November 16th, 2011
In 2007 and 2008 the Fed instituted all sorts of programs to enhance liquidity. It was the first time they went beyond simple rate cuts (which they also employed). In the end it didn't help much. It ensured that banks could fund the positions they wanted, but it didn't stop the sell-off in assets, because the banks didn't want the risk. No one wanted the risk. Liquidity concerns and even some capital concerns are driving down Italian and Spanish bonds, but behind that, there are real solvency concerns. There are clearly liquidity problems again, but they are directly tied to solvency. The Euro basis swap isn't getting worse because US banks don't have money to lend to European banks, they don't want to lend to European banks. Maybe we should be worried the Fed knows something we don't about how bad it is and are trying this ploy again, because it is one of the few things they can do to help Europe?
JPM, which has been stuck holding on to reflationary assets for months and months expecting a QE3 announcement which keeps on not coming as the market always frontruns it and makes any actual reflationary progress by the Fed impossible, couldn't wait to release today's crude price update following the reversal of the Seaway pipeline. The bottom line: JPM is lifting its WTI forecast to $110/bbl in 2012 and $118/bbl in 2013, and see the Brent-WTI spread narrowing to $5 and $3/bbl in those years, respectively. Previously WTI was seen as hitting $97.4 in 2011 and $114.25 in 2013. Consumers everywhere rejoice as they will have to take even more debt on (never to be repaid of course) in addition to never paying their mortgage payments. As noted earlier, now that WTI is well north of $102, kiss any deflation risks goodbye and with that the announcement of MBS LSAPs. At least until tomorrow's post 3 am European gap down, which will be fully filled and then some in the period between noon and 4pm.
And in lieu of any rumors out of Europe (they have all been exhausted, plus nobody believes anything out of the doomed continent), here is our own Fed with its best attempt to talk the market up:
- ROSENGREN: CRISIS MIGHT WARRANT COORDINATED ACTION BY FED, ECB
- ROSENGREN SAYS FED SHOULDN'T BE DISSUADED FROM TRYING TO HELP
- ROSENGREN: CENTRAL BANKS CAN'T SOLVE ECONOMIC PROBLEMS ALONE
So who steps in: aliens?
"What is the future of work?" Given the "recovery’s" stagnant job market and the economy’s slide into renewed contraction, it’s a timely question. To answer it, we must first ask, what’s the future of the U.S. economy? In broad brush, the Powers That Be have gone "all in" on a bet that this recession is no different than past post-war recessions: all we need to do to get through this “rough patch” is borrow and spend money at the Federal level, and the household and business sectors will soon recover their desire and ability to borrow more and spend it all on one thing or another. We don’t really care what or how, because all spending adds up into gross domestic product (GDP). In other words, we're going to “grow our way” out of stagnation and over-indebtedness, just as we’ve done for the past fifty years. Unfortunately, this diagnosis is flat-out wrong. This is not just another post-war recession, and so the treatment—lowering interest rates to zero and flooding the economy with borrowed money and liquidity—isn’t working. In fact, it’s making the patient sicker by the day. The best way to eliminate the signal noise of official propaganda (“The stock market is rising, so everything’s great for everyone!” etc.) and the high keening wails of Keynesian cargo cultists is to construct a model of the underlying fundamental forces that will shape the future. The best way to do that is to glance at a few key charts.
We are trying to decide what is funnier: Italy cancelling bond auctions and telling the world it does not need the cash, even as its Treasury Director tells the world the country will need to raise €440 billion... that's €440,000,000,000 in cash, next year, or that as Reuters reported earlier, the country has simply decided not to issue preliminary Q3 GDP data. It makes sense: due to austerity Greece had to clamp down on ink costs and as a result was unable to print tax forms. And now Italy gets two ministers for the price of one (PM and FinMin) and now its statistic office is cutting back on calculator and abacus costs. Very prudent and we are sure the ECB will be delighted with this proactive expense management.
....or else you will figure out not only that there is such a thing as sovereign crisis spillover into financials, but why UniCredit was once again the most active name on Sigma X yesterday, and why earlier today it is rumored that the bank is scrambling for emergency ECB assistance. But such is life when your equity is €14.5 billion and your total holdings of Italian bonds ar... €40 billion! If we were betting people, we would probably out a dollar down that UCG is the next Dexia.
The last time Whitney Tilson decided to go public (on a completely unsolicited basis) with his investment thesis of short Netflix, the market took him to the toolshed leading to Tilson (as usual) underperforming the S&P by a ridiculous amount. This time around, with his very public announcement that he is now long NFLX and GMCR... things don't seem to be much different. We have created a CIX screen which is basically an anti-Tilson ETF: long GMCR (on the inevitable squeeze) and short Netflix on the billions in off balance sheet liabilities that somehow were missing from Tilson's thesis, and the result is...
I add some real BoomBustBlog style meat to an already interesting Bloomberg piece that poses the question, "Can Goldman or JPM start a worldwide bank run?" Well, I think you all know my stance on this.
CBO is selling a subsidy for mortgages. Why?
And so Europe bites the hand that feeds it:
- EU's Juncker says that German debt level is a cause for concern according to a German newspaper - RTRS
- EU's Juncker says Germany has higher debts than Spain but 'no-one wants to know about that' - RTRS
What could have possessed this pathetic bureaucrat to criticize the only strong country in Europe is beyond imagination: if this is how he hopes to get Germany nervous about its debt levels and agree to monetizing, he is about to get a pretty brutal lesson in what it means to serve Le Bic Mac at 3:15 am on Luxembourg Strasse. Needless to say the Euro is not happy. We anticipate an immediate retraction saying his words were taken out of context as this is noting short of all out war between the EU and Germany.
Gas up, other retail sales down.
Troubled Jefferies & Co does not have actively traded CDS referencing it, which is probably a good thing. It does, however, have cash bonds and while its equity price remains above the lows from two weeks ago, bond prices are cratering and just traded at record lows. The 8.5% of 2019s are actively trading around $92-95 (having fallen from $110 in two weeks and $120 in three months). This price represents a yield of 9.5% (or a z-spread of 823bps!). Translating the asset swap spread of 756bps from this bond into a CDS contract, we see a cumulative 65% probability of default (over the next 8 years) being priced into the market (assuming a 40% recovery). It certainly seems like the bond market is much more nervous of JEF than the equity market for now!
While it will hardly come as a surprise to many, the bitter truth that bankers are to blame for much of the inexorable plunge that Europe faces (and for that matter the rest of the Western/Keynesian world) has once again been dragged front-and-center. In an interview on Australian TV, a former Unicredit senior banker, Jonathan Sugarman, discusses (along with no less than everyone's favorite roulette player - Nick Leeson) how rules are broken (not bent) and the 'rotten culture encourages excessive risk taking'. The former head of risk management resigned after being forced to break the law - specifically by dramatically under-reserving (or over-leveraging). These figures were not reported which means that, in Mr. Sugarman's words, he was "100 per cent certain that Unicredit broke the law while he was working there". The rot goes deeper though, as the interview describes, when he turned himself over to the regulators (blood-dripping knife in hand), they simply said "Fine, just don't do it again". Reflecting on the twenty years since Barings, Leeson remarks: “The weakness is in those risk management compliance and control areas. Always has been, still is and probably always will be”. Comforting?