Archive - Aug 27, 2012 - Story

It's quiet out there; too quiet. But if you were watching carefully this morning, everyone's favorite government-subsidized bank - Citigroup - flash-crashed to the tune of a $1.2bn market-cap loss in a fraction under 100 milliseconds. A 1.3% micro-crash on absolutely massive volume so perfectly visualized thanks to Nanex. When does this 'liquidity-providing' fiasco stop?

Welcome to the new America — where banks must be protected at all costs. Whether it’s a bailout or a trumped up charge to silence a protestor, if the banks want it, they get it. The district attorney in the case has dropped the charge of attempted robbery. However, a terroristic threat charge remains. Meanwhile, the economic evidence is mounting that countries that want to recover need to tell the banks to take a hike.

It seems the 'we -really-want-it-but please-don't-blame-us-when-it-all-goes-pear-shaped' meme continues in Europe as ECB's Asmussen adds his own peculiar mix of talking out of both sides of his mouth, (via Bloomberg):

• *ASMUSSEN SAYS DOUBTS ABOUT EURO'S SURVIVAL UNACCEPTABLE FOR ECB
• *ASMUSSEN: ECB STILL WORKING ON DETAILS OF BOND PLAN, WILL ADDRESS SENIORITY CONCERNS
• *ASMUSSEN: ECB WILL STRICTLY SEPARATE MON. POL., SUPERVISION ROLES

but

• *ASMUSSEN SAYS ECB CAN'T PAY FOR FISCAL POLICY MISTAKES
• *ASMUSSEN: WE WON'T TAKE SUPERVISOR RESPONSIBILITY WITHOUT TOOLS
• *ASMUSSEN SAYS HE PREFERS BAILOUT FUND TO BUY BONDS BEFORE ECB

Clearly there is still ongoing uncertainty and confrontation within the governing council - and it is obviously not just Weidmann. Market response - not a blip in ES or EURUSD!

With London closed, the market's 'police' were away and so the mice played. Credit markets (sovereign and corporate) went absolutely nowhere as trading was minimal to negligible but equities just could not help themselves as the path of least resistance was to retraced back up from Friday's loss. The move in European equities is simply catch up to Friday's post-European-close levitation in the US (admittedly with a little higher beta) and volume was as dismal as one would expect. FX markets are also dead with EURUSD up only 5 pips at the EU close - having traded in a 40 pip range since it opened on Sunday night (most of which was around the Asian and European data releases). Quiet - in a word - with reality returning tomorrow as London's credit traders come back.

It doesn't get any better than this - or at least in the last 30 years we have not seen a post-panic rally in risk appetite extend beyond the current length of this move. Credit Suisse's Global Risk Appetite index, which is notably tracking lower with ISM New Orders data, has not extended beyond this time-frame from any of its previous 'deep-panic' peaks. While equity markets contonue to diverge higher, risk appetite is notably lagging and one has to wonder if that historical 'animal-spirits' trough-to-peak period (which is set to coincide with Jackson Hole, FOMC, and ECB meetings) will hold once again as hope fades and reality rears its ugly head.

A recent article discusses an old document (the "Report from Iron Mountain") supposedly written by a committee of academics, explaining why war was necessary as an organizing principle of society. In reality, nature thrives on diversity and yet the current authoritarian vision of the ever-more centrally-planned world appears to be to create a larger political union still. But the end is coming for them. We have entered the twilight of their vision. It is the same fear that motivates the Report from Iron Mountain. The system is too complex to be controlled. Back then the authorities said they feared chaos breaking out over the necessary changes to the economy that would follow from a transition to perpetual peace. In reality they feared the loss of control.

Following last month's plunge in the Dallas Fed Manufacturing data (which was its biggest miss in 14 months and lowest print in 10 months), today's -1.6 print was the biggest jump in 7 months. From last month's -13.2, against an expectation of -7 this month, the -1.6 'beat' was very 'impressive' though obviously still negative. Critically though, once again, much of the rise in the index is predicated on the hope-section of the survey as while current activity indices such as production, new orders, and growth rates fell (and inventories rose), their corresponding future expectation indices all rose (even though expectations of the general activity index were mixed). Notably, the Prices Paid index jumped the most in 19 months. Once again it appears that good is bad, bad is better, but terrible is awesome; as the market's entirely lost discounting mechanism has no idea what to do with this flashing red headline.

In the 'I need to read that again to make sure I am not totally nuts' headline of the day, Reuters is reporting that 100 Sardinian miners have gone totally M.A.D. over the potential closure of the mine they work at. Barricading themselves 400 meters underground with 350 kilograms of explosives and threatening to "stay [there] indefinitely." While one certainly sympathizes with anyone who is unable to adapt to the New Abnormal Normal, one question does remain - is the 'blowing up the mine to protect their jobs' concept a Keynesian 'broken-window-fallacy' joke? or do they (like their forefathers who also occupied the mine in 1984, 1993, and 1995) hope the Italian politicians will simply back-down, collateralize the explosives with the ECB, and bail the whole mine out.

We advise you to take note of the political opposition that is coalescing in Europe. The cry across the Continent, in various languages, is “Enough.” All of the grand designs speculated about for the ECB rest upon the use of the EFSF and/or the ESM as stated specifically by Mr. Draghi. Over the weekend the Bundesbank was absolutely critical of any such plans and they were supported by several statements made by Ms. Merkel. It is now dubious, in my view, whether Austria, the Netherlands, Finland and perhaps Germany would support not pledges but more actual money to be used for Greece, Portugal and Spain. The rub is on and the size of these potential programs will, without doubt, affect the funding nations in Europe along with the nations that need the capital. Muddling is no longer possible, delay has run out of road, postponement is no longer an option as recession grips the Continent and as each solvent nation seeks to defend itself.

UPDATE: Isaac downgrade (from potential CAT 2 to CAT 1) is helping

In the immortal words of the movie 'Something about Mary', "we got a bleeder" in Crude oil. The front-month WTI contract just snapped over $2.50 lower as SPR-release rumors reassert on fears of Isaac's impact (and of course Jackson Hole).

Weidmann rejected suggestions that he was isolated on the ECB Governing Council in having such reservations. "I hardly believe that I am the only one to get a stomach ache over this," he said. Alexander Dobrindt, a senior German politician who has been the Executive Secretary of the Christian Social Union of Bavaria since 2009, was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe". A conservative ally of Merkel, Dobrindt echoed Bundesbank’s Weidmann that Greece should leave the currency bloc by next year. The comments show the huge divisions in Germany over the debt crisis now in its 3rd year and the understandable concerns of inflation and even hyperinflation. The Bundebank and senior politicians and allies of Merkel may thwart Mario Draghi’s big plans to do “whatever it takes” to solve Europe’s financial collapse. One way or another, the euro is certain to fall in value in the long term.

Forget the few hundred million dollars in wrist-slap fines the banks face from regulatory discipline over the Libor rate manipulation 'conspiracy fact'. As the WSJ reports this morning, the number of suits and potential liabilities are rising rapidly as cities, insurers, investors, and lenders all jump on the cabal-beating band-wagon. From individual investors claiming lost returns due to low rates to hedge funds squeezed in derivatives trades, liabilities could exceed $176bn as the blood-suckers lawyers note "this is just the beginning" as "scores of interested potential clients" have called. While, obviously, it won't be easy to win in court, the ongoing costs of litigation and potential liability (which will be largely ignored by Messrs. Bove et al. we are sure) range from Macquarie's $176bn estimate to Morgan Stanley's $7.8bn (quite a range) and it will likely take years for the lawsuits to see resolution. Notably though, floating-rate bond-holders are likely to have the most success (and easiest claim) as Darrell Duffie notes "assuming they can convince a jury Libor was too low, it's pretty easy to then show they were paid too little interest" but in the meantime, as CalPERS adds, "we await the regulatory investigations, which will drive the outcome" of litigation.

Yesterday, Jens Weidmann called it a "drug addiction"; for the past 4 years we have called it sheer insanity (and other less polite words). Whatever one calls it, it is obvious that using monetary policy to delay the need for real (not theatrical) fiscal policy involvement that sees to restore debt credibility (i.e., deleverage) does nothing to fix the underlying problems, and merely provides an ever briefer respite from the symptoms of insolvency without ever addressing the underlying cause. Today, even Bank of America has realized this fundamental Catch 22 that is now the paradox at the heart of what remains of capital markets: more easing serves to appease politicians, who see no need to change any of their broken policies, in the process requiring even more QE in the future, and so on, until this always ending in tears game of extend and pretend comes to a sudden and violent end.

While there are many answers to this rhetorical question, a key one is the schism that exists between the two media behemoths when it comes to the topic of the NEW QE, elsewhere incorrectly called QE3. While the now virtually daily missives from Fed mouthpiece Jon Hilsenrath, whom once has to wonder whether he is more of a part time worker at the WSJ or the New York Fed, are there to force markets ever higher each day, with promises that Bernanke will not sit idly by if the S&P were to ever close red (the S&P being a multi-year highs notwithstanding), and that as he stick saved the European close on Friday, the Fed has lots of additional capacity for more QE, Bloomberg actually has the temerity to ask: why do we need any more QE: after all so far all previous iterations have been a disaster. Sure enough, a few hours after Hilsenrath did his latest Fed planted piece in which he amusingly pretended to be objective about more QE and "sized up" costs of more QE, here comes Bloomberg in its daily Brief newsletter, with a far simpler question: why the hell do we keep doing the same idiocy over and over, hoping and praying to generate inflation, knowing full well if we do get inflation, with global central banks soon to hold half of the world's GDP on their books, it will promptly deteriorate to the "hyper" kind.