Archive - Jul 4, 2011 - Story

The timing on the earlier pronouncement that rating agencies may have found religion could not have been better. Not even an hour later, here comes Moody's with a blockbuster which may put China's "White Knight" status, at least as ar as Europe is concerned, in grave danger. In a report just released, the rating agency not only warns that China's debt problem is "bigger than stated" (i.e., China is hiding a ton of ugly stuff off the books), but goes ahead to quantify it: "Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report....we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." Naturally, the implication is that this is an absolutely willing "omission" (thank you central planning), which means that of China's $5.8 trillion GDP (or whatever imaginary number the Polit Bureau is happy with throwing around for mass consumption), $540 billion is debt that is "unaccounted for", most likely due to being, well, bad. That would be equivalent to saying that $1.4 trillion of US corporate debt is delinquent. And lest anything is lost in translation, Moody's drives the steak through the Dragon's heart: "Since these loans to local governments are not covered by the NAO
report, this means they are not considered by the audit agency as real
claims on local governments. This indicates that these loans are most
likely poorly documented and may pose the greatest risk of delinquency." So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3...

Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg: "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."

Leave it to Goldman to explain why the surge in crude prices is actually a good thing. Enter the good old ("recycled" some may say tongue in cheekly) recycled petrodollar thesis. The logic, in brief, is as follows: Petroleum exporters are the primary beneficiaries of rising oil prices and, assuming they don't use the bulk of the funds to buy their citizens' endless love (a big if in recent months), use this "savings" flow to purchase various assets from developed capital markets. To quantify, Goldman suggests that that the $70/barrel rise in crude over the past 2 years "has caused petrodollar saving flows to rise from roughly $10bn to $70bn per month, thus adding roughly $700bn of asset demand to global capital markets." Which is supremely ironic: those who claim that the IEA's action is comparable to a QE are 100% dead wrong. It is actions which raise the price of oil that have an implied QE effect, whereby the abovementioned $700 billion in recycled capital is only possible due to the surge in crude. As prices drop, whether it is due to idiotic, politically-driven actions like that by the IEA, or otherwise, the recyclability of petrodollars plunges, and far less "savings" end up being reinvested in US asset. What would be further ironic is if the administration realizes this paradox, and in order to save the market (which it will have to very soon in the absence of ongoing flow monetization by the Fed), it send the price of WTI well over $100 to generate bond buying interest in the short-term. That said, based on some of the stupidity we have recently seen out of the White House, such an outcome would not surprise us in the least.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 04/07/11

Now that formal newsflow has officially replaced the Onion's funny pages, it is only fitting that the reality of politics and finance be reduced to a board game. Enter Grant Williams, to whom the last days of the Ponzi unwind are nothing more or less than a game of KerPlunk!: "When playing KerPlunk!, the early straws are easy to pull out without causing any dislocation amongst the marbles. Consequently, there is a period when players spin the tube with abandon and yank straws from the bottom of the pile with the kind of carefree attitude one normally only sees on the face of a Fed Chairman about to be interviewed by CNBC, but as it goes on, almost imperceptibly, the game changes and tension begins to creep into the face of each and every player. The shift normally happens when one stray marble drops as a straw is pulled out without the requisite attention being paid to the ramifications of doing so. The sound of that one marble hitting the plastic floor of the tube is normally enough to concentrate the minds of the players for a minute or two, but pretty soon, as a few more straws get pulled out without further consequences, players relax again. It’s about this time that the game changes completely. Without any warning, the remaining tangle of straws suddenly looks precarious and finding a straw to pull out safely requires extreme focus...Each of the straws is virtually guaranteed to dislodge some marbles when pulled out – no matter how much care is taken – and while there are still a few straws which will cause minimal problems, certain straws, when pulled out, will cause a small avalanche. By this stage in the game it is abundantly clear to all the players that the point of no-return has been reached and in no time at all - and indeed at any moment - all the marbles will end up tumbling down; the cacophony of noise created by the echo in the plastic tube jarring to one and all."

While the overall market may have taken a sharp move higher in the last
days of the quarter on what has been a vicious short covering rally, the bulk of hedge funds continue to underperform either the general
market or their respective benchmarks. And while funds will shower
their LPs with promises of outperformance, in some very prominent cases
performing outright fraud and fabricating trades, one of the better
indications of the performance of the levered beta chasers is the activity in the real
estate market in Greenwich, CT. It is there, that courtesy of Prudential's Mark Prunier, we find that sales of homes in the ultra-luxury $10+ million bracket are not doing that hot. In fact they are doing outright horrendous - the current inventory backlog in the most expensive real estate segment in this hedge fund playground is the biggest since 2004: at last check (June 2) there were 52 homes in this bracket, of which only 5 had been sold in 2011, and 1 was pending closing. And while it is difficult to correlate real estate sales and general net worth of Greenwich's hedge fund-based residents, it appears that there isn't much appetite for local housing purchases. On the other hand, that there is such an inventory glut also shows that nobody is too desperate to cut prices to sell at any cost. Following this trend over the next several months will likely provide additional clues into how hedge funds truly measure their own relative strength as we enter the second half of the year.

Independence Day is not about blind nationalism, it is not about statism, it is not about collectivist subservience to a pervasive bureaucracy; it is about the rebirth of the individual in the face of overwhelming despotism, and the creation of a country whose fundamental focus was the nurturance of such individualism above the desires of government. Beyond the often irrational fears of the “majority”. A philosophy of decentralization that was meant to supercede elitist addictions to power and dominance. The 4th of July is a marker, an oasis in the annals of history, when the true potential of humanity could be glimpsed, even if only for a moment. Ever since, men have longed for another opening in the veil. We have allowed ourselves to be manipulated, conned, conditioned, and enslaved. We have abandoned our self sufficiency, and become utterly dependent upon political and economic systems we no longer have any real influence over. America has lost itself, and the darkness grows ever more heavy. For those who have awakened to this reality, I can say only this; you are not the first. Others have come before you. Others have fought back. Others have been victorious.

The 5th Greek bailout tranche has not been delivered yet, under the very, very strict condition that the country adhere to the terms of its pillaging by European banks, and already Greece, which has proven beyond a reasonable doubt that a country that refuses to do work, and conducts full day strikes on a whim actually does not grow, has just fallen behind a critical monthly Troica benchmark. From Dow Jones: "Greece is at risk of missing a key budget target in June, European Union experts said in a report, a sign of the uphill struggle the country faces as it tries to get its deficit reduction plans back on track. The report, prepared by European Commission budget experts with input from European Central Bank officials and published over the weekend, says that Greece could miss its June target for its primary budget balance, a measure of the government deficit that excludes interest payments on outstanding debt." And here is why the last thing anyone in Europe cares about is actual Greek growth: "Government revenue faces "significant" shortfalls that have only partially been offset by lower spending and delayed payments, the report says. "As a result, the quarterly performance criterion on the primary balance could be missed already in June." June. As in before the disbursement of cash contingent on the primary balance being met...

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Confusion continues to reign supreme over what the French rollover plan does for the various entities. The details and mechanics are a bit sketchy, but I have attached the proposal that I found, and will use that as a basis for the analysis. As I go through the details, and incorporate the latest rating agency comments, the conclusion remains the same – this is a good deal for the Participants, a mediocre deal for the Troika, and punitive to Greece.

There may have been those who thought that our focused mockery of Moody's head something Mark Zandi went a little too far last summer when he and other prominent Princeton proctovoodoologist Alan Blinder praised Tim Geithner's abysmal "recovery" in a desperate attempt to get an administrative job away from their respective sinking ships. Well now he have pure comedy genius to add to allegations of incompetent buffoonery. On Friday, Zandi told Yahoo's Daily Ticker that of all proposed replacements to Tim Geithner (a list which he somehow was not part of despite years of sycophantry) JPMorgan head, currently embroiled in billion dollars worth of mortgage fraud litigation, would make a "Fabulous" Treasury Secretary. That's right: the head of the bank that effectively shares its balance sheet with the Fed courtesy of being the primary shadow banking system gatekeeper as one of two tri-party repo clearers, and whose relentless printing of new bonds would necessitate round after round of QE, would make a "fabulous" treasury secretary... While we are at it, why not just get Bernie Madoff, who continues to be in jail for doing what the global financial system does each and every day, furloughed and have him run the US Treasury every Tuesday, Wednesday and Thursday on alternative weeks when the bimonthly refunding occurs. After all who better to lead the US Treasury than him?

Erste Group's Ronald Stoeferle has released another must read report on gold, recapping all the recent developments in the space, and more importantly putting the recent price moves in context. While there are numerous key observations which we leave to readers to uncover on their own, arguably the key fact is the following: "The possession of gold is tantamount to pure ownership without liabilities. This also explains why it does not pay any ongoing interest: it does not contain any counterpart risk. Along with the International Exchange and the Chicago Mercantile Exchange, JPMorgan now also accepts gold as collateral. The European Commission for Economic and Monetary Affairs has also decided to accept the gold reserves of its member states as additionally lodged collateral. We also regard the most recent initiatives in Utah and in numerous other States as well as in Malaysia, and the planned remonaterisation of silver in Mexico as a clear sign of the times. The foundation of a return to “sound money” seems to have been laid." And as the currency basket vs gold since 1999 chart below demonstrates, the key feature of fiat money is that is most certainly has liabilities, paradoxically in the form of central bank assets which collateralize it. The more worthless "assets" that are taken up by central banks to match the balance sheet expansion, the more worthless the actual currency in the form of actual circulating paper and reserves. As such it is not so much the actual dilution of fiat paper that devalues it: it is the increasingly less valuable available collateral that supports it. As for the future: one of Erste's scarier hypotheticals is that should the US lose control of its monetary base, leading to a 1000% jump in said monetary metric, the shadow price of gold assuming 40% backing of gold, would be $99,419. Frankly we have yet to hear even some of the most undaunted gold bulls throw this number around.

While the legal case against DSK in New York may be ending shortly, a new one, and possibly the first of many if the man's reputation as a womanizer is indeed valid, is about to be launched against him in France. From Reuters: French writer Tristane Banon will file a legal complaint on Tuesday over an alleged rape attempt by former IMF chief Dominique Strauss-Kahn in 2002, her lawyer told Reuters. David Koubbi, Banon's attorney, said the complaint would relate to an incident that took place when she went to interview Strauss-Kahn in an apartment in Paris. She was 22 at the time and has already publically discussed the incident. "Tristane Banon will file a complaint on Tuesday for attempted rape in Paris," Koubbi said." It is unclear if the case will be civil or criminal although considering statuse on limitations on these kinds of things for a criminal trial is hardly 9+ years, we are confident the weakest for of allegation against DSK will be filed. Of course, this is to be expected when one waits 9 years to actually lodge a complaint against something that should have been brough to the authorities' attention immediately.

A few weeks ago Barclays compiled a useful chart representing the largest holders of Greek debt. Today, the bank's Laurent Fransolet has issued an update "of the table “Top 40 holders of Greek government bonds and Greek debt” (Figure 1), in which we show updated holdings for Q4 10 for AXA and add KA Finanz from Austria to the list. We also clarify that the holder EFG in previous versions is Eurobank EFG." Not surprisingly, despite the refining drill down of secondary exposed parties, the top holders remain central bank and affiliated institutions, explaining the ongoing prerogative to not impair central banks' Greek holdings as a result of a rating agency event of, even selective, default.

The 4th of July is a fitting day to ponder the reality that we are at Peak Government, and the Savior State is unsustainable. This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State. In his book Collapse of Complex Societies, anthropologist Joseph Tainter identified two causes of economic collapse: investments in social complexity yield diminishing marginal returns, and energy subsidies, i.e. cheap, abundant energy, decline. In my terminology, the dynamic he describes is one in which the cost structure of a society continues rising due to “the ratchet effect” but the gains from the added expenses are increasingly marginal. At some point the additional costs, usually justified as the “solution” to the marginal returns problem, become counterproductive and actually drain the system of resilience as dissent and adaptability (“variation is information”) are suppressed. This feeds systemic instability: on the surface, all seems stable, but beneath the surface, the potential for a stick/slip destabilization grows unnoticed. Cheap, abundant energy offers a surplus of value that can be invested in social complexity and consumption. Once the cost and availability of energy declines, then that surplus shrinks and can no longer be used to support the high cost structure. The U.S. economy has clearly been driven to the cliff edge of instability by both dynamics: the cheap, abundant energy which enabled fast growth of consumption and high cost social complexity is vanishing, and the cost structure of the economy has ballooned far beyond sustainability.