Archive - Jun 2013 - Story

Late last week, Detroit's emergency manager Kevyn Orr, outlined his plan to stop a disaster becoming a catastrophe in the slumping city. The initial suspension of payment on pension obligation bonds is just the start as Orr warns unsecured creditors may only receive up to 10 cents on the dollar as about $2.5 billion in general unsecured debt won't be recovered. Rather incredibly, the city's General and Police and Fire retirement systems have a combined underfunding of $3.5 billion made worse by "aggressive actuarial assumptions," and "investing in risky development projects around the city and loans that will never be repaid." Under more realistic assumptions the funding status of the two pensions drops from 83% and 100% to 65% and 78% and he notes that "if these pension funds' assets had just been invested in a conservative way," as opposed to the political and reach-for-yield driven extravagance, "they probably would be fully funded now." The bottom line is not just creditor haircuts but,"significant cuts in accrued, vested pension amounts for both active and currently retired persons."

Anyone holding substantial deposits (read over $/€100,000) in G-8 banks: consider this your formal warning All data about such deposits will soon be shared among all "developed" countries, and any (every) country which needs to "resolve" its failing banking sector will use the Cyprus bail-in model and use "tax evaded" deposits to provide a liquidity buffer to its crumbling, and NPL-impaired assets. Oh, and what insolvent socialist manifesto can be released to the public without at least one mention of the phrase "fair taxes." Welcome to the second ComIntern, this time with extra global oomph.

It started off a simple protest in Sao Paulo as a demonstration by students against an increase in bus fares from R$3 to R$3.20, and then quickly morphed into general demonstration of discontent with the nation’s political classes on both sides of the spectrum involving over 200,000 across the country, with those marching on Monday holding placards decrying everything from the enormous sums spent on the World Cup to the treatment by police of protesters last week. It got to the point where protesters invaded and occupied, peacefully, the roof of the national Congress complex in Brasilia. Then things turned less peaceful when a breakaway group from the main rally in Rio de Janeiro attacked the state legislative assembly building and attempted to set it on fire.

Hedonically-adjusted inflation is in check, and the housing "recovery" is in doubt: the perfect cocktail for Bernanke to announce no tapering... Or to shock the world and in just over 24 hours say that as we prepares to wave bon voyage he will start to reduce the liquidity injection into the markets as he has been warning for the past 3 months.

When the S&P, always so conveniently ahead of the curve, yesterday revised its forecast for Europe from growth in the second half of 2013 to 2014 one couldn't help but golf clap, as well as wonder if they finally started looking at the fundamental depressionary reality on the ground instead of the rating agency's infamous "models." A depressionary reality confirmed by the latest car sales number for May which just hit a fresh 20 year low.

• Obama Says Bernanke Fed Term Lasting ‘Longer Than He Wanted’ (Bloomberg)
• Merkel Critical Of Japan's Credit Policy In Meeting With Abe (Nikkei)
• China Wrestles With Banks' Pleas for Cash (WSJ)
• Biggest protests in 20 years sweep Brazil (Brazil)
• Pena Nieto Confident 75-Year Pemex Oil Monopoly to End This Year (Bloomberg)
• G8 leaders seek common ground on tax (FT)
• Putin faces isolation over Syria as G8 ratchets up pressure (Reuters)
• Former Trader Is Charged in U.K. Libor Probe (WSJ) - yup: it was all one 33 year old trader's fault
• Draghi Says ECB Has ‘Open Mind’ on Non-Standard Measures (BBG)
• Loeb Raises His Sony Stake, Drive for Entertainment IPO (WSJ)

There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.

Eventually the money runs out.  Much of America was shocked when the city of Detroit defaulted on a $39.7 million debt payment and announced that it was suspending payments on $2.5 billion of unsecured deb.  Anyone with half a brain and a calculator could see this coming from a mile away.  But people kept foolishly lending money to the city of Detroit, and now many of them are going to get hit really hard. But what Detroit is facing is not really that unique.  In fact, Detroit is a perfect example of what the future of America is going to look like.  We live in a nation that is rotting, decaying, drowning in debt and racing toward insolvency. Just like Detroit, a day is rapidly approaching when America will not be able to kick the can down the road anymore. Sadly, our politicians don't seem inclined to do anything about it and most of the population seems to think that our exploding national debt is not a significant problem. By the time it becomes clear how wrong they were, it will be far too late to do anything about it.

President Obama announced late last week that the US intelligence community had just determined that the Syrian government had used poison gas on a small scale, killing some 100 people in a civil conflict that has claimed an estimated 100,000 lives. Because of this use of gas, the president claimed, Syria had crossed his “red line” and the US must begin to arm the rebels fighting to overthrow the Syrian government. The process was identical to the massive deception campaign that led us into the Iraq war. That is exactly what the Obama Administration is doing with Syria: fixing the intelligence and facts around the already determined policy. And Congress just goes along, just as they did the last time. The president has opened a can of worms that will destroy his presidency and possibly destroy this country. Another multi-billion dollar war has begun.

Nike recently published a series of ads declaring “winning takes care of everything,” in reference to Tiger Woods’ recapture of the world #1 golfer ranking. The slogan went over with certain critics like an illegal ball drop. Many economists insist that “economic growth takes care of everything,” and the related debate is no less contentious than the Nike ad kerfuffle. Listening to some pundits, you would think there’s one group that appreciates economic growth while everyone else wants to see the economy crumble. It seems to me, though, that growth is just like winning – there’s no such thing as an anti-winning camp, nor is there an anti-growth camp. More fairly, much of the growth debate boils down to those who think mostly about long-run sustainable growth and those who advocate damn the torpedoes, full speed ahead growth. I’ll break off one piece of this and consider:  How much of everything does growth take care of?

When over four years ago we put together our "How To [Read/Tip Off] Zero Hedge Without Attracting The Interest Of [Human Resources/The Treasury/Black Helicopters]" Guide", many thought we were being paranoid. We weren't, as last week's revelations by Edward Snowden demonstrated to the entire world. And yet, besides those from the intelligence community, few realized just how deep the reach of the Turnkey Totalitarian Tyranny ("TTT" or the Orwellian Banana Republic) truly goes. So as the Snowden enthusiasm spreads and more and more insiders with intimate knowledge of the broken system step up to expose the unconstitutional actions and illegal deeds that occur each and every day in the dark corner of US society well on its route to inevitable dissolution (ref USSR and WB Yeats), the question arises: how to do it - How to leak information to the press and other distribution agents without tipping off the very espionage agency at the nexus of it all? Luckily while information may be intercepted at every electronic turn, it still is largely free (at least until the advent of the Internet kill switch). So for all you wannabe Snowdens out there, here from Wired's Nicholas Weaver, is the perfectly timed "The Whistleblower’s Guide to the Orwellian Galaxy: How to Leak to the Press", which should answer all the 30,000 foot-level questions...

Few others are better equipped to comprehend both the insider's and outsider's perspective on what the government, the Fed, and the banks are doing in this so-called 'recovery' we are experiencing than David Stockman. Nowhere does he detail this better than Chapter 31 of his new book 'The Great Deformation'. In this first part (of a five-part series), he explains just what happened after the US economy liquidated excess inventory and labor and hit its natural bottom in June 2009. Embarking upon a halting but wholly unnatural "recovery," doing nothing but igniting yet another round of rampant speculation in the risk asset classes. The precarious foundation of the Bernanke Bubble is starkly evident in the internal composition of the jobs numbers.

In remarks given late last week to the curiously named United States Institute for Peace, the head of the Treasury’s Financial Crimes Enforcement Network (FinCEN) vociferously denied any attempts at regulating digital currency... specifically Bitcoin. But that doesn’t mean they can’t spread fear, uncertainty, and doubt. Bitcoin, being completely decentralized,  is nearly impossible to regulate. And the government at least seems to understand this point. Which is why the director so emphatically denies attempting to regulate the digital currency. But in this short 4-page speech, the Director twice made a connection between Bitcoin and (you guessed it) terrorism. Twice more connected Bitcoin to those who would exploit children. And four times linked digital currency to ‘criminals’ in general. It’s certainly enough to scare most people away.

"The power of the press (and the nouveau press)! Following a very solid open, stocks maintain their early gains until FT Harding hits the tape with an article suggesting a signal from Bernanke this Wednesday that the taper was drawing near – in contrast to the more dovish Hilsenrath last week. Stocks drop nearly a percent. Then via Twitter Harding casts doubt on his own predictions and more than half of those losses are reversed. The price action just reinforces how important the FOMC Wednesday will be."

"Recent bouts of positive correlation between equities, bonds and commodities suggest that the Fed’s stimulus inflated prices of financial assets, and removal of the stimulus could create a tail event in which prices of most of assets could go down. To reduce this risk, investors could diversify ‘safe haven’ assets away from treasuries and into other assets that are at lower risk in case of tapering. For instance,  investors could increase allocations to equity index put options.... we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year." - JPMorgan