Archive - Feb 2012 - Story

Over the weekend, we commented on Dylan Grice's seminal analysis which excoriates the central planning "fools", who are perpetually caught in the "lost pilot" paradigm, whereby the world's central planners increasingly operate by the mantra of “I have no idea where we’re going, but we’re making good time!” and which confirms that in the absence of real resolutions to problems created by a century of flawed economic models, the only option is to continue doubling down until terminal failure. Basically, the take home message there is that once "economists" get lost in trying to correct the errata their own models output as a result of faulty assumptions (which they always are able to "explain away" as one time events), they drift ever further into unknown territory until finally we end up with such monetary aberrations as "liquidity traps", "zero bound yields" and, soon, NIRP (which comes after ZIRP), if indeed the Treasury proceeds with negative yields beginning in May under the tutelage of the Goldman-JPM chaired Treasury Borrowing Advisory Committee. Today, it is Bill Gross who takes the Grice perspective one step further, and looks at implications for liquidity, and the lack thereof, in a world where one of the three primary functions of modern financial intermediaries - maturity transformation (the other two being credit and liquidity transformation) is terminally broken. He then juxtaposes this in the context of Hyman Minsky's monetary theories, and concludes: "What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is two per cent of par and the downside substantially more?" In other words, Pimco is finally grasping just how ZIRP is punking it and its clients. It also means that very soon all the maturity, and soon, credit risk of the world will be on the shoulders of the Fed, which in turn labor under a false economic paradigm. And one wonders why nobody has any faith left in these here "capital markets"...

While we wait for the antics in Greece to result in some announcement, I can’t help but think about how different the Greek situation is from when JPM bought Bear Stearns (shortly after the last time the Giants won the super bowl). The “weekend” deadline for Bear was neither artificial, nor self-imposed. Without a deal, Bear would have failed that week as risk aversion hit an extreme. Greece has until the March 20th payments, so all the deadlines we keep hearing about are mostly negotiating ploys. The negotiators in Greece will have to approve whatever they decide, so they will need some time. When Jamie Dimon said “done” on the Bear deal, it was done. It also meant a very savvy investor had his people do the analysis and was comfortable with the deal (I’m sure the Fed backstop didn’t hurt). But in Europe, almost none of the people involved in the negotiations have the authority to “pull the trigger”. They have to go back to their respective parties or groups or special interests they represent and get the deals approved. Even more bizarre, is how few of the people involved have financial experience, let alone investment experience. They are largely politicians. The Minister of Finance was the Minister of Defense less than a year ago. The IIF team has limited experience in distressed debt. The “technocrat” in charge has experience, but like many of the Troika members it is as an economist in a functioning economy – not the disaster that is Greece.

Weekend talks between Greek government officials failed to reach a definitive conclusion and as such market sentiment has been risk averse across the asset classes. The equity market has been chiefly weighed upon by the banking sector and as such underpinned the rise in fixed income futures. However, recent trade has seen a slight pullback led by tightening of the French spreads on reports of good domestic buying noted in the belly of the French curve. Today marks the deadline for Greece to provide feedback as to the proposed bailout terms put forth by the Troika, but with continued disagreement on the fine print in the additional austerity proposals, market participants remain disappointed in the lack of progress. Of note a PASOK spokesman has said that Greece should not hold a general election after clinching an agreement on a second bailout package, suggesting instead an extension of Lucas Papademos' tenure. However, the two main unions of Greece have called for a 24hr strike on Tuesday. Looking ahead there is little in the way of major US economic data today so Greece will likely remain the dominant theme for the rest of the session.

• Greeks Struggle to Resolve Their Differences (WSJ)
• China May See Deeper Slowdown on Crisis: IMF (Bloomberg)
• Banks to take a hit on US home loans (FT)
• Europe’s banks face challenge on capital (FT)
• Smaller Interest-Rate, Credit-Default Swap Trades Seen On Horizon  (WSJ)
• Pro-European elected Finland president (FT)
• Push Sputters for Credit-Default Swap Futures (WSJ)
• China Money Rate Rises as Central Bank Gauges Demand for Bills (Bloomberg)
• China Takes On Skeptics of Aid to Euro Zone (WSJ)

Something quite notable has shifted in recent weeks in Europe, and it originates at the European paymaster - Germany. While in the past it was of utmost importance to define any Greek default as voluntary (if one even dared whisper about it), and that the money allocated to keep the Eurozone whole would be virtually limitless, this is no longer the case. In fact, reading between the headlines in the past week, it becomes increasingly obvious that Greece will very soon become a new Lehman, i.e., a case study where the leaders are overly confident they can predict the outcomes of letting a critical entity default, and manage the consequences. Alas, this only proves they have learned nothing from the Lehman case, and the aftermath is still not only unpredictable but uncontrollable. But that's a bridge that Europe will cross very shortly. And what is truly frightening is that this crossing may happen even before the next LTRO hits the banks' balance sheets, thus not affording Euro banks with sufficient capital to withstand the capital outflow and funds the unexpected. In the meantime, here is UBS summarizing the palpable change in European outlook over Greece, and over the entire "Firewall" protocol.

Gold has followed the now familiar trading pattern of gains in Asia followed by weakness in Europe. While gold has fallen and is weaker in most currencies gold remains higher in euro terms due to euro weakness on the concern of a Greek default. Spot gold bounced back in Asian trading Monday as investors snatched up bargains after a 2% dip the previous session.  The Greek debt debacle is still supporting the price as a deal remains elusive. There continue to be concerns of a “Lehman moment” but markets remain fairly sanguine of a positive outcome despite the continual risk of a Greek default.  Gold remains an essential diversification as central banks keep money loose with record low interest rates and Asian powerhouses China and India still drive demand.  Silver has also fallen this morning. Barclays Capital, who have been quite bearish on silver in recent years, say that they are “expecting prices to rise in the next few sessions, along with gold, pegging silver's next resistance level at $35.70/oz and support near $33/oz.”

In contrast with better news from macro data, the negotiations about the next Greek package intensified and this will likely remain the key focus in the upcoming week. On one hand, the present value reduction in a PSI has still not been formally agreed. On the other, the Greek Government still has to commit to more reforms in order for the Troika to agree to a new program. A key deadline for this commitment is on Monday at 11am local time in Athens. Eurogroup President Juncker has talked openly about the possibility of a default on Saturday in the German weekly Der Spiegel. Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, Poland, Indonesia and a few others. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

Since 2008 and the bursting of the great credit bubble, central banks have been printing money hand over fist in a desperate attempt to generate the inflation they feel is necessary to drag the world out of a perceived deflationary spiral. The chart (left) shows the growth in ‘assets’ of G-3 Central Banks over the last 17 months alone, during which time, they have increased by 32%. To date, the level of the various benchmark CPI indicators would suggest there have been no deleterious effects, but just because the results aren’t showing up where those in charge of measuring them are LOOKING, doesn’t  mean they aren’t showing up at all. Look at food prices across Asia. Look at housing prices in Hong Kong. Look at fuel prices in Nigeria. Look at heating costs in the UK. Look at gold.

Not too surprisingly, following an atrocious year for hedge funds in 2011, 2012 has opened with a bang, as virtually all of the brand name funds are green for the year, while the best performers are all the European focused funds which last year crashed and burned. Call it sector rotation into the most hated names (something we took advantage of two weeks ago with our bizarro market strategies), or just call it a dead cat bounce, one can see why nobody wants the party to end: just a few more months like January, and everyone will be above the high water mark, valuations be damned.

The Greek endgame appears to be approaching... or not. After a "marathon" (in Greek terms) session between the Greek coalition cabinet members ended with no definitive agreement, and in fact LAOS president said that more austerity would "contribute to a recession that the country can not afford, and a revolution of misery which will then burn down Europe", while New Democracy's Samaras stated he would "not permit any more austerity", even as Papademos on the other line apparently said that the leaders have agreed on 2012 spending cuts of 1.5% of GDP, the Troika seems to have had enough of being Greek'd around, and demands an answer by 11 am tomorrow. Supposedly, "or else" no more cash. Then again, we have heard all of this before. In fact, the Troika talks are continuing right now as European representatives entered the Greek PM office, following a late night meeting with the IIF. That said, the market is once again quite nonchalant about all of this, with the EURUSD trading down a modest 50 pips to 1.3107 having touched just under 1.3080 earlier. Bottom line: it is likely that nothing will happen tonight.

The announcement of Obama's recognition by the Nobel Peace Prize committee in 2009 seemed, to many, more like an 'Onion-worthy' headline than reality but now, as The Associated Press reports, it seems the officials face a formal inquiry over the selection criteria that could rescind the last three years' awards. The accusations at the root of the inquiry stem from persistent complaints by a Norwegian peace researcher that cites the original purpose of the prize was to diminish the role of military power in international relations, and if the Stockholm County Administrative Board, the overseer of such foundations, finds that the founder Alfred Noble's will is not being honored then (while unlikely) Obama (2009), Liu Xiaobo (2010), and last year's Liberians could face their awards suspended as 'champions of peace'. Fredrik Heffermehl, the inquiry's instigator, rhetorically asks when addressing the 2009 committee choice of Obama for "extraordinary efforts" to boost international diplomacy: "Do you see Obama as a promoter of abolishing the military as a tool of international affairs?" as he notes the 1895 will of Nobel to "work for fraternity between nations, for the abolition or reduction of standing armies and for the holding and promotion of peace congresses."

With Greek politicians on the verge of selling out the population more than ever before only to preserve the country's ability to be an ECB toll stop, where it takes Troika money and promptly pays Greek creditor banks, the time to return to the Syntagma Square webcam has arrived especially since tonight is the night when the population learns if Greece will comply once again with Troika demands for record austerity or finally cut the cord. Because with the latest round of troika <a href="http://www.bloomberg.com/news/2012-02-04/eu-imf-insist-on-greek-minimum-...">demands being </a>that "the minimum wage be cut to less than 600 euros ($790) a month and that at least one holiday allowance, the so-called 13th and 14th wages, be abolished, Mega TV said" and that "pensions paid by supplementary funds should be cut by 35 percent" it the local population believes that waving goodbye to one's retirement to fund a bank's bonus is worth it, then it deserves all the bending over it gets.

As an ever greater portion of the world succumbs to authoritarian control (whether it is of military disposition, or as we first showed, a small room of economists defining the monetary fate of the future as central banks now hold nearly a third of world GDP within their balance sheets) we can't help but be amazed as the population simply sits idly by on the sidelines as the modern financial system repeats every single mistake of the past century, only this time with stakes so high not even Mars could bail out the world. Unfortunately, with the world having operated under patently false economic models spread by hacks whose only credibility is being endorsed by the same system that created these models over the past century, the only temporary solution to all financial problem is to "try harder." Sadly, the final outcome is well known - a global systematic reset, in which the foundation of all modern democracies - the myth of the welfare state (which at last check, was about $200 trillion underfunded on an NPV basis globally and is thus the most insolvent of all going concern entities in existence) is vaporized (there's that word again) leading to global conflict, misery and war. Sadly that is the price we will end up paying for over a century of flawed economic models, of "borrowing from the future", of ever more encroaching central planning, and of an economic paradigm so flawed that as Bill Buckler puts it, "Keynes’ response to those who questioned the “longer-term” consequences of his advocacy of credit-creation as a basis for money was - “In the long run, we are all dead”. It is difficult to overemphasise the venal arrogance of this remark or the destructiveness of its legacy." Alas, the last thing the central planning "fools" (more on that shortly) will admit is their erroneous hubris, which in the years to come will claims millions of lives. In the meantime, we can merely comfort ourselves with ever more insightful analyses into the heart of the broken system under which we all labor, such as this one by SocGen's Dylan Grice, whose latest letter on Popular Delusions is a call for "honest fools" - "Frequently, when we make mistakes we try to correct them not by changing the flawed thinking which led to the mistake in the first place, but by reapplying the same flawed thinking with even more determination. Behavioural psychologists call it the “lost pilot” effect, after the lost pilot who tried to reassure his passenger: “I have no idea where we’re going, but we’re making good time!” Policy makers on both sides of the Atlantic are treating today’s malaise with the same flaky thinking which created it in the first place. How can that work?" Simple answer: it can't.

Yesterday we presented why when it comes to Syria, the UN Security Council can forget any attempt at "overhauling" a regime that is a cornerstone for Russian naval presence in the Mediterranean and the middle east. Today, in the aftermath of the UN reminder that it is the world's biggest collection of post-facto hypocrites, not to mention, the world's most irrelevant and ineffectual organization, anger at the Russian and Chinese veto has already manifested itself, as protesters have attacked the Russian embassy in Tripoli and tore down the Russian flag, Al Jazeera reported on Sunday. As Itar-Tass reports, "According to Al Jazeera, the riots staged by the Syria opposition involved Libyans as well. No further details are available so far. None of the Russian diplomats has been hurt in an rally stage by the Syrian opposition in front of the Russian embassy in Tripoli on Sunday, an officer from the Russian embassy told Itar-Tass over the phone. “No one has managed to break into the territory of the Russian diplomatic mission, no one of the personnel has been hurt. All are safe and sound. Although the protesters have managed to tear down the Russian flag,” the diplomat said." Still, the wily occupiers of the Kremlin preempted what they perceived as potential 'displeasure' with Russian tactics to protect its own national interests. Because as Zero Hedge has been reminding readers on occasion, Russia has something that is far more valuable to Europe than the Goldman-alum controlled printing press: it has the world's largest natural gas reserves. Which for a continent gripped in one the coldest winters on record, whose heating infrastructure is based primarily on natgas, and where Russian imports account for 25% of total nat gas, Russia has the upper hand in, well, everything. Which it gladly reminded the world of yesterday. According to the AP: Russia's state-controlled Gazprom natural gas giant acknowledged for the first time Saturday that it "had briefly reduced gas supplies to Europe amid a spell of extreme cold."  Oops... Just a fat finger there, nothing to worry about. Oh, and if anyone forgets that in the Eurasian continent it is Russia who increasingly holds all the cards, Gazprom may "briefly" cut all supplies to Europe, -40 C degree temperatures be damned. Briefly...