February 24th, 2012
The better tone in risk markets is largely being driven by encouraging economic data from the US and Europe, which as a result saw Bunds trade in negative territory. Of note, ECB’s Liikanen has said that inflation is not a particular concern in Europe, adding that the ECB has never said that there is an interest rate floor. On the other hand, Gilts are being supported by comments from BoE’s Fisher, as well as less than impressive GDP report. Nevertheless, EUR/USD took out touted barrier at the 1.3400 level earlier in the session, while USD/JPY is trading in close proximity to an intraday option expiry at 80.60.
Bunch of irrelevant and reflexive (stock market is up so confidence - in what? manipulated markets? - is higher, so stock market is up so confidence is higher etc) stuff today, as the world central banks prepare to pump another $600-$1000 billion into the consolidated balance sheet and send input costs into the stratosphere. Somehow this is bullish for stocks. Luckily, it will finally break the EURUSD - ES linkage.
'Gold Bullion or Cash' Shows Buffett, Roubini, Krugman Mistaken; Faber, Rogers, Bass, Einhorn, Gross CorrectSubmitted by Tyler Durden on 02/24/2012 07:33 -0500
Currency debasement of all major currencies is happening today on a scale never before seen in history. Yet there continues to be a complete lack of awareness amongst the majority in the western world as to the risks posed by our currency monetary and financial system. There continues to be a lack of knowledge and indeed often wilful ignorance regarding gold. Indeed, some comments on gold are so ignorant of the historical and academic record that they have all the hallmarks of crude anti-gold propaganda – and will be seen as such in time. Gold is a proven safe haven asset and currency. Despite much recent academic evidence and the historical record showing this and despite voluminous articles, research and evidence, (evidence succinctly summarised in the video 'Gold Bullion or Cash'), there continue to be frequent anti gold outbursts by some of the most respected and trusted people in the western financial and economic world. Such attacks on gold have come from men such as Paul Krugman, Nouriel Roubini and more recently Warren Buffett. Alan Greenspan correctly wrote in 1966 that "an almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions”. Today, an almost hysterical antagonism towards gold bullion as a diversification and as a store of wealth alternative to fiat currencies unites beneficiaries of the current status quo – both intellectual beneficiaries and material beneficiaries. That status quo is a massively leveraged and insolvent monetary, financial and economic system.
- U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut (BBG) -Expect one whopper of a seasonal adjustment to compensate
- European Banks May Tap ECB for $629 Billion Cash (Bloomberg) - EURUSD surging as all ECB easing now priced in; Fed is next
- Madrid presses EU to ease deficit targets (FT)
- Greek Parliament Approves Debt Write-Down (WSJ)
- Mentor of Central Bankers Fischer Rues Complacency as Economy Accelerates (Bloomberg)
- Draghi Takes Tough Line on Austerity (WSJ)
- European Banks Hit by Losses (WSJ)
- Moody's: won't take ratings action on Japan on Friday (Reuters)
- Athens told to change spending and taxes (FT)
In a must-watch follow-up to his original Punk Economics Lesson, David McWilliams describes how the new bankocracy in Europe will lead to a massive injection of liquidity; blowing bubbles in financial assets while the citizenry is bled dry (ring any recent bells?). The banks again get all the money they need while the average citizen shoulders the burden. Specifically in the case of the Greeks, they are left with the uncertainty of a return to the Drachma or the certainty of decades of indentured servitude. Enter the ECB with their cash-for-trash deal. This is a scam, he proclaims correctly, insolvent banks lending to insolvent governments and we are calling it success? The banks can turn a tidy profit, but the straight-talking Irishmen asks the question every Greek citizen should be asking: "where does the profit come from?" The answer: the average tax-paying European citizen, and it is this that provides the comfort for the Germans to allow the Greeks to default without bringing down every bank in Europe in a contagious cascade of margin calls, un-hypothecation and deleveraging. Critically, the question is not if or when Greece will default but will they be allowed to default enough? The lesson for all is that to stay in the Euro, all European nations have to become more like Germany - which is very different from the community of equal nations that the Europeans signed up for 20 years ago at Maastricht. Don't be fooled that the European debt story is over, it is not. In fact, he finishes - rather ominously, the interesting bit hasn't even started yet.
Having spent much of the day attempting to explain the difference between nominal and real wealth creation and that asset price movements are different to the economy, we turn back to Michael Cembalest of JP Morgan to set the story straight on one of the most frequently cited reasons for the rally: "It's the economy, stupid". It is hard to disagree that there are positive signs, but as the JPM CIO opines, let's be realistic: US growth is projected to be ~2.5% for 2012. Some argue that profits are the driver, and they are doing well, but their apparent strength is masked by a sad truth that gets little exposure. Looking at where those profits come from shows that if labor compensation grew at trends comparable to prior recoveries, a big chunk of current-cycle profits would disappear (quicker than a rehypothecated 2Y BTP under Corzine's watch). Cembalest summarizes that while this doesn't mean these profits are entirely illusory; it does mean that they come with related costs: such as weak household income and bloated government budget deficits - which have a cost as well (don't they?).
Sometimes one picture really is worth a thousand words.
Belgium's total exposure to its bank bailouts: 41% of GDP. But finally there is some resistance.
Greece has been the most pillaged country in Europe this Depression, among other reasons, because no one in any leadership position seems to have learned lessons from the 1930s. Plus, banks have more power now than they did then to call the shots. Despite no signs of the first bailout working – certainly not in growing the Greek economy or helping its population - but not even in being sufficient to cover speculative losses, Euro elites finalized another 130 billion Euro, ($170 billion) bailout today. This is ostensibly to avoid banks’ and credit default swap players’ wrath over the possibility of Greece defaulting on 14.5 billion Euros in bonds. Bailout promoters seem to believe (or pretend) that: bank bailout debt + more bank bailout debt + selling national assets at discount prices + oppressive unemployment = economic health. They fail to grasp that severe austerity hasn’t, and won’t, turn Greece (or any country) around. Banks, of course, just want to protect their bets and not wait around for Greece to really stabilize for repayment.
When one puts aside all the histrionics, all the melodrama, all the irrelevant secondary bullshit such as appearance, charisma, ability to tele-evangelize, all the irrelevant policies such as what planet the US should colonize or how women should procreate, and focuses on just one thing: which presidential candidate (not to mention president) will do the right thing for America, which is to make sure that it doesn't collapse under a record debt load, there is just one answer. And it is not even ours: it comes from the impartial Committee for a Responsible Federal Budget Project, aka US Budget Watch ("U.S. Budget Watch neither supports nor opposes any candidate for office. Its reports are intended to promote understanding and discussion of the federal budget and how specific policy proposals would affect the deficit") which today released an analysis on debt sustainability titled "The GOP Candidates and the National Debt." The answer is in the chart below.
2012 is proving to be the 'Year of the Central Bank'. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.... All of this pervasive intervention most likely explains more than 90 percent of the market's positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for "coordinated action". It does work in the short-term.... But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.
Since at this point US society is irrevocably split into two camps, on one hand those who believe Keynesian propaganda, where the only cure for unsustainable debt is more debt, and on the other those who believe that a return to a gold standard is the only way to prevent an epic socio-political collapse, also known in official US circles as "extremists", and since we know that the status quo will never let the latter get their way without a fight (quite literally and quite violently), it is only logical that 'if you can't beat them you have to join them'. In which case we believe that instead of breaking windows, or starting wars, or even expecting a growth boosting alien invasion that would lead to a surge in GDP that may or may not come, one should not only go for broke, but do so in style. As such we propose that the US, already the world's most expansionist and aggressive foreign policy power, not like there is anything wrong with that of course - it is all for the sake of liberating oppressed foreign oil, should one up itself and build the true symbol of its contemporary socio-historical status: the Imperial Death Star. Yet the real benefit in addition to blowing up various alien world that refuse to bail out the world's central bank confederacy, is that the cost of construction of said Keynesian masterpiece, would be an epic $852 quadrillion, which in turn would go straight to US GDP.
Overnight action saw EURUSD surging over 1.33 and retracing back into the US open as broadly European equity markets started to play catch up to European credit's recently weak performance. Couple that with a miss in jobless claims and the rise in WTI and Brent prices and shortly after the US open S&P futures fell 9pts rather rapidly. However, fears of margin compression or consumer spending impacts were quickly dismissed as every asset class took off and never looked back - as only one thing matters (and USD weakness and commodity strength confirmed that belief). Having underperformed the last day or two, HY credit jumped higher, catching up with IG and HYG's recent performance and over-taking stocks, as high beta took over again on the heels of what can only be assumed is central bank largesse as financials and energy names outperformed. There were some 'odd' disconnects among the broad asset classes today with Treasuries rallying euphorically after the strong 7Y auction, Gold rallying well and then losing a lump on a Zero Hedge margin rumor, and up-gaps in EUR (and down in USD) into the close to sustain the rally. While Oil was notably higher on the day, Silver took the honors - now up over 6% on the week - as Brent-WTI compressed this afternoon as the latter pushed above and held $108.5. The Treasury-Stock disconnect continues to grow, and yet when we adjust for the USD-numeraire, the two asset classes agree wholeheartedly on low-/no-growth - perhaps it is time for the 'transitory' word to re-appear.
AIG just conducted a two-fold master class of i) how to confuse Wall Street of having "superb" earnings, and ii) how to avoid paying any corporate taxes for years to come. Because as part of the company's just announced massive $19.8 billion profit, a whopping $17.8 billion was nothing short of the oldest tax accounting gimmick in the book - the release of a valuation allowance (i.e., deferred tax liability vs deferred tax asset conversion). In other words, apples to apples, the real Net Income attributable to shareholders was not $19.8 billion but realistically $2 billion, which would compare to last year's $11.2 billion if only it was not for a $13.5 billion gain on divested business posted in Q4 2011, when the company again was fudging numbers like a drunken sailor. Anyway, we are confident even the algos will figure it out eventually. But the real slap in the face coming from this bailed out company is that as a result of this accounting change, AIG will essentially not pay any taxes for years to come, most likely until its next insolvency.