Archive - Feb 6, 2013 - Story

Some thought the irony of a Treasury Secretary who cheated on his taxes was extreme but Germany has gone one better as the nation's Education Minister has just been stripped of her PhD due to plagiarism. As Spiegel Online reports, the University of Düsseldorf has revoked German Education Minister Annette Schavan's degree because "she systematically and deliberately presented intellectual efforts throughout her entire dissertation that were not her own." As such, she was guilty of "intentional deception through plagiarism." Schavan is yet to resign from Merkel's Cabinet. What next? A skeet-shooting gun tzar, a job tzar responsible for thousands of jobs losses while in the private sector, or a Nobel Peace Prize winner building a drone army.

While it is a time-honored tradition that every single person who worked with Tim Geithner, usually on spotless terms, never daring to say one word out of place for fears of offending the former Treasury Secretary and jeopardizing their government salary, has upon exit from the public sector penned a book bashing none other than the Tax-challenged former head of the New York Fed (whose leaks of imminent Fed activity will never be investigated by any US judicial body), it is certain that Tim Geithner's upcoming book will have a different subject. And since the centrally-planned US population is always glad to help out with ideas, today's key trending hash-tag in twitter is none other than #geithnerbooktitles, which as the name implies, is the collective twitter subsonciousness' proposal for what Timmy's new book should be called. The real time list is presented below. Readers are naturally encouraged to provide their own suggestions.

16 point 7 trillion dollars.  That is our current national debt.  12 point 8 trillion dollars.  That is the amount households carry in mortgage and consumer debt.  We are now addicted to debt to lubricate the wheels of our financial system.  There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems.  At the core of our current financial mess is how we use debt as a parachute for any problem.  We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades.  The results were not positive. People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry.  Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans.  When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion. Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.

The coincidental resurrection of Bunga Bunga boy Berlusconi, amid financial and political fraud allegations (and facts), appears to have struck fear into the heart of European investors. The Draghi 'promise' seems to be getting ready to be tested as 'populist' Berlusconi closes the gap on his adversaries in Italy's election - and with it brings the threat of an end to austerity and any sense of stability in the new normal fiscal and political calmness that has 'apparently' existed for a few months. As the chart below indicates, via Bloomberg, as interest has risen in Berlusconi, so stocks (and Italian credit markets) have plunged at their fastest pace in five months. Recent polls by Sky Italia show the gap narrowing every week as the Monti Paschi debacle drags more and more of Europe's elite into its quagmire. The critical aspect of this renewed 'fear' is the thesis supporting much of the world's risk-assets is predicated on a few fulcrum securities in Europe indicating a cessation of tail risk - with Italian bond yields at six-week highs, concerns are starting to show.

Nearly a month ago, the first expose on a previously secret money-losing derivative at Italy's Banca dei Monte Paschi emerged and nobody took notice. A few days later a second derivative emerged, and the market finally paid attention sending the stock plunging and political spirits in Italy stirring due to the repeatedly bailed out bank's close ties to the leading Italian Democratic Party. Then a third and a fourth derivative emerged. This, of course was just after Italy's Finance Minister Grilli assured everyone that Monte Paschi is "solid", that oversight of the bank was "continuous and thorough", that "aid was not to help an insolvent bank" and most hilariously, that "the Italian banking system is unique for no bailouts" (except for all the bailouts as Rajoy might add). It was also after various assurances that the first two derivatives were all there was, that Mario Draghi did not know about any of this, until it was revealed he knew years ago, and that no other banks would be impaired. Well, while we still don't know how deep the derivative rot has spread in Italy, but it is guaranteed it does not stop at BMPS, we have now learned of yet another derivative, this time with JPM, that the bank had lied even more, and also that the previously loss estimates for Monte Paschi were, naturally, optimistic and that the final loss may be up to (or over) €1 billion.

In yet another day marked by simply unbearable propaganda, about an hour ago an EU official pulled a Lanny Breuer and was quoted as saying that "things are going well" in Greece. Oh are they? Then perhaps the same official can explain why a clip of a scuffle breaking out at a free food handout in Greece, where one man was "trampled and injured", and where a "Reuters photographer was hit on the head with cauliflower heads" has been the most watched item on Greek TV in the past day?

It seems the repayment of LTRO funds had quite a significant 'deleveraging' effect on the world's easy policy central bank balance sheet expansion. In USD terms, global central bank balance sheets have just experienced their biggest 4-week plunge since July 2009. Gold, like credit markets and European stocks, which have all underperformed US stocks, it appears merely discounted expectations of a drop in liquidity. We humbly suggest the momentum fueled, rotation-meme-driven, retail-is-in-now, US equity markets are due to meet their liquidity-maker sooner rather than later - if history is any guide. While, of course, the central banks' balance sheets are expected to expand (infinitely if they are to be believed), it would appear markets are stuck in the short-term for now (as opposed to discounting the future). Certainly the dramatic drop in central bank liquidity has had an effect in Europe as (led by credit) equity markets are well off their highs.

Down over a point in the long bond. Up almost a point in the long bond. Equities down more than 100 points. Equities up almost 100 points. All of this in the span of two days. Nothing was particularly new; no event popped up on the radar screen, no black swan swopped in from the horizon to startle the markets and anyone observing the markets may well ask, reasonably ask, just what the heck is going on. First, in my mind, we are getting a pretty good signal that the markets are running out of steam and that the collective vision of the way forward is murky. We are in a fragile state; near a tipping point. Please remember, however, that there are two components to additional debt and the markets have only focused on one side of the equation which is the interest rate variable.

We had to reread this DOJ statement on today's RBS wristslap twice, as the hypocrisy was literally mind-blowing: “As we have done with Barclays and UBS, we are today holding RBS accountable for a stunning abuse of trust,” said Assistant Attorney General Breuer.  “The bank has admitted to manipulating one of the cornerstone benchmark interest rates in our global financial system, and its Japanese subsidiary has agreed to plead guilty to felony wire fraud.  The department’s ongoing investigation has now yielded two guilty pleas by significant financial institutions.  These are extraordinary results, and our investigation is far from finished.  Our message is clear:  no financial institution is above the law.”

Conjuring Kyle Bass' recent explanation of the massive surge in the nominal price of the Zimbabwean stock market enabling the purchase of only 3 eggs, much is being made of the surge in Japan's Nikkei index (overnight up ~3.8% and the last few months). It would appear that, as we noted recently, the world forgets (quite readily) that 'real' and 'nominal' returns are quite different. With JPY collapsing at its fastest rate in a decade (relative to fiat and hard currency) to 33-month lows, is it any wonder that the nominal price of the stocks that represent the nation are surging to keep their 'value'. In nominal terms, NKY is at its highest since 2008; in real (gold) terms, it is laboring at its lowest since 1984 - which do you trust to judge your wealth?

When it comes to estimates of China's growth rate, we could go with the local politburo propaganda which even China itself has admitted is goalseeked worthless drivel fit "only for reference", or we could listen to a megacap CEO, who actually is on the ground and whose business model depends on accurately predicting the underlying economic reality of the world's biggest nation. We chose the latter, in which case we now know that China's 2012 GDP growth was only 3-4%, half the reported 7.8%.

Well that didn't take long. It appears spending time with the family is over-rated (or perhaps they couldn't stand him either) as Turbo Timmy has landed his first post-Treasury gig (Citi next?). The Council of Foreign Relations has graciously brought this "tireless and creative" thinker on board as a Distinguished Fellow. His role... "to strengthen their capacity to produce thoughtful analysis of issues at the intersection of economic, political, and strategic developments." We assume this is his gracious 'giving back' phase before six-months down the line slithering over to the big bucks at a bank when he suspects no one will be looking... The mutual adoration society continues...

Six months after the Barclays epic wristslap in which there were none - zero - criminal charges against Libor manipulators, it is time to trot out the same old theatrical song and dance again, this time focusing on bailed out RBS, which the CFTC just fined a whopping sum of $325 million, modestly less than the $16 billion profit the bank made in 2007, followed by the epic subsequent collapse which saw $104 billion in bailouts to keep the bank afloat courtesy of Biritsh taxpayers. In other words: manipulate the world's most sensitive credit-related metric, and you will see either 5% of your peak profits deducted, or we will force you to get even more bailouts.

Platinum prices have already risen by more than 12% so far in 2013, following the same advance for all of 2012. Platinum supplies have fallen to a 13-year low as mines in South Africa, the world’s biggest producer, close and the platinum industry is in crisis due to industrial unrest, geological constraints and sharply rising costs. Global production will drop 2.7% to 5.68 million ounces, the least since 2000, according to Barclays Plc, which raised its 2013 shortage estimate sixfold last month after Johannesburg-based Anglo American Platinum Ltd. (AMS) said it plans to idle shafts.  Anglo American Plc’s platinum unit, the largest producer, last month proposed the halt of four mine shafts that would cut about 7% of global production. At the same time, demand from carmakers, the biggest consumer of the metal, will increase 0.5 percent in 2013, Barclays says.  Perhaps, most importantly investors are buying platinum at the fastest pace in three years and yet holdings of platinum remain very, very small. Global production of the metal will fall as South African output drops 3.4% to a 12-year low of 4.11 million ounces, Barclays estimates.