Archive - 2012 - Story

As in any other Ponzi scheme, when the weakest link breaks, the chain breaks. The risk of such a break-up, applied to economics, is known as systemic risk or “correlation going to 1”. As the weakest link (i.e. the Euro zone) was coupled to the chain of the Fed, global systemic risk (or correlation) dropped. Apparently, those managing a correlation trade in IG9 (i.e. investment grade credit index series 9) for a well-known global bank did not understand this. But it would be misguided to conclude that the concept has now been understood, because there are too many analysts and fund managers who still interpret this coupling as a success at eliminating or decreasing tail risk. No such thing could be farther from the truth. What they call tail risk, namely the break-up of the Euro zone is not a “tail” risk. It is the logical consequence of the institutional structure of the European Monetary Union, which lacks fiscal union and a common balance sheet.... And to think that because corporations and banks in the Euro zone now have access to cheap US dollar funding, the recession will not bring defaults, will be a very costly mistake. Those potential defaults are not a tail risk either: If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults. The fact that they shall be addressed with even more US dollars coming from the Fed in no way justifies complacency.

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population. But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not. Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance). And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

In the hours following the release of the latest Flow of Funds statement on Thursday, some of the glorified powerpoint-cum-statist tabloid media outlets released a very disingenuous and flat out wrong comparison of household net worth to total US debt (even though technically total US GDP was showed, although the two are now interchangeable with total US Debt having surpassed total US GDP).  Supposedly this was intended to demonstrate the "net worth of America is massively positive" and that America is "not even close to being broke." Of course, by doing so they merely confirmed once more their complete cluelessness when it comes to the debt market, as US household net worth (source) is the direct beneficiary not just of sovereign debt, but certainly all on-balance sheet debt verticals in existence which include, again from the Flow of Funds report tab L.1, household, non-financial corporate, non-financial non-corporate, financial and rest of world debt. The grand total is also conveniently tracked by the Fed in the Total Credit Market Debt Owed category (source) which in the last quarter was $55.3 trillion: just "modestly" above the $16.3 trillion strawman of merely US Federal debt. Comparing this to the $65 trillion in household net worth certainly gives a far less rosy picture of just how "massively positive" net worth of America is.

Update: As expected, there is a "but"

While this still has to be confirmed by official Egyptian sources, both Al Jazeera and Al Arabiya are reporting that in what may be a first time in history, a "temporary" dictator - Egypt's Mohamed Morsi - has decided to end his temporary status and become one of the ordinary people again, having rescinded the much maligned decree giving him sweeping powers that brought the country to the edge of civil war and martial law less than two years after the Arab Spring removed Hosni Mubarak from decades of Egyptian rule.

In what is the day's most overhyped piece of non-news, we go to Italy to learn what many already knew on Thursday, namely that with the loss of support of Berlusconi's PDL party, Mario Monti's technocratic government, which correctly "feels" it lost its parliamentary support, is coming to an end and after a two hour meeting between the former Goldman advisor and Italian president Napolitano, Monti announced he "intends to resign after checking to see if parliament can pass next year's budget law, President Giorgio Napolitano's office said on Saturday... If the budget law can be passed "quickly", Monti said he would immediately confirm his resignation. Monti's announcement came after a two-hour meeting with Napolitano, who has the power to dissolve parliament." The reason this is non-news is that Monti government's tenure is ending in a few months anyway, and general elections are coming in Q1 regardless. In other words, it may take weeks or months for the budget law to pass, or not, at which point it will be time for new elections anyway.

Tim Geithner's time is almost done, but the former NY Fed head is only one of very many whose position is expected to be replaced in Obama's second term (just so there is a non-continuous chain of command if and when the time comes for the people to demand an explanation for the state of the US economy from the talented Mr. Geithner). Who else is out and who is expected to be in? The following list attempts to cover all upcoming rotations at the top of the US cabinet. What is not attempted is a prediction of where in the private sector people such as Geithner will end up: that is considered largely self-explanatory.

Update: The devolution is complete as Egypt declares martial law.

It was only a matter of time before Egypt's US-endorsed temporary dictator resolved to what will be spun as temporary military intervention against what is increasingly looking like a permanent counterrevolution by deploying the army to crush local protesters who have besieged the Egyptian presidential palace for almost a week, and have put the country's new "democratic" regime increasingly under threat of collapse.  RT reports that "Egyptian President Mohamed Morsi will authorize the deployment of the country's armed forces to quash protests in Cairo, al-Ahram reported. The military said prolonging the crisis would be "disastrous,” and that they would not tolerate violence. At least six people died and hundreds were reported injured over the last few days in the unrest that has gripped the Egyptian capital since late November. Al-Ahram reported that the armed forces will be given powers of arrest, previously an exclusive right of the police."

When trying to get a handle on investor sentiment, the benchmark of choice for many market-watchers is the CBOE S&P 500 Volatility Index, or VIX. However, this popular “fear gauge” only offers a snapshot of implied volatility, or relative pricing levels, for equity index options, which might not necessarily tell us all we need to know about the mood on The Street.

Bloomberg's Joshua Zumbrun has released a much overdue, MSM apocryphal, somewhat realistic outlook on the endspiel of Bernanke's central planning: i.e., the unwind of the Fed's balance sheet that from just under $3 trillion will reach $5 trillion by the end of 2014. We say "somewhat" because the conclusion in the article is that there is some hope still for an orderly wind down of the Fed's assets without a complete market collapse. The reality is that there is no such hope.

It is no secret that for many years the SEC has been looking into ways of taking down the most infamous of all "information arbitrage" abusing hedge funds: Steve Cohen's SAC Capital, a quest that has finally accelerated to its inevitable terminal point weeks ago. Of course, had the SEC been reading Zero Hedge, the time to get to that critical civilian conviction would have been far shorter. But where the SEC was demonstrating ongoing incompetence, its peer organization - one with all-important criminal enforcement powers - the FBI, was actually several steps ahead, and as Bloomberg reports, is now probing specific trades by SAC, a process which very likely will culminate with criminal charges against one or more people not at CR Intrinsic, but SAC itself. Of course, by several steps ahead, we do mean two years behind Zero Hedge.

Being forced to endure and survive a catastrophic macro event like a monetary or social collapse is perhaps one of the worst experiences I could imagine.  Such a crisis leads to just about every crime and inhuman action in existence, and, the time required for a culture to right itself and rebuild is severely protracted.  A hurricane or earthquake or tidal wave; these calamities are short lived and easy in comparison.  The point is, as survivalists who are preparing to make an economic end-game scenario as “comfortable” to live through as we can, it is incumbent upon us to consider the kind of company we keep during the gambit.  Some allies will make that mad world bearable; others will bring the madness to your doorstep.

Following the passage of ObamaCare, several of the smartest people I know claimed that the bill was actually written by and for the drug and insurance companies rather than “the people” as Obama had claimed. In recent days it has emerged that Liz Fowler, who is said to have been one of the key architects of ObamaCare, is doing what any good revolving door crony capitalist would do.  She is moving to the private sector to receive her payoff. Revolving door on Wall Street.  Check.  Revolving door at the Pentagon.  Check.  Revolving door in Healthcare.  Check mate.  Welcome to America.  Check your freedom at the door.

We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Inflation is a political phenomenon because monetary aggregates are not determined by market forces but are planned by central banks in agreement with governments. Inflation is a tax affecting all real incomes. Inflation is a precondition of extreme deflation: depression. Should in fact the overall debt collapse, there would be an extreme deflation or depression because the money aggregate would contract dramatically. In fact the money equivalent to the defaulted debt would literally vanish. It is for this reason that central banks monetize new debt at a lower interest rates, raising its value. All the financial bubbles and the mass of derivatives are just the consequence of debt monetization. How will this all end? In history, debt monetization has always produced hyperinflation. In Western countries, despite the exponential debt a runaway inflation has not yet occurred. Monetary policy has only inflated the financial sector, starving the private one, which is showing a bias towards a deflationary depression. Unfortunately governments and banks will go for more inflation. As history teaches, besides money the freedom of citizens can also be the victim.

According to Reuters: "Canadian authorities have approved the acquisition of Nexen Inc by China's CNOOC Ltd, a source familiar with the matter said on Friday." It appears Canada decided against infuriating Chinese M&A overtures after all, imminent protecetionist political kneejerk reaction notwithstanding.