Archive - Sep 2011 - Story

When one compiles the annals of the great deflationists of the early 21st century, they will be hard pressed to decide who is deserving of the title most ferocious deflationist in a runoff between David Rosenberg and Gary Schilling. And while David did not have much notable to say today, despite his daily release of interesting and insightful commentary from his perch atop Gluskin Sheff, Gary Schilling took advantage of the media vacuum to appear on Bloomberg TV and preach, what else, deflation. Among the topics touched upon were the #1 issue du jour - the Chinese hard landing, presented earlier here, and the resulting collapse in copper, on bond market volatility, on investing and speculation, and lastly on the S&P, which just like Rosenberg, he see as deserving of a 10x multiple applied to a soon to be revised S&P 500 EPS of 80 (do the math). All in all sensible stuff except for one thing: his statement "Inflating away is an excess supply world is almost impossible, even for the Fed" leaves a little to be desired. While he may be spot on, it does not mean the Fed will not try. And try it will: we expect rumblings for full blown LSAP to commence in a few days, and QE4 in which the Fed will pull a BOJ and buy ETFs, REITs (in addition to MBS and Agency bonds) early in 2012, after which it will be time to quietly depart from these continental US, or else load up on lead, spam and precious metals.

Update: the correct translation is that as of 5pm the debt has not been paid.

In this messed up post-Keynesian world which is so insolvent, it is virtually impossible to keep track of who is about to default, either technically, selectively, or really, who is already bankrupt, who is hyperinflating, and so forth. And while we all know that Europe and the US can at best hope to kick the can for a month at a time until finally they all have to face the truth, we are happy to bring to your attention the latest entrant to the technical default club: Ukraine, which will shortly join its former USSR satellite Belarus in the hyperinflation club. The fact is that the Ukraine is slowly imploding - the government had stopped Treasury payments for all budget expenses in an attempt to accumulate the cash needed to make a coupon payment on debt and which apparently investors are unwilling to roll. In all fairness, the news update indicates that the country just barely made the 5.3 billion hryvnia payment, but that may be it for now. What about the next one? Time to add some Ukraine CDS to that bankrupt sovereign basket, no matter how overflowing it may be at this point.

Around 11:15 this morning, I left my flat and headed towards the Cape Town Gold Coin Exchange to check out their kruggerrand prices today. (Note: They charge around 10% over spot, and buy coins for about 1% over spot. This is inclusive for all major coins that they carry. They have kruggerrands, eagles, and maple leaf coins in stock.) I was sitting at a red light not too far from the new football stadium they built for last year’s World Cup tournament, when suddenly all the traffic lights went out. I thought it was just a weird anomaly, so I proceeded cautiously. By the time I reached the coin shop, I realized that the whole city was without power. Again. Entire buildings had shut down, stores closed, and schools let out. It was a full-blown blackout… and it lasted for several hours. This sort of thing is not uncommon in South Africa. Politicians will tell you that electrical demand is outpacing supply because of the country’s rapidly growing economy. That’s one way to put it– lemons into lemonade.

The second sequential ban of short selling in Europe, which was supposed to expire at the end of the month, has just been extended. At this point we are certain Europe will not allow shorting of financial stocks. Ever. Or at least until the Eurozone implodes... Which will be far sooner than 'ever.'

• ITALY MARKET REGULATOR CONSOB EXTENDS SHORT-SELLING BAN - BBG
• SPAIN'S CNMV REGULATOR EXTENDS SHORT-SELLING BAN - BBG

Next to join the part: France. In other news, since the short sale ban was instituted, SocGen is down 18.5% and UniCredit is down 26.6%.

Those who follow the repo market are well aware that something is quite odd with the 5 Year point on the repo curve. While most other bonds trade normal, the 5 Year OTR trades special. And not just special: really special (see chart below) at -225 bps, a number which has soared in the past 4 days, when it was just 0.00% on September 22. And while we will not discuss what is happening in the repo market in this post (judging by this fact, nothing good), it did help with today's brand spanking new record low yield 5 Year bond auction, which courtesy of the repo skew and certainly courtesy of Operation Twist, just priced at an all time low 1.015%, well inside of the 1.03% When Issued, and printed at a 3.04 Bid To Cover, substantially above the recent average 2.76, not to mention a surge in Indirect Bidding to the tune of 46%, well above the average. So even though the 5 Year auction was a stunning success, sending the 5 Year to under 1%, what it telegraphs is that there is something very messed up in shadow banking, where both money markets and repo are getting gutted courtesy of Europe. We expect ongoing such risk transfer from shadow into sovereign debt: a development which as we discussed previously is very bad.

It was just yesterday that we, as it happens prophetically, said that "we fear the hedge fund space, which at last check was approaching $2 trillion in AUM, will collapse by 25% after the new year when the full carnage of the redemption requests is made public...we certainly had no idea just how pervasive the decimation within the hedge funds ranks was until we saw the mid-September results. We really, really hope the collusive short squeeze-cum-month end rally works out for the hedge fund community, because it really will be "or else." Well, as of today it is nearing "or else" for the world's largest hedge fund Man Group, which is down, yup, 25% today on, you guessed it, redemptions. There is, however, good news for all hedge fund managers reading us today: you will know whether or not you are in business next year, by this friday. As Dow Jones reports, "Friday marks a deadline for investors in many hedge funds with monthly and quarterly liquidity to say they want their capital back." In other words the pain is over, as 25% of hedge fund managers will hear their death sentence in 48 hours and the painful expectation of the inevitable ends.

The risk faced by those who are analyzing macro trends is sounding like a broken record. For those younger readers who have no idea what that means, imagine an MP3 song that will stick on and endlessly repeat a random segment of the song you are listening to until you give your device a sharp knock on the side. That's what a broken record sounded like. The world economy is on the ropes and it won't ever recover. At least not to anything resembling its recent past. Neither the gleeful housing bubble nor the free-flowing credit that enabled that side bubble to emerge will return. The resources simply do not exist to repeat that final orgy of consumption. A new reality is upon us and - while fortunately more and more people are choosing to face our predicament rather than pretend the current risks and challenges do not really exist - the absolute numbers are still small and for the most part don't inlcude any of our political leaders.

3-month USD Libor has not dropped day-to-day since July 25th - a 46 day streak - and while the  individual rates indicated by LI(E)BOR are 'around' 37-43bps currently, someone (or more than one) is willing to overpay (by over 200%) as the Fed's USD swap line usage (or non-EURO tender operations) remains $500mm at a rate of 109bps (vs 107bps the previous week). Perhaps it is time for a certain French bank CEO (who enjoys all the media exposure when telling naive gullible mom and pops just how stable his balance sheet is) to sell some more non-performing assets? Or CSFB to explain how their rate has been flat for 11 days in a row now?

Earlier today Bank of America released a presentation and a conference call in which the firm's head of China equity strategy David Cui spoke about the dreaded "China Hard Landing" or the event that would kill all decoupling dreams for ever and ever, and probably lead to a world depression. It seems that the latest down move in the market is being partially attributed to just this notification finally making the rounds as can be seen in the note below: "BofAML’s David Cui is the Markets’ #1 rated China Strategist according to the 2011 Institutional Investor All-China Survey. While he is not responsible for our China GDP forecast, he sees significant Chinese specific financial market risks that could trigger lower than expected Chinese growth. He sees that those financial market risks as having increased considerably. He will expand on this on the call, but he sees these financial stresses as having a very high probability of triggering lower than expected growth. That lower growth could well be sub 7%, and therefore by Chinese market standards would be termed a “hard landing”, clearly a HUGE issue for all global markets." Granted this is not news to those who have been following the Chinese situation (as fringe blogs have been for over a year), but the market does tend to have a habit of being about 12-18 months behind the curve. Here is what Bank of America had to say...

As realization settles in that levered EFSF may not be the best solution since it is circular and puts the ratings of every country in Europe at risk, along comes another proposal to save Europe.  The "Eureca" plan which can be found at www.rolandberger.com has made its way around the market the past couple of days. The premise of the plan is that speculators are to blame and that Greece should sell its state assets "such as ports, airports, highways, and real estate". The market seems to be grasping at straws. Plan after plan seems to catch a brief following, but falls apart under any scrutiny.  Why are any plans on how to manage a Greek default completely ignored?  I remain convinced that a Greek default could be dealt with.

In his typically anti-prosaic manner UBS' Art Cashin draws the parallels between Caesar's political alliances & apolitical dalliances and the refreshing honesty of Dallas Fed's Fisher with the hope of a new spirit of cooperation blossoming among European leaders and how we lost some belief yesterday afternoon.

Today's core durable goods number is being desperately spun as yet another inflection point for the economy. Alas, nobody buys it any more. Enter Goldman Sachs, which says that while encouraging, is quite dubious if the "recent growth rates will be sustained." Growth of what? Stainless steel scaffolding for lies and rumors that reach to the sky? If so, then yes absolutely. Otherwise, with China rumored to be gearing up to downgrade the CNY (and finally push Schumer over the cliff), we wish the optimists the traditional dose of good luck with their daily hopium.

Either the YesMen have infiltrated Italy's biggest, and most undercapitalied, bank, or the stress of constant, repeated lying and prevarication has finally gotten to the very people who know their livelihoods hang by a thread, and the second the great ponzi is unwound their jobs, careers, and entire way of life will be gone. Such as the head of UniCredit global securities Attila Szalay-Berzeviczy, and former Chairman of the Hungarian stock exchange, who has written an unbelievable oped in the Hungarian portal Index.hu which, frankly, make Alessio "BBC Trader" Rastani's provocative speech seem like a bedtime story. Only this time one can't scapegoat Szalay-Berzeviczy "naivete" on inexperience or the desire to gain public prominence. If someone knows the truth, it is the guy at the top of UniCredit, which we expect to promptly trade limit down once we hit print. Among the stunning allegations (stunning in that an actual banker dares to tell the truth) are the following: "the euro is “practically dead” and Europe faces a financial earthquake from a Greek default"... “The euro is beyond rescue”... “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”...."A Greek default will trigger an immediate “magnitude 10” earthquake across Europe."..."Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty “within minutes.” In other words: welcome to the Apocalypse...