Archive - 2011 - Story

Even as it is ending, the fourth quarter of 2011 has been one of dramatic inversions and dislocations, the two main ones being the decoupling between corporate profits, which have for the first time in years started sagging, as ever more companies pre-announce misses or outright disappoint on the top and bottom line, while paradoxically Q4 GDP is expected to post its best quarter of the year, and print somewhere north of 3%. Which in turn has led to the other great inversion: contrary to 2010 when the US growth was lagging and investors (who still harbor the foolish atavism of believing the market reflects the economy) were told to ignore the US and focus on the rest of the world, now we are seeing the traditional reverse decoupling being blasted from every legacy media mouthpiece: namely that the US can withstand the economic crunch gripping Asia and Europe (incidentally, neither forward nor reverse decoupling has ever worked in the history of the globalized world but knock yourself out). How does one explain this paradox? Simple - as David Rosenberg shows, the payroll tax cut, with its gargantuan $10/week benefit is completely irrelevant. The far more important one is that the average price of gas has tumbled from $3.77 ten months ago to $3.29 currently: "That is practically equivalent to a $70 billion tax cut (at an annual rate) for the consumer sector, and happened right in time for the most important part of the year for retailers." The problem - the benefit is only felt while the price is declining; once it stabilized it has no incremental boost. So unless crude collapses (recall Saxo Bank's outrageous forecasts - it just might), there is no more exogenous boosting to economic growth. And if inversely gas starts rising again, then that $70 billion tax cut will become a tax hike. Long story short, the "US Economic Decoupling" is ending. Furthermore, even if tax manages to pass the payroll tax extension, it will at best not detract from growth. But it certainly will not add to it. Which is why the market which has so staunchly been ignoring what happens in Q1 2012, may want to reconsider. And with 9 days left in the year, it may want to do it soon... just in time for tax selling purposes.

In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans. This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades. The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers. The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.

Not sure what the keyword for shots today is. Perhaps "$40?" Or "herding zombies like cattle on the stage behind the president" Stay tuned and find out.

There are those who contend that when fiat dies, gold and precious metals will take its place. Then, a smaller subset out there, claims that it matters not who owns the gold or silver. All that matters is who is in charge of the lead. The following inforgraphic from ammo.net may shed some much needed light on the topic, which as recent Thanksgiving record sales indicated, more and more people are starting to lock in on (and load).

All neoclassical-Keynesians or whatever else they like to call themselves these days (mendacious voodoo shamans works great but for some reason is considered insulting), should flip through this great flowchart from the BBC which explains how it was nothing else than simply untenable debt that both precipitated and exacerbated the debt crisis, resulting in various derivative offshoots that led to a feedback loop that required ever more debt to artificially smooth out the developing divergences between Europe's two opposite worlds. And yes, while cutting spending involves significant pain, it means a soft reset for the system which will lead to a viable outcome for everyone in the long-run. On the other hand, the Keynesian espoused lunacy is to keep doing more of the same, and hoping for a better outcome which i) will never come and ii) will result in a hard reset from which there will be no recovery. Ironically, it is Europe doing the right thing, and while it will suffer a very deep recession shortly, it will come out stronger at the end. More importantly - it will come out. Which is much more than we can say about America.

2011 has not been good for hedge funds: as the following chart from Reuters shows, this will be the first year of many, possibly ever, in which the average hedge fund had a negative return, even as the broader market had a minimally positive return, although there are still a few more trading days in the year so the S&P could well close negative. No doubt this collapse in returns will be blamed on this and that, yet we can't help but wonder how in the "New Hedge Fund Normal" in which fundamentals no longer matter and alpha is irrelevant, in which what does matter is which central bank prints and how much and who can get more levered beta, in which "expert networks" and "information arbitrage" are a thing of the past, in which every phone conversation is tapped and in which your friendly state DA just wants to bust some hedge fund ass to make that governor bid easier, will hedge funds ever return to their old prominence? And if they can't, just what will happen to that ultra critical $2 trillion marginal purchasing power, levered 3 times, which has traditionally been the driving force for market moves higher? 

Now this is one funny, and very apropos, fat finger. Save this post - in a few years it will be revisited only then it won't be a joke.

Following yesterday's €489 billion LTRO there are few things we know with certainty, primary among them is that the net proceeds from the 3 year refi operation are really €210 billion, due to the rolling of various other duration facilities which are already in use into the LTRO as discussed yesterday. What we do not know, is whether the net proceeds of €210 billion have been used by banks to purchase sovereign debt or as Peter Tchir suggested, are actually used in a reflexive ponzi whereby banks use the explicit ECB guarantee to buy their own debt. Perhaps the best evidence that the LTRO was an epic failure when it comes to subsidizing the peripheral bond market is the fact that hours after its completion the ECB was forced to jump into the secondary market and buy up billions in Italian and Spanish bonds: an action that was supposed to be conducted by the banks themselves. But let's assume that the entire €210 billion form the first LTRO (and there certainly will be more) is used to fund carry trades: what then? Well, luckily UBS has performed a mathematical analysis which looks at how much paper profit banks can extract from said trade and juxtaposes it with the most recent €115 billion capital shortfall calculated by the EBA in its most recent stress test (not to be confused with the second to last stress test which saw Dexia pass with the highest marks possible). The result: woefully insufficient . In other words, anyone who believes that the LTRO will be used by banks as a source of carry "profits" is massively deluded. If anything banks will find creative loophole to prop up their balance sheets and issue more of their own debt instead of chasing pennies in front of the bond vigilante rollercoaster by loading up on more sovereigns. Because the last thing Italian banks can afford is another late Novemeber blow out in yields which brought the system to within hours of imminent collapse.

Banks in weak countries have been issuing debt, getting a government guarantee, and then posting them as collateral at the ECB. There are examples of this for Greek banks for sure, but my understanding is it has also been occurring in Portugal and Ireland. It is the only way banks in Greece (and the other countries) can raise money. It always struck me as a little bizarre, but guess it was done so the ECB could justify lending the money. I always thought it was relatively harmless, and was only adding to the risk of countries that were already in deep trouble – providing a guarantee is NOT riskless. But it appears about €40 billion of yesterday’s LTRO was done by Italian banks that issued bonds to themselves and got a government guarantee, and then posted it to LTRO. So these banks didn’t have any other collateral they could post?  Unicredit has a balance sheet approaching a €TRILLION but they had nothing they could post as ollateral? That seems strange.  Extremely strange. 

As the year grinds to a close, we bring you the most poetic ending possible. That of the veteran trader artiste-cum-fermentation committee chairman himself...

And so the year ends not with a bang but with an economic whimper, as the final Q3 GDP is revised lower from 2.0% to 1.8% on expectations of an unchanged print. The reason: Personal Consumption contributed only 1.24% instead of the 1.63% in the second revision and 1.72% in the advance forecast. No bias there at all. But sure enough, here comes the inventory kicker, which subtracted just 1.35% instead of the 1.55% seen previously. What this means is that the inventory kick which was expected to come in Q4 2011 was pushed forward to prevent a 20% collapse in GDP today as keeping inventory change fixed would have resulted in a 1.6% Q3 final GDP. Net net - very weak report and one which portends weakness from Q3 is spilling over in Q4, where in addition to everything we will soon see the NAR existing home sale adjustment hit the economy with a double whammy of historical adjustments.

Just as Blythe Masters' (yes, that one) team suffered huge trading losses in the middle of 2010 following the abysmal RBS Sempra purchase, showing that when traders of scale lose, they lose big, so today another big commodities trader, Barclays, is reported to have gotten crushed on copper and other base metals bets gone wrong. Dow Jones says that Barclays is set to reshuffle its base metals trading team following a series of significant financial losses made by the desk this year. "The base metals trading team is run by Iain MacRae, who is currently still working at Barcap. The company has been unravelling a number of its copper positions recently, traders and brokers said, along with positions in other base metals it trades. The majority of the losses were in forward copper spreads, people familiar with the matter said. Although these positions were in-the-money a year ago, the market has since gone in the other direction, forcing Barclays to close the positions out at significant loss, these people added....The investment banking division of Barclays Bank, Barclays Capital has been a category one ring dealing member of the London Metal Exchange since May 1997 and is traditionally a high volume participant in base metals futures and options trading. It also owns a 2.3% stake in the LME." As to who the most likely beneficiary of this collapse is Goldman, which in tried and true fashion told its clients to be buying copper throughout the carnage, only to close its copper position at a 20% loss a few days ago. But not before indicating that even more bloodbathing is in store for the future, having concurrently reopened future bullish positions in copper.