The gloves are off! As the French prepare for the loss of their AAA status, the governor of the Bank of France, Christian Noyer, suggests that the UK should be first in the firing line as the data for inflation, real GDP growth and government deficit to GDP are worse across la Manche from where he sits. A month ago French 10 year yields were 3.8%. Today they are just above 3%, so maybe the markets are giving him the benefit of the doubt, but let us not forget that the maturity timeline of French bonds is considerably shorter than the UK. They are about to have a funding problem and that is one of the many issues that the much maligned ratings agencies are concerned about.
If there is one data point that Charles Biderman, of TrimTabs, relies upon, it is the series of salary and wage growth (or real-time tax with-holdings) that his firm keeps an extra special eye on. Critically, in our opinion, he notes the very recent shift from positive growth in income growth (after inflation) to negative for the first time since Q1 2010. The picture is particularly worrying since he notes that this is right before the all important holiday sales period which he suspects will significantly disappoint (as we are already seeing in data post Black Friday). Of course, we have long held that the decoupling of the US with Europe (and Asia for that matter) is more a lag than a simple decoupling, and given Biderman's insight on income growth (after inflation) we tend to agree with the Bay Area brain-box that the slowing economic outlook of Q1 2012 will herald the FOMC's push to QE3. Also noteworthy is that the last time they enacted LSAP (QE2) saw the peak in income growth (after inflation) and so their hope that this printing of money will juice a pre-election-cycle economy and while Obama may hope this brings him back from the edge, we suspect, like Charles, that it will not be enough.
Over the past month we have been closely documenting a major funding squeeze in the all important shadow economy - the "synthetic liquidity" conduit which far more than traditional sources of cash, has become all important for proper bank functioning over the past decade. Courtesy of adverse development in Europe, one by one various components of this unregulated funding scheme have become frozen necessitating the first of many central bank interventions on November 30 to provide liquidity to global banks, primarily to offset such shadow conduits as locked up commercial paper, repo and money markets. Logically, as noted over a week ago, European banks scrambled to obtain cheap dollars by borrowing over $50 billion from the Fed, and plug dollar shortfalls. Yet as all band aid measures designed to offset a broken liquidity equilibrium fail eventually, it was only a matter of time before we saw a direct bail out by the Fed of one or more banks in the aftermath of the November 30 global "bail out." Sure enough, we have our first clue that "something" happened in the week ending Wednesday December 14 that involved an upgrade of the Fed's indirect (and thus untargeted) bailout of global banks, to a focused, and very much targeted rescue of one (or more) banks. And with some additional diligence, it may be possible to narrow down the date of an actual bank bailout: Tuesday, December 13.
Today it seemed that the market latched on to the idea of the Corzine trade as being the new bazooka. banks would borrow lots of money from the ECB to buy sovereign. It certainly seemed to be the case this morning when 3 year and in PIIGS bonds rallied hard. There are several flaws with this as a plan to save the euro. Banks can already buy virtually unlimited amounts of Spitalian bonds. The repo market for these remains orderly so they could finance themselves without the ECB. Maybe the ECB terms are more favorable but the reality is banks could already buy as much sovereign debt as they wanted. The issue is that they already have more than they want. As banks use ECB funds to buy more PIIGS bonds, private investors will be squeezed out. The banks will have concentrated risk that private investors may not be comfortable with. As banks rely on the ECB to fund themselves and to put on disproportionately large positions who will lend to them? Who will buy the shares? At first it may seem good, but they will be at the mercy of the ECB and the politicians. With Greece the politicians have already shown a willingness to try and dictate policy for banks. The on again off again rumor of a financial transaction tax will come back. MF didn't have unlimited central bank backing but it is a bit strange to believe that the trade that brought them down will be the salvation of Europe.
The ever-eloquent populist-in-chief has just turned an important corner. It seems that the clear class warfare escapades he has been engaging in recently have backfired as, according to a poll by Associated Press-GfK, a majority of adults, 52 percent, said Obama should be voted out of office while 43 percent said he deserves another term. This confirms the report from the previous Gallup poll, that our President heads into election year with a significant problem: "Heading into his re-election campaign, the president faces a conflicted public. It does not support his steering of the economy, the most dominant issue for Americans, or his overhaul of health care, one of his signature accomplishments..." While understandably the party preferences bias for and against, it is the Independents that must be the greater concern as "The president's standing among independents is worse: Thirty-eight percent approve while 59 percent disapprove." Given the fact that its-the-economy-stupid, we wonder just how long the entirely independent and sacrosanct Federal Reserve will remain on the sidelines, or is QE3 coming Jan 1st?
A roller-coaster week ended on a negative note as equities and credit ended the day only modestly lower but having sold off relatively decently from the highs just after the open. Equities spurted out of the gate in the day session, not followed by credit (or HYG) or broad risk assets (CONTEXT), only to revert quite quickly and then push notably lower as the Fitch news broke. Equities overshot to the downside relative to broad risk assets - though we note that TSYs were bid all day long, ending the day at their lowest yield and flattest curve levels. The afternoon then saw HYG (the high yield bond ETF) pull higher and higher as equities and credit spreads stagnated, with a weak close in stocks and strong high volume close in HYG (well above VWAP) as credit flat-lined. Gold and Silver managed solid gains on the day, extending the recovery but closing under the psychologically important $1600 and $30 respectively. FX 'wiggled' around today but ended with a small bearish USD bias by the close as the pre-European close action dominated once again ( as we note the $20bn in custodial bonds sold this week in more repatriation flows). It seems attention has shifted back from FX to bonds and stocks as the week rolled on and that sentiment is less than positive despite some technicals (from the forthcoming CDS roll) - even as HYG remains in a world of its own. One final note of caution, implied correlation is once again bearishly diverging from index vol (VIX) the last two days suggesting dealers happy to buy systemic protection - in a similar vein to credit.
It appears Moodys is not having server issues.
- BELGIUM'S CREDIT RATINGS CUT 2 LEVELS TO Aa3 BY MOODY'S
Those expecting an 8 pm Friday night downgrade bomb from the S&P, like in the US downgrade case, will be disappointed. The reason: server maintenance. Said otherwise, S&P has 25 minutes to finally catch up to reality, or D-Day will be postponed to Monday at the earliest.
Net EUR Short Position Soars To All Time Record, Implies "Fair Value" Of EURUSD Below 1.20, Or Epic Short SqueezeSubmitted by Tyler Durden on 12/16/2011 - 17:09
It was only a matter of time before the bearish sentiment in the European currency surpassed the previous record of -113,890 net non-commercial short contracts. Sure enough, the CFTC's COT report just announced that EUR shorts just soared by over 20% in the week ended December 13 to -116,457. This is an all time record, which means that speculators have never been more bearish on the European currency. Yet, the last time we hit this level, the EURUSD was below 1.20. Now we are over 1.30. In other words, the fair value of the EURUSD is about 1000 pips lower, and has been kept artificially high only due to massive repatriation of USD-denominated assets by French banks (as can be seen in the weekly update in custodial Treasury holdings, which just dropped by another $21 billion after a drop of $13 billion the week before). This means that the spec onslaught will sooner or later destroy the Maginot line of the French banks, leading to a waterfall collapse in the EURUSD, which due to another record high in implied correlation will send everything plunging, or if somehow there is a bazooka settlement, one which may well include the dilution of European paper, the shock and awe as shorts rush to cover will more than offset the natural drop in the EUR, potentially sending it as high as the previous cycle high of 1.50. If only briefly.
For today's humorous detour, we go back in time, some could say to prehistoric days, and pull the 2011 year end predictions by Blackstone's grizzled (date of birth Valentine's Day, 1933) Vice Chairman Byron Wien posited back on January 1, who for 26 years in a row tries to predict the future. And fails. Well, technically he did get gold right. And yes, there are two more weeks left in 2011: Wien may still be proven right... crazier things have happened.
Why the abrupt Canadian volte-face? Canada has the world's third-largest oil reserves, more than 170 billion barrels and is the largest supplier of oil and natural gas to the U.S. The answer may lie in Canada’s far north, in Alberta’s massive bitumen tar sands deposits, a resource that Ottawa has been desperate to develop. Since 1997 some of the world’s biggest energy producers have spent $120 billion in developing Canada’s oil tar sands, which would be at risk if Ottawa went green in sporting the Kyoto accords. According to the Canadian Association of Petroleum Producers, more than 170 billion barrels of oil sands reserves now are considered economically viable for recovery using current technology. Current Canadian daily oil sands production is 1.5 million barrels per day (bpd), but Canadian boosters are optimistic that production can be ramped up to 3.7 million bpd by 2025. So, what’s the problem? Extracting oil from tar sands is an environmentally dirty process and the resultant fuel has a larger carbon footprint than petroleum derived from traditional fossil fuels, producing from 8 to 14 percent more CO2 emissions, depending on which scientific study you read.
The Economic Collapse Blog does a terrific job of periodically putting together a compilation of the scariest data points about the US economy. Today is one such day, and the list of 50 economic numbers presented is indeed, as the author puts it, "almost too crazy to believe"... Almost. As noted: "At this time of the year, a lot of families get together, and in most homes the conversation usually gets around to politics at some point. Hopefully many of you will use the list below as a tool to help you share the reality of the U.S. economic crisis with your family and friends. If we all work together, hopefully we can get millions of people to wake up and realize that "business as usual" will result in a national economic apocalypse." Or, far more likely, 99% of the population can continue watching Dancing with the Stars, as what little wealth remains is terminally transferred to those who are paying attention right below everyone's eyes.
When at first you cover a soaring knife near its all time high, try, try again to catch it on the way down. And if you are Whitney Tilson, this is precisely what you do. The fund which is now down 25% YTD has lost 21.4% on its second round Netflix investment, something which Zero Hedge readers were on the other side of for the entire 50% pick in one month. But heaven forbid you learn a lesson: "A couple of weeks ago we sent you an article we published entitled “Why We’re Long Netflix and Short Green Mountain Coffee Roasters,” which is attached in Appendix B. Since then, both stocks have moved against us, making them even more attractive in our opinion." Lordy...
We spoke to soon: it appears suicide is painless after all, as Fitch just changed the French outlook to negative.The punchline: "The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon." As for the line that will finally shut up France in its diplomatic spat with the UK: "Relative to other 'AAA' Euro Area Member States, France is in Fitch's judgement the most exposed to a further intensification of the crisis." And now, the market shifts its attention to non-French rating agencies, who will downgrade France in a "slightly" shorter timeframe... more like 2 hours according to some rumors.
Never a dull Friday when dealing with continents that have a terminal solvency, pardon, liquidity crisis.
- FITCH PLACES BELGIUM, SPAIN, ITALY, IRELAND, SLOVENIA AND CYPRUS ON RATING WATCH NEGATIVE
Shockingly, French-owned Fitch has nothing to say about... France.