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On Capital Controls

What are capital controls? Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

  • Setting a fixed amount for bank withdrawals, or suspending them altogether
  • Forcing citizens or banks to hold government debt
  • Curtailing or suspending international bank transfers
  • Curtailing or suspending foreign exchange transactions
  • Criminalizing the purchase and ownership of precious metals
  • Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders. This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

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Pimco Reports First Treasury Holding Increase In 2012, First Duration Increase Since October 2011

Overnight, Pimco's flagship Total Return Fund posted its monthly update, with several notable highlights. First, total holdings in the fund rose to a record $260.7 billion, a $2 billion increase over April. Next, following months of consecutive reduction in the firm's Treasury holdings, the TRF reported its first TSY increase, rising from 31% to 35%, a modest number historically, but definitely a change in trend. It also appears that Gross has had his fill of MBS, which as we all know too well by know, is how he plans on frontrunning the Fed's next QE episode. At 52%, it was just a modest decline from the April 53%, and in dollar terms the $136 billion in holdings, is only the second highest ever. Still, it is notable that instead of continuing to load up on MBS, Gross is now "diversifying" into Treasurys. All other asset classes were relatively flat, with margin cash increasing slightly from -18% to -21%, or short $55 billion. Finally, the most interest data point has nothing to do with the portfolio structure, but the duration of holdings: the effective duration rose for the first time since October 2011, increasing from 4.61% to 4.81%. Is Gross finally taking a peek from underneath his shell and going to the long-end?

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Guest Post: By Incentivizing Debt, We've Guaranteed Debt-Serfdom and Stagnation

Incentivize debt, and you end up relying on debt as a sustitute for productivity and income. Increase debt, and there's not enough income left for productive investments that might boost income. Incentivize debt via making interest tax deductible, and you create a self-reinforcing feedback of a rising share of declining income being devoted to interest payments. With demand and borrowing both suppressed by debt-serfdom, demand for housing, goods and services declines. Borrowing more to consume simply speeds the cycle of rising interest and falling net incomes. Incentivize debt and you create multiple overlapping death spirals. We are seeing the death-spirals play out in a fractal manner, from households to nations to entire regions. High debt levels lead to high interest payments which lead to low investment and savings rates which lead to lower productivity which leads to stagnation of income, consumption and investment: in other words, a death spiral.

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Meanwhile In Switzerland...

..... The entire bond curve through the 5 year point is now negative (for the first time ever). At this rate, courtesy of the FX peg and the SNB's free put option, whereby EURs are converted into CHFs at a furious pace even as the facade of a collapsing Eurozone is itself crumbling, and the proceeds are use to buy Swiss bonds ever further into negative territory, we may soon have an entire bond curve trading at negative territory. Which, paradoxically, would lead to that Keynesian wet dream: the more debt Switzerland issues, the more money it would make courtesy of negative interest expense, literally, and the faster it would pay down its debt. Curiously, this may not be a bad offset to losses that the SNB is currently experiencing due to its currency peg. And some thought bizarro world was a sitcom construct.

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The Spanish 'Legal-Arbitrage' Bond Trade Is On

As subordination and the inevitable cram-down of European sovereign debt becomes increasingly clear, the 'legal-arbitrage' that we were first to point out back in January in our Subordination 101 post (which worked out extremely well for Greek PSI holdouts), is beginning to be priced into Spanish debt also. As we pointed out yesterday (here and here), being long non-local-law Spanish bonds against a short in a well-matched local-law Spanish bond offers significant upside should things start to get really-ugly (as opposed to the current just-ugly) in Europe. It seems obvious to us that, arbitrage aside, bond portfolio managers should be seeking out these non-local-law bonds and swapping into them (as part of their Fiduciary duty to their investors) if their mandates force them into owning Spanish bonds. In the meantime, as is clear from the chart below (and noted that liquidity/sourcing of the non-local-law bonds is tough but that's why you pay your bond broker so much) that the 'trade' or swap is beginning to be positioned (and especially the last two days where the non-local-law bond has actually risen in price as the local-law bond has crashed).

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"Uganda Is Not Spain"

Nobody can forget how over the weekend Spanish PM Rajoy told economy minister de Guindos to keep a stiff upper lip, and that, lest someone forget, Spain is not Uganda. Two days later nobody is laughing: Spanish bond yields just pushed to Euroarea records, Fitch just downgraded the bulk of Spanish banks, and it looks like Spain may need a second bailout before the details of the first one are even ironed out. However, one entity is not amused. Uganda. Or perhaps, is very amused, depending on one's perspective.

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Guest Post: The ‘Lesser Of Two Evils’ Con-Game

Lesser Of Two Evils?  There’s No Such Thing…

First of all, asserting that there is such a thing as a “lesser of two evils” is an act of naivety.  It relies on a very dangerous assumption; that one can somehow quantify which candidate is going to hurt the country less.  I’ve even read essays by people who pretend they can mathematically delineate the “more evil” of the evils!  Not surprisingly, their “logic” invariably leads them to proclaim the lesser evil to be the candidate of the party they happen to belong to.  Ignorant Republicans always see the Democrat as the greater evil, while ignorant Democrats always see the Republican as the ultimate monster. Here’s some math for you:  there are two candidates for President of the United States, one is a cannibalistic serial killer who plans to murder 20 more people with his own hands while in office.  The other is a cannibalistic serial killer who only plans to kill 19 innocents personally.  Which candidate do you support?

The correct answer is NEITHER.

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What Does European Credit Know That Stocks Don't?

European credit markets are near one-week wides, having tumbled dramatically since yesterday's open. Investment grade credit is leading the charge followed by senior financials as professional investors look for macro protection - we suspect ahead of this weekend's election. However, European equities are modestly higher from yesterday's close and remain higher than Friday's close. Credit markets had their own dead-cat-bounce at the open this morning but that has since faded significantly, so for now, as we have said again and again 'credit anticipates and equity confirms', it seems credit is seeing something a little less sanguine ahead for now. In the meantime, Spanish and Italian sovereign debt is pushing higher in yield (Spain +74bps from yesterday's open to euro-era record highs) and Swiss 2Y rates have hit a new record low at -36.6bps.

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"Due To The Current Market Environment In Europe", Saxo Bank Quadruples CHF Margins From 1% to 4%

Yesterday, Reuters royally spooked the market when it announced that Europe is in all seriousness considering full blown capital controls, including border halts and ATM closures. Subsequently, various European talking heads aggressively tried to talk down this latest development. However, overnight Saxo Bank appears to have focused on the former and not the latter, and sent out an email with the following key text: "Due to the current market environment in Europe, Saxo Bank is adjusting the margin requirement for Swiss Franc (CHF)." Specifically, the margin is going from 1% to 2% on June 14, to 4% on June 21. How soon until margins become so high that they effectively act as an FX trading prohibition- i.e., an implicit "capital control", and how long until all other exchanges get the memo next?

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Euro-Fatigue Storm Rising

The ongoing drama and chaos across Europe has seen the rise and spread of a number of 'extremist' anti-EMU and anti-bailout parties. As JPMorgan notes, the political consequences of reform fatigue are high. Many countries have seen the emergence of nationalist parties but only France, Italy, and Greece have parties advocating EMU withdrawal (for now). This is exactly what we discussed as likely to occur and was quantified here (and here) as inevitably leading to chaos, judged empirically, when austerity has been imposed.

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Spanish Bond Yields Hit 2012 Highs As Merkel Dismisses Eurobonds

Spanish bond yields have leaked slowly higher all day but the very recent news from Merkel, talking on the G-20, that:


has pushed Spanish CDS and bonds to they highest closing levels for the year and just shy of intraday post-EU record wides. For context, these are 15 year high yields at 6.67% and while they 'feel' dramatically high, Spanish bond yields were over 12% in 1995 (but the current spread to Bunds is dramatically wider) highlighting why focusing on the spread not the yield is now critical. 5Y CDS are holding above 600bps again (record wides) and 10Y Spanish spreads (over Bunds) are at 527bps - near all-time (pre- and post-Euro) wides. The last two days have seen a dramatic surge of 38bps from Friday's close and 65bps from Monday's open as Goldman's 'long' short-dated Spanish bond bet continues to Corzine the Muppets.

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Ahead Of Jamie Dimon's Senate Testimony, Who Knew What, When: The Full Infographic

One day ahead of Jamie Dimon's blockbuster appearance before the Senate Banking Committee, Bloomberg has released the definitive timeline infographic of who knew what, when, together with damning evidence that, contrary to what has been represented by JPM execs, the firm knew about the massive risk, which an in house risk manager described as "trying to land a Boeing 747 without flying lessons", as far back as 2010. Not only that but the firm was actively engaged in fudging its VaR for years in an attempt to hide the monster in the closet which we dubbed, long before the details were exposed, the "world's largest prop trading desk". Well, now the monster is out, and nobody wants to come within one bid/ask spread of it. And tomorrow, Jamie will have a fun time explaining just how he let all of this happen for years while potentially engaging in material 10(b)-5 fraud in his public filings and statements.

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Gold Deposits Of USD 1 Billion To Be Collected By Turkish Bank

Turkey remained the world's number one minter of gold coins in 2011. There is an increasing tendency for gold bars to be retail investors' vehicle of choice – although gold coins still retain a majority market share. Turkish people can pay in gold in certain foreign exchange houses and most jewellers will accept gold as payment. Turkish banks are is now offering digital gold saving accounts. Turkey expanded its gold reserves by 29.7 metric tons in April. Turkey’s bullion reserves climbed to 239.3 tons last month meaning that Turkey increased their gold reserves by 14% in April. The central bank on March 27 doubled the share of lira reserves banks can hold in gold to 20%, saying it would provide 6.1 billion liras ($3.3 billion) of extra liquidity. "This addition," the WGC says, "was the result of a policy change under which the central bank will now accept gold in reserve requirements from commercial banks to help the banks utilize their gold in managing their liquidity." Some analysts have suggested that the increase in Turkish gold reserves, as reported by the IMF, may actually be a form of “double accounting”. Whereby the gold held in Turkish banks client’s gold account is transferred from the local bank as a reserve to the central bank, from where it then figures as gold reserves.

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Import Prices Have Largest Drop Since October 09

MoM import prices met expectations with a significant drop and its largest drop in almost 2 years (after the prior drop was revised up to unchanged) but year-over-year saw import prices drop for the first time in 32 months. It seems energy prices were largely responsible as petroleum was down 4.2% MoM - the largest drop since May 2010. The price index for import fuels declined 3.9 percent over the past year after rising 43.7 percent for the year ended May 2011. The decline over the past year was the largest 12-month drop in fuel prices since the index fell 14.2 percent for the October 2008-09 period. Imports ex fuel inched lower -0.1% in May but despite this drop, imports prices for non-fuel imports rose 1.0% YoY. So it seems there is a little here for everyone but not enough for anyone.

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