Archive - Feb 2012 - Story

Let’s be honest, quite a few Americans love a good war, especially those Americans who have never had to bear witness to one first hand.  War is the ultimate tribally vicarious experience.  Anyone, even pudgy armchair generals with deep-seated feelings of personal inadequacy, can revel in the victories and actions of armies a half a world away as if they themselves stood on the front lines risking possible annihilation at the hands of dastardly cartoon-land “evil doers”.  They may have never done a single worthwhile thing in their lives, but at least they can bask in the perceived glory of their country’s military might.   This attitude of swollen ego through proxy is not limited to the “Right” side of the political spectrum as some might expect.  In fact, if the terrifyingly demented presidency of Barack Obama has proven anything so far, it is that elements of the “Left” are just as bloodthirsty as any NeoCon, and just as ready to blindly support the political supremacy of their “side” regardless of any broken promises, abandoned principles, or openly flaunted hypocrisies.  No matter how reasonable or irrefutable the arguments against a particular conflict are, there will ALWAYS be a certain percentage of the populace which ignores all logic and barrels forward to cheerlead violent actions which ultimately only benefit a select and elite few.

Mainstream media is desperately scrambling to fill copy with stories of collaboration, rescue, heroism, sacrifice, and altruism among the European leaders. The dismal reality facing real people and real participants is quite different and as Peter Tchir points out "How many 'untruths' have become so accepted that they are now treated as facts or axioms". In an effort to get to the facts and reality, we disentangle Bloomberg's 'Greek Rescue' story and note the increasingly Orwellian nature of the events unfolding across the pond. But anyways, the machine is grinding along towards headlines of "rescue" where Greece will have been "saved" and "default will have been avoided" and it will be "great that banks and politicians worked to save Greece" in spite of the "lingering doubts that Greece will fulfill its obligations".

Update: And finally for some reality from Dutch fin min De Jager: "We Cannot Approve Second Programme For Greece Until Greece Has Met All Its Obligation"... And now we know who Germany's "+1" will be when Greece becomes Southern Goldman Bavaria: "De Jager Says He’s in Favor of a Permanent Troika in Athens"

We would love to share some witty comments and jovial banter on this latest set of soundbites by Europe's effete bureaucrati on occasion of the latest and greatest Greek bailout, however having already done so on at least 10 times in the past, we have run out of things to say in this particular context and frankly we are bored with this topic. Which is precisely the Eurogroup's intention. Presenting "soundbites du jour, Greece edition N+1".

As forecasts for peripheral macro data continue to deteriorate and core to strengthen modestly, there is little real comfort available from the European situation aside from the 800lb gorilla that all headlines are focused on today. Credit Suisse describes it as "a case of the outlook being less bad than expected, rather that it being better" and notes that post the Greek situation, despite the ongoing rally in the ever-thinning sovereign bond market, that risk premia (that were dangerously forgotten for the first decade of the Euro) will remain at elevated levels. CS sees three scenarios beyond Greece with even the best-case leaving questions of sustainability, trust, and continued negotiations yet the market's willingness to follow along the path of inevitably ruinous policies seems writ large with today's credit, equity, and FX strength.

I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of "insider" technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)?...– So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears...The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping "mandates"). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, "bonds are toast" in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis.

Let's put things back into perspective. Europe is lending money to Greece, which according to latest rumors will at least for the time being be in the form of the dreaded Escrow Account, which in turn means that the only recipients of bailout cash will be Greek creditors, whose claims will be senior to that of the government. In other words, it will be up to Greece, and specifically its own tax "collectors" to provide the actual funding needed to run the country as bailout or not bailout, Greek mandatory (forget discretionary) expenditures will not see one penny from Europe. As a reminder, the country is already €1 billion behind schedule in revenue collections which are down 7% Y/Y compared to an expectation of 9% rise. As a further reminder, the one defining characteristic of Greek tax collectors is that they are prone to striking. Virtually all the time. And that is assuming they even have the ink to print the required tax forms. Which last year they did not. So under what realistic assumptions are Greek tax collectors laboring in the current tax year? Why, nothing short of them having to be not 100%, but 200% more efficient. From Kathimerini: "Greece’s tax collectors were told over the weekend that they would have to do a much better job this year at gathering overdue taxes. How much better? Almost 200 percent." And this, unfortunately, is where the Greek bailout comes to a screeching halt, because while it is no secret that Greek "bailouts" do nothing for the country, but merely enforce ever more stringent austerity to mask the fact that all the cash is simply going from one banker pocket to another, it is the pandemic corruption embedded in generations of behavior that is at the root of all Greek evil. And there is no eradicating that. Now tomorrow, and not by 2020.

Today's FinMin meeting in Brussels is supposed to be "the one", as Greece's fate is finally decided, and Belgian caterers are forced to apply to the EFSF for a bailout (or maybe China will roll them up?) as prospects for further local summits, meetings, shindigs, tete-a-tetes, teleconferences and what nots are severely curtailed. Maybe - maybe not. We will reserve judgment until the end of the day, because, as shocking as it may sound, Europe is not the best when it comes to making decisions on short notice. Or any decisions for that matter. Especially ones which leave Greece in the same predicament as before, and when the country will certainly need more bailouts down the road, because "cutting" debt down to only 129% of GDP does leave some things lacking. In the meantime, assuming everything goes according to status quo plan, here is a timeline and breakdown of events in the aftermath of today's meeting.

• Germany FinMin: More Talks Needed On 2nd Greece Bailout Plan (MarketNews)
• You stand up to the bankers, you win - Icelandic Anger Bringing Record Debt Relief in Best Crisis Recovery Story (Bloomberg)
• Iranian ships reach Syria, China warns of civil war (Reuters)
• Men's suit bubble pops? Zegna CEO Says China Sales Slowing (WSJ)
• German presidency row shakes Merkel's coalition (Reuters)
• Greece must default if it wants democracy (FT)
• Decision day for second Greek bailout despite financing gaps (Reuters)
• So true fair value is a 30% discount to "market" price? Board of Wynn Resorts Forcibly Buys Out Founder (WSJ)
• Spain Sinks Deeper Into Periphery on Debt Rise (Bloomberg)
• Walmart raises stake in China e-commerce group (FT)
• Iron Lady Merkel Bucks German Street on Greek Aid (Bloomberg)

The week ahead is fairly light on big ticket data releases, but what is released will provide more evidence of the strength of global activity. The most important of these will be the flash PMIs for China and the Euro area and the German IFO reading . There is no consensus expectation for the China print, however the Euro area indices are both expected to rise slightly, as is the German IFO. In terms of cyclical hard data, Taiwan export orders and IP for Singapore and Taiwan, Euro area industrial orders and trade data from Japan and Thailand will be notable. Admittedly the data from Asia is likely to be complicated by Chinese New Year which fell in the third week of January, and presumably this is why the consensus expects such a sharp drop in Taiwan IP, however the data are still worth watching for indications of the strength in global activity. Generally, consensus expectations for these prints are not particularly encouraging and any 'beats' would be a positive surprise. It goes without saying that ongoing negotiations towards signing off on Greece's second package will also remain on the radar screen. As we write, Reuters has posted suggestions that the debt swap will be open by March 8 and complete by March 11.

Between the Chinese 'surprise' RRR and the Iran export halt to UK and France (and escalating tensions), Oil prices are off to the races this evening. WTI front-month futures have just broken $105 (now up more than 10% in the last two weeks), the highest levels in over nine months and just 8% shy of the 5/2/11 post-recession peak just under $115. Brent (priced in EUR) remains off last week's intraday highs (as EUR strengthens) but still above the pre-recession peak but in USD it traded just shy of $121 - well above last week's peak. Of course, this will be heralded as a sign of demand pressure from a 'growing' global economy rather than the margin-compressing, implicit-taxation, consumer-spending-crushing supply constraint for Europe and the US that it will become in the not too distant future. As we post, The Guardian is noting that US officials are commenting that "Sanctions are all we've got to throw at the problem. If they fail then it's hard to see how we don't move to the 'in extremis' option." The impact of any escalation from here is gravely concerning with PIMCO's $140 minimum and SocGen's $150-and-beyond Brent prices rapidly coming into focus - and for those pinning their hopes on the Saudis coming to the rescue (and fill the Iranian output gap), perhaps the news that our Middle-East 'allies' cut both production and exports in December will stymie any euphoria.

Just in time for the latest headfake out of Europe where sentiment at least on thus Sunday afternoon is that Greece is somehow saved (on a rehash of an old story, namely that the ECB welcomes the combination of the EFSF and the ESM - something that Germany has previously expressly refused to comply with, and something which is utterly meaningless - where will the money come from - Italy and Spain? Or will China invest more than the single digit billions in EFSF bonds raised to date?), we look at the CFTC Commitment of Traders for an update on speculative sentiment. There we see that just as the general public was starting to comprehend that Germany may let Greece fail after all, a fact confirmed by Tom Stolper's most recent flip flopping on the EURUSD, which caused the Goldman catalyst to end his call for a rise in the EUR currency (and for ZH to take the opposite side as usual, a trade which is now 160 pips in the money-  recall "Needless to say, we are now closing our short reco at a profit 9 out of 9 times in a row, and doing the opposite - i.e., going long."), speculators ended the two consecutive weeks in reducing net short exposure, and the week ended February 14 saw net short interest rise again from -140.6k to -148.6k. So if one is wondering what the weak hands are doing that just got burned shorting the pair in the past 10 days, the 100 pip move higher (which has sent the ES over 1370 and the DJIA futures over 13K) this afternoon explains it. For those wishing to bet on a contrarian outcome, which in Europe is pretty much a given, our advice is to wait for Tom Stolper to issue his latest EUR bullish forecast, which will likely be forthcoming any minute, and which will cement the FX strategist's place in the FX anti recommendation hall of fame.

Now that the bipolar market has once again resynced general risk appetite with the EURUSD (high Euro -> high ES and vice versa), everything in the macro front aside from European developments, is noise (and the occasional reminder by data adjusting authorities in the US that the country can in fact decouple with the entity responsible for half the world's trade. This will hardly come as a surprise to anyone. In fact, the conventional wisdom as shown by Goldman's latest client poll has European sovereign crisis worries far in the lead of all macro risks. Behind it are Iran and nuclear tensions, China hard-landing, the US recovery/presidential election and the Japanese trade deficit/record debt/JGB issues. Which for all intents and purposes means that the next big "surprise" to the market will be none of the above. What are some of the factor not listed as big macro risks? According to David Kostin 'Risks that clients did not mention include late March US Supreme Court review of health care reform (implications for 12% of S&P 500); mid-year deadline to implement Dodd-Frank financial reform (14% of market); and the French Presidential election on April 22nd where polls show incumbent Nicolas Sarkozy trails opposition candidate Francois Hollande." Oddly enough, one very crucial item missing is once again surging inflation courtesy of trillions in stealthy central banks reliquification, sending crude to the highest since May 2011, and the most expensive gas price in January on record.

Nothing appears as ugly as unmasked raw propaganda, or seems as fashionable as well-crafted deception. Yet, the catwalk for both forms of propaganda is one and the same, deception wearing the most titillating togs provided by the top fashion house, the House of Public Relations. And the deceptive PR isn’t limited to multinational firms or businesses in general; it is part and parcel of our daily existence, having infiltrated most if not all institutions, totally poisoning politics, and eroding away whatever little honesty might still be left in our elected officials. During the past century we have seen the transformation of the raw epithet known as propaganda, and all its implied vilification, to that of an accepted social science with full academic accreditation, unashamedly sitting at the same table with all reputable and time-honored professions. We, members of society, have swallowed lock, stock and barrel the presumed need by notable individuals and institutions to receive help from specialized professionals to show us all the good things about them, their positive contribution to society. But much of what we get is tainted with deceit.

When the prospect of a nation being unable to roll over a paltry few Euros of maturing debt is enough to galvanise the entire financial world into monetary excess exceeding anything imaginable as recently as late 2007, one must conclude that the markets are skating on the thinnest ice in their entire existence. But skate they are.