrell has never hidden his contempt for the broken financial and social system currently imploding at every step, although courtesy of enjoyable and distracting $0.99 apps and semi-soft porn dancing shows on primetime, few seem to care or notice. For those who do notice, however, Paul has some words of caution: prepare an "evil plan" - Farrell explains: "Got your “Evil Plan” yet? You really need one. For self-defense, attacks, plain old survival. Why? Things are bad folks. And they’re going to get much worse. Trust no one. Believe nothing you hear. Nothing....While reading Hugh MacLeod’s best-seller “Evil Plans: Having Fun on the Road to World Domination” over Memorial Day I ran across a Newsweek feature, “Mad As Hell,” an ominous warning screaming: “The anger that fueled the Arab Spring is now boiling over in Europe. Could club-wielding protesters be in America’s future too?. What’s an “Evil Plan?” For MacLeod it started as personal, years ago when he broke free of corporate life, became an entrepreneur, made “a good living, doing what you love, without being accountable to some larger company.” That triggered a revolution." Alas, if only it was as easy for most as it is for MacLeod...

Moody's joins every other sellsides who forgot to actually perform any due diligence on the company Buy rating notwithstanding, and has just put the company's Ba2 rating on downgrade review. This is more bad news for Paulson who is rumored to have not only a big position in the company's stock, but substantially exposed to its debt as well. Moody's cites: "allegations surrounding the accuracy of Sino-Forest's audited accounts and its business model" as the reason for the downgrade. Great job Moody's: feel free to piggyback on the work of 2 guys in a small office somewhere who did your job for you. Now when is Mark Zandi taking over Goolsbee's job?

Following yesterday's news out of Zillow of a 0.77% drop in April home values compared to March, today we get an update from CoreLogic which in turn looks at the latest trends on "underwater" (or negative equity) mortgages in the US. In summary: "10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011, down slightly from 11.1 million, or 23.1 percent, in the fourth quarter. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the first quarter. Together, negative equity and near-negative equity mortgages accounted for 27.7 percent of all residential properties with a mortgage nationwide. In the fourth quarter, these two categories stood at 27.9 percent." The most impacted state is Nevada, which has 62.6% of all mortgages underwater (with another 4.8% in near-negative), followed by Arizona, Florida and Michigan. California is fifth with 30.9% of all homes underwater. We doubt these millions of "homeowners" are benefiting much from the wealth effect.

In case anyone was wondering why Goolsbee was the latest sacrifice at the altar of public discontent with Obama's economic "policies" here it is: "Americans' disapproval of how President Barack Obama is handling the economy and its growing budget deficit has reached new highs amid broad frustration over the slow pace of economic recovery, according to a Washington Post-ABC New poll released on Tuesday. The ratings Obama's approval rating bounced to 56 immediately after bin Laden was killed last month. Fifty-nine percent, a new high, gave Obama negative marks for his handling of the economy, up from 55 percent a month earlier. Obama's approval rating on the deficit issue hit a new low of 33 percent, down 6 points since April. The state of the economy poses a huge challenge for the president, whose re-election in 2012 may depend on his ability to convince voters that his economic policies have been successful." Unfortunately Goolsbee's departure means that the one sacrificial lamb left in the Obama economic circle (now that Mark Zandi seems a shoo in for at least one position on Obama's staff), Tim Geithner, will be kept in Obama's back pocket until QE 3 (which will come - Obama has nothing else left up his sleeve) proves to be an abysmal failure and be fired once the Fed's balance sheet hits about $4 trillion, roughly $1.3 trillion higher than where it is now.

Another quiet day in the economic activity docket, with the bulk of the action occurring in the afternoon. Today's key event is Der Bernank's address at the International Monetary Conference titled "The US Economic Outlook"

Yep, yhe headline barrage continues - from Reuters:

• Moody's sovereign head says more likely than not that Greek debt roll-over would be a credit event
• Moody's sovereign head says hard to see how any Greek roll-over would be truly voluntary, would therefore be a default
• Moody's sovereign head says any Greek restructuring would to big to be effective therefore disruptive for ECB, Banks
• Moody's sovereign head says impossible to have orderly and effective Greek debt restructuring
• Moody's head of sovereign risk says Euorzone, ECB has resources to contain short term financial pressures
• Moody's says current Greek rating sees 50% default risk in 3-5 years

Naturally, unless this changes and Moody's is bribed with enough worthless paper to keep its mouth shut, this means game over for the "voluntary" bailout track as we predicted, as it implies an event not so much of default (which certainly will occur), which is largely irrelevant, but of remarking of ECB Greek bond collateral, which will certainly be greater than the 4.25% haircut needed to push the ECB into insolvency.

The soap opera begins early today (at least in the US), after the Irish Times reports that the IMF is open to delaying Greece's repayment of its international loans but believes a major restructuring of its debt would create untold problems in the euro zone, a senior IMF official said today. "Athens has made progress in tackling its debt crisis but cannot afford to relax the pace of reforms, Bob Traa, the International Monetary Fund's senior representative in Greece, told a banking conference. "If you want a debt restructuring that will really make a difference, it will need to be very large. Such a large debt restructuring would create untold problems not just in Greece, but also in the euro zone," Mr Traa said. But he did hint that the IMF was open to other solutions. "Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortisation right at the end of the programme. This is a technical issue we can think about," he said." Unfortunately, as the rating agencies have made clear by now, such a move would be considered a technical default, and thus is unworkable as the very simple matter at the heart of the whole eurozone crisis is the forced marking of debt from mythical par levels (where the ECB has it) to market values (around half): a development which would lead to the insolvency of the ECB, something discussed minutes ago. All Europe wants is a phase transition that allows it to keep marking Greek bonds at par, and how this is achieved is irrelevant.

• Rogoff - The global fallout of a eurozone collapse (FT)
• Europe’s Banks Too Fragile to Afford Greek Default (Bloomberg)
• Geithner Wants Global Rules on Derivatives (WSJ)
• Low Yields on Treasury Debt No Guarantee Financial Crisis Won’t Hit U.S. (Bloomberg)
• Debt crisis and IMF to dominate Obama, Merkel talks (Reuters)
• Lehman Brokerage Gets $2 Billion From Barclays (Bloomberg)
• Obama’s Chief Economist Goolsbee Is Said to Consider Return to Teaching (Bloomberg)
• Hong Kong Banks’ Mortgage Rate Increases Taking Steam Out of Housing Boom (Bloomberg)

As if insolvent European private banks were not enough to worry about (and with banking assets of 461 percent of GDP in the UK, 178 percent in Germany, and 820 percent in Switzerland, there is more than enough to worry about), a new study by Open Europe has found that at the heart of the insolvency argument is none other than the only hedge fund that is even worse capitalized than the US Federal Reserve: the European Central Bank. "With Greece forced to seek a second bail-out to avoid bankruptcy, Open Europe has today published a briefing cataloguing how the eurozone crisis could drive the European Central Bank itself into insolvency, with taxpayers likely to pick up a big chunk of the bill.  The role of the ECB in the ongoing eurozone and banking crisis has been significantly understated. By propping up struggling eurozone governments and providing cheap credit to ailing banks, the ECB has put billions worth of risky assets on its books. We estimate that the ECB has exposure to struggling eurozone economies (the so-called PIIGS) of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Of this, around €190bn is exposure to the Greek state and Greek banks. Should the ECB see the value of its assets fall by just 4.25%, which is no longer a remote risk, its entire capital base would be wiped out." It seems that in crafting "prudent" capitalization ratios courtesy of Basel 1 through infinity, the global NWO regulators totally let the ECB slip through the cracks. The finding also confirms what we have been saying all along: there is no way that any form of voluntary or involuntary phase transition that will require the ECB to mark down assets that it has on its books at par (yet are worth 50 cents on the dollar) can ever occur: such an event would result in the immediate insolvency of the European lender of first and last resort, and, in turn, the unravelling of the Eurozone.

Appeals for changing the fixed CNY exchange mechanism are now coming not only from the office of Chuck Schmuer. In a column in China's Caixin website, Zhou Qiren, a central bank advisor, said that China's yuan exchange rate formation mechanism needs drastic reform. "The central bank has used too much money to intervene in the foreign
exchange market, so modest reform is not going to help," said Zhou, a
member of the Monetary Policy Committee under the People's Bank of
China, in his special column on the Caixin website. "We need drastic measures," he said. Zhou said the growth of China's monetary base is largely decided by the
central bank's purchase of foreign exchanges, which in turn is fueling
inflation. The comments resulted in dollar weakness overnight as soon as they hit the wires, sending the DXY to one month lows of about 73.616, a level last seen on May 5. The statement offset some carry currency weakness overnight after the RBA decided to keep rates unchanged at  4.75% in a widely expected decision, though a hike is still thought likely in coming months to combat inflation amid a massive trade and mining boom. Additionally, courtesy of further rumormongering out of Europe, which today has been with a EUR-bullish bias, the EURUSD has continued its uptrend, and is now also trading at one month highs, appreciating by 700 pips since recent lows of under 1.40 on May 23, last printing at 1.4666. As usual, Greek newsflow will dominate the EURUSD, and thus, the general market.