Archive - Jun 2012 - Story

Say what you will about JPM's soon to be former employee (once the IG trade complex is fully unwound... sometime in 2013) Bruno Iksil, but you don't get to run up a several hundred billions notional CDS book (and blow it up) by being stupid. No, Bruno was certainly not stupid. In fact, he has reportedly exhibited precisely the very same brilliant trait that Europe's also very smart central-planners, as well as all other people in positions of power under the current status quo regime, demonstrate day in and day out: "Baffle With Bullshit."

Initially presenting the potential problems of our current healthcare environment, the creator of 'the bears that explained Quantitative Easing' provides much food for thought on the unintended consequences of Obamacare (in all its 2700 page glory). For everything you need to know about how it devolved to this ("To understand healthcare in America, you have to think about bananas") and how to think about the new tax's potential implications (e.g. lower quality of service, capped hiring rates among employers), seven minutes well spent.

Last week it was Merkel promising she would die before she allowed Eurobonds (technically this has not been refuted: all she has done is allowed... uhmm... err... we don't really know - lots of confusing headlines out there, lots of chatter, a big short squeeze and no actual details). And now, here comes...

• GERMAN FINANCE MINISTER SCHAEUBLE SAYS NO EURO BONDS IN HIS LIFETIME EITHER WITHOUT COMMON FINANCIAL POLICY

And by common financial policy of course they mean "joint sovereignty" or at least all European gold pledge at Geld4Gold. Time to send Goldman's ambassador to Germany to investigate.

Everyone knows that Italy's unelected PM, Mario Monti, is a former Goldman Sachs International 'advisor.' As such, it is only natural that being part of the banking cartel he would do everything in his power to promote an inflationary agenda, one that seeks ECB bond monetization intervention, (another central bank headed by a former Goldmanite of course), perpetuates the status quo, and one that naturally contravenes everything that German citizens have been pushing for in their desire to avoid the risk of another hyperinflationary episode. Especially if, as is well-known, resolving Europe's problems, however briefly, facilitates an Obama re-election campaign because as conventional wisdom is also catching on, should Europe implode before November, Obama's reelection chances plunge accordingly. And yet, even as Goldman's tentacles had spread all over Europe (as seen here), conventional wisdom was that Goldman's influence in Germany was relatively muted.

Wrong.

Following a 3-sigma fall yesterday, WTI crude has rebounded exuberantly amid the European ecstacy and the Iran Oil Embargo. Up almost 9% from late yesterday's lows (a 6-sigma jump), it appears yet another squeeze is in play (perhaps from demand-pull on the back of Hillary's unyielding national policy - oh yeah apart from China and Singapore). While the WSJ notes: "There's no material price premium from the Iran issue", it seems the potential for an epic short-squeeze - as Iran's largest importer of Oil (cough China cough) is now exempt (and continuing to hoard) leaving refiners potentially tight on supply - as macro tail-risk is seemingly removed from the downside by the 'nothing' summit we just experienced.

This week may very well go down as 'connect the dots' week. Things have been moving so quickly, so let's step back briefly and review the big picture from the week's events. When you connect the dots, the next steps lead to what may soon be regarded as an obvious conclusion: the system, as it exists right now, is crumbling. No amount of self-delusion can make this go away. Rational thinking and measured action, on the other hand, can make the consequences go away... turning people from victims into spectators of the greatest bubble burst in modern times.

... Nothing more (or less) than NYSE short interest as of June 15 (at 14.7 billion shares) soaring to the highest since October 2011, just before the mega ramp on the previously mentioned October 26, 2011 Greek "Bailout" started on another total non-event as history would show (as would be the ensuing global central bank interventions, and LTROs 1+2). This is also tied for the 3rd highest short interest since July of 2009. Which brings us to the following question: we know that over the past month the only stock "market" catalysts have been small groups of "educated" central-planners: the Fed, SCOTUS, and Eurocrats, with the only upside catalyst being taxpayer cash. Does the chart below mean that the only technical item that matters is Short Interest (as well as short interest in the highly levered and beta-rally inducing EUR), and every time this number rises above a given threshold the various Wall Street repo desks will merely engage in forced buy-ins and cause epic short squeeze like the one today? We don't know. However, we do know that with both long-side and short-side trading becoming meaningless and everything now just an HFT-facilitated stop hunt, this is the surest way to make sure nobody is left trading these markets anymore, something which relentless ongoing cash outflows from equity funds confirm every single week. The good news: once the weak hands have covered, a new wave of shorts can reenter, only to be burned as well on the next overhyped non-event out of Europe or anywhere else.

Exuberance rules and it seems everyone and their mum believes that something significant just happened in Europe in terms of a 'game-changer'. We suspect this is anchoring bias writ large - we've been down so long that any up feels great. While every asset class jumped dramatically on the day - EURUSD 4-sigma surge, stocks up 3 to 4%, Credit snapping tighter, Europe's VIX plunging, and Sovereign bond yields gapping down - the truth of the matter is that if this were truly a 'game-changer' then would it not be likely that risk assets would be higher than they were just a week ago? Between the total uncertainty of the actual plan's implementation and Merkel still pouring cold water timelines on things; we note that Spanish and Italian bond spreads end the week practically unchanged; Corporate and financial credit spreads are at 6/21 high levels (but not beyond); Europe's VIX has compressed dramatically in our favor for relative to US VIX but remains at 6/21 levels; and only stocks are above those 6/21 highs in their typical high beta excited hopeful manner. Into a thinly traded weekend ahead of July 4th, we would have expected a little more from this nouveau-deal.

In this bizarro world, in which beggars have practically convinced themselves, and certainly the S&P500, they are now choosers, the latest escalation is actually biting the hand that feeds you. Below is today's front page of Italian Libero. It is self-explanatory.

The global economy is now addicted to debt. Once debt stops expanding, the economy shrivels. But expanding dent forever is unsustainable. Welcome to the endgame. Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to "grow our way out of debt" is not supported by data.

It's official: all those rumors of unprecedented deposit withdrawals in May as Greece was heading into one then another parliamentary election were true. According to just released NBG data, May deposit outflows were €8.5 billion, or the highest on record, bringing the local banks' total private sector deposit base to just €157 billion, the lowest since January 2006, and represents a massive 5% outflow of the entire deposit base as of the end of April. And keep in mind rumors of epic bank jogs and trots did not really pick up until weeks into the second Greek election two weeks ago. At this rate of outflows the entire Greek banking system will have zero deposit cash left in under two years. So aside from the 'details', Europe is all fixed and stuff.

Epic Rant. Everyone's favorite Bay Area truthsayer is back and this time he is taking on the general ignorance of an indoctrinated mainstream media and the brainwashed investing public. Dismissing the nonsense of one media blogger's belief that the 'Euro would be better off without the meddling Germans' - implying that once the ECB was left to follow the path of stupidest resistance of printing and spending that all will be well with the region, Biderman conjures Lewis Black (spit and all) in the incessant belief that more debt can solve a problem of too much debt. Furthermore, the expectation that a European QE can bring rates down for Europe (without a German pillar of sanity) is ludicrous: "Unreal, what sane person would by short-term zero-interest rate debt instruments issued by a combination of broke debtor nations?" Reading the media or watching nitwits opine on CNBC and Bloomberg that everything is #winning: 'just because the Federal reserve or ECB prints money' is clearly frustrating as the TrimTabs CEO concludes "You just cannot print money and solve the world's problems".

Today's 4-sigma short-squeeze ramp in EURUSD (up over 220pips from pre-Summit-statement) is very reminiscent of the 10/26/11 reaction to the Greek debt deal. EURUSD rallied magnificently, squeezing a dominating short-crowd over 400 pips higher that time. But it is the impulse reaction that we note - within two days, the entire rally had faded and indeed went on to sell off for a few more months as reality struck. One month after the last 4-sigma jump in EURUSD (late November 2011) we saw the global co-ordinated central bank liftathon that started the five-month epic idiocy of the equity exuberance that was the decoupling, self-sustaining, short-squeezing, 'cleanest dirty shirt' first quarter of 2012. Trade accordingly.

Between 'Twist+', his belief that Germany will 'blink' leaving any eurozone breakup/exit unlikely this year, and confidence that the US (Fed) and China (fiscal and monetary) will attempt once again to pump things up, Bob Janjuah (of Nomura) expect to see a risk-on phase that lifts the S&P - possibly climbing the wall of worry back up to the 1400s by late July or early August. His stop-loss (which would be very bearish in his view) is a weekly close under 1267 for the S&P. And then? He would look to position for an extremely bearish risk-off phase over late August through to November or December. The drivers of this extremely bearish expected phase are not new: overly bullish positioning and sentiment; weak global growth, not just in the eurozone but also in the US and the BRICs; the next leg of crisis in the ongoing eurozone debacle in my view; and of course the looming US fiscal crisis, which in Bob's view is not even ‘slightly’ priced into markets, but where he feels the probability of a crisis is close to 75%. His forecast for this extremely bearish risk-off phase over late Q3 and Q4 is that the S&P 500 trades below the low of last year, perhaps as low as 1000. Into 2013-14, I am still concerned that my long-standing 800 S&P500 target will be hit, but it will not be a straight line - QE3 will provide a short but sharp risk-on relief to markets. But as the bearded bear forecasts, once its ‘benefits’ subside (in weeks) it will be the failure of this QE3 to ‘fix’ things that, I fear, will open the door to 800 S&P.