Archive - Apr 2012 - Story

In all of the polls for the last six months the socialist, Francois Hollande, is ahead in the run-off election between 6 and 16 points. The first bout is April 22 and the Concours d’Elegance is May 6. Now no one that is not French can understand the French well. The psychology of this nation is singular. What Mr. Hollande’s win will mean for France is something to be carefully considered. A tax rate on the wealthy at 75%, renegotiate the EU fiscal pact, raise the minimum wage, impose more governmental spending, a decrease in the retirement age and a hostility directed at the banks and other financial institutions that may be described as combative or perhaps virulent and a complete change in attitude and direction from Napoleon’s strutting reincarnation also known as Sarkozy. Furthermore, no one is paying particular attention to the announcement of an upcoming EU meeting to propose reintroduction of border controls between France and Germany but it is a clear sign of Federalism on the wane and of Nationalism coming to the fore.

Back in July of last year, before it was even remotely acknowledged (and in fact it was roundly denied) that Greece would set a debt haircut precedent, which despite all the rhetoric has merely given all the other PIIGS ideas about debt haircuts of their own (and how to achieve these as fast as possible), Zero Hedge was the first media outlet to cut to the truth, with "The Fatal Flaw In Europe's Second "Bazooka" Bailout: 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP." Note we said "soon to be" because it was obvious that the modestly complicated math of Germany bearing the cost of keeping the Eurozone alive would take quite a while to trickle down to the common German man. We did, however, underestimate the Bundesbank's mathematically helping hand in the form of one chart, most recently observed here, which makes the math far clearer than anything we could ever do to explain: namely the exponentially grown Bundesbank TARGET 2 balance, which is essentially Germany's way to fund, via the ECB, account imbalances across the Eurozone (explained in gory detail here), and put the national economy on the hook in ever greater amounts to a sudden and disastrous collapse of the Eurozone, because should a fat tail even occur, a solid 25% of German GDP would be Corzined. Today, The Telegraph's AEP does a bring down on the current status of this one biggest wildcard for Europe's future: namely, German anger, or as he puts it "tempers" which it appears have finally begun to boil.

Japanese Finance Minister said an IMF funding increase to USD 400bln is "coming into sight", and that he expects the BRIC nations to offer funds to the IMF at the appropriate time. The finance minister sees funding figures to be released as early as tomorrow. (Sources) The IMF looks set to reach or pass that target, with USD 320bln secured yesterday and many of the largest emerging economies still to contribute. ECB’s Knot and EU’s Rehn have said IMF commitments may have to be up to USD 500bln, and expects China to boost resources.  Brazil’s finance minister has said his country is still not ready to give numbers on their IMF contribution. The Indian finance minister has said he will take time to provide an answer to the funding question for the IMF. China also remains undecided on an increased IMF contribution.

• Current account surplus recycling goes global: BRICS demand bigger IMF role before giving it cash (Reuters)
• Obama oil margin plan could increase price swings (Reuters)
• Britons Abandoning Pensions Amid ‘Outdated’ Rules (Bloomberg)
• Hedge-Fund Assets Rise to Record Level (WSJ)
• Way to restore confidence: SEC considers case against Egan-Jones (FT)
• Qatari wealth fund adds 5% Tiffany stake  (FT)
• "Do we file?" Dewey Pitches Plan for Rescue (WSJ)
• French president slips further behind Socialist challenger Hollande (ANI)
• Nine U.S. Banks Said to be Examined on Overdraft Fees (Bloomberg)
• Capital Rotation: Investors fret on emerging markets and look to U.S. (Reuters)
• Verizon's Answer to iPhone: Windows (WSJ)

When in doubt how to cause an algorithmic buying spree, go for the lower common denominator: issue bills, or have a confidence index beat expectations. We had Spanish Bills cause a 200 point DJIA melt up earlier in the week, which means today we get confidence, specifically that of Germany's Ifo Business Survey. While Germany's various PMI may still be declining, and the market going nowhere in a hurry, not to mention international trade especially involving China sliding, if there is one thing German manufacturers have in copious amount, it is confidence. In April, the Ifo index edged higher in April to a level of 109.9 after 109.8 in March, defying consensus expectations of a decline to 109.5, and climbing to the highest level since last July. The assessment of current conditions also increased slightly to 117.5 after 117.4 (close to two standard-deviations above the long-term average). Business expectations remained stable at 102.7 (0.6 standard deviations above historical average).  And since algos only care about headlines on the margin this was enough to light a rocket under the EURUSD, however briefly and send it, and the US futures by implication, over 1.3200. Once again, even Goldman warns against reading much into these data: "The somewhat more muted signals coming from the PMI surveys caution against taking the Ifo at face value and there are not enough hard data available for Q1 that show which survey is the better guide at this point to the underlying momentum of the German economy." That's ok, A desperate for any good news Europe will take it.

While Eric Sprott obviously has a modest axe to grind, his open and honest discussion with Charles Biderman on the difference between gold ETFs methods of owning gold, so-called physical vs paper gold, is noteworthy given the depth he goes into. After explaining the concerns with GLD, Pisani's putterings, and tax-related differences, Eric goes on to discuss his and other physical trusts and how he started down this route. The latter end of the brief discussion shifts from the practicalities of owning 'sound money' or 'hard assets' to the thesis for doing so - the debasement of fiat currency and the printing press fanaticism being exhibited globally. Concluding with his thoughts on what could change this thesis, he sees the greatest risk that "we come to our financial senses" - a highly unlikely scenario given the dominoes likely to fall should that occur.

After last night's sabre-rattling missile-hurling efforts in 'The Koreas', one could be forgiven for strolling down memory lane to the Doomsday Clock and how many minutes we are to the midnight of global disaster. Well, Leon Panetta has the answer today in this clip. Somewhat shockingly honest, Panetta changes the metric from time to distance and states, on CNN's 'Situation Room', that "We’re within an inch of war almost every day in that part of the world, and we just have to be very careful about what we say and what we do". As Politico reports, the lugubrious Leon says that America is prepared for "any contingency" that might result from North Korean actions. While cool diplomat Clinton "believes that [Kim Jong Un] may have some hope that the conditions in North Korea can change", Panetta underlined the administration's firm stand to any further provocative actions concluding "unfortunately these days, there is a hell of a lot that keeps me awake."

Milton Friedman was a proponent of so-called “floating” exchange rates between the various irredeemable paper currencies that he promoted as the proper monetary system. Many have noted that the currencies do not “float”; they sink at differing rates, sometimes one is sinking faster and then another. This article focuses on something else. Under gold, a nation or an individual cannot sustain a deficit forever. A deficit is when one consumes more than one produces. One has a negative cash flow, and eventually one runs out of money. The economy of a household or a national is therefore subject to discipline—sooner or later. Friedman asserted that floating exchange rates would impose the same kind of forces on a nation to balance its exports and imports. He claimed that if a nation ran a deficit, that this would cause its currency to fall in value relative to the other currencies. And this drop would tend to reverse the deficits as the country would find it expensive to import and buyers would find its goods cheap to import. Friedman was wrong.

In our daily scouring of the markets we run across a plethora of charts, many of them boring, some interesting, and a few select ones, exponential, and thus completely unsustainable. The US debt load is of course one of them, global central bank assets is another, as is pretty much everything associated with Europe these days. However, the following exponential chart is one we had never encountered before: it shows the number of major "disturbances", read power outages, in America's power grid in the last decade. The chart is, well, disturbing.

A month ago we presented the latest derivatives update from the OCC, according to which the Top 5 US banks held 95.7%, or $221 trillion of the entire US derivative universe (which in turn is just a modest portion of the entire $707 trillion in global derivatives as of June 30, 2011). And while the numbers of all this credit money, because that's what it is, and the variation margin associated with all these trillions in bets is all too real, appeared impressive on paper, they did not do this story enough service. So to present, visually this time, the US derivatives problem, we go to our friends from Demonocracy, who put the $229 trillion derivative 'issue' in its proper context. For those curious what a paper equivalent of bailing out the US derivatives market would look like, now you know.

In what may be the gray swan indication that all hell is about to break loose, we read that one of the world's largest hedge funds, British Man Group with $58 billion in AUM, is about to launch High Frequency Trading - the same high volume churning, sub-pennying, liquidity extracting, stub quoting and quote stuffing parasite that crashes the equity, and as of recently the FX and commodity markets, into that most sacred of markets: US Treasurys. The official spin: "The Man Systematic Fixed Income fund, yet to be launched, will try to identify and profit from dislocations in liquid government bond markets." What this really means is that the final frontier of market rationality is about to be invaded by artificial momentum generating algorithms, who couldn't care less about fundamentals, and whose propensity to crash and burn at the worst of times, may end up costing the Fed all those tens of trillions it has spent to keep the Treasury market calm, cool, collected, and largely devoid of any volatility and MOVEment. But all that is about to change: "The unit is run by Sandy Rattray, who co-developed the VIX. VIX volatility index, also known as the "fear index", widely used to measure investors' perception of risk." As a reminder, the VIX index is only relevant when there are surges in volatility, something which we are confident Mr. Rattray will no doubt bring to Treasury trading momentarily. 

NYSE volume was 20% above yesterday's and S&P 500 e-mini futures (ES) volume surged to its 2nd highest of the year as the last 30 minutes saw heavy volume and large average trade size very active as it pushed up towards VWAP and oscillated around its 50DMA. ES closed below its 50DMA for the first time since Monday but equities notably underperformed Treasuries (playing catch-up to bond's recent rally). Equities hit their lows at around 1430ET as ES coincided with Monday's closing VWAP (and Apple also tested and stayed around Monday's closing VWAP) and with a spike down and recovery in WTI prices (margin calls?). The major financials saw their best levels pre-open and slid lower all day with very little bounce at the close. While there was plenty of volatility in FX and commodity markets, close-to-close changes were relatively benign in the USD (DXY) and Oil, Copper, and Gold (while Silver modestly outperformed). All the action in FX was between US open and Europe's close but the afternoon saw AUD drifting weaker and CAD lose most of its spike gains from yesterday as JPY also slipped relative to the USD reducing some of the negative carry impact. Just as we had noted, and reiterated this morning and afternoon, equities performed the same hope-driven rally relative to broad risk assets as last week, and before the late day VWAP-seeking surge, almost completed their shift to fair-value. VIX also pulled higher to its credit-equity-implied fair-value before falling back as we rallied into the close. Overall average trade size today in ES, given its very heavy volume, was among the lowest of the year which suggests a lot of algos trying to wriggle their way back to VWAP to release some orders and with equity reverting to Treasury's, credit's, and broad-risk-asset's views of the less-than-stellar world, we suspect there is more selling to come here - albeit with OPEX complications.

Or, rather, make that 'at'. Suffer us this brief detour into history, when hilarity ensues as we watch how Arthur Laffer, one of the "world-renowned", "greatest economists" of his generation and inventor of the Laffer curve, describes the US economy as of August 2006, indignantly making wagers with Peter Schiff that the bums bears will always lose, and otherwise validating the cardinal flaw canon of modern economics, namely that unsustainable debt is really just very  much sustainable wealth.