Archive - Aug 31, 2011 - Story

Yesterday Zero Hedge contributor Bruce Krasting had some very insightful and very prophetic words when he asked rhetorically if a "Government investment disaster in the works??" The company in question is (now former) massively subsidized solar energy company Solyndra. Solyndra filed for bankruptcy less than 24 hours after Bruce proposed that the company is nothing but a stimulus black hole. We congratulate him on his investigative efforts. Alas, being private, there was no way to short it and capitalize on this investigative coup de grace. And while there are no winners, there are plenty of losers? Who - why US taxpayers of course. Why? Because as some may recall, Solyndra is one of the "shining examples" of Obama's $787 billion American Recovery and Reinvestment Act. After all none other than president Obama said that Solyndra is "leading the way toward a brighter and more prosperous future.” He also cited it as a success story from the government’s $787 billion economic stimulus package." Alas Solyndra has now become a less than shining example of the complete catastrophe this latest exercise in pointless Keynesianism has been, all on the backs of US taxpayers. But don't worry, Obama is about to bring us a fresh new such fiscal stimulus catastrohpe any minute. This time it will be different.

Yesterday it was Evans saying explicitly it was QE3 or bust. Today it is Lockhart's turn to stop just short of reiterating what is now getting prices in every single day: "As you know, the FOMC stated after its last meeting the intention to keep the policy rate at near zero for two more years. Also, the current policy is to maintain the Fed's balance sheet scale for the foreseeable future. I support this position. Given the weak data we've seen recently and considering the rising concern about chronic slow growth or worse, I don't think any policy option can be ruled out at the moment. However, it is important that monetary policy not be seen as a panacea. The kinds of structural adjustments I've been discussing today take time, and I am acutely aware that pushing beyond what monetary policy can plausibly deliver runs the risk of creating new distortions and imbalances." He is aware, yet he will gladly vote for it when the time comes. And the time will come very soon because as he just said during his speech Q&A, "slow growth is now a bigger problem than inflation"... which as we showed yesterday is 4%, and "that we have a jobs crisis." Net net: one more dove doing what he does best - beg for more inkjet cartridges.

Well the second Greek bailout lasted all of... 5 weeks. Time for Bailout #3?

• EC PRESIDENT BARROSO SAYS WORKING ON NEW GREEK PROGRAM
• BARROSO SAYS EC REVIEWING WITH ECB AND IMF GREEK FIN. ASSIST

In the meantime, we learn that while two broke Greek banks just merged to create a bigger broke bank, the country's 4th largest bank admitted to resorting to the last ditch liquidity program discussed on Zero Hedge a week ago.

Yesterday we had the first case study of what happens in a hyperinflation, when we noted that the local central bank had just hiked interest rates from 22% to 27%. Net result for the economy? Zero. Today is case study #2 where we learn what happens to an imploding economy which happens to be surrounded by friendly neighbors who just happen to find themselves in a massive arbitrage courtesy of a currency that is losing multiples of its value on a monthly if not daily basis. Per Bloomberg: "Belarus’s supermarkets are running out of meat as Russians take advantage of a currency crisis that a devaluation and the world’s highest borrowing costs have failed to stem. “All meat has gone to Russia,” Alexander Andreyevich, an 82-year-old former tractor-plant worker, said Aug. 25 in Minsk, the capital. “My relatives near the Russian border called me a few days ago and said the shops are empty."..."Private stall owners simply go and buy meat from state- owned vendors and sell it a couple of steps away for a hefty profit,"Deputy Agriculture and Food Minister Vasily Pavlovsky told reporters in Minsk Aug. 24. The government banned individuals in June from taking basic consumer goods such as home appliances, food and gasoline out of the country. Russians, buoyed by the removal of border checkpoints July 1 as part of a customs union, have circumvented the restrictions." Funny- if the locals had preserved their purchasing power by holding their money in gold, they would not find themselves in a position where those who still have a stable fiat exchange rate (for the time being) can literally steal products from under their noses for a paltry sum as sellers scramble to converts products into some currency before it is devalued even more tomorrow.

Marx predicted a crisis of advanced Capitalism based on the rising imbalance of capital and labor in finance-dominated Capitalism. The basic Marxist context is history, not morality, and so the Marxist critique is light on blaming the rich for Capitalism's core ills and heavy on the inevitability of larger historic forces. In other words, what's wrong with advanced Capitalism cannot be fixed by taxing the super-wealthy at the same rate we self-employed pay (40% basic Federal rate), though that would certainly be a fair and just step in the right direction. Advanced Capitalism's ills run much deeper than superficial "class warfare" models in which the "solution" is to redistribute wealth from the top down the pyramid. This redistributive "socialist" flavor of advanced Capitalism has bought time--the crisis of the 1930s was staved off for 70 years--but now redistribution as a saving strategy has reached its limits... That gambit has run out of steam as the labor force is now shrinking for structural reasons. Though the system is eager to put Grandpa to work as a Wal-Mart greeter and Grandma to work as a retail clerk, the total number of jobs is declining, and so older workers are simply displacing younger workers. The gambit of expanding the workforce to keep finance-based Capitalism going has entered the final end-game. Moving the pawns of tax rates and fiscal stimulus around may be distracting, but neither will fix advanced finance-based Capitalism's basic ills.

Two weeks ago when expanding its debt monetizing vehicle, the SMP, to include the debt of Spain and Italy, one of the few appeasements offered to the public by "Europe" was the resolute demand that a transaction tax, aka Tobin, be enacted immediately if not sooner. Today, about two weeks later, the same behemoths of European structural stability, Germany and France, hoping the general public has largely forgotten all that was said in mid-August, has come out with the generous announcement that... they will propose a financial transaction tax. It is unclear if sometime between the first proposal and today's, Merkozy dropped the demand for Tobin Taxation, in order for it to be priced in once again as an indication of the fiscal prudence of the European leaders. And if so, will the market respond like it did last time around and plunge by 5-10%?

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

Market Recaps to help improve your Trading and Global knowledge

"What we view today as "normal" I argue is simply not normal. Just think about if you wanted to go to town 120 years ago. If you wanted to go to town you actually had to go out and hook up a horse. That horse had to eat something, which means you had to have a patch of grass somewhere to feed that horse which meant you had to take care of some perennial in order to feed that horse in order to go to town. And so throughout history, you had these kinds of what I call ‘inherent boundaries’ or brakes on how much a single human could abuse the ecology. And today, during this period of cheap energy, we’ve been able to extricate ourselves from that entire umbilical, if you will, and just run willy-nilly as if there is no constraint or restraint. And now we are starting to see some of the outcome of that boundless, untied progression. And so the chances are, the way to bet, is that in the future we are going to see more food localization, we are going to see more energy localization, we are going to see more personal responsibility in ecological lifestyle decisions because it's going to be forced on us to survive economically. We are going to have to start taking some accounting of these ecological principles."

While there are those financial publications who have realized that reliance on shadow markets for unsecured repo and otherwise lending may be troublesome in the short-, medium- and long-run, something we warned back in March 2010, a far more tangible threat is not what is happening in the already largely contracting shadow banking realm, but in real, non-shadow markets. Because for shadow to be impaired, these traditional liquidity conduits would have to be shut down first. Alas, while stocks resolutely continue to ignore anything but both good and bad headlines, all of which justify either QE3 or a surging economy (nothing new - as we have said this will occur most likely through the end of the year in a carbon copy of 2010), liquidity in non-shadow markets is the most impaired it has been in a long time, with 3M USD Libor rising again to 0.327% from 0.326%, although the story as usual lying below the headlines. As the charts below show not only are European banks seeing their LIBOR rates increasing (in as much as any of this is even remotely credible), with SocGen and Barclays the two most troubled banks from a self-reported liquidity standpoint, but also that the spread between the lowest and highest reported LIBOR is now the widest it has been in all of 2011. A few more days in which European funding markets completely ignore what is going on with US stocks (the same as US bonds incidentally), and the time to talk about shadow banking repo halts may indeed be nigh.

That the August Chicago PMI dropped to 56.6, down from 58.8 in Julye, and the lowest since November 2009 is irrelevant. What is relevant is that this number beat expectations of 53.3, so the ripfest is on: after all, stocks move higher on worse than expected data, which should they not surge on a consensus beat. Remember: the QE3/career risk rally is on. Nothing else matters. Among the index components, Prices paid dropped from 71.7 to 68.6, Production declined from 64.3 to 57.8, same for New Orders, Backlogs, and Inventtories. The two components that did go up were Supplied Deliveries from 55.9 to 60.5 and Employment, up from 51.5 to 52.1. And now everyone looks to tomorrow's ISM, for which the PMI is traditionally a good proxy, with hope that the number will print above 50 despite every single regional Fed indicating a mid-40's print.

Don't look know but Canada just confirmed the first signal of a recession, after its GDP printed negative (on expectations of an unchanged number) for the first time since Q2 2009, due to a drop in exports and oil output, most of it blamed naturally on "transitory" factors. Odd how the US used the transitory line for months until it all turned out to be permanentory. What, however, is truly hilarious is the continued denial to look facts in the face as confirmed by the following three Canadian sellside analysts, who seem positively giddy that the number was major miss to expectations: their take home, just like as in the case of Canadian banks having some of the lowest TCE ratios in the world: "ignore it." Perhaps when next quarter Canadian GDP prints negative again, and the economy is officially in a recession, then the delightful comedy crew of what passes for "analysts" up north will have some words of caution finally. As for whether a recession confirmation in 3 months will be negative for the same banks which are downplaying both the GDP and its risk to their near world record leverage, we leave to the far more erudite, and far less shoot-from-the-hip Globe and Mail.

• Canada GDP prints at -0.4% on expectations of 0.0%, first contraction since Q2, 2009
• Italy Living on Borrowed Time (WSJ)
• Choice for EU: Bail Out Greece or Bail Your Banks (WSJ)
• Economy Deeply Divides Fed (Fed Mouthpiece)
• SEC Lawyer Blew Whistle Before (WSJ)
• Noda promises action on surging yen (FT) ... again... always
• White House could unveil mortgage plan next week (Reuters)
• Greek Bailout Talks Face Hurdles (WSJ)
• Panama Canal upgrade sparks US ports battle (FT)
• Japan Finds Radiation Spread Over a Wide Area (WSJ)

The perpetually wrong ADP report for August has come, printing at 91K, on expectations of 100K, and down from a downward revised 109K (previously 114K). How much of a leading indicator to Friday's NFP this is is anyone's guess: historically the ADP's error factor has been between -100% and +100%. Also as a reminder, the report does not account for the Verizon employee strike which impacted initial claims last week and which according to Goldman will likely be an addition downward wildcard in Friday's NFP.

• A German government spokesman said that the German cabinet has approved framework for a draft law on expanding the Eurozone rescue mechanism
• A French government spokeswoman said that France wants full application of a Eurozone agreement on Greece and no bilateral deals
• A German government draft mentioned that the EFSF will be allowed to recapitalise banks but only via national governments, which negated an earlier press report suggesting that the fund can lend to banks directly
• According to an Italian government source, the government is set to drop pension changes from its austerity package
• Strength was observed in CHF across the board as no comments emerged on curbing the currency's strength following the Swiss government's regular meeting

As previously reported, Italy is stealthily undoing its entire €45.5 billion austerity plan proposed two short weeks ago, first cutting the provision for tax hikes for high earners, and now also scrapping the proposed pension changes as Ansa reports - the pension proposal, would have excluded time at university, mandatory military service, from calculations of the retirement age and pension level. That is now gone due to a vocal opposition against every single austerity line item. Unfortunately for Italy, which has been hoping nobody would notice: Bloomberg, which has released an analysis titled "Berlusconi’s Backpedaling May Push Italy Back Toward The Brink of Disaster." It is rather self-explanatory: as a reminder the ECB is only buying Italy bonds as part of its SMP monetization expansion due to promises that Italy would slash its deficit and implement austerity. Now that this is obviously not happening, the SNB is expected to balk at future purchases of Italian debt due to Germany complaining loudly that it is supposed to carry the burden of Italy's consistent lying. Already Italian bonds have resumed their climb wider, and explains the weaker than expected BTP auction of 3 and 10 year bonds conducted yesterday.