It is seemingly clearer and clearer that with the current structure and membership, the Euro does not work. The market seems to be driving the change in the direction of membership changes (via restructurings and temporary devaluations - e.g. GRE CDS and W.I. Drachma) while the euro-zone-'management' seem prone to structural changes (i.e. EFSF umbrella, Euro-bonds, and fiscal union). While the cost of either approach is likely extremely high, some research from early Summer by ESCP Europe suggests a non-trivial approach that reduces aggregate debt for the European sovereign complex by almost 64% is possible. The solution:- bi- & tri-lateral netting, and free-trading.
The bottom line for us that while breaking up the Euro will be extremely expensive and potentially dramatically destabilizing from more than a simple market-perspective (as monetary-union disruptions have historically tended to end in civil hostility), this study provides a simple way to see how a fiscally-joined and central Treasury-based system 'could' come out stronger. However, the path to that 'potential' strength will be littered with the bodies of financial and non-financial equity holders, senior- & sub-debtholders, CDS traders, and FX jockeys thanks to risk-free rate re-adjustments, subordination, ringfencings, forced recapitalizations, and implicit austerity.
Obama Takes Class Warfare To The Next Level With The "Buffet Rule" And A New "Millionaire Tax": Is A Market Selloff Imminent?Submitted by Tyler Durden on 09/17/2011 - 21:03
In his increasingly desperate attempts to pander to a population that has by now entirely given up on the hope, and barely has any change left, Obama is going for broke (or technically the reverse) by setting the class warfare bar just that little bit higher. This time around, his targets are millionaires, who according to the NYT are about to see their taxes soar. Or not: nobody really knows if the proposed "Buffett Rule", affectionately known for crony communist #1, will impact just millionaires income tax, which incidentally is the same as what everyone else is paying, or, far more importantly, their Investment Income, which is where the bulk of America's wealthy income comes from. Which incidentally makes all the sense in the world: two and a half years after Bernanke has been desperately doing everything in his power to raise the "wealth effect" if only for the richest 1% of the US population, it is, from the government's perspective, time for the taxman to come knocking and demand his share of the capital gains. Yet what is lost in this ridiculous proposal are the unintended consequences, which always follow idiotic decisions arising out of central planning, number one of which would be a market crash as those who have paper gains since the market lows of 2009, scramble to lock in the old capital gains tax rate of 15% instead of holding on to paper profits that could end up being as high as 35% (or more): an event that would cut actual income by over 25% should one wait to cash out! And since 25% is substantially more than anything that Twist and QE3 and 4 could hope to achieve, it is all too conceivable that those holding on to profitable positions will have had enough, and take their profits, likely converting them into physical and non-dilutable assets along the way. As to whether they would subsequently relocate to far more hospitable countries, such as those that don't foment class warfare, and implicitly invite a civil war, that remains yet to be seen.
Once upon a time, there were a bunch of banks that said “Hey, forget balance sheets. If they have collateral give them a loan.” For a while it was good money. As long as they got payments, it was OK. So there were more loans, which in turn bid up the value of the collateral. Then the worm turned, because what goes up must come down. When collateral values collapsed, so did lending. It got real hard to keep up with the loan payments. Banks started looking like they came straight out of Goodfellas. This isn’t an American story at all. All of these types of issues are about debt resolution. It has happened for centuries, probably further back in history. You know the story, but perhaps there are some details here that may open eyes. Like why you heard about Japanese CEOs committing suicide. Often it was because to keep their businesses running, they had to pledge all their personal possessions for a loan. The insurance benefit was all that was left for their families when their businesses went bankrupt. This collateral value collapse implies banking crisis implies real problems for a lot of voters. Anywhere this happens, it is a political crisis, and governments have to step in. This is where the story goes from bad to worse.
It appears that once politicians become disentangled from the incessant need for happy-speak and propaganda, truthiness is much more capable of flowing from their orifices. During a speech at the World Economic Forum on Friday, Gordon Brown explains what everyone in power knows, yet is loathed to admit, that "The euro cannot survive in its present form, it’s going to have to be reformed dramatically. We are I think at an hour to midnight in the way that we look at this issue." He adds "European banks as a whole are grossly under-capitalized."
If there is one thing America has had a lot of, it is (failed) attempts to make a political statement by "occupying" Wall Street, although how anyone makes a "statement" on a weekend, when all the trading on Wall Street is done out of Chicago and Mahwah (and not on Saturday), and all the actual capital decisions are made out of midtown (and Shanghai) is a little confusing. Today, Operation EmpireStateRebellion, for whom this is neither the first, nor the last attempt to organize an improvized rebellion, has proceeded with its latest such statement, which will come and go and achieve nothing, as unfortunately the welfare and entitlement society of the US is ingrained far too deeply fo anyone to actually willingly give up on their paper 201(k)s and Social Security benefits, no matter how much of an underfunded ponzi they may be. The only time something, anything, can happen in the US is when that monthly retirement fund, annuity report or Schwab statement shows $0.00 in the bottom line for everyone (middle class that is, the others will have long since converted their paper wealth into physical). Not a second before. That said we do wish them all the best. Those willing to watch this weekend's gathering of idealists can do so at the webcast (with commercial interruptions) below.
If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day. Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro. So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it. The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment? The Fed Scheduled their meeting for 2 days. It now starts on September 20th. Maybe a co-incidence, but what better way to be prepared for new emergency policies? CDS "rolls" on the 20th. On the 21st, all Sept 2011 CDS will have expired. My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system. As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.
Looks like no more official trips for G-Pap anywhere very soon:
- ECB'S WEIDMANN-IT IS WRONG TO ABANDON ALL PRINCIPLES OF MONETARY POLICY BY CITING A GENERAL EMERGENCY-SPIEGEL
- GERMAN CSU HEAD - IF GREECE CAN'T OR WON'T KEEP TRACK WITH RESCUE PLAN THAN AN EXIT FROM THE EURO ZONE IS CONCEIVABLE-SPIEGEL
Some of us were brought into political adulthood reading Walt Kelly’s masterful creation, Pogo, the lovable character living in the Okefenokee Swamp of Georgia. From dialogue used in that comic strip, many were the quotes that attained temporary or even permanent fame, but one topped them all: “We have met the enemy and he is us.” And Kelly’s reference point was not only the environment but his belief that we are… all of us, responsible for our myriad pollution: public, private and political. A quote that couldn’t be more apropos to our times, and our resistance to accept that one fact which is just as important today as it was in a cartoon a half century ago. That resistance was experienced last Tuesday, September 13, during a quasi-debate among Republican contenders for the party’s nomination to the presidential elections next year. Among the eight candidates on stage was (R) Rep. Ron Paul, a long time legislator and the baton carrier for the Libertarian wing of the Republican Party. Ron Paul is definitely not a politician in contention to represent his party given his criticism of the existing bipartisan foreign policy and his anti-war stance. And he knows it!
Did everyone's favorite pathologically lying Prime Minister finally get the long overdue bad news? After yesterday Bloomberg released the following succinct statement... "Greek Prime Minister George Papandreou will meet with International Monetary Fund Managing Director Christine Lagarde in Washington on Sept. 20, according to an e-mailed statement from the premier’s office in Athens. On the same day, Papandreou will also meet with U.S. Treasury Secretary Timothy F. Geithner, according to the statement. Papandreou will visit New York and Washington from Sept. 18 through to Sept. 23, and will speak at the United Nations General Assembly, the email said." BBC News now follows it up with.... "Greek Prime Minister George Papandreou has cancelled a visit to the US because of the seriousness of the country's debt crisis, Greek media reported, quoting government sources. State TV said he decided to return home after consultations with Finance Minister Evangelos Venizelos. Mr Papandreou planned to attend the UN General Assembly and IMF meetings. The decision comes a day after eurozone ministers delayed a decision over debt-ridden Greece's next bailout loan." Having acted like a petulant child most of his political career, did G-Pap just pull the final act and "retaliate" at the IMF and the US for snubbing him in the only way he knows - by refusing to grant Timmy G and Lagarde an audience? In the meantime, Europe believes it is ready to cut the cord with Greece...
Bill Ackman's HKD Revaluation Trade As Predicted By Deutsche Bank In 2010... And Why DB Thinks It Is WrongSubmitted by Tyler Durden on 09/16/2011 - 22:46
Following recent disclosure that Bill Ackman's latest so-called 'slam dunk' idea is a bet on a revaluation of the Hong Kong dollar (as described here), it is interesting to see what someone like Deustche Bank's Mirza Baig thought precisely about the trade that Ackman is proposing as some unique concept (in 151 pages no less) as long ago as November 2010. To wit: "Public complaints against inflation are already loud, and may intensify if the reflationary tide swells further. This could turn up the heat on the authorities. Since 1983 when the current regime was adopted, Hong Kong has experienced CPI inflation as high as 12% and deflation as low as -6%. The current inflation rate of roughly 3% looks benign in this context. In 2008 when inflation crossed 5%, the public debate on monetary policy became more intense, but Hong Kong ultimately braced the peg. In short, we feel the situation will have to become far more extreme, and other policy tools prove ineffective before authorities capitulate and allow a revaluation of HKD. At present, the probability of this scenario is low, in our view. This is why we noted earlier that we expect the reval trade to attract more interest from offshore investors, and possibly reach blow-out levels by the middle of ." And after highlighting the Ackman's trade from 10 months later, DB concludes that "[t]he more likely scenario is that Hong Kong will attempt to ride out the reflation tide with its current policy. The public would gradually move to using RMB for payments, and the HKD would fall into relative disuse. Once China’s capital account is sufficiently open (5-10 years later), Hong Kong would endorse the shift towards China through a formal peg vs. RMB at the then prevailing exchange rate (i.e. without any revaluation)."
Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.
Despite all the negative news, markets are hanging tough. Why? I believe financial markets continue to have a "Moral Hazard" premium priced-in. The idea that governments will step in to save the day remains entrenched in the minds' of investors. There are signs, however, that this premium may soon be re-priced. Indeed, this week's rally has left much to be desired. Copper, nor the credit markets, have confirmed the move higher in equity markets. Breadth has lagged as well. These are signs that this latest rally isn't healthy. Should government authorities fail to come through and Eurozone contagion takes hold, financial markets would begin to compress this premium. A strong break of 1120 would signal that a re-pricing is ongoing. Overall, the global economy is at a crossroads. Until the Eurozone issues are structurally taken care of, I remain very cautious. Capital preservation remains the name of the game.
Moody's Continues Review Of Italy's Aa2 Ratings For Possible Downgrade, To Conclude Review Within Next MonthSubmitted by Tyler Durden on 09/16/2011 - 17:08
"In light of the increasingly challenging economic and financial environment and fluid political developments in the euro area, Moody's is continuing to evaluate Italy's local and foreign currency bond ratings in the context of the risks identified. Moody's will strive to conclude the review within the next month."
Looks like SocGen pulled a TGIF today and in response to its Corporate Market Alert, in which it asked the rhetorical question, "Fed QE '2.5': gold and equities to take off again?" it answers itself quickly and to the point in just 6 simple charts. Here they are...