Archive - Jun 2012 - Story

Two days ago we noted with muted disgust that Europe has legislated to scrap the use of rating agencies, who were everyone's best friend during the up-phase in the global ponzi, but now that deleveraging is accelerating and ratings downgrades are coming, are like the drunk guest who refuses to leave the insolvent party at 4 am. Sure enough, the time has come to enact rules to kick them out. But wait, there is much more. Moments ago Reuters reported that the European Central Bank is discussing a medium-term plan (as in indefinite) to scrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said. You read that right: the ECB itself will decide what the collateral value is of pieces of paper it accepts, in exchange for other pieces of paper with the faces of famous dead people on one side (even if technically the whole operation takes place electronically). And to think that for some odd reason allowing drug addicts to write their own prescriptions is illegal. Apparently all is fair in love and breaking all rules of sinking monetary systems.

And so the gaming continues: Initial Claims miss expectations of a 383K print, coming at 387K, a number which next week will be revised to 390K. This is the 7th miss in a row, and 23rd miss of the past 26 weeks. It is also the highest 4 week average since December. But the mainstream media has its soundbite: "initial claims decline by 2,000" because, lo and behold, last week's 386K print was revised to 389K. We have discussed this topic to death: little to add here. The ceremonial scripting by the BLS continues full bore. The only real data point in today's release: those collecting extended claims continue to hit the 99-week cliff, as 42K more drop off Komrade Samov's free lunch dole. Finally, judging by the somewhat muted positive market response to this latest piece of horrible economic news, the data was bad but not bad enough: we need a 400K+ print for the ES to get back to 1,400 it appears.

First and foremost; nothing is happening in the European Union without the agreement of Germany. They have the gold and they will make the rules regardless of the words bandied about proclaiming brotherly love and the solidarity of the European nations. This is all drivel, just politics and a subject that can be ignored as you concentrate on what is really important. When Germany speaks, on a scale of 1-10 with 10 being the most important; Germany is a 10 and the only 10 on the Continent.

Looks like the long-anticipated E-bay auction for Santorini may be closer than expected: in the aftermath of Greece's now absolutely bankrupt status, whereby the comatose patient is kept alive only thanks to a Made in Germany ventilator, it was only a matter of time before the country started with the Blue light special firesales. Sure enough from Bloomberg: "National Bank of Greece SA is preparing to sell an Athenian Riviera resort, visited by world leaders and movie stars for more than half a century, in a test of the country’s ability to sell assets amid concern that it will leave the euro. The 3.3 million-square-foot Astir Palace complex has already drawn investors’ interest, according to Aristotelis Karytinos, general manager of real estate at the lender. The Athens-based bank and Greece’s privatization fund, which owns part of the property, will put out a public tender in coming months, he said." Why is the Astir Palace unique? "Since its opening in 1960, the resort’s guests have included Jackie Onassis, Nelson Mandela, Tony Blair, Jane Fonda and Frank Sinatra, according to the resort’s website. Astir Palace in 1993 and 2009 hosted the Bilderberg conference." Something tells us we know just where the winning bid for the last remaining Greek assets may come from.

Even as Moody is now about a week late on its Spanish bank downgrade where the banks are rated higher than the sovereign (which obviously is kept in check to prevent yields on bonds from soaring even more), here comes the next wholesale bank downgrade:

• Moody's expected to announce ratings downgrade for UK banks this evening - Sky Sources
• Exclusive: Big news - I'm told Moody's will announce downgrades of some of world's biggest banks, incl in UK, after US mkts close tonight. - Sky's Mark Kleinman

Looks like that fabricated 2 notch Margin Stanley downgrade (because 3 notches just won't do - those 4 months of Gorman-led "negotiations" made that painfully clear) is about to strike. The real question is: What Would Egan Who Do?

• German court may delay ESM bailout fund ratification (Reuters)
• New dangers lurk for rudderless Spain (Reuters)
• SEC Said to Depose SAC’s Cohen in Insider-Trading Probe (Bloomberg)
• With Europe broke, Asia is Wall Street's new dumb money: Riskier Bets Pitched To Asia's Rising Rich (WSJ)
• Spain expected to request bank aid after debt test (Reuters)
• Lawmakers Push for Overhaul of IPO Process (WSJ)
• Israel: "all options" open after Iran talks fail (Reuters)
• Canadian housing boom to grind to a halt (Financial Post)
• Italians Dodge Property Tax in Test for Monti’s Austerity (Bloomberg)
• ORCL earnings must have been good: Oracle CEO Ellison to Buy Most of Hawaiian Island Lanai (Bloomberg)

Hours before Spain is expected to present the bank "assessment" from Roland Berger and Oliver Wyman on its comprehensive bank insolvency status, the country sold €2.22 billion of two-, three- and five-year government bonds, in a sale which saw solid demand but yields that are simply laughable and are completely unsustainable, culminating with a record yield on 5 year paper. Per Reuters, the Treasury sold 700 million euros worth of a 2-year bond, 918 million euros worth of a 3-year bond and 602 million euros of a 5-year bond, beating a target to issue up to 2 billion euros of the debt... In a nutshell: big demand for paper that will leave Spain pennyless. Not very surprising, and as Elisabeth Afseth from Investec summarized, "They got it away, it's about the most positive thing you can say about it." Elsewhere the German economy continues to deteriorate from carrying the weight of the PIIGS on its shoulders, with the Mfg PMI and Services PMI both missing estimates of 45.2 and 51.5, and printing at 44.7 and 50.3, respectively. This was a 3 year low for German PMI and now all but confirms that the economy will enter a recession at the next GDP update. But all this pales in comparison with the latest update of the Greek comedy where we learn that the three parties forming Greece's new coalition government have agreed to ask lenders for two more years to meet fiscal targets under an international bailout that is keeping the country from bankruptcy, a party official said on Thursday. This came a few hours after a German parliamentary group officially spoke against a time trade-off for Greece. Which means that beggas will not be choosers after all.

HSBC's Flash Manufacturing PMI printed at 48.1 - its lowest in 7 months as contraction continues in the world's growth engine - as inventories rise at a faster rate and new export orders plunged at the fastest rate since March 2009. Risk markets were already leaking lower before this but extended losses with ES down 6pts from the close (and over 11 from the day's highs). Treasuries are bleeding a little lower in yield but the real action is an exaggerated slide in WTI (which is rapidly heading towards a sub-$80 handle) and EURUSD which has dropped back to the day's lows around 1.2660. Copper, Gold, and Silver are also sliding lower as AUD weakens (as we suggested last night) back to 1.0150.

One of the things that’s really unique about this part of the world is having access to so many people with first-hand experience of living under Soviet rule. It’s a bizarre thing to say, but the stories they have to tell are extraordinary. ast night I had dinner with some friends, including one woman who was just a child at the end of World War II. She explained to me that her family had been wealthy landowners near the capital city… until the Soviet-controlled government came in, confiscated all of their property, and shipped the adults off to Siberia. “There were so many opportunities to leave beforehand,” she explained, ”but they just never thought things would ever get that bad here. Everyone saw what happened in other countries, but my family never expected that it would happen to them.” While most people probably aren’t going to end up in Siberia anytime soon, the lesson is still valuable.

The revaluation that is underway now is beyond the simple scope of corporate earnings valuations, going to the very core of the system itself.  Just like the equity pricing regime (and investor expectations for equity assets) needs to adjust to the twelve-year-old bear market reality, pricing within the global banking system as a whole needs to adjust to the reality that the artificial growth of the economic textbook is not replicable.  The economic truth of 2012 is that much of the science of economics, and the foundation that gives to finance and financial pricing, was a temporal anomaly befitting only those specific conditions of that bygone era.  In other words, the entire financial world needs to reset itself outside the paradigm of pre-2008.  The secular bear market in US equities is one strand of this changing landscape, perhaps the first stirring of the collapse of the activist central bank experiment. In the end, the potential selling pressure of the dollar shortage is irresistible, no matter how “cheap” stock prices are to earnings, but none of it may matter in the grander scheme of a dramatic reset to the global system.  The inability of that global system to escape this critical state, to simply move beyond crisis and function “normally” again, demonstrates conclusively, in my opinion, the foundational transformation that is still taking place well beyond the stock bear.  Everything is a locked feedback loop of negative pressures in this age, no matter how much we want to see “value” where and how it used to exist. 

Paradigm shifts are rarely orderly, but there are warning signs.

Capitalists have been gripped by 'systemic fear' making them worry not about the day-to-day movements of growth, employment, and profit, but about 'losing their grip'. An interesting recent article by the Real-World Economics Review on the Asymptotes of Power focuses on the fact that the capitalists are forced to realize that their system may not be eternal, and that it may not survive in its current form. The authors fear that, peering into the future, the '1%' realize that in order to maintain (or further increase) their distributional power (their net profit share of national income - which hovers at record highs) they will have to unleash even greater doses of social 'violence' on the lower classes. The high level of force already being applied makes them increasingly fearful of the backlash they are about to receive (think Europe to a lesser extent) and nowhere is this relationship between the wealthy capitalists and social upheaval more evident than in the incredible correlation between the Top 10% share of wealth and the percent of the labor force in prison. In order to have reached the peak level of power it currently enjoys, the ruling class has had to inflict growing threats, sabotage and pain on the underlying population. Although there are no hard and fast rules here, it is doubtful that this massive punishment can be increased much further without highly destabilizing consequences. This crisis is rooted in our past sins and we are unlikely to escape the punishment we justly deserve.

There has been much talk today about Obama's use of the "executive privilege" yet few are familiar with the details of this relatively unknown presidential option. The AP sheds much needed light on this practice: perhaps the most fitting, to the constitutional expert president, is that the "privilege" isn't in the Constitution nor has been clearly defined by the courts. In other words - just the kind of loophole that one needs to mask the fact that the very person tasked with imposing justice is himself guilty of performing just the opposite. Yet Obama has only used it once (so far) during his tenure as president. Dubya used it six times, Bush Sr used it once also. Slick Willie however takes the cake with 14 cases of executive privilege during his 8 years on top.

Despite what her officials say publicly, austerity has limited support within the ECB itself, because it is run at the top by neoclassical economists. Instead, the real constraint is Germany, whose citizens’ savings are on the line and which faces the prospect of its third currency collapse in a century. So this is where the lines are drawn up: spendthrifts desperate for more money, a conflicted central bank, and Germany. Angela Merkel has made considerable progress in pushing the German electorate in a direction that is completely against its instincts by playing the political card marked “there is no alternative.” With her considerable political skills, she may be able to push her people some more, but it is becoming increasingly difficult, because everyone in Germany can see that committing real savings to bailing out the spendthrifts only wipes out the savings. These are not euros simply conjured out of thin air, because the Bundesbank cannot print them and probably wouldn’t do so anyway. But the pressure is mounting on her, and she is being squeezed by governments such as the British and the Americans, who are now panicking over the consequences of failure. This is why both countries went public last week, with David Cameron even visiting Merkel in person. It is a sure indication that major governments outside the Eurozone are beginning to expect the worst, and that unless Germany gives way, it will happen quickly.