Archive - Mar 2012 - Story

Jim Grant is simply brilliant in this must watch interview with CNBC's Bartiromo, which we won't spoil with commentary, suffice to provide the following pearl of an exchange:Maria Bartiromo: "What are the alternatives?" Jim Grant: "Capitalism is an alternative for what we have now. I highly recommend it." Maria: "We all do." Grant: "No we don't." Maria: "The Federal Reserve may not." Grant: "We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C." In other news, Joseph Stalin is now delighted that Ben Bernanke has decided to shoulder the legacy of central planning and is firmly committed to proving that where Vissarionovich failed, the ChairSatan will succeed.

Last night we noted the very concerning rise in margin calls for European banks thanks to collateral degradation at the ECB. This story has become very popular as traders try to figure out which assets were deteriorating rapidly and which banks face immediate cash calls. One thing that came to mind for us was - what about Gold? Coincidentally or not, the last time we saw a big surge in collateral margin calls by the ECB (in September of last year), not only did Gold lease rates explode (implode) but Gold prices fell off a cliff as the squeeze came on from gold liquidity providers pushing prices down to exacerbate the negative lease rates on the gold collateral. The point here is that as margin calls come in from the ECB, we wonder whether banks will be forced to liquidate their gold (last quality collateral standing) to meet the ECB's risk standards. The key will be to watch gold lease rates (as we explained here and here) and ECB Margin calls to see if Gold is merely suffering a short-term dip from USD strength derisking or if this is  a more broad based meeting of collateral desperation need that might have legs - only to be bought back later. MtM losses combined with collateral calls (as we noted earlier) was never a recipe for success and we will be watching closely.

In what should come as no surprise to anyone who has a frontal lobe, yet will come as a total shock to the central planners of the world and their media marionettes, the latest attempt to sucker in retail investors courtesy of a completely artificial 20% stock market ramp over the past 4 months driven entirely by the global liquidity tsunami discussed extensively here in past weeks and months, has suffered a massive failure. Exhibit 1 and only: as ICI shows today, following what is now a 20% ramp in the stock market, not only have retail investors continued to pull out cash from domestic equity mutual funds (about $66 billion since the recent lows in October, the bulk of which has gone into bonds and hard commodities), but the week of February 29, when the market peaked so far in 2012, saw the biggest weekly outflow of 2012 to date, at -$3 billion. Alas, this means that the traditional happy ending for the authoritarian regime, whereby stocks get offloaded from Primary Dealers, and GETCO's subsidiaries, to the retail investor, is not coming, and soon the scramble for the exits among the so-called "smart money" will be a sight to behold.

Today we observed how as the US is considering releasing crude from its Political, pardon Strategic Petroleum Reserve, China was doing just the opposite. Now, in a further step confirming that China is acting as a much more rational capitalist power, and is rapidly encroaching on the "reserve" status of the sacrosanct USD, the FT writes that China intends to extend renminbi loans to other BRIC nations in "another step toward the internationalisation of its currency." To those following the stealthy Chinese incursion into currency markets as a dollar alternative, this is not news: already we know that China and Japan have bypassed the dollar entirely and now engage in direct bilateral trade using JPY and CNY (even as most other nations in Asia have developed bilateral agreements to transact in a non dollar basis). This is merely the latest incremental step which will see China become the dominant player in the currency arena, and further puts to doubt the fate of the US Dollar as the default currency. Of course, the market will not acknowledge any of this until the developing (i.e., non-insolvent world) is transacting entirely with US intermediation. And at that point, the US will be merely another Zimbabwe case study, where it can print all the money it wants to fund its deficit, and the only ones who care will be wheelbarrow manufacturers.

Volumes were above average today but well below yesterday's blockbuster as average trade size also pushed higher as we levitated in stocks (ignoring the afternoon rollover in credit markets - which closed at their lows of the day). ES (the e-mini S&P 500 futures contract) rallied (initially on 'expected' jobs data then a veiled QE-reference from the WSJ) to recover the wondrously mystical 38.2% of the last few days sell-off before limping slightly lower into the close. Financials wentr from worst (yesterday) to first (today) but oinly recovered a fraction of their losses as all sectors ended in the green today. Broadly speaking riskj assets drifted up with stocks (led by stocks) but closed in almost perfect CONTEXT by the end of the US day session as Treasuries limped begrudgingly higher in yield (though the curve flattened modestly), FX majors were relatively stable but JPY weakness pushed FX carry up supporting risk overall, and commodities leaked gently higher (outperforming USD's modest weakness on the day) as Silver and Oil outperformed on the day (with the latter back above $106). Gold limped back up to $1685 (juiced by the WSJ QE story) but Silver's high beta exuberance dominated that. Ahead of NFP and PSI the next 2 days it seems like little real rerisking occurred today and the fact that credit underperformed and implied correlation diverged from VIX tells us that under-the-covers, protection was more bid than embracing risk.

We know how AIG and MF ended, as of yet we don't know how LTRO will end. Lots of "carry" trades have worked out well, but when they don't, the result is pretty ugly. Now we are seeing margin calls from the ECB starting to occur and we noted yesterday that MtM losses will start to evolve in some of the carry trades as risk is unwound very recently - perhaps we are getting a sneak peek at the cause of the next vicious cycle crisis.

One look at the just released consumer credit data would make one believe that the US consumer is getting back into it and the velocity of money is finally starting to ramp up: after all the headline January number came at a whopping +$17.8 billion on expectations of +10.5 billion. Nothing could be further from the truth.  As the first chart below demonstrates, January revolving credit, as in that used on one's credit card, actually declined by $2.9 billion compared to December, and was back to $800.9 billion: the first decline in 4 months as consumers spend less following an already weak holiday season. Yet offsetting this was an absolutely massive surge in Non-revolving credit, i.e., mostly student debt, which soared by $20.7 billion in the month, the highest sequential jump in this category in history, leading to a very misleading print of a major increase in credit. For earlier observations on the soaring student loan bubble see here. And it gets worse: when spread by sources of credit, the only place where credit came from was the US government, which funded a near record $28 billion, all of it going into student loans, even as every other source of credit declined in the month! If this is not the most blatant gaming of headlines, we don't know what is. But yes, America's lucky students get ever deeper into debt slavery, only to realize upon graduation that there are no jobs that pay high enough to allow them to pay off this debt. Thank you uncle Sam - may we have another bubble.

An engineer, a biologist and an economist are washed ashore on a desert island. After a few days without food they are starving. Eventually, they stumble on a can of beans on the beach. They spend a few minutes considering how they might feed themselves. The engineer is the first to speak: "We could hit the can with a rock until it opens." The biologist counters, "We could suspend the can in a seawater solution and wait for erosion to work its magic." The economist is last to contribute: "Let's just assume we have a can-opener." OK, so it's not the funniest joke in the universe. But it has the ring of truth.

In their own inimitable manner, the two bears are back to take on gas prices. Dismissing the higher demand thesis, concerns of the lack of supply, instability in the Middle East, and of course speculators (the same ones who were blamed for financial stocks' deterioration), our favorite speakers-of-the-truth point to what is the only relevant factor - the falling dollar. The Bernank once again stars for his schizophrenic perspective of asset price rises. Enjoy.

Unfortunately it is not a EURUSD recommendation to be faded and generate 10 out of 10 anti-Stolper trades. However, the Goldman strategist, who has likely taken to following new FX glory boy Alex Hope, takes a look at recent strength (and weakness) in FX carry strategies and finds (rather correctly) that this strength seems driven by little more than a broader rally across risk assets in general. As we have been pointing out, the correlation across our CONTEXT basket (which includes FX carry) has been relatively high both up this year and down very recently, and Stolper discusses whether to fade or follow FX carry strategies and when they do and don't work. His unsurprising conclusion being that FX carry can only continue to rise if broad risk assets rise (and vice versa). Somewhat ironically he remains light on tactical recommendations, preferring to watch - nice way to earn a bonus if you can get it.

Update: the Official name of the iPad 3 is ... "The New iPad" - probably means "Awesome Table Thingy" was taken by another Chinese maker.

AAPL just went red for the day and we note NFLX is also down 2.5% now on the day, as business models proceed to start cannibalizing each other in a world in which consumer cash is actually, gasp, finite. In other news we expect the formal name of the iPad 3 to be revealed as "iECB Collateral" in which case watch as the stock price soars and the company's market cap moves to match the ECB's $4 trillion balance sheet once Europe's taxpayers are forced to bailout not only Greece but the biggest hedge fund hotel of all time. That. Or wait until the Bank of iSrael to lift all offers all the way through the iNBBO. One thing is certain, however: due to its edibility, the iPad3 will surely be sterilized.

Apple share price dropped modestly (around $4) as Tim Cook took the stage but has levitated back up as he mentions...

*APPLE SAYS SIRI WILL BE COMING TO JAPAN
*APPLE NEW APPLE TV HAS NEW USER INTERFACE, GOES ON SALE MARCH 16 FOR $99, NEW APPLE TV HAS 1080P SUPPORT
*APPLE HAS SOLD MORE THAN 55 MILLION IPADS SINCE ITS DEBUT
*APPLE NEW IPAD HAS SIMILAR BODY AS PREVIOUS MODELS, 9.7 INCH SCREEN, AND RETINA DISPLAY, HAS NEW A5X CHIP, FOR QUAD-CORE GRAPHICS

Yesterday we pointed to the fundamental reason for Europe's angst - that of dramatic imbalance across nations finances. Today we look at the implications of the growing concerns at sustainability of the Euro-area itself. Deposits are fleeing the PIIGS at ever faster rates, growth remains a dream as PMIs for most of the PIIGS trend towards (or are at) record lows, and despite all the liquidity provision of the two LTROs, credit extension to the real economy dropped once again. The Greek PSI remains front-and-center from a headline perspective but yesterday's dismal Euro macro data combined with the reality of these three factors appears to be increasingly repriced into sovereign credit spreads as CDS drag manipulated bonds wider in the last week.

We shared our thoughts on the implication for more possible QE, sterilized or not, earlier, as did the market: why is risk higher, and with it the threat of inflation, if the Fed is doing perfectly innocuous sterilized easing? Maybe because it does not matter if the Fed intervenes sterilized or unsterilized, as long as the Fed intervenes, period? Now we present the knee jerk reaction of several Wall Street experts, all of whom are about as confused about this development, which is neither here nor there in terms of actually achieving any of the Fed's goals, as we are.