Archive - Jul 19, 2013 - Story

As the nations of Europe argue over and over that France is not Greece, Portugal is not Ireland, and reality is not fantasy, Bloomberg has in fact quantified just where each of these troubled nations stands for the next five years. The bad news for the Spanish - facing demands for Rajoy's resignation over the graft - is that they have the worst five-year outlook of all European nations. Worse than Portugal, notably worse than Greece, and dismally worse than Bulgaria. On the bright side, Norway - with the best outlook by far over the next five years - looks attractive (or closer still Luxembourg.)

As part of the Appendixed disclosures in the aftermath of JPM's London Whale fiasco, we learned the source of funding that Bruno Iksil and company at the firm's Chief Investment Office used to rig and corner the IG and HY market, making billions in profits in what, on paper, were supposed to be safe, hedging investments until it all went to hell and resulted in the most humiliating episode of Jamie Dimon's career and huge losses: it was excess customer customer deposits arising from a $400+ billion gap between loans and deposits. After JPM's fiasco went public, the firm hunkered down and promptly unwound (or is still in the process of doing so) its existing CIO positions at a huge loss. However, that meant that suddenly the firm found itself with nearly $400 billion billion in inert, nonmargined cash: something that was unacceptable to the CEO and the firm's shareholders. In other words, it was time to get to work, Mr. Dimon, and put that cash to good, or bad as the case almost always is, use. So what has JPM allocated all those billions in excess deposits over loans? Courtesy of Fortune magazine we now know the answer - CLOs.

Oil and gas exploration is getting bigger, deeper, faster and more efficient, with new technology chipping away at “peak oil” concerns. While hydraulic fracturing has been the most visible revolutionary advancement, other high-tech developments are keeping the ball rolling - from the next generation of ultra-deepwater drillships, subsea oil and gas infrastructure and multi-well-pad drilling to M2M networking, floating LNG facilities, new dimensions in seismic imagery and supercomputing for analog exploration.

The broad Bloomberg 500 European index is up for the 4th week in a row (+6.9% over that time) showing a strikingly similar move to the pre-May collapse run. European stocks remain well off their YTD highs (unlike the US exuberance though) and there is an increasing dispersion across various countries (and asset classes). It appears that the rising tide of global liquidity is not floating all boats the same anymore. Italian and Portuguese stocks had their best week in almost 3 months at +4.3% (and Greece best in 2 months) but Italy's bonds only managed a meager 5bps compression in spreads. Spanish stocks gained only 1% on the week, much more in line with its 6bps spread compression. Portuguese bond spreads collapsed 64bps on the week - the best week in over 4 months as it's all fixed again eh? Europe's VIX is back below 17.5% and has seen its biggest 2-week drop in almost five months.

Last year, Senator Schumer (Democrat, N.Y.) famously told Fed chairman Ben Bernanke "You are the only game in town." Really, Senator? What about the real economy? Bernanke and the Fed's machinations are indeed the only game in town for the parasitic financiers, but unnoticed by the Senator, America's real economy is innovating away from the dead hand of the Fed and its toxic spew of free money to the predatory class. There's actually three games in town: the financier game the Fed is playing that will end in collapse, the Federal government's borrow-and-blow trillions of dollars game that will also end badly, and the real economy, where millions of people don't give a rat's rear-end about Bernanke's latest attempt to placate the financial Monster Id he has created.

"For years, the City has spent more than it takes in and has borrowed and deferred paying certain obligations to make ends meet. The City is insolvent" - Kevin Orr

Markit has released its global business confidence survey, and it makes for sobering reading. Due to sharp declines in business confidence in both the US and China, a new post crisis low has been reached in June. Only the UK was a notable exception, as business confidence there jumped. We would submit that this is no coincidence, as the pace of money supply growth is increasing sharply in the UK, while it it slowing down in both the US and China. The culprit for the slowdown in money supply growth in the US is lending by commercial banks, which is decelerating sharply even as monetary pumping by the central bank continues at full blast.

The current regime of extreme monetary policy that has become the new normal - to which we have become entirely desensitized and addicted - remains the biggest (and most dangerous) experiment in central planning in the 100 year history of the Fed. Trusting the beard and his band of PhDs to get this right may be a stretch though, as UBS' Art Cashin notes, their track record has not been stellar and as he notes from the 10th Annual Report of the Fed: "the Fed was supposed to extend credit only for 'productive' and not for 'speculative' purposes."

Microsoft's collapse last night is extending this morning as the stock holds at its 100DMA, down 10% from yesterday's close. The drop is knocking 24 points off the Dow and along with GOOG's damage is weighing heavily on the Tech sector overall (which was more evident in last night's Nikkei dump than in the US for now). The drop for Balmer's baby means a $30 billion loss of market cap - or one Schwab or Aflac or Freeport-McMoRan (or 2 Mattels).

UPDATE: Well that didn't last long - maybe just "Oops" would have been more appropriate

Michigan Governor and Detroit's emergency manager take the stage to explain it all...

While in the past President Obama has been more that willing to throw good money after bad and "refuse to let Detroit go bankrupt," it seems when push comes to shove - under the intense scrutiny of a nation awash in scandal, a drastically bifurcated congress - that despite the imploring from local congressmen for "moar" already - that the savior of the city will not this time ride to the rescue on his white horse. In a statement, the White House said they "are monitoring the situation in Detroit closely," with no hint - just as they have made clear for months - of any sort of Federal bailout. As USA Today notes, the federal government provided federal loans to prevent New York City from declaring bankruptcy during the 1970s. But times have changed; the federal government has debt and financial problems of its own, and a Detroit bailout could run into significant opposition in Congress and cause serious damage in the Muni market.

Yesterday, in a widely leaked move, the ECB announced it was lowering haircut higher rated collateral (and rising haircuts on lower rated collateral) for European banks in a move that is supposed to ease credit channels in Europe and boost lending. But will it? And what is the impact on actual eligible collateral as a result of this move. According to Goldman analysis, the impact of the ECB's move is virtually non-existent (but then why do it?) or 0.1% to be specific. Specifically, what yesterday's announcement does is boost the pool of eligible collateral, estimated at €15 trillion, by €20 billion.

Europe has denigrated into a strange place where fantasy replaces reality as necessitated by their governments and the Union that governs them. It is a world where anything but direct liabilities are not counted, where securitizations worth 50 cents on the Dollar are held at par and where both data and numbers are manipulated for the preservation of the State. Dreams are born of imagination, fed upon illusions, and put to death by reality. The guillotine returns after September 22, 2013.

For the first time since QE2 was announced (August 2010), the price of WTI Crude oil is now more expensive that Brent crude. The Brent-WTI spread has collapsed from over $23 in Feb 2013 and is now negative and notably below the long-run average level of around $0.98. At $109, WTI is the highest since March 2012. Gas prices - at the pump - continue to rise significantly reaching the highest since March, but given the lag to production, are set to reach well over $4.00 per gallon on average.