Archive - Aug 2012 - Story

There was a time when getting a stable, lucrative financial job meant working for a hedge fund, preferably in the risk department. It still does: the biggest and most profitable hedge fund of all - the Federal Reserve - as well as its various adjunct "all P no L" offices, and judging by the spike in recent job wanted posting by said hedge fund et al, things are looking up for those who want to manage taxpayer funded "risk." For the job seekers our there disillusioned with a 2 and 20 model that no longer works in the new central planning normal, get involved. As for why the Fed would suddenly be fascinated with risk now, after its DV01 is well over $2 billion, we have no ready answers.

Around 1000 people per day are still losing their jobs in Greece with the percentage of the population not working now uncomfortably larger than those who are employed. This is creating drastic - or perhaps more aptly philosophical - reflections by its people. As the BBC reports, the feeling in Greece is that a "whole generation is on hold" and there is a growing trend towards the creation self-sustaining eco-communities - free of the ties of money and modern civilization. "What others saw as a global economic crisis, [Greeks] saw as a crisis of civilization" and so they are trying something different, growing their own food, bartering with one another, and exchanging surpluses with other villages. The community calls itself "Free and Real" - an acronym for Freedom of Resources for Everyone, Respect, Equality, Awareness and Learning - and it is growing as a stunning 76% of Greeks would like to emigrate. The positivist angle notes that the Greek crisis is not all bad as it shows the lives we are leading are not working and Greeks can "begin to look for alternatives." Everyone is stressed; but "Being able to work is a basic human right in a civilized society, if the government won't provide us with it then we will have to fight for it."

There is plenty of talk about the looming Fiscal Cliff, but like so many other downside risks in this market, investors are not positioned for it as they appear convinced that it won't be allowed to happen or some compromise will occur. We remain on the side of the fence where nothing will occur; no compromise reached, until the governement is 'forced' by the market to take action - by some asset value plunge that scares then into scramble mode. Unfortunately, as these two simple charts from Morgan Stanley highlight, gridlock appears guaranteed (but then again, with a market economy at multi-year highs the incumbents remain dominant).

A weekend article from Der Spiegel has been the centre of must attention this morning amid a light economic calendar on both sides of the pond. The article reported that the ECB would set limits to the yields of periphery country debt and intervene should these limits be breached. This weighed on the German Bund from the Eurex open and saw the Spanish curve trade lower by 25bps to 35b ps, as well as buoying the EUR currency and riskier assets in early trade. Risk-on moves in EUR and DAX futures were retraced as the ECB denied these reports, saying that it was misleading to report on decisions not yet taken, though it will act within its mandate. A German finance ministry spokesman also denied all knowledge of the reports a short while before hand. Furthermore, the latest monthly bulletin from the Bundesbank that once again reiterated the disapproving German stance toward the ECB's controversial bond-buying programme also dampened the mood.

Silver, wine, art and gold – or SWAG – may be the solution for investors looking to protect their wealth in the coming years according to perceptive Reuters Columnist, James Saft. In an interesting article and an interesting video for Reuters, Saft coins the term “Investing 201” which means having SWAG in your portfolio in order to protect investors from “a grim decade of money printing and financial repression.” SWAG, as in silver, wine, art and gold, are real assets that might just outperform if official policy causes the money supply to surge according to Saft. This is the idea of Joe Roseman, who says SWAG will do very well over what could be a very troubled next decade. "These assets effectively act as a money supply index tracker," said Roseman, who for 16 years was a money manager and economist at Moore Capital, run by the legendary Louis Bacon. "If the authorities are going to bail themselves out, money supply will expand. Every single time governments have been here, this is exactly what they have done."

Buy everything I say without limit. Leverage each purchase to the maximum allowed under the law. The markets will only go up and not down and 100,000 is the next stop for the S&P. It is to be Dow without Jones, assets without liabilities and wealth without poverty. The Middle Class has been evacuated and everyone is wealthy beyond belief. It is just there, of course, that the truth lies in this merry old land, “beyond belief.”

"I like fantasy---it wakes up the brain cells.”

- Dr. Seuss

The market has reached a level where only recurring hopes and prayers of incremental monetization and easing by one or more central banks have any impact. For the past two months it has been primarily the ECB which continues to talk a lot but do nothing, with infrequent and false speculation that the Fed will step in during the annual Jackson Hole pilgrimage in 10 days and add more reasons to send gasoline to all time highs for this time of year 2 short months ahead of the election. It won't. Which always left the PBOC. However, as we have repeatedly explained, concerns about food inflation have and will keep China in check for a long time. The market finally appears to have grasped this last night, when the regional Asian markets reacted accordingly, and the dour theme has merely carried over into Europe and now the US, especially following the ECB's sound refutation of the Spiegel fishing expedition.

• Caterpillar warns on global uncertainty (FT)
• Only 3 years behind the curve as usual: Moody’s warns on California city defaults (FT)
• Monti Says ‘Tragedy’ If Euro Became a Factor of Disruption (Bloomberg) - the same Monti whose disruptive comments recently enraged Germany?
• China Home Prices Climb in More Cities Prompting Policy Concerns (Bloomberg)
• China's Big Four boost new bank loans in Aug first half (Reuters)
• EU Leaders Plan Shuttle Talks to Bolster Greece (Bloomberg)
• US rule set to slash cars’ fuel use (FT)
• Spain Seeks Commitment From Central Bank on Bond Buys (WSJ)... and preferably completely unconditional
• Finnish Euro Doubts Hide Business Plea to Commit to Currency (Bloomberg)

We said hours until the latest ECB rumor was dismissed. We meant minutes:

• ECB SAYS BOND YIELD TARGETS HAVE NOT BEEN DISCUSSED BY THE COUNCIL.
• ABSOLUTELY MISLEADING TO REPORT ON DECISIONS NOT YET TAKEN
  
• WILL ADHERE STRICTLY TO ITS MANDATE

Socialists everywhere crushed. And now, time for Spiegel to cite "unnamed sources" that the EFSF is going to use 3-4x leverage... Just like last year. Because the broke continent can't even come up with new bullshit any more so must recycle.

For whatever reason, yesterday's unsourced Spiegel report that the ECB is actually contemplating open-ended monetization with arbitrary yield targets on various European nations is the talk of the town, if only for a few more hours until, just like last year, the proposal is summarily dismissed, only to be reincarnated once Spanish yields pass north of 8% again. In the meantime, it has allowed those very well paid sell-side strategists to present their erudite opinions, which naturally do not matter in the grand (and not so grand) scheme of things as long as Germany sticks to the 9-9-9 plan.

And to think that the market could have learned its lesson by now. Following the planting of an unsourced, glaringly obvious ECB propaganda report such as that attempted yesterday in Der Spiegel, in which nothing of substance was in fact enacted or even proposed (as rate caps is merely a regurgitation of ideas thrown out previously in the summer and fall of 2011), peripheral bonds once again tightened on absolutely nothing, with the Spanish 10 Year now back in the 6.30% territory, over 100 bps inside where it was a month ago. On not a single enacted reform or actual ECB action. Of course, it was a matter of hours before the German FinMin put an end to this latest rumor, and sure enough an hour ago a spokesman for the German FinMin said they were unaware of any ECB plan to target bond spread. Perhaps because there are none? And of course, if there were, the Germans would promptly put an end to what is my implication an open-ended bond buying program without conditionality: something that worked like a "charm" last summer with Italy. And just to make sure Germany's message was read loud and clear, here is the Bundesbank turning on the "just say 9" machine.

When China started tightening policy to fight inflation, almost no one thought that it would slow the economy to what China is in right now. When China started imposing ever more aggressive real estate prices curb, some people believed that that it would not make home prices drop (because there are many people in China, and urbanisation, etc), and even less believed that it would slow the economy to what China is in right now. When China started to slow down more than most thought, almost no one thought that it could be a big problem, while some thought that the slowdown was “engineered” to fight inflation.  Because it was an intentional slowdown, not many people believed that it could get much worse. Digging deeper, we have not found much good reasoning behind those who insist on the uber-optimistic case, and most bullish arguments can be boiled down: "This is China.  China is different.  Don’t ask, just buy."

"Greece set a precedent for 'Here's what you're going to get, take it or leave it'" is how the WSJ summarizes an analyst's 'shocked' thoughts on the growing game of 'call my bluff' being played among beggars being choosers. Belize is surprise surprise running out of money to pay its debts and is insisting that creditors forgive 45% of what they are owed - OR allow it to delay any debt payments for 15 years (yes, seriously, read that again) - leaving a default on the country's $543.8mm almost inevitable. Three things stand out to us: 1) the nation's government shunned bondholders by simply posting a note on its website that it would be 'skipping a payment' as opposed to telling creditors directly; 2) none other than 'Long GGBs are the slam-dunk trade-of-the-year' Greylock Capital are "mystified" that yet another trade has gone pear-shaped adding that they are "sure every country could benefit from not paying their debt but this isn't the way to do it!"; and 3) this would be one of the worst restructuring terms ever as the "Greek effect" could inspire other countries to pursue restructurings on more favorable terms - especially given that: "Even if you don't need a restructuring you can force one upon bondholders because it's so hard to recover money from a sovereign who won't pay,"