Archive - Mar 14, 2014 - Story

While most understand that Ukraine owes Russia a few billion here or there for its energy bills that are past due, there is a more concerning issue. The Ukraine owes $3 billion to Russia in bonds that have been issued under UK law. One of the stipulations of the bonds is that if the Ukraine's debt-to-GDP ratio should exceed 60%, the bonds will become immediately callable. Once the Ukraine gets funding from the IMF, this is of course going to happen right away – its debt-to-GDP ratio will then most definitely exceed 60%, so the first $3 billion of any aid the Ukraine receives in the form of loans will right away flow into Russia's coffers. The American and European tax cows will no doubt be thrilled.

If we had to summarize China's upcoming credit cataclysm in one chart, it would be the following.

Utah state prosecutors have received accusations of wrongdoing and gathered evidence in a wide-ranging corruption scandal involving Majority Leader Harry Reid and rising Republican Senator Mike Lee. However, as The Washinton Times reports, FBI agents have been thwarted in their efforts to launch a full federal investigation by the Justic Department. "DOJ risks creating the perception of a cover-up," warned one senior FBI official.

History suggests that low-intensity conflict within the ruling Elite is generally a healthy characteristic of leadership in good times. As times grow more troubled, however, the unity of the ruling Elite fractures into irreconcilable political disunity, which becomes a proximate cause of the dissolution of the Empire if it continues. We recently proposed the idea that Wall Street now poses a strategic threat to national security and thus to the Deep State itself. Many consider it "impossible" that Wall Street could possibly lose its political grip on the nation's throat, but I suggest that Wall Street has over-reached, and is now teetering at the top of the S-Curve, i.e. it has reached Peak Wall Street.

Broad European stocks dropped 3.3% on the week - the biggest fall since June of last year. Despite a late-day surge on the back of surprising relief from Lavrov's comments on not invading Ukraine (well, he's hardly going to pre-announce) Germany has seen its worst 2-week drop in 28 months. Sovereign bond spreads rose 10-13bps on the week for the peripheral nations (which is actually notable given how tight they trade now). Russian stocks have plunged 22% from Feb 18th highs and Russian 10Y bond yields surged to near 10% yields. Ukraine's short-date bonds remain at yields around 50% and the Hyrvnia is losing ground.

Kerry speaks. The punchline:

• KERRY SAYS RUSSIA NOT PREPARED TO TAKE STEPS BEFORE REFERENDUM
• KERRY SAYS U.S. AND INTERNATIONAL COMMUNITY WILL NOT RECOGNIZE OUTCOME OF CRIMEA REFERENDUM

And of course, the hollow threats - the costs are back.

• KERRY SAYS THERE WILL BE COSTS IF RUSSIA DOES NOT CHANGE COURSE
• KERRY SAYS IF RUSSIA DOES ESTABLISH FACTS ON THE GROUND THAT THREATEN UKRAINIAN PEOPLE 'THAT WILL BEG AN EVEN GREATER COST'

Everything else was superfluous.

While investors enjoy collecting and reading the monthly and year end letters by distinguished hedge fund managers, the only one that really matters is the annual report by the world's "greatest hedge fund in history" (not our words, those of Warren Buffet). It is here where we find that in 2013, the Fed generated a record $90.5 billion in Interest Income, surpassing the previous all time high of $88 billion set in 2011. But what is most disturbing is that the Fed is getting increasingly less bang for the buck courtesy of its own ZIRP policy. This is best manifest in the declining Return on Assets: recall that in 2013 the Fed's total assets rose by over $1 trillion from $2.9 trillion to $4.0 trillion as of December 2013, a 38% increase. And yet the profit boost was a fraction of this increase. Sure enough, ROA tumbled, and continues to drop: at 2.2% down from 2.8% in 2012, the Fed's "efficiency" is now the lowest since QE began in 2008, when ROA was just 1.9%.

A month ago we reported that according to much delayed TIC data, China had just dumped the second-largest amount of US Treasurys in history. The problem, of course, with this data is that it is stale and delayed. For a much better, and up to date, indicator of what foreigners are doing with US Treasurys in near real time, the bond watchers keep track of a far less known data series, called "Treasury Securities Held in Custody for Foreign Official and International Accounts" because it shows what foreigners are doing with their Treasury securities held, as the name suggest, in custody by the Fed. So here it goes: in the just reported latest data, for the week ended March 12, Treasurys held in custody by the Fed dropped to $2.855 trillion: a drop of $104.5 billion. This was the biggest drop of Treasurys held by the Fed on record, i.e., foreigners were really busy selling.

While we doubt anyone reading this will be shocked by major fraud at the Environmental Protection Agency (EPA), the potential extent of the fraud is huge, and we still have no idea how big it is. A report released by the EPA’s Inspector General found that over 90% of sampled transactions were for “prohibited, improper, or erroneous purchases.”

Crimea's Prime Minister Sergie Aksenov has been very vocal this morning with comments on nationalizing the region's banks, but the following few comments are sparking concerns:

• *AKSENOV SAYS CRIMEA ISN'T TAKING ORDERS FROM RUSSIA
• *AKSENOV SAYS DOESN'T ENVISAGE UKRAINIAN CIVIL WAR
• *CRIMEA MAY FORMALLY JOIN RUSSIA NEXT WK, INTEGRATE IN 1 YR: PM

We will see what Obama, Merkel, and Ukraine's leadership has to say about that... Turchynov, for one, has warned to be "ready for a full-scale invasion at any moment."

On the heels of yet another multi-hour meeting with Russian foreign minister Lavrov, John Kerry takes to the podium to explain next steps...

US-RUSSIA TALKS ON UKRAINE "FORMIDABLY DIFFICULT"

It would appear that pending wars in Europe, freezing snow storms (and droughts) in the US, and Asian credit concerns have finaly taken their toll on US consumer confidence. At 79.9 relative to an expectation of 82.2 this is the biggest miss since Dec 2012 and lowest since Nov 2013.Current conditions rose modestly but the economic outlook fell by its most in 5 months. UMich confidence remains notably below the July 2013 peak levels (which correspond quite coincidentally to the same 4 year 4 month cycle we have seen in the prior 2 cycles) despite stocks have made higher highs since then as the decoupling remains in place.

With the Bank of England recently denying any collusion with dealers to manipulate FX rates and exclaiming "it was not our job to go hunting for the rigging of markets," the WSJ reports that none other than that bastion of trust The Federal Reserve examined key FX benchmarks months before global regulators sounded alarms over the manipulations... but took no action.