Archive - Jun 2011 - Story

So 3 years after bailing them out and making the Bernanke put the defacto trading policy of the MOMO/POMO generation, they finally realize they destroyed the system? Better late than never.

• HOENIG SAYS BIG FINANCIAL FIRMS PUT `CAPITALISM AT RISK'
• HOENIG SAYS POLICY MAKERS SHOULD `GO BEYOND' DODD-FRANK ACT
• HOENIG: SEPARATING PRIMARY DEALERS, BANKS WOULDN'T IMPEDE FED

We can only hope a closer reading of the last bullet means that Hoenig is now pushing for an end of Glass-Steagall. Expect to hear bankers screeching about tanks in the streets and mass suicides if a repeal of Gramm-Leach-Bliley is even mentioned.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

Confused about the latest attempt by an insolvent French banking cartel to sugarcoat what they are doing in Greece? Don't be. After all this is nothing but a repeat of a failed idea first floated back in October 2007, when a Super SIV was supposed to shore up the hundreds of billions of toxic subprime debt while packaging it in a tidy off-balance sheet little packet. Presenting the MLEC part deux. And yes. Back then the idea crashed and burned because it was understood it would be a total disaster. If it passes beyond the production stage this time, it really is game over for the ponzi extend and pretend brigade.

Xerxes Blankfein's attempts to auction off Athens' monuments appear to have met with a resilient match in the face of the communist affiliated Spartans who have now covered the Parthenon with slogans that read: "The peoples have the power and never surrender - Organise - Counterattack." For indications of just what this "organized counterattack" will look like keep an eye on livestreams from Syntagma tomorrow, when the stakes will be far higher than during last week's vote of confidence.

As the Greek parliament begins its debate on the mid-term austerity plan expected to culminate with a vote later in the week, below is a quick glance at the layout of the Greek parliament via Reuters for those who are still unsure of the distribution of power. As can be seen, PASOK's majority is in question, with just 5 votes in protest needed to scuttle the carefully set up house of cards which would set off in motion a chain of events that would lead to a liquidity freeze worse than anything seen in the aftermath of Lehman. The question is whether any of the opposition parties will shift their allegiance to G-Pap: if the vote of confidence is any indication, in which not a single non-Pasok member voted for the PM, it does not look good.

There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don't align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street's "happy story" about how the recovery is weak but muddling forward with "uneven growth" (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of "growth" that counts) will still be rising forever (as usual). The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed "recovery" is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices. We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction...Which leads me to play Devil's Advocate: what if both consensus camps are wrong?

Just out from Reuters:

• EU WORKING ON CONTINGENCY PLAN IN CASE PARLIAMENT REJECTS AUSTERITY PLAN
  
• SEVERAL OPTIONS FOR GREEK CONTINGENCY PLAN RULED OUT, INCLUDING EU BRIDGING LOAN - SOURCES
• ONE OPTION IN CONTINGENCY PLAN WOULD BE FOR A THIRD PARTY TO EXTEND A NEW LOAN TO GREECE
  

But, but, didn't Schaeuble just say there is no "Plan B"... or was that just the now traditional weekend lie to get the EURUSD to spike higher on nothing but an endless barrage of lies. In other news, here comes the (heavily collateralized) Greek Debtor in Possession loan we predicted a month ago.

The collapse in the manufacturing base continues: the Dallas Fed general business activity index just printed at a whopping -17.5 on expectations of -3.2,  number that was supposed to be a gain from before, and yet another confirmation that Wall Steet is populated by a bunch of illiterate lemmings. From the report: "Perceptions of general business conditions were mixed in June. The general business activity index pushed further negative, falling from –7.4 to –17.5. Twenty-eight percent of respondents said activity weakened this month, the highest share in nine months. However, the company outlook index rose from 3.2 to 7.2, suggesting manufacturers were more optimistic about their firms’ prospects for the near future." Ah, back to consuming hopium. We wonder how many of these manfucturers were optimistic back in Q1 when the the index was printing in the 20 range only to see a near-historic collapse. We are now certain the ISM will pring sub-50, with a print as low as 46 most certainly possibly.

One of the side effects of the US hitting its debt ceiling in mid-May is that while the components of its total debt have been shifting, with total marketable debt slowly grinding higher, while intragovernmental holdings (i.e., government retirement pension accruals) declining, the total thing has been flat as a pancake at just $25 million below the mandated ceiling. Since May 16 (or 57 working days now), total US debt has been $14.345 billion and not a penny more. Yet the issue is that with the US expected to have a roughly $1.5 trillion budget deficit in the calendar 2011 year, the ongoing contraction in debt issuance is only temporary. Basically when and if the debt ceiling is lifted, the Treasury will not only have to issue as much debt as before, but it will have to issue massively more in the short term to catch up to the ongoing run rate, and also in order to prefund the same retirement accounts it has been plundering for the past 6 months. So here's the math. As the chart below shows, since May 16, the cumulative divergence between where total debt is and where it should be is now a whopping $265 billion. That's right: when the debt ceiling cap is finally lifted, and it will be lifted, with republicans "kicking and screaming", Geithner will suddenly find himself needing to plug a gap of over 2 months worth of accrued treasury issuance. Mathematically, this means the Treasury will have to sell not the $100 billion or so in net debt but well over double that in August and September. And this will happen at a time when there is no QE2 to soak up the excess slack.

Some time ago it was revealed that in its rush to catch up with western military technology, China has now developed an aircraft carrier and a stealth fighter (reverse engineering efficiency notwithdtanding). Now, it appears that China has developed its first ever unmanned drone. Wired has the latest: "It was another big reveal in a long history of them. Six months after the Chinese air force let the first photos of its new stealth fighter
leak online, Beijing’s military has “accidentally” showed off another
secretive weapon system: a small drone, apparently used to scout ahead
of China’s fast-growing fleet of warships. Details of the Unmanned Aerial Vehicle — gleaned entirely from a snapshot
(.pdf) taken by a Japanese navy patrol plane last week — are sketchy,
at best. But the new UAV certainly represents a step forward in China’s development of American-style spy drones." Of course, the "leak" is anything but, and is merely another attempt to demonstrate its ongoing scramble to keep up with the US across all verticals. After all: why peg to the dollar, if you can't peg to the military. And while these attempts at oneupmanship are childish, expect to see a very vocal response from the headline hungry general population which may soon find itself in a "panic" over the fact that the biggest communist power in the world is suddenly getting "just as strong."

We have long been warning that by fat the biggest risk to the Greek banking system is not whether or not its retains its access to the ECB funding window (it will, probably even in the case of a Greek bankruptcy through covert pathways), but domestic confidence in the financial institutions as expressed by deposits, or rather, the lack thereof. Today, as part of its Weekly Credit Outlook, Moody's issued for the first time a very stark warning that should the rate of attrition in domestic deposits (and to see where these are going merely look at the daily EURCHF chart) persist, or accelerate, the results would be disastrous. To wit: "a sustained decline of deposits by more than 35% (roughly equal to
the consolidated banking system’s liquid assets and ECB funding
availability) within a short period of time, would cause a severe
shortage of cash among banks."  Bottom line, it is unclear if even the existing deterioration in the deposit base can ever be undone due to the banks unprecedented reliance on the ECB for day to day funding, now that the bulk of domestic Greek capital is stashed away, safely, somewhere in the Swiss Alps: "With the decline in customer deposits, we expect Greek banks to find it increasingly challenging to reduce their ECB funding dependence, which is their primary objective based on their funding plans committed to the Central Bank of Greece."

Not surprisingly, the personal household weakness continues into May, when both personal income and spending came lower than expected, the first printing at 0.3% on expectations of 0.4%, in line with a revised 0.3% in April, while spending printing coming unchanged in May on expectations of a 0.1% rise, down from a revised 0.3% in April. Most important was that the PCE deflator increased by the most since late 2009, surging from 2.2% to 2.5%, just as expected. Squatters rent component of income once again increased: "Rental income of persons increased $3.3 billion in May, compared with an increase of $2.9 billion in April." More importantly, "Private wage and salary disbursements increased $14.1 billion in May, compared with an increase of $26.4 billion in April." This in line with observed decline in tax withholdings by the government over the past several months. Net result, in May the savings rate increased modestly from 4.9% to 5.0%, much to the chagrin of spending advocates everywhere, as in addition to deleveraging, US consumers also saved more. And this is before the market flush in June...

That the Spanish savings banks, or cajas, have long been a source of instability is well-known to everyone with more than a passing knowledge of the pitfalls of the Spanish economy. Last year, in "The Ticking Time Bomb That Are The Spanish Cajas", we said "Cajas are likely hiding losses on home loans by taking non-performing mortgages out of securitized pools. Absent this unsymmetrical onboarding of risk, the overall deterioration of the broader pool would have become ineligible as collateral in ECB refi operations." We also noted that at 264 bps, Spain CDS "is cheaper than a deserted Salamanca hotel." (it is 320 bps today and soon going much wider). So now that Ireland (of all bankrupt countries) is slinging feces in a desperate attempt at distraction and pointing fingers at Spain, it is logical that the mainstream media would once again remind the world that Spain's financial system is effectively hollow, and that the greatest mystery in the financial world continues to be that Spanish CDS is not trading 2 or 3 times wider than where it is now. As Bloomberg says "Spanish banks have 50 billion euros ($70.7 billion) in unrecognised problematic real estate assets, El Confidencial reported, citing a report by the Boston Consulting Group. The consulting group estimates that Spanish banks need between 20 billion euros and 30 billion euros in additional capital and that Spain’s bank rescue fund, known as the FROB, could end up taking over 20 percent of the banking industry, El Confidencial added." But not before the second European Stress Test finds that all Cajas, just like last year, are perfectly capitalized, in what will be the latest daily lie out of Europe.

• Uncertainty persisted over the outcome of Greece’s 5-Year austerity package vote in the Parliament on Wednesday as lawmakers continued to switch sides
• French Finance Minister Lagarde said that the government has a first draft for a deal with French banks on a Greek debt rollover
• According to ING, Fitch could downgrade Italy after Moody’s placed the country’s sovereign rating on watch negative earlier this month
• According to the Bank for International Settlements, global interest rates must rise to avoid high inflation becoming entrenched

• China Auditor Warns of Risk on Local Debt (Reuters)
• Germany's Weber Slams Rescue Efforts (WSJ)
• Papandreou Faces Showdown on Austerity (Bloomberg)
• Obama to meet Senate leaders, keep debt talks alive (Reuters)
• Deutsche Bank, UniCredit May Have to Raise Additional Capital After Basel(Bloomberg)
• China to stimulate domestic demand: Wen (Reuters)
• Outflows a 'Major' Risk for Greek Banks (WSJ)
• Brussels eyes Tobin tax to aid EU coffers (FT)
• Threat of $100bn hit if US top rating lost (FT)
• Fed Seen Buying $25 Billion a Month in Treasuries After QE2 Comes to End (Bloomberg)