Archive - Sep 2011 - Story

Following the lovely goose egg of a jobs report last week, markets started the week with an Asian Invasion rout led by the Hang Sang down 3%, and the Kospi shedding 4.4%. The second act of this sonata was Europe getting hammered led by a German Blitzkrieg 1-2 punch with the DAX losing 5.28% but more uniquely, the German 10-yr setting a new record below 2%. With all these trick-or-treats haunting the markets one has to ask, ‘Is the Ticking Time Bomb Going Off and the Inception-Style Dream Collapsing?’ We think so and we will begin by looking to a place that would seem most odd…the institutional players.

Any time a major bank releases a report saying a given course of action is too costly, too prohibitive, too blonde, or simply too impossible, it is nearly guaranteed that that is precisely the course of action about to be undertaken. Which is why all non-euro skeptics are advised to shield their eyes and look away from the just released report by UBS (of surging 3 Month USD Libor rate fame) titled "Euro Break Up - The Consequences." UBS conveniently sets up the straw man as follows: "Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change." So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany. "Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. " It also would mean the end of UBS, but we digress. Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole' Hank Paulson : "The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war." So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.

As if we didn't have enough to worry about with sovereign shenanigans in Europe, which bridges to build in the US, and a slowing China, Israel's top-brass now fears a winter of radical Islam, an increase in the chance of a multi-front war, and notes Hamas using a new advanced rocket (perhaps this will be the bazooka that Trichet borrows?).

Having twiddled thumbs all day, equity futures just reopened with a modest drop - extending losses from the overnight session - and US credit markets are reflecting European weakness as financials lead us wider.

While NATO members, led by France, piously proclaimed at the onset of their military offensive in Libya that their concerns were solely humanitarian, a covert tussle to gain a commanding lead in developing the country’s energy riches in light of Colonel Gaddafi’s departure is well underway. The Libyan economy depends primarily upon revenues from the oil sector, which contribute about 95 percent of export earnings, 25 percent of GDP, and 80 percent of government revenue. Prior to the outbreak of conflict, Libya was exporting about 1.3-1.4 million barrels per day from production estimated at roughly 1.79 million barrels per day, of which approximately 280,000 barrels per day were indigenously consumed. But analysts believe that with reconstruction Libya could soon be exporting 1.6 million barrels per day of high-quality, light crude. But current production is the proverbial mere drop in the bucket. Libya has the largest proven oil reserves in Africa with 42 billion barrels of oil and over 1.3 trillion cubic meters of natural gas. Causing oil company executives from Houston to Beijing to drool on their Gucci loafers, only 25 percent of Libya’s territory has been explored to date for hydrocarbons.

Since it will be a slow news day until futures open in a few hours, readers who are locked indoors can waste it by listening to the oddly named Palmetto Freedom Forum which is basically another GOP presidential debate where candidates will take to the stage one at a time to substantively answer questions on their views from three panelists: South Carlolina Sen. Jim DeMint, Rep. Steve King of Iowa, and Dr. Robert George, founder of the American Principles Project and McCormick Professor of Jurisprudence at Princeton University. The participating candidates will include the major GOP contenders: Rep. Michelle Bachmann, Herman Cain, Newt Gingrich, Rep. Ron Paul, and Mitt Romney. As Townhall observes: "Sen. DeMint, et al's questioning is sure to challenge the participants on the hard-hitting issues, and should serve as a great preview to this Wednesday's GOP debate." That said, Rick Perry, and his Bank of America supporters, will be materially missing so no hard-hitting answers from the Texan.

Just when we thought the world was running out of headlines, here come something that will send futures scurrying for even more safety. According to Belgian Nieuwsblad, the CEO of Belgium's biggest bank has just resigned. As a reminder, Dexia is the one European bank that in the 2008-2009 period borrowed more money from the Fed than anyone else, and which we have discussed on several occasions in the past few months as being rumored to be on the receiving end of a variety of liquidity "complications" and countreparty concerns. Typically rumors of that nature, coupled with the sudden departure of the CEO, end up being proven as fact shortly to quite shortly. In other news, we are happy to announce the expansion of the PIIGS to BIG PIS following the arrival of the latest country to join the sovereign and bank funding crisis.

Three weeks ago we predicted that should the austerity in Italy be truly enacted, then the Syntagma square strikecam would have to be promptly carted out of Athens, and into Rome, where Michele Caruso Cabrera would have to wear a gas mask in some 5 star hotel high above the Piazza Navona. Well, for now the austerity has been delayed, but not for long: the ECB no longer wants to play ball with Berlusconi and even if it takes a complete government overthrow, massive spending cuts are at most months away. In the meantime however, the labor unions have decided to not wait, and in a first for the soon to be en-Greeced country, have occupied the Milan stock exchange. Since next steps from here are all too clear, prepare for yet another interesting overnight futures session, once electronic trading reopens in 3 hours.

While today's market action is merely a reaction to pent up negative news over the weekend, all attention now moves to this week's most critical binary event: the much anticipated German Constitutional Court's vertdict on Eurozone bailouts. While a ruling that destroys the eurozone is unlikely, there are quite a few interesting nuances that may come out of the main event on Wednesday. For those who are unfamiliar with the story here is a critical briefing from Open Europe. "On 7 September, the German Constitutional Court will deliver its keenly anticipated verdict on the eurozone bailouts, following several challenges against the rescue packages of Greece, Ireland and Portugal in addition to complaints against the ECB’s bond buying programme.[2] The Court will almost certainly approve the bailouts, fearing that any other decision would spell disaster for the euro. In order to protect its reputation, however, the Court could well demand more influence for the German parliament and lay down additional constitutional red lines – possibly including restrictions on joint debt liabilities in the eurozone – in return for approving the bailouts. Any such limits would hugely complicate any move towards a fiscal union in the eurozone. Injecting more parliamentary democracy into the eurozone crisis is clearly a good thing, but it will also further limit EU leaders’ room for manoeuvre when dealing with the crisis, which in turn could increase market uncertainty. Unfortunately for the ECB, under such a scenario it would once again be forced to pick up the responsibility of lender of last resort, as the EFSF will be too inflexible and unresponsive to play that role."

No video here: just audio - like his last "Irene is a national catastrophe" videoconference from the vacation. Soundbites include the following (via Bloomberg):

• OBAMA SAYS UNIONS CRUCIAL TO AMERICA'S MIDDLE CLASS
• OBAMA SAYS AMERICA NEEDS 'STRONG LABOR MOVEMENT'
• OBAMA SAYS U.S. AUTO INDUSTRY PROVED 'THE CYNICS' WRONG
• OBAMA SAYS CONGRESS NEEDS TO 'GET ON BOARD' ON ROAD REPAIR WORK
• OBAMA QUOTES 1948 TRUMAN SPEECH PRAISING UNIONS
• OBAMA SAYS HE WILL STAY FOR COLLECTIVE BARGAINING

and the kicker:

• OBAMA SAYS ROADS AND BRIDGES NEED REBUILDING IN U.S.

Enjoy America: you are about to have many bore roads and bridges rebuilt.

According to the Handelsblatt, while the majority of the members of the ECB's shadow council - an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institute - supported an unchanged policy the bias is increasingly shifting to one of easing. This comes on the heels of Trichet's idiotic decision, just like in 2008, to start hiking rates in several months ago (ridiculed extensively on these pages and elsewhere) which not only ended up costing Europe its common currency much faster than had it merely kicked the can down the road, but could very well be the last bad decision by the ECB: should Greece be kicked out of the Eurozone as a result of this decision, the ECB is over. It is therefore not surprising that not only is the shadow council scrambling to undo 5 months of bad decision making by the ECB, but the bankers on the council, particularly RBS, PIMCO, RBS (RIP by the way), Barclays and Tudor and HSBC are either expressing an easing bias or outright pushing for a 50 bps cut. Alas, this is too little too late. And the irony is that once the Fed proceeds with QE3, and commodities surge again, the ECB will really be helpless as the continent's core redlines even as the Periphery remains terminally insolvent (ignoring for a minute the inflationary elephant in the room that is China). So will Trichet disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months.

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.