Archive - Aug 2012 - Story

The very vocal head of the world's largest bond fund has long been critical of the global ponzi system better known as the "capital markets." Now, finally, he shifts his attention to Europe, where the interests of his parent - Europe's largest insurance company Allianz are near and dear to the heart, and deconstructs not only the biggest challenge facing Europe: getting access to your money, but also the fatal flaws that will make achieving this now impossible. To wit: "Psst! Investors – do you wanna know a secret? Do you wanna know what Angela Merkel, François Hollande, Christine Lagarde and Mario Draghi all share in common? They want your money!" .... but... "private investors are balking – and for what it seems are good reasons – because policy makers’ efforts have been, until now, a day late and a euro short, or more accurately, years late and a trillion euros short." And so they will continue failing ever upward, as permissive monetary policy which allows failed fiscal policy to be perpetuated, will do nothing about fixing the underlying problems facing the insolvent continent. Then one day, the ECB, whose credibility was already massively shaken last week, will be exposed for the naked emperor it is. Only then will Europe's politicians finally sit down and begin doing the right thing. It will be too late.

• Monti Warns of Euro Breakup as Tussle Over Spain Aid Hardens (Businessweek)
• Italy doesn't need German cash, Monti tells Germans (Reuters) - at least we know who needs whose cash...
• Spain has time to Wait for Clarity on EU Aid -Econ Min (Reuters) - which came first: the Spanish bailout request or the denial to need a Bailout request? Ask the Spanish 2 year...
• Bundesbank Weidmann’s opposition to a proposed new wave of ECB bond purchases has support of Merkel’s CDU - Volker Kauder
• China media tell U.S. to "shut up" over South China Sea tensions (Reuters)
• Top Chinese Leaders Gather in Annual Summer Conclave (WSJ)
• Greece Agrees With Troika on Need to Strengthen Policy (Bloomberg)
• Coeure Says ECB Should Look at Getting Loans Into Real Economy (Bloomberg)
• Italy Central Banker Sees Potential Rate Cut as Euro Economy Slows (WSJ)
• A Dose of Dr. Draghi's 'Whatever It Takes' (WSJ)
• Greek bank head sent savings abroad (FT)

Even as the ECB is desperately doing its best to stick a finger in every hole in the leaking European dam, in which just like in the US failed monetary policy is a substitute for sound fiscal one, and in which the pattern of interventions and cause and effect will now follow that of Japan until the bitter end, others are not waiting around to see the results. Reuters reports that Royal Dutch Shell is pulling some of its funds out of European banks "over fears stirred by the euro zone's mounting debt crisis, The Times reported on Monday." And shell is not the only one: more and more institutional are actively preparing to lock up their cash on a moment's notice, an eventuality which can be seen best at the ECB itself, where deposits with the ECB (collecting 0.00%), dropped to just €300 billion the lowest since 2011, while the ready for withdrawal current account saw holdings rise to a record €550 billion overnight, a €20 billion increase overnight. And so the cycle repeats anew, and Gresham's law rises to the surface, as bad money pushes out good money, and in return the situation deteriorates once more, until the next time much more than just harsh language out of the ECB will be needed just to preserve the status quo.

Human nature hasn’t changed in centuries. We have faith that humanity has progressed, but the facts prove otherwise. We are a species susceptible to the passions of power, greed, delusion, and an inflated sense of our own intellectual superiority. And we still like to kill each other in the name of country and honor. There is nothing progressive about crashing the worldwide economic system and invading countries for “our” oil. History has taught that there will forever be manias, bubbles and the subsequent busts, but how those in power deal with these episodes has been and will be the determining factor in the future of our economic system and country. Humanity is deeply flawed; the average human life is around 80 years; men of stature, wealth, over-confidence in their superior intellect, and egotistical desire to leave their mark on history, always rise to power in government and the business world; this is why history follows a cyclical path and the myth of human progress is just a fallacy.

After last week's event-a-palooza, where the headlines, the spin, the erroneous HFT trading, and the propaganda (Draghi is too cold; Draghi is too hot; Draghi is just right) just refused to stop, we finally enter the summer proper where all of Europe is on vacation, as is congress. Add on top of this a very light macro event week and an earnings season which has seen the bulk of companies already report, and we expect the volume in the coming 5 days to be among the lowest recorded in 2012, and thus in the past decade. Which of course means that the cannibalization among the market makers will continue as more and more firms succumb to "trading anomalies."

In what may be the most amusing news of the day, according to the FT the CFTC will shortly drop its 4 year old investigation into silver manipulation, "after US regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation." How about evidence to support an "illegal" case? Of course, that this is happening after the recent discovery that the world's most pervasive fixed income benchmark was manipulated for years, if not decades, can only be reason for laughter and wonder if the CFTC used the same assiduous diligence methods in pursuing the alleged perpetrators of precious metal manipulation as it did in letting the fraud at PFG slip through its fingers for two decades. We will probably never know, or at least not until an email mentioning bottles of Bollinger and silver price "fixing", (or "banging the close" for that matter) in the same sentence inexplicably turns up and makes a complete mockery of the CFTC yet again.

According to CNBC's David Faber, Knight Capital will live at least for another day and avoid bankruptcy. Instead, it will experience dilution which will make its equityholders almost wish the company was filing. Knight, via Jefferies, is about to stick its shareholders with a massive dilution following the issuance of a $400 million convert bond at a $1.50 conversion price, or more than 60% dilution from Friday's $4.05 closing price. This means the pro forma share count will soar from 90 million to 350 million upon conversion, which as David Faber says, will take place promptly by all members of the syndicate after 10 business days. In other words, KCG just issued stock at a ~63% discount to new money.

Remember late-2010? When Spain wasn’t a problem, but merely a potential problem? I do. Back then, the general opinion was that if the contagion spread to Spain the game was over because there wasn’t enough money with which to bail out an economy the size of The Kingdom of Spain. I’m not sure exactly what happened— maybe I wasn’t paying attention—but suddenly, almost two years on and in an environment where even the rich nations of Europe are seeing an undeniable slide towards recession, there is no talk about Spain being ‘too-big-to-bail’ anymore.

Did somebody repeal the laws of mathematics?

Update via CNBC:

• CITADEL, KRR SAID NO LONGER TO BE LOOKING AT KNIGHT
• KNIGHT CAPITAL CLOSE TO FUNDING DEAL, CNBC'S KATE KELLY SAYS
• KNIGHT MAY GENERATE ABOUT $400 MLN FROM INVESTORS, KELLY SAYS
• GETCO, TD AMERITRADE LIKELY PART OF INVESTMENT GROUP: KELLY

Knight Capital is scrambling: it has a few hours to convince any potential suitors that it is worth some $300 million more alive than having its carcass picked off at a cost of $0.01 over its debt (which itself will likely be materially impaired) in a Chapter 11 Stalking Horse sale. If the Sunday before the Lehman, and MF Global, bankruptcy filings is any indication, the third time will not be the charm for the company whose 1400 employees may have no place to call work at 9am tomorrow. Sadly, in a world in which entire countries and continents have taken on the patina of Schrödingerian felinism, constantly shifting between alive and dead states depending on who is looking, we would take the under on the probability that the firm's lawyers will not be visiting 1 Bowling Green at some point in the next 16 hours.

Rather than give the people a voice, democracy allows for the choking of life by men and women of state authority.  When Occupy protestors were chanting “this is what democracy looks like” last fall, they wrongly saw the power of government as the best means to alleviate poverty.  What modern day democracy really looks like is endless bailouts, special privileges, and imperial warfare all paid for on the back of the common man. None of this is to suggest that a transition to real democracy is the answer.  The popular adage of democracy being “two wolves and lamb voting on what’s for lunch” is undeniably accurate.  A system where one group of people can vote its hands into another’s pockets is not economically sustainable.  Democracy’s pitting of individuals against each other leads to moral degeneration and impairs capital accumulation.  It is no panacea for the rottenness that follows from centers of power.  True human liberty with respect to property rights is the only foundation from which civilization can grow and thrive.

For a presidential election taking place when the US debt/GDP has for the first time in 70 years crossed above 100%, in which over 50 million Americans collect food stamps and disability, in which M2 just crossed $10 trillion, in which total US debt is about to pass $16 trillion, and when total nonfarm employees in America (133,235,000) are the same as they were in April of 2005, it is quite surprising that economics has not taken on a more decisive role in the electoral debate. But while both candidates may, for their own particular reasons, not want to bring up the slow motion trainwreck that is the US economy now, in 4 years whoever is running for president will not be so lucky, because as the US debt clock shows, assuming current rates of progression, things are about to get far, far worse.

A year ago, the budget “deal” concocted between Mr Obama and his Congress was ballyhooing a “plan” to cut $US 1.2 TRILLION off annual budget deficits over a DECADE. Now, the projection for the 2012 budget is that the US government will add that amount to the funded debt of the US Treasury over ONE YEAR. This would be hilariously funny if it wasn’t so tragic. What is even funnier - and more tragic - is that the entire world is “depending” on the people who concoct this stuff.