Archive - Mar 2012 - Story

What is more amusing than the pathological liars that are Tim Geithner or Ben Bernanke testifying to congress? Both of them testifying at the same time. Such as now. From C-Span: Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke go before the House Oversight and Government Reform Committee Wednesday to discuss lessons learned from Europe’s sovereign debt crisis. In a hearing titled, “Europe’s Sovereign Debt Crisis: Causes, Consequences for the United States and Lessons Learned,” both financial chiefs will share their personal experiences.  Since the crisis, the Federal Reserve has assisted foreign counterparts by provide monetary support. In November, the Fed and it's worldwide counterparts announced a cut in the interest rate premium charged to over seas banks which borrow in dollars.  The monetary policy targeted struggling European banks. In a Senate hearing earlier this year, leading economists also testified on the European debt crisis and the outlook for the eurozone. They said that the U.S. should treat the crisis as a wake-up call and urged lawmakers to bring down debt and spending to sustainable levels.

Earlier today, Goldman's Peter Oppenheimer made the news following publication of his report "The Long Good Buy" posted here. In itself, that would be nothing spectacular - just one man's opinion. However, when taken in the entirety of Goldman's views on the world, it bears some criticism, because while on one hand we have a key Goldman strategist telling the world it is all clear in stocks, virtually at the same time Goldman's chief economic strategist, Jan Hatzius, who is German, gave the following interview to Handelsblatt, in which he lays out his "doubts about an early recovery of the U.S. economy. In this interview he explains why positive unemployment figures are deceptive, and why the real estate crisis will have lasting effect." Perhaps his most important observation, when asked if Americans have learned anything from the crisis: "I do not think there has been a big change in behavior. During the crisis, Americans simply responded to the realities. They could no longer borrow as much money. Now again a little more credit is available, and you can borrow some more money again. But I do not think there has been a fundamental change." Alas he is correct, and incidentally the reason why Goldman has such a massive credibility problem is that while on one hand one part of the firm goes ahead and pitches equities, on the other, a respected economist says that the economy is so sluggish that he gives a greater than 50% chance of more QE. Perhaps at this point it is bear reminding what a third Goldman strategist said back in October 2010: "Goldman Sachs Admits The Truth: "The Economy Is Not The Market And QE2 Is Not A Panacea." Then again, with career risk once again paramount for every money manager out there, as the bulk of hedge funds once again underperform the market, perhaps not.

The EURUSD, Treasuries, and European sovereign spreads had been leaking in a risk-off direction from around 530amET this morning but European risk assets (followed quickly by US) accelerated shortly after comments by Citi's Willem Buiter, in a scathing Bloomberg Radio interview that pulled no punches with regard to US and European fiscal and monetary policy, noted Spain is 'at greater risk than ever before' of debt restructuring. The EUR reacted quickly and started to drop - now lower on the day - and sovereign spreads (which had been leaking gently wider) accelerated. "Spain is the key country about which I'm most worried", Buiter added, "and it has moved to the wrong wide of the spectrum". Simultaneously the DAX dropped (after stabilizing at slightly positive levels from a higher open) shifting into the red, US Treasuries went bid with the 10Y yields dropping almost 5bps from its overnight highs, and US equity futures fell 4pts back to unch. European corporate credit is still digesting the technicals of the roll and is less reactive so far though broadly speaking equities are underperforming.

It was nothing more than a footnote in the Morgan Stanley financials; a $3.4 billion pay-out by Italy to settle a derivatives contract made in 1994. Say goodbye to 50% of the tax hikes imposed by the Monti government because that is what was wiped out by this payment. It is also interesting to note that that Mario Draghi, currently President of the European Central Bank, was the Director-General of the Italian Treasury when this derivative was formulated. Then comes the bomb, only mentioned in a brief article yesterday on Bloomberg, and not noted anywhere in the Press this morning. Marco Rossi Doria, an undersecretary in Monti’s administration, tasked with responding to a parliamentary interrogation on derivatives, admitted that the Italian Treasury had $211 billion in "notional" exposure to derivatives, which is around eleven percent (11%) of Italy’s total GDP. This new exposure, coupled with the work I did a few days ago and noted in my commentary of March 17, now brings Italy’s actual debt to GDP ratio to a whopping 144.3%.

Roughly at the same time Francesco Garzarelli fired the first warning shot against Treasurys on January 23, 2012, telling 'clients' that "We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00" a trade which has largely worked which means that the Goldman counter-axe is hurting big (although following the trade snap yesterday this may be over for now), the firm's Peter Oppenheimer started drafting a magnum opus, making a 40 page case, chock full of graphs, charts, bullet points, and footnotes, iPad optimized and likely coming to a Kindle near you, desperate to convince clients to sell their bonds to Goldman, and to buy all of Goldman's inventory of stocks from the firm because "After more than a decade of de-rating, equities are implying unrealistically large declines in growth and returns into the future." As a reminder, this is a deja vu repeat of precisely the same trade that Goldman enacted back in 2011... and then back in 2010... and each of those times was accompanied by lots of pretty charts and fancy bullets. Will this time be different, and is the proper call, as usual, to trade alongside Goldman (sell equities, buy bonds), or to do what Goldman tells the muppets to do? You decide.

Going into the US open, most major European bourses are trading in modest positive territory this follows the publication of a Goldman Sachs research note titled “The Long Good Buy” in which the bank outlines its thoughts that equities will embark on an upward trend over the next few years, recommending dropping fixed-income securities. We have also seen the publication of the Bank of England’s minutes from March’s rate-setting meeting in which board members voted unanimously to keep the base rate unchanged at 0.50%; however there was some indecision concerning the total QE, with members Miles and Posen voting for a further increase to GBP 350bln, however the other seven members voted against the increase. Following the release, GBP/USD spiked lower 35 pips but has regained in recent trade and is now in positive territory.  Looking elsewhere in the session, UK Chancellor Osborne will present his budget for this financial year at 1230GMT. We will also be looking out for US existing home sales and the weekly DOE inventories.

• So much for that: Obama to fast track southern portion of Keystone XL Pipeline (1600 Report)
• French Police Say They Have Cornered Suspect in School Shooting (NYT); French shooting suspect had been arrested in Afghanistan (Reuters); Suspect in French shootings says he’ll surrender to end standoff (Globe & Mail), Toulouse suspect escaped from Kandahar jail in mass Taliban jailbreak in 2008 (BBC)
• Bernanke Says Europe Must Aid Banks Even as Strains Ease (Bloomberg)
• Monti faces clash with unions over reform (FT)
• UK budget to balance tax breaks with austerity (Reuters)
• Romney scores big win over Santorum in Illinois (Reuters)
• U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions (Bloomberg)
• Bernanke Says Fed Failed to Meet Goals During Great Depression (Bloomberg)
• Revised tax deal reached on Swiss accounts (FT)

There are those who, not illogically, thought that the second interest rates start creeping up, that there would be a rush of mortgage activity to lock in rates as low as possible before 30 year mortgages roll ever higher. Of course, for that plan to work, one Benjamin Shalom Bernanke would need to have broad credibility among the general population, as he would need to be perceived as one who would not rush to purchase bonds in the future, should rates jump far too high, in the process impairing banks and PDs which still hold massive amounts of paper. If, however, that plan were to not work, then the latest recent attempt to force a rotation out of stocks and into bonds would have abysmal consequences on housing, as the entire mortgage issuance machinery would grind to a halt. Alas, it appears the latter has happened. Minutes ago we got the latest MBA Mortgage Application data and it was ugly. The broad Mortgage Application index collapsed by 7.4% in the week ending March 16, when rates experienced the bulk of the move downward, which was the 6th consecutive week of declines, following last week's 2.4% drop. And while refis have been down for 5 weeks in a row, with the index slamming 9.3% lower as higher rates have now obviously killed any interest in mortgages, so have purchase applications. MBA Purchasing index was down 4.4%, breaking a trend of 3 weeks of gains. Some other hard statistics: the Average 30 year fixed rate soared to 4.19% from 4.06% last week, while the refi % of number of loans dropped to 73.4% - the lowest since July 2011.

Bernanke's splendiferous defense of all things holy and Central-Bank-like this afternoon has a little for everyone - if you spent the time to listen/read his entire lecture. For those who did not, perhaps the following word-cloud sums up his perspective - and its odd subliminal messaging. The words Gold and Standard appear more times than Central and Bank; the words Policy and Economy are almost equal in number and very close together in this 'randomized' word-cloud; Collateral and Essential appear infrequently but oddly proximate when the random hand of Worldle is applied; the Dollar got its rightful tiny mention; and the Inflation-Deflation debate will rage on - as Inflation slightly outnumbered Deflation but the randomizer did its job and strangely placed Inflation next to Bad and Deflation next to Great. There was no mention of Oz, Unicorns, Beard-Trimmer, Ron Paul, or Those-Bloody-Bears-On-YouTube.

It is widely known that US corporate profits recently hit an all time high. What is less known is that in Q4, profit margins for the first time rolled over by 27 bps, and double that if one excludes Apple. What is very much irrelevant, is that to Wall Street none of this matters, and the consensus (of which GMO's Jim Montier says "the Wall Street consensus has a pretty good record of being completely and utterly wrong") believes that Q4 will be largely ignored, and margins will continue soaring ever higher. Well, the same Montier, has a thing or two to say about this consensus surge in profits ("it is almost unthinkable that it will remain at current levels over the course of the next few years"). More importantly he looks at the Kalecki profits equation, and finds something rather peculiar. Namely Japan. Because while taking the profits equation at its face value would surely explain the 10.2% in corporate profits, of which a whopping 75% is thanks to America's burgeoning deficit, it would imply that Japanese corporate profitability, where there has been not only a long-running current account surplus, but zero household savings, and massive fiscal deficits, should be off the charts. Instead it is collapsing. Why? Montier has some ideas which may force Wall Street to renounce its bullish views, although probably won't. However, the implications of his conclusion are far more substantial, and if appreciated by corporate America (whose aging asset base is the problem), may ultimately result in a revitalization of the corporate asset base, however not before the dividend chasing frenzy pops in the latest and greatest bubble collapse.

In a succinct and chart-laden presentation, Professor Antony Davies, of Duquesne, offers a simple perspective on just how bad things are for the US (in terms of debt or obligations). Putting the interest cost in the context of war-spending, his analysis is interesting given the recent and dramatic rise in interest rates. Current interest payments, given the US Government's lowest ever 3% interest cost, are $440 billion, or three times the annual operating expenses of the Iraq and Afghanistan wars. While his discussion of a market-set interest rate is perhaps a little off-the-mark given the extent of QE programs and their reach-around prime-dealer duration-reducing effects, it is nevertheless true that the more money the government is spending on interest, the less money is available to provide services and his punchline on what happens should rates rise even modestly from here sums the real problem the US faces (even as a currency issuer as opposed to a currency user - given the inherent instability that making totalitarian use of the reserve status would incur).

One simple chart.

It was all ponies and unicorns as the EU-ECB-IMF 'Troika' mission found 'no sign of reform fatigue' in their report today, noting the 'remarkable' nature of the fiscal adjustment. Perhaps they should have asked someone outside of the halls of government as this tragic story from The Guardian notes the Portuguese death rate rising as health and welfare cuts from the 'remarkable' austerity package are biting at the people hard. During February, there were 20% more deaths than normal and the cost cuts are blamed as a visit to the ER has more than doubled. There is a general strike, as we noted earlier, on Thursday as the leader of the unions notes "They are driving the country towards disaster". While the IMF believes that Portuguese debt is sustainable, most practicing market participants who do not have a gun to their head see full well the unsustainable nature of the Portuguese debt load seeing the IMF's position as "wishful thinking". There is a growing tension as Irene Pimentel notes "I worry that democracy is at stake" and on the people's apparent stoicism for now, "I think it will explode eventually, it is impossible for people to remain this passive." At least Portuguese bonds are happy, and accept the culling of the Portuguese population at the altar of the euro, as a worthy supplication, worth at least 250 basis points.

Canada's natural resources minister told delegates at the International Energy Forum in Kuwait that his country was on the cusp of becoming an "energy superpower." Canada ranks No. 6 in terms of global oil production, but much of its crude exists in the form of oil sands. European leaders are considering a measure that would classify oil sands as an environmental issue, prompting Canada to threaten to take the issue to the World Trade Organization. With the U.S. political system in a deadlock over Canadian crude, the Ottawa government is now working to convince the international community that the global market is in jeopardy if polices "discriminate against oil sands."