Archive - Mar 2012 - Story

There are those who recall that not ten days ago, according to the IMF's Greek (un)sustainability analysis, worst case scenario no less, Greek GDP would somehow miraculously post just a 1% drop in 2013. Unfortunately this won't happen. According to the overnight PMI update out of Europe (where was saw the jobless rate at the highest since 1997), the Greek economy just imploded at a record pace. This follows the already horrendous budget revenue data from January which came in down 7% on expectations of a 9% rise. Sure enough, as expected the fact that the entire country has taken the rest of 2012 off with no incentive to actually work, will do miracles for Greece. From Reuters: "The Markit Manufacturing Purchasing Managers' Index (PMI) for Greece fell to a survey low of 37.7 points in February from 41.0 in January, staying below the 50 mark that divides growth in activity from contraction for each of the past 30 months. Production and new order volumes fell at the sharpest pace in the near 13 year history of the survey as austerity sapped demand. New export orders fell for a sixth straight month and at the steepest rate since May 2010." Translated: the situation is hopeless and getting worse. Expect the German, pardon Troika, Kommissar to be shocked, shocked, to find out that not only do banks in Greece have no deposits left, but the entire economy picked up and left.

As already noted, consumer data this morning came in surprisingly weak, always a harbinger of GDP decline. Sure enough, here is Goldman with the first downward GDP revision in the aftermath.

Today for the first time ever Greek 10 year bonds slide to below 20% of par (5.9% of 2022 dropped to 19.145 cents) as expected some time ago, as increasingly the revulsion to post reorg bonds gets greater and greater courtesy of that now meaningless cash coupon of 2% through 2015. When considering that the country will redefault within a year, it explains why nobody has any interest in holding Greek paper even assuming there is an EFSF bill sweetener. Also, today's ISDA decision did not help. What is most amusing is that as of this morning, the country's 1 Year bonds hit an all time high yield of 920.2%. Well, if Greek bonds crossing 100% just 5 months ago was not quite attractive, perhaps 1000% will. At this rate we expect said threshold to cross some time today.

And some more bad news for the economy, as the driver of 70% of US GDP, the US consumer, continues to retrench. Today's personal spending and income data showed several things: that in January Personal Incomes did not keep pace with the rate of growth, rising 0.3% compared to 0.5% in December, and less than the 0.5% expected. Spending also missed expectations of a 0.4% rise, instead picking up just 0.2%, from 0.0% in December. More importantly, we once again see that living in a socialist state has its drawbacks when the spigot is shut off: among the biggest drivers for the weak data was a change in government handouts: "Personal current transfer receipts decreased $3.6 billion in January, in contrast to an increase of $13.8 billion in December.  Within personal current transfer receipts, “other” government social benefits to persons decreased $14.9 billion in January, in contrast to an increase of $1.5 billion in December.  The January change in “other” government social benefits to persons reflected a decrease of $13.6 billion due to the expiration of the Making Work Pay refundable tax credits." Luckily what the government takes with one hand it offsets with the other: "Government social benefits for Medicaid decreased $7.8 billion in January, in contrast to an increase of $0.2 billion in December.  Government social benefits for social security increased $20.3 billion in January, compared to an increase of $9.6 billion in December. The January change reflected 3.6-percent cost-of-living adjustments (COLAs) to social security benefits and to several other federal transfer payment programs.  Together, these COLAs added $30.2 billion to the January increase in government social benefits to persons."  Well at least somebody still does COLA in this day and age of ubiquitous 'deflation.'

A rather uneventful initial claims report which came in line with the election year expectations, beating consensus of +355K modestly, at 351K, which is where it was last week, except for the traditional 100% of the time, upward revision to last week's data, which was pushed higher from 351K to 353K, and in turn which will force algos to read the news as a decline in claims. Today's number gets some additional scrutiny as it comes in the NFP survey week. Continuing claims same deal: the number came a little better than expectations of 3418K at 3402K, was a deterioration compared to the unrevised last week number of 3392K but an improvement to the revised # which was 3404K. On the other hand, people at the trailing end of the cliff declined, as those on EUCs and Extended benefits dropped by 16K in the week ended February 11. As a result, people collecting extended benefits are now 1.13 million less than a year ago, and no longer collect direct BLS benefits. As for disability that's a different matter. Finally, none of this impacts America's young workers, who as noted yesterday, have an employment rate of 54%.

Very busy day today with personal lack of savings, an ISM number which will likely beat consensus so much it will be above the highest Wall Street estimate, construction lack of outlays, Ben Bernanke speech day two, GM channel stuffing, and many Fed speakers.

The positive PMI data would ordinarily result in some price weakness as would the testimony from Bernanke which suggested that the Federal Reserve's ultra loose monetary policies may not continue much longer. However, the scale of the selling and size of the price falls was unusual. Respected analysts such as legendary Jim Sinclair, John Embry and Jean-Marie Eveillard suggested that the sell off was due to manipulation by bullion banks. Sinclair said it was an “intervention” and was “window dressing” that long term bullion investors should not be concerned about as inflation was coming due to “QE to Infinity.” Embry said that it was a “smash down” and a “paper fiasco.” Jean-Marie Eveillard suggested that central banks may have intervened, as they are doing in fx and bond markets, and sold gold in volume into the market. It is of course very difficult to ascertain what caused the sharp falls in the precious metals yesterday however it would be naive to completely discount what Sinclair, Embry and Eveillard believe may have happened.

European bourses are trading in positive territory ahead of the North American following a relatively quiet morning in Europe. Markets are led by the financials sector, currently trading up around 1.10%. This follows yesterday’s ECB LTRO. As such, the 3-month Euribor fix has fallen to 0.967%, a significant fall in inter-bank lending costs. PMI Manufacturing data released earlier today came in roughly in line with preliminary estimates. The Eurozone unemployment rate for February has also been released, showing the highest jobless rate since October 1997. There has been little in the way of currency moves so far in the session; however there may be fluctuations in USD pairs following the release of ISM Manufacturing data and weekly jobless claims later today.

• China’s Holdings of Treasuries Dropped in ’11 (BusinessWeek)
• Bundesbank at Odds With ECB Over Loans (FT)
• Euro zone puts Greece's efforts under microscope (Reuters)
• Bank of America Considers a Revamp That Would Affect Millions of Customers (WSJ)
• In Days Leading Up to MF Global's Collapse, $165 Million Transfer OK'd in a Flash (WSJ)
• Greece Approves Welfare Cuts for 2nd Bailout (Bloomberg)
• Irish Minister Pushes to Cut Bail-Out Cost (FT)
• China to Support Tech Sectors (China Daily)
• Spanish Bond Yields Fall in Debt Auction After ECB (Reuters)
• China to Expand Cross-Border RMB Businesses (China Daily)

As expected by virtually everyone:

• NO PAYOUT ON GREECE $3.25 BILLION DEFAULT SWAPS, ISDA SAYS

Keep in mind, as criminal as this appears, and as damaging to the CDS market, the real trigger will be what ISDA does determines following the end of the PSI process. If there is no credit event then either, especially when the CACs are triggered as expected - an event which will certifiably be a trigger event under Section 4.7, then ISDA is truly hell bent on blowing up the CDS market as a hedging vehicle in its entirety.

Somehow, following three years of defaults, the world has only now figured out that the ISDA CDS trigger determination committee is made up of the same bankers, who stand to lose everything in the case of global out of control contagion, such as that which may occur if an unwelcome CDS trigger sends the house of cards collapsing, and force mark to market losses on all those institutions which hold impaired debt at par (all of them). As a result, the ISDA meeting which is currently in process is expect to find absolutely nothing, and we agree, however not for that particular 'conspiratorial' reason, but because ISDA is waiting for the PSI outcome for a realistic finding on a credit event. Because after all ISDA is not stupid: they don't want to appear like a pushover - remember how vehemently ISDA had opposed a Greek CDS trigger in the days when Europe still was not prepared for this outcome -  but on the other hand wants to preserve some CDS market credibility, which would disappear if none of the recent events in Greece were to trigger CDS. Yet more Greek creditors are getting impatient. Even as the first ISDA meeting has to find (that there has been no CDS trigger), the association's determination committee has just released that it has gotten a second question whether a "Restructuring Credit Event occurred with respect to The Hellenic Republic?" We find it rather odd (or not really) how suddenly quite a few requests are springing out of the woodwork by creditors who obviously are interest in a Greek default. As such the PSI gets quite interesting, because if the pre-PSI action is any indication, quite a few creditors are rather interested in triggering just the event they now consistently badger ISDA with.

Regular readers are all too familiar with the saga of Goldman Sachs, which back in December 2010 called for a new American golden age, only to crash and burn as the economy not only slid right back into its depressionary glidepath but had to be bailed out by the Fed yet again. Sure enough, back in December of last year, the same firm made a surprising forecast, being the first of many (as others naturally jumped on the Goldman bandwagon), calling for an imminent housing bottom. Naturally, we scoffed at said proclamation. Two months later, which have seen two months of deteriorating conditions and declining prices, Goldman is out, saying that it may have just been kidding. From Goldman's Hui Shan: "In December 2011 we published a new house price model for 147 metro areas that pointed to a decline of around 3% from mid-2011 through mid-2012 before stabilizing in the year thereafter. Excess supply and negative house price momentum were the main drivers of the projected decline over the subsequent four quarters. In the year thereafter, the model suggested that house prices would stabilize as the negative momentum faded. Our model also pointed to substantial variation in house price appreciation across metro areas. Although city-by-city house price dynamics are particularly difficult to model, we projected increases in Detroit, Miami and Cleveland, but significant declines in Portland, New York and Atlanta during the next two years. Since publication of this forecast--which was based on Case-Shiller house price data up to 2011Q2--house prices have weakened anew....The implications of these changes are threefold: First, we now see a somewhat weaker near-term house price outlook. Specifically, we forecast that house prices will decline by 3.3% from 2011Q3 until 2012Q3, and by an additional 1.1% between 2012Q3 and 2013Q3. Second, the expected bottom in house prices is pushed out from end-2012 to mid-2013. Third, the long-run outlook for house prices is not significantly affected by our update." So for anyone basing their housing recovery call on Goldman, sorry - Goldman was only kidding. Again.