Archive - Jan 25, 2012 - Story

This is how Goldman sees today's events, and critical FOMC announcement, public communication overhaul and press release, unfolding.

Even as the Euro-Dollar 3 Month basis swap has contracted to a nearly 6 month low at -75 bps, on residual hopes that the LTRO will do anything to fix Europe (it won't - just compare it to the €442 billion 1 year LTRO from June 2009 which worked until it didn't for the simple reason that Europe does does not have a liquidity problem), Europe has once again reemerged as a source of risk off (not least of all because the fulcrum security benefiting from the LTRO - the Italian 2 year BTP is for the first time in weeks wider by 17 bps). Why? The same reason as always: Greece, with a touch of Portugal. As BBG observes the positive sentiment in Asia earlier was retraced in the European session, with commodities, FX, equities lower, especially after ECB demurred from accepting losses on its Greek bond holdings. What that means is that as we patiently explained over the weekend, the imminent Greek default (just listen to Soros over in Davos spewing fire and brimstone on Europe for allowing the situation to get to a place where a Greek default is inevitable) will create so many subordinated junior tranches of Greek debt it will make one's head spin. But while the fate of Greece is all but sealed, and a CDS triggered virtually factored in (note: a Greek CDS trigger, in isolation, won't have much of an impact as repeated here before - in fact it will return some normalcy to the market as CDS will be a hedging vehicle once again over ISDA's corrupt trampled corpse), it is what happens to Portugal and its bonds that has the market gasping for air. Because as Zero Hedge pointed out first, a Greek default will be impossible to be enacted in Portugal in its currently envisioned format, as stupid as it may be. In fact, due to the pervasive and broad negative pledges in most medium-term Portuguese bonds, any priming Troika bailout is impossible without providing matching collateral for everyone else under UK indenture bonds!

In case one was wondering how the Goldman trading team was axed in Apple, we now know that they are pushing their inventory of stock in the name out of the door and to clients harder than ever, having just released a forecast with a $600 price target. However, with nearly 200 hedge fund holders in the name, and pregnant to the teeth in the stock, we fail to find who the incremental buyer of GS' AAPL stock will be.

• Angela Merkel casts doubt on saving Greece from financial meltdown (Guardian)
• Germany Rejects ‘Indecent’ Call to ECB on Greece, Meister Says (Bloomberg)
• Obama Calls for Higher Taxes on Wealthy (Bloomberg)
• Fed set to push back timing of eventual rate hike (Reuters)
• Recession Looms As UK Economy Shrinks By 0.2%, more than expected (SKY)
• King Says BOE Can Increase Bond Purchases If Needed to Meet Inflation Goal (Bloomberg)
• When One Quadrillion Yen is not enough: Japan's first trade deficit since 1980 raises debt doubts (Reuters)
• Sarkozy to quit if he loses poll (FT)
• U.S. Shifts Policy on Nuclear Pacts (WSJ)
• ECB under pressure over Greek bond hit (FT)

As the title of this essay suggests, a loan is an exchange of wealth for income.  Like everything else in a free market (imagine happier days of yore), it is a voluntary trade.  Contrary to the endemic language of victimization, both parties regard themselves as gaining thereby, or else they would not enter into the transaction. In a loan, one party is the borrower and the other is the lender.  Mechanically, it is very simple.  The lender gives the borrower money and the borrower agrees to pay interest on the outstanding balance and to repay the principle. As with many principles in economics, one can shed light on a trade by looking back in history to a time before the trade existed and considering how the trade developed. It is part of the nature of being a human that one is born unable to work, living on the surplus produced by one’s parents.  One grows up and then one can work for a time.  And then one becomes old and infirm, living but not able to work.  If one wishes not to starve to death in old age, one can have lots of children and hope that they will care for their parents in their old age.  Or, one can produce more than one consumes and hoard the difference.