Archive - Apr 2012 - Story

The European Central Bank prints money and hands it to the banks in undiminished size and at an interest rate which compels massive carry trades. The European banks buy sovereign debt that helps to lower the price of the sovereign’s funding costs, the banks use some of the money to increase their own capital and lend some of the money to individuals and corporations in the nations where they are domiciled. The money gets used and eventually dries up and a some of the capital is used to come into compliance with Basel III. The yields of the periphery nations fall but then begin to rise again. Germany, using Target-2, keeps lending money to the other central banks which use part of the money to support their currency, the Euro. The circle is then completed and the equity markets, notably in America, trade off of the strength of the Euro and some days at almost a point by point movement. Never before in the history of the world has such a grand scheme been implemented and in such an all-encompassing fashion. The unlimited amount of money that is available, because they can print all the money they want, has allowed Europe to game the world’s financial system while no one looked or caught on to the scheme. The world’s fiscal system has been rigged by Europe.

Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse. In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system.  A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators. In a number of cases, they clawed back the funds and profits that the convicted parties had fraudulently obtained. Flash forward to the 2008 credit crisis, in which just the related household sector losses alone were over 70x greater than those seen during the entire S&L debacle. So how many criminal referrals did the same agency, the Office of Threat Supervision, make?

Zero

The question puzzling currency markets is why the EUR is so strong.  While we have argued that during the risk-off period of the last month or so post-LTRO2 (before Tuesday) EURUSD strength appeared to be driven by repatriation flows and balance sheet reduction, new information over the last couple of weeks driving the expectation that growth will be weak enough in the US to keep US policy very stimulative for a nice long time, we tend to agree with Steven Englander of Citigroup who argues that it looks very much as if QE3/Fed-stimulus anticipations are behind the EUR relative strength recently. Indeed the recent USD weakness is pretty much across the board, suggesting that it is less EUR attractiveness than USD unattractiveness that is driving the EUR’s gains.  That said, I think the buzz around various euro zone measures to help out banks and ease the rigidities of the fiscal compact is also helping support the EUR by reducing tail risk, but right now the USD/Fed is the bigger story. Back of the envelope math based on the Fed/ECB balance sheets and EURUSD implies the market expects  around $700bn of QE3 and given swap-spread differentials there appears to be little liquidity premium to reduce this expectation.

China is preparing to avoid U.S. sanctions on Iran by paying for oil with gold.  Not only that but, as Forbes contributor Gordon Change also mentions, China has already been bartering with Iran to get a hold of petroleum using among other goods, Chinese washing machines, refrigerators, toys, clothes, cosmetics, and toiletries. The barter trade works, but Iran needs cash too - hence Gold. Thus, the leadership in America in its infinite stupidity has actually accelerated the demise of the U.S. dollar as the world’s reserve currency. In a similar move on a more micro level, the government of Spain in a similar desperation has banned the use of cash transactions above 2,500 euros.  How do you think citizens are going to respond to this?  People are already in the streets. Everything is going to go black market and to a barter system.  It will happen country by country as governments get increasingly desperate and the authoritarian clamp down continues.  It will happen on an increasing level until all of these house of cards bureaucratic states fail and something new is reborn - just as we noted in a small town in Greece recently.

When even Pisani is questioning the fundamental-less QE3-addicted rally, it is perhaps self-evident that volumes were lagging today and stocks gave up most of their gains to end fractionally higher in the S&P 500 e-mini futures. Stocks peaked at the open of the US day-session after an overnight ramp that started in the depths of the overnight session (3amET) as auctions and data became so bad that traders adjusted their odds of a central-banker injection which seemed to spur wholesale buying of gold, stocks, selling of the USD (but also selling of US Treasuries - which did not fit with the QE meme). Gold continued its debasement rally after the US day-session as stocks sold back off as GDP composition weakness became clear. As we pushed into the European close, stocks rallied back to catch up with Gold's performance on the day and then sagged for a quiet low volume afternoon that saw the ES drop back below 1400, below its opening levels as Gold held above $1660. Treasuries limped around in another narrow range day ending a fraction lower in yield but off their best levels of overnight (where 10Y got down to 1.88%). Whether it is discounting Fed easing or EUR repatriation, USD weakness was broad today but JPY and AUD strength was relatively equal providing little carry-driven strength to support stocks. VIX warbled above and below 16% but ended back above as the term structure of vol continues to leak flatter. A solidly green week for stocks, accompanied by falling volumes and average trade size has seen the nominal value of the S&P 500 almost overtake Silver for best-performing asset YTD (after Silver's post LTRO2 collapse). Copper outperformed Gold and Oil on the week - though they managed to more than double the implied move from USD's weakness (-0.5% on the week). The lack of financials in today's push along with only modest energy, industrials, and materials follow through suggests investors are losing hope rather quickly with the QE chatter and the slide into the close did nothing to stay anxiety.

It must be difficult for the BRICS countries today. On one hand, they continue to jockey for respect among the Western powers, insisting on participating in quasi-European bailout funds like the IMF. On the other hand, they are also clearly aware of the Western nations' continuing efforts to surreptitiously devalue their domestic currencies, and the pernicious effect that has had on them as exporters and as lenders of capital. In that vein, it was interesting to note that during the latest BRICS Summit held this past March in New Delhi, the main topic of discussion centered on the creation of the group's first official institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Although not openly discussed, reports suggest what they were really talking about was creating a type of BRICS central bank - an institution that could facilitate their ability to "do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations…" Given the incredible scale of western central bank intervention over the past six months, the BRICS' increasing frustration with their printing efforts should be a given by now. The real question is what they're doing about it, and what assets they're accumulating to protect themselves from the inevitable, which brings us to gold.

In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."

While many will remember 1982 for its disco and the movie E.T., it is perhaps best known by an investing public as the end of a 16 year secular bear market. The 10% decline from 1966 was better, however, than the 38% loss from 1937 to 1941 and the 80% loss from 1929-1932 but together this triumvirate make up the secular bear markets. Luckily, as IceCap's Keith Dicker notes, for most of the investment industry they can gloss over these extended loss periods and instead focus on the long-run secular bull markets (cue Jeremy Siegel). However, he points out that unknown to many and ignored by the rest, "we are in the middle of another long and dragged out Secular Bear Market which has seen investors lose 7% since the year 2000 - that's 12 years of hopes for nothing." Understanding secular markets and how they transition from BULL to BEAR is perhaps the most rewarding investment perspective you won’t hear from anyone else. While financial markets continue to yo-yo with our retirements, the truth is, the next Secular BULL Market is not quite ready to perk its head up just yet as Dicker addresses P/E ratios during inflationary and deflationary periods summing up his view of the world rather succinctly: "As central banks continue to bail out banks and countries, they implicitly create an investment culture whereby failure is rewarded and success is taxed to reward those who failed."

Americans consume 20 million barrels of oil per day and FutureMoneyTrends asks what will happen when the price of gas reaches $4, $5, or $6 per gallon. Between exponentially rising fuel prices and stagnant wage growth for those employed, American consumers were broken in the lead up to the start of the depression recession in 2008. The situation is massively worse now than at the bottom in March 2009 (from $2.00/gallon to $3.92 currently) and that is where they take up the narrative of where we go next as the cost to drive has more than doubled in the space of three years and is on an unsustainable path; either as a nation of consumers facing de minimus wage growth, or the lack of firms' ability to pass this cost on to consumers leading to more unemployment. As the unreality of the S&P 500 passing back above 1400, a reflection back on the real economy is sobering to say the least.

The balance sheet recession diagnosis of many of the world's developed nations remains among the clearest explanation linking the failure of textbook monetary policy to the dismal multipliers, transmission mechanism breakages, and sad reality of a recovery-less recovery. Whether you agree with Richard Koo's traditional but massive Keynesian fiscal stimulus medicinal choice is a different matter but the Nomura economist delineates the three problems (two macroeconomic and one capital flow) exacerbating the eurozone crisis and notes that "bulls have gotten ahead of themselves". Noting that the central bank supply of funds may help address financial crises but cannot resolve problems at borrowers, and that authorities have never admitted they were wrong, Koo stresses the three key reasons that bullish speculation on eurozone is premature - monetary accommodation's ineffectiveness when the private sector is deleveraging, active fiscal retrenchment by the core when fiscal stimulus is the only plus for aggregate demand, and Japanese and US lagged-examples of that dash any short-term hope that structural reforms will lead to growth. Even his solution to the European debacle - one of financial repression limiting the sale of government bonds to each nation's own citizens - while retroactively limiting a nation's largesse seems to only lead to the inevitable Japanification we have discussed at length. In the meantime, Koo appears far less sanguine than the markets about the prospects for anything but further demise in Europe (and the US).

It is three and a half years since the Great Recession hit in 2008 with the collapse of our financial system caused by the Wall Street banks and their captured politician cronies in Washington D.C. Their mouthpieces in the mainstream media have been telling the American sheeple that we have been out of recession and in recovery since the 4th quarter of 2009. It truly has been a recovery for the Wall Street bankers and the mega-corporations that have laid off millions and opened new factories in the Far East while generating record profits and rewarding their executives with millions in bonuses. The stock market has doubled from its 2009 lows. All is well on Wall Street – not so much on Main Street. The compliant non-questioning MSM reported that GDP in the 1st quarter rose 2.2%, less than expected. This pitiful government manipulated result confirms that we are back in recession. The first quarter had the huge benefit of fantastic weather, an extra day, and a supposed surge in jobs. And this is all we got? Take a good long hard look at this chart.

Whatever one thinks of the practical implications of the Kalecki equation (and as we pointed out a month ago, GMO's James Montier sure doesn't think much particularly when one accounts for the ever critical issue of asset depreciation), it intuitively has one important implication: every incremental dollar of debt created at the public level during a time of stagnant growth (such as Q1 2012 as already shown earlier) should offset one dollar of deleveraging in the private sector. In turn, this should facilitate the growth of private America so it can eventually take back the reins of debt creation back from the public sector (and ostensibly help it delever, although that would mean running a surplus - something America has done only once in the post-war period). This growth would manifest itself directly by the hiring of Americans by US corporations, small, medium and large, who in turn, courtesy of their newly found job safety, would proceed to spend, and slowly but surely restart the frozen velocity of money which would then spur inflation, growth, public sector deleveraging, and all those other things we learn about in Econ 101. All of the above works... in theory. In practice, not so much. Because as the WSJ demonstrates, in the period 2009-2011, America's largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers. Those among us cynically inclined could say, correctly, that the US is incurring record levels of leverage to fund foreign leverage, foreign employment, and, most importantly, foreign leverage.

For the third week in a row, European equity and credit markets have remained range-bound. Equities broadly ended the week in the green with the BE500 (Bloomberg's broad S&P 500-equivalent for Europe) ending near the top of the recent range - around the pre-NFP levels from 4/5. Spain and Italy have seen improvements this week in their equity indices but they remain down notably on the month and perhaps surprisingly only the UK's FTSE 100 is in the green for the month. Credit is considerably more dispersed but also green close-to-close on the week after a strong finish today (as the dismal data started rumors of more ECB easing and QE3 lifts). Stocks and high-beta crossover credit outperformed in the liquidity rush but subordinated financials lagged on the week. Critically though, while anchoring bias might make us all feel joyous in the last few days of recovery, we remain significantly red on the month across all risk asset classes in Europe. Sovereigns followed the same path as equities and credit - with another range-bound rotation up better on bill auction success and worse on bond auction failure but as with equities/credit today's exuberance lifted them to the middle of the recent range - well off the best levels of the last few weeks. Most notably, Spanish and Italian 10Y bond spreads are over 60bps wider in April and continue to trade in a two-steps-wider-one-step-tighter rotation intra-week. Portugal is the big winner on the week (and month) when it comes to bond spreads - which are now back to mid-September levels. However - as we have tried to explain before - the massive cheapness of Portuguese bonds relative to CDS (the so-called basis) has just been too tempting and grabbing this 'risk-free' carry has provided some bid to a notably illiquid Portuguese bond market and crushed the differential between bonds and CDS. The point being - be careful in reading too much into Portuguese bond improvements as it is much more a technical arbitrage move than real money flowing into this restructuring prone nation.

Inside sources are reporting that there's a new drug of choice circulating in the hallways of power--the White House, Federal Reserve and the Treasury Department--and it's a perfectly legal prescription psychotropic: Delusionol (tm). Delusionol works by activating the parts of the brain that replace cognition and reasoning with positive fantasies. For example, a driver on Delusionol might run over a person in a wheelchair, bounce off a fire hydrant and send a baby carriage hurtling into a brick wall, and they would be happily convinced that they were an excellent driver. Now you understand why Delusionol is being gulped in vast quantities in the halls of power: the guys (and yes, it's mostly guys) really want to believe the "economic recovery" they've been hyping, and since it's rationally preposterous, they need a drug to suppress recognition that their policies have only made the financial disease worse and stimulate a delusional belief in the fantasy of "recovery."