- China Cuts Reserve Requirement for Banks as Europe Crisis Threatens Growth (Bloomberg)
- Don’t Count on China Easing Curbs: PBOC Adviser (Bloomberg)
- Germany Told to Act to Save Europe (FT)
- Fed Policy Makers Sharpen Differences Over Bond-Purchase Policy (Bloomberg)
- European Nations Pressure Own Banks for Loans (WSJ)
- Govt tries to soothe companies' concerns (China Daily)
- S&P Rates China Banks Higher Than U.S. Rivals (Bloomberg)
- Republicans Make Demands on Payroll Tax Cuts (FT)
- Eurogroup Set to Fix EFSF Leveraging Rules, Deal With Greek Aid (Reuters)
It appears that China has already forgotten its close encounter with inflation as recent as a few months ago leading to assorted riots, and is instead far more concerned with the collapsing housing market. As a result it just announced a 50 bps reserve ratio cut, well in advance of when most commentators thought it would happen, on what is now the start of a monetary policy loosening cycle. The kneejerk reaction is for futures to surge and gold to spike, and crude to pass $100, even as the EURUSD was once again drifting lower overnight. And while this is beyond bullish for commodities, we doubt equities will remain bid unless Europe mysteriously fixes itself overnight too. Which won't happen. More from Reuters: "China's central bank cut the reserve requirement ratio for its banks on Wednesday for the first time in nearly three years to ease credit strains and shore up activity in the world's second-largest economy." Naturally, this ties Bernanke's hand even more as Chinese inflation will now be stoked internally in addition to importing any excess inflation to be generated by the Chairman, likely leading to an even faster spike in global inflation the next time we get US-based quantiative easing. Look for Chinese-based purchases of gold to surge.
The '-flations' are as much part of the commonplace parlance for every sell-side strategist, talking-head, and gold-bug as dividend-stock, quality balance sheet, and long-time-horizon is for long-only managers. Whether deflation, stagflation, inflation, disinflation, or reflation, they all have their moments of sublime glory. Bank of America's Economics team have found some extremely timely 'inflation' signs in the food industry, where it is becoming, somewhat incredibly in this age of supposed frugality and deleveraging, cheaper to eat-out than to cook-at-home. This price disequilibrium has seen consumers respond accordingly; spending on food away from home has picked up while spending on food at home has slowed and also very notably households spending the marginal unit of 'time' working as opposed to 'eating' as economic frailties continue.
Chris Martenson Lecture On Why The Next 20 Years Will Be Marked By The Collapse Of The Exponential FunctionSubmitted by Tyler Durden on 11/29/2011 - 23:12
In this video Chris Martenson, economic analyst at chrismartenson.com and author of ‘The Crash Course’, explains why he thinks that the coming 20 years are going to look completely unlike the last 20 years. In his presentation he focuses on the so-called three “Es”: Economy, Energy and Environment. He argues that at this point in time it is no longer possible to view either one of those topics separately from one another. Martenson explains how exponential growth works and why it is so scary that our economy is based on it. In an example he illustrates how unimaginably fast things speed up towards the end of an exponential curve. He shows that an exponential chart can be found in every one of the three “E’s” for instance in GDP growth, oil production, water use or species extinction. Due to the natural limitations on resources, Martenson comes to the conclusion that we are facing a serious energy crisis.
It is a bad day for people named Paulson. We are not sure if John Paulson, who has not updated the HSBC hedge fund performance tracker through November although was quite happy to do so in October when the market could only rip higher, is more apologetic in his latest letter for the fact that his sold gold holdings to buy even more Bank of America stock, which as everyone knows is about to have a 4 handle, or because somehow his gold fund has managed to return just 1%, even as the shiny object itself has a solid 20% YTD return. Frankly we don't care; LPs in the fund, however, should... although as Paulson has repeatedly stated he has barely seen any redemption requests despite his abysmal performance, so at the end of the day it appears that everyone has gotten what they want. The bulk of the attached Paulson Q3 letter, procured courtesy of ValueWalk, says nothing of note, except to regurgitate some repeatedly stated facts about gold stocks being cheap, and to note that Martin Feldstein has joined the fund as an advisor side by side such "luminaries" as Alan Greenspan, Ed Altman and Chris Thornberg. What is notable, is that Paulson has presented investors with a company matrix of five large banks (their identities are quite simply once one looks at the fund's most recent 13F) which he believes will generates ludicrous potential returns. The last time he did this was for Bank of America. Our advice: short these with leverage.
Some (non-news!) final details are coming out from Europe this evening on the EFSF structure, size, and funding. We provided a framework for understanding the entity this morning, along with some views on just how successful it would (or would not) be. EFSF CEO Regling stated that various approaches will be used simultaneously, providing the entity with more funding flexibility, which is odd since in the next breath he notes the decision to tap the short-dated debt markets in December (seems with all that flexibility you might want to go a little further out). The current lending capacity is EUR 440bn, and they expect a 20-30% partial protection approach meaning they could theoretically leverage around EUR 250bn by around 3-4x. What is most ironic is German FinMin Schaeuble's comments, via The Telegraph, that "although Europe desperately needed a fund "capable of action", plans for the EFSF were too "intricate and complex" for investors to understand", further noting that the fund won't stem the debt crisis.
But maybe the most damning statement comes from the architects of the fund themselves, Regling and Juncker, who said that it is "not possible to give one number on EFSF leveraging" and that the "EFSF firepower will be less than EUR1 trillion ". Case closed.
Bank of America now precisely at $5.00 following an after hours downgrade from A to A-. We note that BofA's CDS widened 10bps today while MER CDS widened 18bps and notably wider (we haven't seen runs post downgrade) and we wonder how this will impact the firm's huge derivative book which was recently moved to the Bank's higher rated, and deposit backed unit for its better rating support. In fact, following such a drastic action, it is quite likely that derivatives units across the board will see counterparties scrambling to demand a far greater cash cushion for fears of the same downgrade waterfalls that took down AIG and MF Global.
UPDATE: The S&P downgrade after-hours of the major financials is dragging ES lower and more in line with medium-term CONTEXT. BAC lost $5 momentarily.
Bank Of America and Morgan Stanley closed today down around 7% from the 0931ET tick yesterday with BofA managing to defend the $5 Maginot Line once again - though closing almost at their lows. Tech and Financials were the worst sectors of the day (and the only sectors with negative performance) as Energy outperformed dragged by a war-premium-driven Oil price that crossed $100 intraday but ended just shy of it (up 2.5% from its intraday lows). After some early vol, FX markets trod water post the European close, practically unchanged on the day (and DXY -0.7% on the week) as equity markets once again outperformed credit in their illusory manner (though IG and HY did rally some on the day). Correlations continue to deteriorate across a broad basket of risk assets as TSY yields oscillated up and then down and then up into the close but it was Oil and AUDJPY's trend up that supported ES more than anything today.
Why do Banks remain such lousy investments?
- Is the revenue model fundamentally broken?
- Is the capital model fundamentally broken?
- Is the risk model fundamentally broken?
- Is the compensation model fundamentally broken?
- None of the above?
- All of the above?
Do I REALLY have to give you the answers to these questions?
Looking back at the year it is amazing to think that just how much has already happened in the year that was, and still has at least one month left, unless of course the accountants have something to say about it and the calendar is cut short by a month or so to allign with Jefferies Fiscal Year End. Hopefully without jinxing any fireworks, we present one of the best lookbacks at what has transpired in Europe, courtesy of this interactive timeline from Reuters. Also hopefully without spoiling too much, here is the not so surprising ending - the Titanic sinks in the end.
Update: It appears that Portugal is fighting a valiant battle, with the site back on and off intermitently.
LulzSec, which had been missing lately from the mainstream news, has struck again, this time with the site of the Portuguese Parliament. It is unclear just how the Portuguese pissed off the hacker collective, but as they say in trading floors when they want to get that pesky salesman off the line pronto "it is what it is." Link to a DDOSed Parliamento.pt here.
Today's ISDA settlement auction process for the Dynegy CDS credit event offers some perspective on the smartest of the smart of our dealer community. Bloomberg notes that RBS was forced to pay a $1.9mm penalty for massively missing the inside bid-offer at the initial auction. In our humble opinion, it would appear that the CDS trading desk got their math wrong and posted a discount (1-R) instead of the Price they were willing to trade the deliverable bonds at. Their 29.5/31.5 bid/offer would invert to a much more reasonable 68.5/70.5 perfectly straddling the $69.5 initial midpoint of the auction. We suspect the RBS pink slips were flying rather fast on this mathematical error... Although since the BLS also works on a 1-R basis, this means that initial jobless claims will be one less for the week.