Archive - Jan 2013 - Story

Define irony? Here is one, or rather two, tries. Back in the 1970s, it was none other than the US that armed the Taliban "freedom fighters" fighting against the USSR in the Soviet-Afghanistan war, only to see these same freedom fighters eventually and furiously turn against the same US that provided them with arms and money, with what ended up being very catastrophic consequences, culminating with September 11. Fast forward some 30 years and it is again the US which, under the guise of dreams and hopes of democracy and the end of a "dictatorial reign of terror", armed local insurgents in the Libyan war of "liberation" to overthrow the existing regime (and in the process liberate just a bit of Libya's oil) - the same Libya where shortly thereafter these same insurgents rose against their former sponsor, and killed the US ambassador in what has now become an epic foreign policy Snafu. But it doesn't end there as according to Russia, it is the same US weapons that were provided to these Libyan "freedom fighters" that are now being used in what is rapidly becoming a war in Mali, involving not only assorted French regiments, but extensive US flip flops and boots on the ground. "This will be a time bomb for decades ahead."

Those wondering if Steve Cohen is attending the most epic of "economic forum" boondoggles elsewhere known as Davos (where for some reason Derek Jeter is present and accounted for) was just to get a hot tip, or to interact with the Swiss branch of Gerson-Lehrman, the one where not every conversation is being recorded by the feds, the answer is neither. The man, whose fund as most by now have been made aware is one turned informant away from greeting the men in gray coats on its front porch at 72 Cummings Road, is in Davos to learn about... "Resilient Dynamism."

UPDATE: *HOUSE HAS ENOUGH VOTES FOR DEBT-LIMIT BILL; VOTE IS CONTINUING

The House is now debating the "No Budget, No Pay" Delay-and-Pray bill debt-ceiling-extension and is due to vote around 1230ET. As CSPAN notes, the deal would raise the government's current $16.4 trillion debt limit until May 19. In exchange, the House and Senate must pass a budget resolution by April 15 or place members' salaries in an escrow account until the chamber acts. The bluff-calling continues...

Since Alan Greenspan became the Fed chairman in 1987, there has been a policy consensus on the primary role and effectiveness of monetary policy in cushioning an economic downturn and kicking it back to growth. Fiscal policy, due to the political difficulties in making meaningful changes, was relegated to a minor role in economic management. Staving off crisis and reviving growth still dominate today's conversation. The prima facie evidence is that the experiment has failed. The dominant voice in policy discussions is advocating more of the same. When a medicine isn't working, it could be the wrong one or the dosage isn't sufficient. The world is trying the latter. But, if the medicine is really wrong, more and more of the same will kill the patient one day. The global economy was a debt bubble, functioning on China over-borrowing and investing and the West over-borrowing and consuming. The dynamic came to an end when the debt crises exposed debt levels in the West as too high. The last source of debt growth, the U.S. government, is coming to an end, too, as politics forces it to reduce the deficit. Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth.

Uber-bullishness is the order of the day in the markets. Last week we noted that the DJIA has climbed to a new post-2007 high. And now, the “fear index” VIX is hitting lows (as we discussed in depth last night). This implies that the market has become dangerously euphoric, and that risk is being improperly priced. The last time VIX fell to an all-time low and market-confidence hit an all-time high, it presaged a financial crisis. This time may not be so different.

We have discussed Dallas Fed's Richard Fisher's money-where-his-mouth-is perspective on the world before and the (sadly) non-voting member is among UBS' Art Cashin's most respected and candid of the FOMC. A glance through the transcripts that Art highlights below should both make readers sick at the constant pollyanna-ish nature of Fisher's comrades and perhaps more confident that his insights will be listened to more astutely 'the next time' as he noted at the time "No amount of rewriting of history will exonerate us". Once again, after reading these transcripts, do we really believe that central bankers are omnipotent? or incompetent?

MARTIN SMITH: Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?

LANNY BREUER: Well, I think I am pursuing justice. And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there’s some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it’s a factor we need to know and understand.

As with every piece of potentially bad news in the here and now, the IMF provides some bone for bulls to gnaw on by offering hope that 2014 will be considerably better. What at first glance is a broad-based slashing of global growth outlooks for 2013 ends up being yet another hockey-stick expectation dangled out in front of the world's investors. With Europe now downgraded to a recession in 2013 (GDP -0.2%), we should not fear though as Olivier Blanchard adds that "If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected," and sure enough 2014 is expected to herald a new era of growthiness (GDP +1.0%) for the troubled region. He does offer one note of reality that is critical - "Financial market optimism should not lead to policy complacency" - alas we fear that time has long gone. World Trade Volume expectations have been ratcheted lower with Brazil and Newly Industrialized Asia seeing the biggest downgrades to growth.

I am sorry to tell you that whatever door that had been opened is now closed. America has turned the corner from the self-sufficiency of an individual to a new ideology for this country which is that incomes and life-styles should be equalized by taxes in the name of patriotism and for the greater good. The Socialism of much of Europe has arrived at our shores and spread from sea to shining sea and the safety net of decades past for our less fortunate citizens has been raised to a harmonization of social/governmental benefits regardless of hours worked or income earned. Stock markets rise, Treasury yields decrease, other bonds compress because there is no place off-world to invest money and it must be put somewhere. We are living in a fantasy world of the voters’ making and, I predict with some certainty, that we will all suffer the consequences of our decisions. The problem is extremely serious, answers are frustrating and aggravating and great care must now be exercised because this cliff is exceedingly steep.

A Chinese solar firm which nearly produced the country's first domestic bond default will complete an interest payment on schedule after a local government intervened on its behalf. Investors say the latest instance of a government riding to the rescue of a troubled Chinese firm has led to moral hazard and inefficient credit allocation. In previous near-defaults, local governments had stepped in directly to arrange bailout funding. But as in past cases, the deal flouts legal notions of debt seniority by allowing one group of creditors - bondholders - to get paid in full, even as a pre-existing default remains un-cured. Analysts say the market does not effectively price in risk because investors assume the government will never allow a default.

From 11-inch subways to under-quality coffee and from watered-down beer and fake beef, food fraud is on the rise. So what is food fraud anyway?  Well, it’s sort of what you would expect.  It’s when companies label food one way, but the truth turns out to be completely different.  I have been predicting an escalation in this trend for years, since it was obvious that as inflation led to increases in food prices, companies would resort to this type of behavior to keep margins inflated. So in their latest study, the non-profit food fraud detectives at the U.S. Pharmacopeial Convention (USP) show us the extent of this extremely dangerous trend.

One can only hope that mild concussion has not entirely wiped the frontal cortex from Secretary of State Clinton's brain and that we get some answers today. Prepared testimony (below) shows no use of the words 'take the fifth' or 'recollection'...

Last week, following documentation from Deutsche Bank (and Nomura), it became clear that Italy's Monte Paschi (BMPS) bank (the oldest in the world) has engaged in derivatives with the German and Japanese banks in order to save itself during the financial crisis. The derivatives, according to Bloomberg, were done off-market and allowed the booking of large upfront gains which covered losses optically that the bank faced as European liquidity dried up completely - the offsetting 'losses' are now coming due. Today, amid growing outcry over the 'deal', the former head of BMPS has resigned. Bloomberg reports that Giuseppe Mussari, now Italy's top banking lobbyist, was the Chairman of BMPS during the derivative deal period. BMPS shares were halted after plunging dramatically as investors are still unclear of the extent of losses it faces on derivatives. If that was not enough chicanery, there is a twist in that none other than Mario Draghi, as Director of the Bank of Italy, would have had to vet Mussari (and his banks' regulated books) during this period - as BMPS accumulated what is obviously undocumented derivatives positions to intentionally obscure losses. Once again, years later, it seems the truth comes out - and of course we would expect no-one to go to jail - and the lying in Europe (then and now) continues unabated - as the reality of financial system health remains hidden from view.

With the most recent Spanish economic data in retail sales, house prices, manufacturing, and bad loans all confirming depression-level activity, or lack thereof, there was just two major metrics still missing: GDP and employment. Today we got Q4 GDP, which declined 1.7% Y/Y, and 0.6% from Q3. This was the worst year over year deterioration in the overall economy since Q4 2009 when the country was reeling from the Lehman bankruptcy global aftershock. We just need to get the unemployment number, which will be well north of 26%, for the picture of how the country with the ECB-backstopped and thus soaring bond curve is truly doing.

Heading into the North American open, equities are trading in minor negative territory, led lower by banks as markets look forward to the first LTRO repayment, as well as lingering concerns that losses from derivatives contracts by Monte Paschi (entered with Nomura) may undermine the lender’s earnings. Monte Paschi shares opened 8% lower and were halted by the exchange to prevent a further slide in share price. As a result, even though EUR/USD is trading higher and peripheral bond yield spread are tighter, Bunds are trading in minor positive territory. Of note, Spain’s Iberian neighbour Portugal opened books for its 2017 bond and books are said to be around EUR 10bln, with guidance at MS+395bps (down from original MS+410bps). EUR/USD has also benefited from the decision by the Portuguese Treasury to tap capital markets only a day after a successful placement by Spain yesterday. Looking elsewhere, even though USD/JPY has bounced off earlier lows, implied vols continue to trade heavy as option decay and re-positioning post the BoJ decision weighs on prices. So much so that R/R has slipped to Sep levels, but still favours bets on further JPY depreciation.