Archive - Jun 2012 - Story

UPDATE: The Bundesbank, as usual, ready to pur some 'reality-based' cold-water on the situation:

*BUNDESBANK SAYS IT'S CRITICAL OF ECB COLLATERAL DECISION

*BUNDESBANK SAYS IT WON'T ACCEPT COLLATERAL IT DOESN'T HAVE TO

They came, they spoke, they spiked EURUSD; but now just over 90 minutes later the full force and furor of the 3 horse-men (and 1 woman) of the Euro-zone have tried and failed to get any market belief in their constant tirade of the same facts and denials. No matter what Monti, Hollande, and Rajoy say, Merkel's reply summarizes to: "No Free Lunch" and while markets exhibit their 'spasmodic' response function to any comment from Europe, sooner now (rather than later) we revert to pre-bullshit levels. As a reminder, the half-life of the Spanish Bailout was 7 hours as we noted here which must make this total reversion particularly worrying for the 'elite'.

After a series of idiotic pleadings by Europe's broke insolvent countries that everything is now all fixed, Merkel decided to put some order into the house and reminder everyone who actually still has money:

• MERKEL SAYS DIRECT BAILOUT FUNDING OF BANKS VIOLATES TREATIES
• MERKEL SAYS GERMAN TAXPAYERS WANT GUARANTEE ON HOW AID SPENT

Which is funny: because the Golden Rule is that he who has the gold, makes the rules. And the rule is, and has always been, that the "guarantee" for further bailouts will be even more gold. Physical not metaphorical.

Greece may have a new government that is the same as the old government, but what is important is that it is "fixed".

Update: we have entered full retard rumor territory again:

• GUINDOS SAYS NO PLAN TO APPLY LOSSES ON JUNIOR BANK BONDHOLDERS

In other words, no B-word; to summarize - Spain float rumors, does not like market response, denies rumor. Taxpayer rape must continue.

* * *

Spain just uttered the "B" word and ruined the party:

• SPAIN SAID TO WEIGH IMPOSING LOSSES ON JUNIOR BANK BONDHOLDERS

What is the B-word you ask? Why Burdensharing of course. And we can see why it would be confusing - it never happened once in the past 3 years of central bank coordinated bailouts.

The XLE closed yesterday at 63 - only a buck above the June 1 lows. For the year, XLE is now down a whopping 8 bucks. And of course oil, which started the year at 103 and peaked at 110, has dropped to 78. Jefferies' David Zervos offers some critical insight into the energy sector bloodbath in the last few months, which of course begs the question - what in the world is going on? Shouldn't all this accomodative policy by the Fed, ECB, SNB, BoE and BOJ be sending commodities to the moon? The answer, he believes, is straightforward - central banks are NOT being accomodative enough. These downward trends in the energy and commodity complex should be a warning sign to anyone with a "price stability" mandate. For now we should look at this energy cliff as an early warning sign for stress in the system. And as such we should expect the usual central bank backstopping to come out in force if this trend picks up material steam! Its the same old story, reflation or bust - and Zervos is still betting the central bankers deliver the former!

Goodbye European Central Bank. Hello Salvation Army Bank.

or in other words:

"THE ECB RATES THIS SPIDERMAN TOWEL-BACKED CURRENCY AAA+++

Over the last few weeks markets have recovered from the significant stresses that were building towards the end of May (until yesterday's slow realization). The recovery has been in no small part due to expectations of intervention and that fresh rounds of QE and their equivalents will soon be implemented around the developed world. Deutsche Bank believes that markets are now addicted to stimulus and can’t function properly without it. There is little evidence yet to suggest that markets in this post crisis world have the ability to prosper in a period without heavy intervention, though empirically asset prices benefit from liquidity but that the environment remains fragile enough for them to struggle to maintain their levels when the liquidity stops. Critically, they agree with us that the structural problems the West faces mean that QE and its equivalents and refinements will likely need to be around for several years to come to ensure that the financial system and its economies don’t relapse into a depressionary tail-spin. There is no evidence that we are currently close to being able to wean ourselves off our liquidity addiction. The hope would be that with further injections we can prevent the worst case scenario but the base case remains for the stress and intervention cycle repeating itself as far as the eye can see. Central banks still have much to do.

When the US Dollar is ultimately dethroned as the world's reserve currency (and finally gets rid of all those ridiculous three letter post-Keynesian economic "theories") nobody will have seen it coming. Well, nobody except for the following headlines: ""World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees." And while the expansion of the "dollar exclusion zone" was actually quite glaring to anyone who dared to look, one thing was obvious: it was confined to Asia. No more courtesy of the following FT headline: "Brazil and China agree currency swap." More: "Brazil has provided a vote of confidence in China’s efforts to promote the renminbi as a reserve currency by becoming the biggest economy yet to agree a swap deal with Beijing. Brazil and China announced the R$60bn (US$29bn) local currency swap after a bilateral meeting between Wen Jiabao, the Chinese premier, and Dilma Rousseff, Brazil’s president, on the sidelines of the Rio+20 environmental summit in Rio de Janeiro."

In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.

• Mario Monti: We Have a Week to Save the Eurozone (Guardian)
• Europe Central Bank Prepares to Relax Collateral Rules (WSJ)
• EU Banks' Risk in Eyes of Beholder: Worry Is That Lenders Are Boosting Gauge of Their Health (WSJ)
• Europe finally learns about subordination: Bailouts' Creditor Hierarchy Scares Private Bondholders (WSJ)
• Merkel Isolated in Race for Euro Crisis Solution (Spiegel)
• Fed’s Re-Twist May Lift Treasury Repurchase Agreement Rates (Bloomberg)
• China Said to Propose Keeping Limit on Local Government Loans (Bloomberg)
• Moody’s Downgrade Hits 15 Top Banks (FT)
• IMF Challenges Berlin’s Crisis Response (FT)
• Colombia to Auction Rights in 2013 to Gold and Coal, Not Coltan (Bloomberg)

Even though it was one of the first to call for a coordinated market crash (remember XO going over 1000 bps?) last month before a coordinated policy response can come into play, today Citi's Mohammed Apabhai has doubled down on yesterday's market moving Goldman call, once again making it quite clear that only a collapse can bring the much needed policy "salvation." The bogey? 12% down according to Citi, before the "liquidity put" comes in play and 1285 could "indicate liquidity support." In other words: in order to go up, first the market must go down.

Draw a Wall Street paycheck long enough and you will work with an amazing spectrum of personalities.  Today’s note from Nic Colas (of ConvergEx) is an homage to his past coworkers in the form of some offbeat comments that have stuck in his memory over the past 25 years on the Street (and will ring true to anyone who has spent more than a day on a trading floor).  On the psychology of money management: “Last year we made $360 million and lost $330 million."  On the importance of language in positioning an investment story: "The company’s revenues aren’t unpredictable; they are just chunky.”  And our favorite, from long ago: "Who cares if most money managers underperform.  They all seem to have big houses and pretty wives."  No, not all these quotes are exactly "Politically correct", but they all represent some useful truths about investing and capital markets.