We have often discussed the temporary and tenuous nature of any and all government-suggested solutions so far to the European crisis on the basis that the 'model' is broken. Following the decision to go for PSI, and the possibility of a sovereign leaving the Euro-zone (Greek referendum ultimatum), money is no longer fungible in and across European banks (deposits) and sovereigns as it seeks the stability of a narrower and narrower core. Arnaud Mares, of Morgan Stanley, who wrote the initial and definitive Greek story long before most others, brings up this very point; questioning the fungibility of Greek Euro deposits with French Euro deposits, for example, and interpreting the situation as a 'run on banks and governments'. His view that without a clear path to a fiscal lender of last resort - or a true fiscal federalism across a united Europe - which ensures solvent governments will never go illiquid, then the December 9th decisions mark a bifurcation point of critical import.
If governments choose to engage on the route to fiscal federalism, we believe that this does not mark the end of the crisis. It could, however, mark the beginning of the end of the crisis, as it would be a decisive first step towards stabilisation and a European federation. The alternative could well be the beginning of the end for the European confederation.
Europe has to choose between debt assumption (enhanced federal control of national budgets accompanied by centralised funding of governments) and a debt jubilee (wide-scale debt repudiation), with all the social, economic and political consequences this entails. Mares' four-question-framework for considering the words and deeds of December 9th is critical, though complex, reading to comprehend the tipping point we are at.
It’s fascinating to watch things play out as we rapidly approach the final rounds in the end game of the great game. The great game is of course the never-ending global struggle for power and dominance. The current entrenched powers that be have been in their positions for a very long time and they have no intention of giving up that role. What the moral and decent percentage of humanity need to understand in no uncertain terms is that these folks and their minions have no conscience. They could care less how many starve to death, get blown to bits in war or waste their lives away in front of the television set watching Snookie on the Jersey Shore. In fact, I am certain that they totally get off on these things. Degrading humanity into an animal-like state clearly appears to be their aphrodisiac. Notice how the media encourages people to go out and trample each other for a $2 waffle maker on Black Friday. The scenes of people running into Wal-Mart or Best Buy in the early morning hours when they should be at home with their families having conversation after Thanksgiving dinner reminds me of scenes of cattle being shuffled into a sorting pen. Actually if you look at this video the cattle appear much more civilized http://www.youtube.com/watch?v=C71324F_Q-8 (just go a minute and a half in). I think the second step after one sees the insane matrix we are trapped in is to free yourself from it mentally and emotionally. It is the mental and emotional control that they are really after. That is the most powerful and effective tool of control so don’t give them the satisfaction. Try to buy local and support your communities. It may cost more but in that case just buy less. You will feel good about it. More specifically, anything encouraged by the mainstream media, like spending money you don’t have on superfluous items made in China with slave labor and sold to you at a giant tax dodging corporation should be avoided if possible. With that out of the way, on to the main topic of this paragraph. The good ol’ SDR. I will tell you one thing right now. When TPTB progress to talking about IMF rescues and SDRs we are the end of the line boys and girls. This is the LAST play they have in the conventional playbook.
Nassim Taleb rants against it all the time: the propensity for the media to frame a narrative, or a plotline, to explain market moves. His contention is that for the human mind it is always far more reasonable to have a cause and effect relationship to what is effectively an engine of chaos at the margin, especially these days when the margin is defined 70% by various algorithms, all of which engage in often times illogical feedback loops (such as the ES is high because of a high EURUSD, which however is high due to stressed French banks liquidating USD-assets and repatriating the funds to shore capital) and/or with levered synthetic products such as ETFs, amplifying the noise. On the other hand, sometimes a narrative fits: what Art Cashin describes today as the "post hoc" syndrome. Is he right, or is the human mind desperately grasping to attribute a pattern, and thus pretend it is in control, when faced with the strange attractor that modern capital markets have become. You decide. Here is Art explaining the basics of "post hoc", aka Monday Morning quarterbacking.
In the wake of chopping its Central Bank swap rates, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right. The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks). Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks. Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.
Given the better-than-expected ISM print earlier, one could be forgiven for believing that the US is just fine thank you very much. Our earlier discussion of the dispersion in the ISM sub-indices, and yesterday's discussion of the PMI 'catch-up' nature of the very recent pre-holiday seasonal orders given the unusual slump in October may weaken the decoupling view but strategists will extrapolate trends as normal. Whether you believe in tooth-fairies or decoupling, Goldman's Global Leading Indicator continues to accelerate downward and moved into negative territory for the first time since August 2009. Amid a broad deterioration in components their outlook for global growth remains soft, even as the US export miracle remains alive and well.
Just when you thought it was safe to go all-in buying financials, stocks, commodities, Chinese IPOs and even Tilson's fund, the last few hours of Europe's day was very disappointing. Commodities took a fairly serious plunge as the dollar strengthened (macro data? or just a reality slap). Credit and equity markets oscillated but legged down into the close and ES also slipped to day's lows as we closed. Sovereigns were on a tear, thanks obviously to a helping hand early on from ECB's SMP program, but even they started to leak back wider in spread and higher in yield into the close. It was not cataclysmic, obviously, but was hardly the follow-through risk-on day that so many had hoped and dreamed of last night and most notably, broad risk assets in general have been leaking lower since US close last night, leaving ES rich relative to CONTEXT.
The system is not unsustainable; it is already broken, and needs to be put on a path of real, concrete productivity and growth (labor, learning, creative application, quality of life, etc.), not malignant expansion of credit and debt. My argument is that debt forgiveness is an essential mover in this necessary transformation. Debt in its current ideological form, must be decisively repudiated in practice and replaced with a working system based on healthy, productive principles. This process of repudiation includes extinguishing delusional economic assumptions and practices—the parasitic “skim-scam” of “internalizing gains and externalizing liabilities” in an inherently interconnected system, and the addictive habit of leeching off the future. Transformation involves “paying forward” our talents and investment in the growth of a stronger, safer, and more solvent future. This will be discussed in the next part.
Anyone who held only cash all year, and followed our advice to do the inverse of the ridiculously overly publicized in every possible venue "Tilson trade" (as in buy GMCR and short NFLX) on November 11, can now unwind, having made not only their year, but guaranteed themselves a place in the top 0.01% performing hedge funds in the world in 2011, with a 50% return in two work weeks, and likely the opportunity to raise their AUM by billions in 2012 as everyone else still flounders with ridiculous momentum, 13F mimicry and beta chasing strategies. We can only hope and pray that Whitney makes it once again all too public what his next trade will be.
Watch Live As A Recusing Gary Gensler Tries To Explain Why The CFTC Failed Massively In Its MF Global OversightSubmitted by Tyler Durden on 12/01/2011 - 12:11
Nothing like watching one Goldmanite explaining why he failed to prevent another Goldmanite from (allegedly) stealing hundreds of millions in customer accounts. Linked below is the live hearing by the "Continuing Oversight of the Wall Street Reform and Consumer Protection Act" in which Schapiro and Gensler are held to account for their epic failure with MF Global oversight.
A week ago, Zero Hedge brought up the last Hail Mary available in Europe's fiscal arsenal: the Redemption Fund. Specifically we said, " There are currently three options being discussed for the Stabilittee bonds - all of which have more than short-term time horizons for any potential implementation and so we suspect, as CS mentions, that the talk of the Redemption Fund from the German Council of Economic Experts will grow louder as an interim step" and quoting Credit Suisse, " One proposal that might be able to co-exist with the Treaties as they are is the recommendation of the German Council of Economic Experts, pooling sovereign debt in a Redemption Fund as we discussed briefly last week. We are quite surprised that the idea does not seem to have generated more traction in the press since it is one of few proposals that actually provides a means for reducing debt (rather than moving it around the euro area) and is aimed not to fall foul of the German Constitution. Something based around this idea might be a contender for a precursor to permanent Eurobonds, buying time while the Treaties are changed." Sure enough here is Reuters showing that it only took Germany one week to catch up to what our readers already knew, from Reuters: "Germany will propose setting up special national funds for euro zone sovereign debt that is over 60 percent of gross domestic product to help build market confidence, the country's finance minister said on Thursday. Wolfgang Schaeuble told reporters that Germany would make the proposal at a European Union summit next week. The funds should be supported by public revenues and dismantled within 20 years, he said." In other words even Europe now admits that the EFSF as even as stop gap measure to fill the void before the ECB acquiesces to print, is dead, and is looking at the last measure available to fix the fundamental problem at the heart of the Eurozone (yesterday's liquidity band aid is just that) which is the rolling of untenable amounts of leverage. Unfortunately, the core provision of Schauble's redemption fund variation which is that the fund is national, "which would get around German concerns about the "communitarization" of debt between European states" means that the idea is hardly unlikely to pick up as it relies on already insolvent countries to fund it. If this is indeed the final backstop to be presented at the European Summit, it may be time to turn bearish on Europe all over again, today's surging sovereign bond prices notwithstanding.
In its November presentation, Hinde Capital presents some observations on why fiat money may be the latest exponential concept on its way to singularity status, with the now traditional implications of what this means for hyperinflation: "High (hyper) inflation is caused by financing huge public deficits through money creation. Even 20% deficits were behind but four cases of hyperinflation. The US government deficit is 10% of GDP, but currently the US deficit is over 30% of all government spending. The world reserve currency is in the red." He also points out the only assets not to join the exponential growth ("Global financial assets have risen 17-fold over the last 3 decades from $12.3 trillion to nearly $210 trillion") in other fiat funded assets and liabilities - gold. To wit: "Gold investor holdings stands at $2.0 trillion (Nov 2011), 0.96% of Global Financial Assets (GFA). In 2000 gold holdings were worth $227 billion, or 0.2% of GFA, but this isn’t the whole story... Today 0.2% would be worth $1.45 trillion ($1800 troy oz. Au) or 0.7% of Global Financial Assets (GFA). Therefore new investment gold only provided 0.26% increase in % gold holdings. In 1968 to 1970 % gold holdings of GFA = 5%, to attain this % at current values of gold ($1,800), $10.4 trillion dollars need to be invested. $10.4 trillion is equivalent to 5.8 billion troy oz at $1,800 or 1.2 x gold ever produced.5.8 billion troy oz. is 3.6 x known gold reserves (based on US Geological Survey). Clearly not only is public ownership miniscule, but to return to the 70s % holdings requires too much gold than these prices can handle. This transfer of gold will take place at much higher prices." And the world's central banks are doing their best to make the transfer happen faster...
We need to look at why the funding rates were cut. It is not because everything is better: Firstly this action, coming in a timely fashion, was certainly warranted and shows a new resolve to act in a banking crisis. However it is the fact it was warranted is the problem and whilst it makes Dollar funding cheaper, it remains to be seen if banks trust each other enough to lend. I am not sure about this and the situation must have been really bad for such action as it was clearly not as pro-active as they may like to suggest. A crisis was very close indeed and whilst this action eases the situation it may not be a cure. The banks still face massive headwinds from here. The RRR cut from China helped risk appetite earlier but again is a clear sign that lower growth and thus easing is on the way in China. Hard or soft landing we don’t yet know but a landing for sure as evidenced in last night’s fall in the PMI data. (China PMI came in at 49 vs 49.8 exp) The steep fall in exports was what caught my eye!
Modest beat with prices paid in line with expectations at 45, New Orders rising from 52.4 to 56.7, but the employment index mirroring the Chicago PMI decline and dropping from 53.5 to 51.8: taken in conjunction with today's Initial Claims, probably not the best way to enter the NFP number, yet we are somehow convinced the final NFP print will be 4 std devs above the mean Wall Street consensus. In other news, the headline number is the highest since June. Curiously, and as always happens in strange times, exports increased and imports decreased. One wonders just how realistic an export surge to imploding Europe or China really was in the past month really was.
Following yesterday's shove-liquidity-down-your-throat-of-last-resort action by the Fed et al. 3M USD Libor fell, admittedly marginally, for the first time since July 25th. The 0.1bps compression was practically insignificant as only 4 of the 18 member banks actually reduced their bids - Citi, Rabobank, RBC, and UBS but we are sure headlines will crow of the impact the coordinated central bank action has had already. What is most concerning when we look at the individual Libors of each member is one bank stands out over the last few weeks. Given that we know the dollar funding market is highly stressed (USD-cross currency basis swaps), this appears to be the only efficient way to understand which bank might be under the most stress. Given Credit Agricole's notably weak Tangible Common Equity Ratio and the fact that its Libor was such an outlier recently, it is hard not to suspect the global stick-save was instigated because this $1.59tn asset-heavy bank was on the verge of failure.