Archive - Sep 5, 2011 - Story

Welcome to the new reality. Executive agencies in the United States have extraordinary unchecked power. They can seize your assets, freeze your bank accounts, intercept your emails, comb through your credit card transactions, and even take away your children… all without so much as a court order or any form of oversight. We’ve explored before how you can end up on the wrong side of a government agency, even if you haven’t done anything illegal. If you are so much as suspected of wrongdoing, they can come after you… even if you’re just in the wrong place at the wrong time, they can come after you. These are two cases where the government has come after its citizens– even when they are doing the RIGHT thing. Think about it: two of the most unlikely people in the country have become enemies of the state: an eleven-year-old girl who wants to save a baby bird, and a manufacturing company that has managed to stay in business (and continue hiring!) in the midst of the worst recession in the nation’s history. This is why we internationalize. This is why we have a plan.

All stock jockeys can now step away from the terminal: both Europe and ES are now closed until late this afternoon which means the E-Trade momentum chasing baby will have to suffer its losses for at least 6 hours in complete collateral call misery. In the meantime, however, gold continues to trade for a little longer, and at last check the spam nemesis was trading over $1900 once again and just one less well known dead president away from its all time highs. We expect the record to be taken out possibly as early as this evening.

Zero Hedge first mentioned the phrase "stall speed" while discussing the Q1 US GDP, which we predicted would translate into a disappointing print for Q2, eventually leading to a negative number in Q4. This was about 4 months ago. Since then our GDP prediction has been validated, but we had yet had to see "stalling" make the vernacular. That has now changed, following the release of a brand news report by SocGen which focuses on the phenomenon of... global stall speed and how specifically this is affecting the key investment verticals around the world as well as what the possible policy responses are. But perhaps more interesting is SocGen's succinct explanation of how the world now finds itself in a global perfect storm, and whose ending will likely be very much comparable to that of the eponymous movie starring George Clooney.

Just a headline from Bloomberg for now:

• ITALY'S TREMONTI CANCELS SPEAKING APPEARANCE IN PIACENZA
• TREMONTI CANCELS APPEARANCE TO RETURN TO ROME TO GO TO SENATE

Will Tremonti finally resign and tell his idiot of a boss to shove it? Or will he declare the truth about Italy's toxic death spiral. Either way, the market can not wait to find out. More as we see it.

It is only a matter of time before France announces to little fanfare that its GDP is about to be slashed, and that as a result the rating agencies put it on downgrade review, and blowing up the entire EFSF mechanism. But before that one needs to shake out the weaker hands, like Italy. For better or worse, that just happened. From Reuters: "Italian economic growth is likely to fall short of the government's official forecast of 1.1 percent in 2011 and 1.3 percent in 2012, probably coming in under 1 percent, a senior government source said on Monday. "It will be very difficult for Italy to reach 1.1 percent growth this year and next," the official, who spoke on condition of anonymity, told Reuters." So if the raters needed any excuse to go ahead and downgrade Italy even more, this is it. As for France: we give them a few months before they also have to tell the truth, and face the music, although with French CDS once again trading at all time wides, the market is not waiting.

Back on Friday, August 26, we indicated that the stock market had gotten overly exuberant and that the "fair value" based on the now traditional Risk Context fair value regression analysis performed by Capital Context indicated a fair value for ES of about 15 points lower. Well, it took a while, but finally the spread has not only compressed, but in fact has the ES trading below its corresponding long leg. For all those who lasted out this trade which has a 100% success rate to date courtesy of idiot algos and convictionless momo chasers, congratulations.

It is unclear what just spooked the market, but whatever it is, stocks have had enough fun for the day. After the ECB just announced that it had monetized a whopping E13.3 billion in the past week, nearly double expectations, and a total of E134 billion since the SMP program's inception, the market took one quick look at just how effective this program has been, shuddered, and plunged realizing that neither ECB intervention, nor the shorting halt is doing anything at all. As a result, ES is now down 21, EURUSD just dropped below 1.41 (Chinabot is about to give up), and rolling halt of Italian banks have started, with Intessa, Mediaset and Impreglio all halted. We expect UniCredit to follow suit as usual.

I think we are entering a new crucial phase in the problems in Europe as quarter end reports will drive a notional reduction. During parts of 2007 and 2008, CEO's of banks and other financial institutions, did not want to show any exposure to sub-prime, or to certain banks, or to leveraged loans, etc. The CEO's in particular were convinced that they needed to show ZERO net exposure to the asset classes most in question. As part of the "window dressing", their risk management departments were told to be short and told to reduce notional exposures. It was no longer just an economic decision it had become a "what's best for the share price" decision. The reality, is making money is best for the share price, but that notion gets thrown out the window once CEO's panic. I believe we are there, and there are some real repercussions from that. The main problem is that we will see credit curves flatten and possibly invert. As short dated paper to the current "culprits" (sovereigns and financials) matures, the lenders will not want to roll over the positions.

Gold’s London AM fix this morning was USD 1,896.50, EUR 1,341.13, and GBP 1,174.67 per ounce. The gold fix was higher than Friday’s in all currencies (USD 1,854.00, EUR 1,301.23, and GBP 1,143.81 per ounce). Despite continuing denial, a recession in the U.S. is inevitable; the question is only with regard to how deep the recession is and to the nature of the recession – inflationary, stagflationary, hyperinflationary or deflationary. The consensus, especially amongst Keynesians, is that deflation is most likely. However, given the degree of currency debasement being seen internationally stagflation is also a risk. Hyperinflation, as being experienced in Belarus today, is the macroeconomic and monetary ‘black swan’. There are growing concerns that the Eurozone crisis might degenerate again soon due to the Greek debt crisis and risk of default. Over the weekend talks between Greece, the IMF and ECB representatives over new bailout funds broke down. The euro has fallen and the German local elections have added to concerns over Greece.

Despite some better-than-expected macro data overnight (admittedly marginal), investors continue to retreat from any European exposure as sovereign stress leads to financial stress and drags non-financials into an austerity-driven slowdown. The snaps wider in credit markets are very reminiscent of crises past when being hedged at any cost was more important than any short-term trade opportunity.