Archive - Mar 2012 - Story

March 31st

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Europe: "€1 Trillion May Not Be Enough"





A core piece of last week's European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European "firewall" in the form of a combined EFSF and ESM rescue mechanisms, to bring the total "firepower" to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB's agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the 'firewall" does not represent new money, nor is a "firewall" to begin with - it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that "Even a 1-Trillion Euro Firewall wouldn't be enough." And they are correct, because the size of the firewall is completely irrelevant, as explained later. All the "firewall" does is shift even more backstop responsibility on the only true AAA-country left in the Eurozone, Germany. However, the main cause of problems in Europe - a massive debt overhang which can at best be rolled over but never paid down due to the increasingly lower cash flow generation of Europe's (and America's) assets, still remains, and will do so until the debt is finally written down. However, it can't because one bank's liability is another bank's asset. And so we go back to square one, which is that the system is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damning conclusion is finally being understood by most.

 

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The Muppets Are Confused How Goldman Is Both Bullish And Bearish On Stocks At The Same Time





Ten days ago, Goldman's Peter Oppenheimer published the "Long Good Buy, The Case For Equities", a big research piece, full of pretty charts and witty bullets, which actively urged the rotation out of bonds and into stocks, yet not only marked the peak of the market so far, but drew ridicule even from the likes of CNBC. More importantly, it has generated a plethora of questions from the muppets (aka Goldman clients) themselves, who are wondering how Goldman can be both uber bullish, and yet still have a 1250 S&P 2012 YE price target, as per the other strategist, David Kostin ("We expect the S&P 500 will trade at 1325 by mid-year (-5.6%) and 1250 in 12 months (-10.9%)."), or said otherwise, just how is it that Goldman is having its cake and eating it too? Below is David Kostin's attempt to justify how the firm can pull a Dennis Gartman (and virtually any other newsletter and book seller - after all what better way to say one was right than to have all bases covered) be both bearish and bullish at the same time.

 

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The Spanish Riotcam Has Arrived





Spain's honeymoon with its new government is over.

 

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Chris Martenson Interviews Charles Biderman: The Problem With Rigged Markets





"Even Wile E. Coyote had to come back down to earth sooner or later", says Charles Biderman, founder of TrimTabs Investment Research. In his opinion, the prices of stocks and bonds - enabled by excessive financialization of our economy and central bank money printing - have been defying gravity for a dangerously long time.  If we continue to do all we can to preserve the status quo -- to maintain "phony" asset price levels as Charles calls them -- at best we will restrict overall growth and handicap the economy. The problem isn't so much the unfairness and malinvestment evident in a rigged market. As Charles shrewdly asks: what happens when the market becomes un-rigged? We've never experienced the unwinding of an entirely manipulated financial system, so we can't predict for sure. But at this point, a painful collapse of our markets and loss of the US dollar as the world's reserve currency seem entirely plausible.

 

March 30th

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Massive $17 Trillion Hole Found In Obamacare





Two years ago, when introducing then promptly enacting Obamacare, the president stated that healthcare law reform would not cost a penny over $1 trillion ($900 billion to be precise), and that it would not add ‘one dime’ to the debt. It appears that this estimate may have been slightly optimistic… by a factor of 1700%. Because coincident with the recent Supreme Court debacle, in which a constitutional law president may be about to find that his magnum opus law is, in fact, unconstitutional, someone actually read the whole thing cover to cover, instead of merely relying on the CBO’s, pardon Morgan Stanley and Goldman Sachs’, funding estimates. That someone is Republican Jeff Sessions who after actually running the numbers has uncovered that the true long-term funding gap is a mind-boggling $17 trillion, just a tad more than the original sub $1 trillion forecast. This latest revelation means that total underfunded US welfare liabilities: Medicare, Medicaid and social security now amount to $99 trillion! Add to this total US debt which in 2 months will be $16 trillion, and one can see why Japan, which is about to breach 1 quadrillion in total debt (yen, but who's counting), may want to start looking in the rearview mirror for up and comer competitors. And while Obama may have been taking creative license with a number that is greater than total US GDP, he was most certainly correct when saying that Obamacare would not add a penny to US debt. Because the second the US government comes to market to fund a true total debt/GDP ratio of 750%, it is game over, and the Fed will have its hands full selling Treasury puts every waking nanosecond to have any time left for the daily 3pm stock market ramp.

 

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Guest Post: Will India Stop Buying Gold?





We've read mixed reports about how lofty gold and silver prices are affecting demand in India. One month we're told demand is up, and the next it's supposedly down. I'm not suggesting that official reports are inaccurate, but it is admittedly confusing and doesn't help us understand the real trend in the country. Why should we care about the gold market in India? Well, let's face it; the nation is one of the biggest consumers of the metal, a major driver that can give us hints about demand and investment trends, along with what to perhaps eventually expect here in North America. But reading third-party reports about India is very different than getting information firsthand from a credible source in the country. I wanted to get to the bottom of what's really going on in India by talking to a reputable bullion dealer who could give me the inside scoop, an up-to-the-moment dispatch from the front lines, as it were. So I did just that.

 

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This Time Is No Different - Reflections On 1929 Optimism





When it comes to markets, the following clip, as well as memories of recent market collapses, highlights that it is usually brightest just before it's pitch black.

 

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Groupon TVIXes Muppets





It seems like yesterday that to much pomp and circumstance, Groupon came public. We can only hope that anyone who bought into the public offering sold long ago, because the company has just decided to TVIX the muppets:

  • GROUPON CUTS FORECAST - BBG
  • GROUPON REFUND RESERVE ACCRUAL INCREASED - BBG

But most importantly:

  • GROUPON SAYS MATERIAL WEAKNESS IN INTERNAL CONTROLS - BBG

We are fairly confident that the stock will continue imploding after hours until such time as confidence in the stock market returns.

 

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Stocks Odd Man Out As Every Other Asset Class Has Now Faded LTRO2





Silver remains the best performer YTD and the Long Bond the worst performer but what is most notable is the quiet serenity of the equity rally continued through March as Commodities, Precious Metals, Treasuries, and Corporate Bonds all lost notable ground post LTRO2. Is equity keeping the dream alive as the liquidity spigot has slowed to a drop (for now)? AAPL had it largest 2-day drop for almost 4 months into quarter-end - ending under $600 - and the broad S&P 500 pulled away once again from credit yesterday and today as IG, HY, and HYG close practically unchanged from last Friday's low but the ES up 15-20pts. Of the S&P sectors, Energy was the only one to fall appreciably post LTRO2 with Utilities the only sector in the red YTD -2.6% as Financials +21.5% and Tech +18.5% dominate.

 

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Guest Post: The Consumption Dysfunction





pce-foodandgas-savings-033012The sharp drop in the personal savings rate in the month of February, which just hit to lowest level since January of 2008, is indicative of the problem.  While personal savings rates could be bled down further to sustain the current level of subpar economic growth - the world today is vastly different than prior to the last two recessions where access to credit and leverage we very easy to obtain.  It is entirely possible, that in the very short term, we could see personal consumption expenditures continue to make some gains even in the face of the obvious headwinds.  However, it is important to keep these month to month variations in context with longer term historical trends.  Personal consumption is ultimately a function of the income available from which that spending is derived.  As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles.

 

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Another Failed Grand Plan In Europe





The last hour has spewed forth more disingenuous clap-trap from European finance ministers. From 'sufficiency of the firewall' to the 'absurdity of Spain needing a bailout', it beggars belief that these humans can look at themselves in the mirror every morning (as they feel the 'need' to lie' - or are simply ignorant of the reality). At some point in the near future there will be about €40 billion of money sitting in the ESM and a bunch of promises from countries failing to live up to existing debt obligations, and that is the big firewall? The correlation between who is providing the guarantees and who will need them cannot be ignored. This new €500 billion number doesn’t exist, it’s not just meaningless, it’s non-existent if Italy or Spain needs money. People can take away whatever they want, but unlike LTRO which had real injections of liquidity, this is just like the July plans from last year and the November “grand” plans. It sounds great, especially when too many people are willing to blindly follow what the politicians want them to, but it doesn’t work in practice.

 

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European Bailout Stigma Shifts From Banks To Sovereigns As Bundesbank Refuses PIG Collateral





Back in early February, the ECB's Margio Draghi told a naive world when discussing the implication of taking LTRO bailout aid, that “There is no stigma whatsoever on these facilities." We accused him of lying. Additionally, we also suggested to put one's money where Draghi's lies are, and to go long non-LTRO banks, while shorting LTRO recipients. In two short months the spread on that trade has doubled (see below), which intuitively is not surprising: after all, as a former Goldmanite (and according to some - current), Draghi is merely treating Europe's taxpayers like the muppets they are. As such, fading anything he says should come as naturally as Stolpering each and every FX trade. Yet what that little incident shows is that despite all their attempts otherwise, the central planners can not contain every single natural consequences of their artificial and destructive actions. Today, we see learn that the same Stigma we warned about, and that Draghi said does not exist, is starting to spread away from just the bailed out banks (becuase we now know that the LTRO was merely a QE-like bailout of several insolvent Italian and Spanish banks), and to sovereigns. From Bloomberg: "Germany’s Bundesbank is the first of the 17 euro-area central banks to refuse to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund, Frankfurter Allgemeine Zeitung reported." And where Buba goes, everyone else is soon to follow. And what happens then? Since it is inevitable that Spain and Italy will be next on the bailout wagon, what happens when over $2 trillion in bonds suddenly become ineligible for cash collateral from the only solvent central bank in the world (aside for that modest, little TARGET2 issue of course). Will it force the ECB to be ever more lenient with collateral, and how long until the plebs finally realize that the ECB has been doing nothing but outright printing in the past 5 months? What happens to inflationary expectations then?

 

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Treasuries Crash Back To Equity's Unreality





Presented with little comment except to say that is a very rapid and quite large dump in 10Y Treasuries to 'correct' up (in yield) to equity's apparent ignorance of dismal data...

 

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Is The Chinese Stock Market About To Crash?





"The eternal optimists would have us all believe that China will awaken from its slumbers amid a blaze of new, debt-fuelled spending initiatives and so buy up all the goods we find so hard to sell at home (without offering a substantial concession in price)" is how Sean Corrigan begins his assault on the non-reality that is China's 'save-the-world' protagonists. It is worth noting, however, that those who actually invest in the place seem to be too busy selling their equities to pay much attention to the Panglossians and Polyannas. With a 10% slump in the past 12 sessions in the main indices (retracing a major fib interval of the 2012 rally), there seems little enthusiasm there for clinging on in the hope that the PBOC will bail anyone out - and the wedge is closing on something big in the chart. Plain vanilla economics might well be correct in telling the bulls that they may rely on a Zhou Xiaochuan Put to spare them too much future pain, but the law of the political jungle, red in flag, tooth, and claw, may well dictate otherwise. As we write, it seems beyond dispute to say that the Chinese hierarchy is battling it out behind closed doors to determine the long term future of the regime and, by implication, the direction of the entire nation. In such momentous times, we would perhaps be foolish to think that the routine application of short?term countercyclical policy will bear overmuch weight in their counsels. Simply out, there is too much political infighting for any large-scale action to be taken as "Having moved against the state-capitalist left of old man Jiang and his Chongqing bruisers, surely the last thing Hu & Co. would want in their final months in office would be to unleash another oligarch?enriching orgy of speculation of the kind such a mass stimulus would be almost bound to foment."

 
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