June 19th, 2012
The word “privatization” is a loaded term these days. Unions and big government worshippers scoff at the idea of any public services being in the hands of ruthless, greedy capitalists. The left has the distorted view that people in the private sector are driven primarily by their desire to cut costs and throw workers out on the street. To them, government workers are angels sent from heaven to do God’s work. In our world of unceasing centralization of power, lawmakers are finding more deceptive ways to mask their lust for dominance. Public-private partnerships are the embodiment of what Mussolini dubbed “corporatism;” that is the “merger of state and corporate power.” Under corporatism, the ruling class is able to expand unbeknownst to the Boobus Americanus and its equivalent in other countries. The Average Joe still has his wallet forcefully stripped of its contents but now the state’s cronies get to partake in the plunder. Meanwhile the same big businessmen who benefit from government privilege still maintain their praise for free markets while working with politicians to forcefully subdue their competition. There is actually another, more accurate term for public-private partnerships. It’s called fascism; plain and simple.
It would appear that one-by-one the open-market indications of stress in European funding markets are manipulated to the point of worthlessness. As the provision of unsecured lending is for all intent and purpose finished in Europe, LIBOR is a mirage and even cross-currency basis-swaps (though modestly margined) have lost their 'signal' as MRO/LTRO reduced the term-funding need. However, as recently highlighted by @SoberLook, the EUREPO curve - which measures how much banks have to pay to borrow, when pledging or repo-ing assets, for loans - is not only un-manipulated as of yet but is flashing very bright warning signals that all is absolutely not well in European bank liquidity. The 'signal' that is clear is the inversion of this curve, which means simply that it is significantly more expensive to repo (borrow) in the ultra-short-term than for a much longer-term. This is likely due to the banks' need to fund deposit outflows, thus requiring the banks to 'find' that cash (by 'lending' their assets as security for the loan). The loss from the counterparty bank seizing your collateral if it went broke is far higher over a longer-period and thus there is a very strong preference to only repo overnight relative to 3 months, for instance. This repo curve inversion signals a total lack of trust among European banks (in even the shortest of tenor), no belief in short-term 'bailout effects' lasting more than weeks, as well as a huge demand for cash (repo) that suggests deposit outflows remain very active.
“Over the last thirty years, the United States has been taken over by an amoral financial oligarchy, and the American dream of opportunity, education, and upward mobility is now largely confined to the top few percent of the population. Federal policy is increasingly dictated by the wealthy, by the financial sector, and by powerful (though sometimes badly mismanaged) industries such as telecommunications, health care, automobiles, and energy. These policies are implemented and praised by these groups’ willing servants, namely the increasingly bought-and-paid-for leadership of America’s political parties, academia, and lobbying industry.” – Charles Ferguson
Once you dig into the details beneath the thin veneer of Bernaysian obfuscation, you realize the corporate mainstream media storyline of middle class decline has a veiled storyline of a powerful, connected 1%, enriched at the expense of the middle class.
Nationalism, like any political idea, is a spectrum of views not an absolute. As UBS notes in an interesting article today, the policies of Golden Dawn are not the policies of the True Finns of Finland, or the Freedom Party of Austria. However, there is undoubtedly a trend within the Euro area in favour of those parties that promote nationalistic policies (perhaps defined as the aggressive pursuit of domestic or indigenous interests over regional interests) and this trend raises considerable questions over the future of the Euro. The first and most obvious consequence of a rise of nationalism within the Euro area is that it will make managing the Euro crisis ever more complex to resolve. The other issue that arises from the rise of nationalist parties in the Euro area takes us away from the specifics of the Euro integration. Nationalism very readily turns into prejudice against others. UBS' Paul Donovan adds that the Euro area will work best when it recognises and uses its economic resources (people in this instance) to the best advantage. Festering resentment and nationalism is unlikely to produce that sort of a climate. Given how important it is to restore competitiveness to the Euro area economy, this is not a negligible economic cost.
Some news & headlines from the day
Forget turning Japanese, an anxious-looking Paul Krugman appeared on Stephen Colbert last night to hawk his book and suggested that "Ireland is Romney economics in practice". Noting that Obama "inherited a Depression" but has unfortunately not taken us out of it due to a "whole lot of opposition from 'the other guys'". The Kaped Keynesian Krusader went on to note that "a recession is when things are going down but a depression is when things are down" and suggests an Obama campaign slogan "It's Not As Bad As The Great Depression" to which Colbert retorts that electing Romney would seem to be the path to 'ending this depression now'. While Krugman opines that if we would just re-hire all the government workers who have been laid off over the past few years then all would be well in the world, we suspect Colbert is closer to the truth when he comedically adds that "obviously the way to end the real depression is a war in Europe" and while USA is not Greece (or Uganda), it appears we will be Ireland if Romney gets elected.
America's welfare state is about to suffer a double whammy of epic proportions. On one hand, extended unemployment benefits are now running out at a pace of 100,000+ per week, as more and more American's lose eligibility for Komrade Samov's 99-week sponsored vacation, meaning millions of Americans heretofore sitting comfortably on their couch playing Call of Duty and collecting $400 a week will now start having to think for a change - never a good thing for any regime that relies on its electorate to be docile as drunk and fat Hindu cows. And now this: "New York would prohibit welfare recipients from spending their tax-funded benefits on cigarettes, alcohol, gambling, and strip clubs under a bill passed overwhelmingly by the state Senate on Tuesday. "I understand that people need food stamps," said Republican Sen. Thomas Libous, a Broome County Republican. "What I don't understand is why they need to go to strip clubs, buy lottery tickets, go to a 'racino' or buy alcohol." Wait, you mean you can't spend other people's money to pay for a lap dance? What crazy form of inhumane austerity is this. And isn't spending taxpayer dollars at the Spearmint Rhino one of the amendments to the post-Obama constitution? But perhaps the scariest implication is that New Yorkers actually do spend their EBT money at the Spearmint Rhino right off the card, being ripped off with the traditional 15% plastic surcharge instead of just paying cash. Now that is really stupid.
“We fear a programmed strangling.”
In a previous post we showed how, despite Goldman's best wishes, the market may have just priced itself out of a treat from the Fed tomorrow, and right into a trick. That said, in case the Fed has in fact succumbed to the pleadings of its superiors (read Primary Dealers) and does proceed with some seriously unsterilized dollar mauling, the next question is what is the best hedge. SocGen asked the same, and provided several strategies to take advantage of central planners exhibiting a rare case of Einstein's definition on insanity... over and over. Their "Strategy #1: Bolster Positions In Gold Ahead of QE3." Why? Because once the next round of the gold juggernaut is unleashed, gold may go to anywhere between $1900, just shy of the all time nominal high, and $8500... just a tad higher than the nominal high.
Ever since the beginning of the year we have been saying that in order for the Fed to unleash QE, stocks have to drop by 20-30% to give political cover to the Fed (and/or ECB) to engage in another round of wanton currency destruction. Because while on one hand the temptation to boost stocks is so very high in an election year, the threat to one's presidential re-election chances that soaring gas prices late into the summer does, is simply far too big to be ignored. Yet here we are: stocks are just 4% off their 2012 highs, even as bonds are near all time low yields, and mortgages are at their all time lows. As such, even with the latest batch of economic data coming in simply atrocious, the Fed finds itself in a Catch 22 - it wants to help the stock market hoping that in itself will boost the "economy", yet it knows what more QE here will do to the priced of gold and inflation expectations: something which as Hilsenrath himself said yesterday does not compute, as it runs against everything "Economic textbooks" teach. What is more important, is that the market, like a true addict, is oblivious to any of these considerations, and has priced in a massive bout of Quantitative Easing to be announced tomorrow at 2:15 pm. There is one problem though: has the market, by pricing in QE on every down day - the only buying catalyst in the past month have been hopes of more QE - made QE impossible? Observe the following chart from SocGen which shows 6 month forward equity vol. What is obvious is that due to precisely being priced in, QE is now virtually unfeasible, irrelevant of what Goldman and its "FLOW QE" model tell us. As SocGen simply states: "More stress is needed to trigger ample policy response."
S&P 500 e-mini futures managed to get back above their 50DMA, fill the gap back to the 5/4 ugly-NFP print levels, and retrace 61.8% of the recent swing high-to-low ahead of tomorrow's hope-laden FOMC-print-fest. As we noted here, credit markets do not agree that QE is coming anytime soon and today's Gold deterioration suggests expectations for anything more than a twist extension are overblown (which we suspect would be a huge disappointment to a market only 4% off its highs and a VIX with a 17 handle earlier in the day. As the afternoon wore on and the incredible reporting falsehoods were denied, equity markets (and EUR) reverted lower (led by financials) pulling back to VWAP (and VIX pushed back rapidly to 18.5 - ending the day higher in vol (despite a 10pt jump in the S&P). Low volume and falling average trade size suggests this was far from the start of a new trend in stocks and the push higher (and steeper) in TSY yields to Monday's opening highs seems more like QE hope fading than growth hope. Silver just underperformed Gold on the day (both leaking lower) as Oil and Copper rallied (leaving WTI in the green for the week) as USD weakened and round-tripped to Monday's opening lows (with AUD now 1.3% stronger on the week). Investment grade credit remains a considerable underperformer relative to the high beta equity and high yield markets but 'agrees' with Gold and Treasuries in its view of no LSAP tomorrow- and the surge in implied correlation into the close suggests macro overlays as opposed to a market with any conviction.
In a somewhat inspired line of questioning by Rep. Gary Ackerman on the differences between 'investing' and 'gambling', the JPMorgan CEO diligently notes that "on average Gamblers lose" implicitly stating, we assume, that 'investors on average win'. Ackerman interestingly takes up the common myth that banks (and Wall Street in general) were 'on the level' and 'facilitated investing' but to him the 'hedges' that JPM (among others) are placing are nothing but gambling as he correctly notes the dismal truth that banks are not in fact there for the common good in "helping jobs and being good for America". Betting against your initial bet suggests a lack of 'knowing what you are doing' is how Ackerman frames his concerns, and furthermore (as we pointed out), hedging against your hedge just makes the whole thing farcical as if "throwing darts at a dartboard" and in the process does not help the economy or create one job. The main thrust being that: if JPM is right a majority of the time it helps the company, but if they are wrong it puts systemically everything at risk - the public investing confidence in the system (an unhedgeable risk). Dimon's contrite response is: "We don't gamble; we do make mistakes."
For the second time in a few short months we are amazed to learn that beggars can be choosers. The Greek pseudo-coalition between ND, Pasok, which promptly determined it would only be part of a coalition if Syriza joined, then even promptlier completely forget what it had said hours ago after Syriza said "no way, Jose", and some other party with the word "Democracy" in its name, are in deep discussions over what conditions they should give Europe in exchange for a coalition government. That's right: the Greek coalition government is debating over a set of demands to hand over to Europe in order to form a government which will last at most weeks.