• Bruno de Landevoisin
    09/21/2014 - 14:52
    Dear Janet; If I may be so forward, as a concerned citizen of the Constitutional Republic of the United States, it is with great consternation that I feel compelled to write you this distressing...

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Tranched EFSF - Or TARP Lite

The EU is getting closer to having two actual alternatives for EFSF on the table. Partial Protection Certificate (PPC) - the goal of which is to reduce coupons on bond issues - and Co-Investment Funds (CIF) which create a levered vehicle for purchasing/supporting secondary bonds. CIF’s seem to have a better chance of working, though they will require not only cheap EFSF money at the first loss part of the capital structure, but also some “dumb” money at the senior part of the capital structure.  If they get enough of that, they can create some compelling value for “mezz” investors. This is not TALF.  TALF was a much better deal for outside investors.  The range of assets the investor could choose from was broad.  Most fund managers believed they were “cheap” but couldn’t come up with the capital to invest, or handle the downside. TALF was a great opportunity.  CIF’s may create some interesting opportunities, and are at the very least flexible enough, that investors could have a discussion, but they are nowhere near as appealing as TALF was.



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Guest Post: The True Intrinsic Value of Euro 'Money'

Ever wondered about the true intrinsic value of Euro banknotes? Prudent Investor blog reader Kurt Lindlgruber from Austria sent me this pragmatic approach, pulling up the calorific value of such notes once they have lost their purchasing power as did all fiat currencies in history. Lindlgruber's calculations contradict French philosopher Voltaire's famous quote that 'Paper money will always return to its intrinsic value. Nothing.' It is not all that bad. Your soon-to-be worthless Euros will at least keep you warm for a few minutes.



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Ryanair Offers Berlusconi A Chance To "Escape" From It All

Ryanair has demonstrated masterfully how one can take an abysmal situation (the Italian head's upcoming urgent planning for one-way departure options from Italy, following the inevitable collapse of the Italian bond market) and spin it to one's promotional advantage. Today, the Italian website of Ryanair carries those two things nearest and dearest to Silvio's heart: "escape" opportunities and "charity" catalogues.



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Daily US Opening News And Market Re-Cap: November 8

  • Financials received a boost after Societe Generale reported a decline in their exposure to PIIGS nations, together with positive corporate earnings from Lloyds Banking Group
  • According to a government source, Greece’s two major parties have not reached a deal yet on coalition government. However, according to a minister, the Greek PM has said farewell at the cabinet meeting, and has told the cabinet that by tonight he will probably have settled the name of the new PM
  • According to reports, Italy’s main opposition parties will abstain in today’s vote. Also, Italy's Northern League leader Bossi asked Berlusconi to resign
  • Bank of Canada governor Carney said the BoC stands ready to reactivate its extraordinary liquidity facilities if needed, adding that European bank deleveraging could trigger sharp swings in global liquidity
  • SNB’s Jordan said that CHF is overvalued, however he also commented that it would be wrong to engage in a competitive devaluation of the currency


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US Mint Gold Coin Data And Research Casts Doubt On ‘Gold Bubble’

US Mint gold coin sales fell in October leading to further speculation that this was another sign that the gold bull market was over. Rather than idle speculation it is important to look at the facts and analyse them. Dr Constantin Gurdgiev, a non Executive member of the GoldCore Investment Committee, has analysed the data re US Mint coin sales in October and has looked at them in their important historical context going back to 1987. The data since 1987 until today and the evidence from the US Mint regarding the behaviourally anchored, long term demand for gold coins as wealth preservation tool for retail investors does not support the view of dramatic over buying of gold or piling into gold by ‘Joe Public’, the shoeshine boys or the fabled speculatively crazed retail investor that some commentators suggest is happening today. The man and woman in the street in the western world continues to be a bigger seller of gold (jewellery into scrap) than buyer as seen in the western world phenomenon that is ‘cash for gold’.



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Frontrunning: November 8

  • Japan Bought 300 Million Euro Worth of EFSF Bonds, Official Says (Bloomberg) - don't spend it all at once boys
  • Italian Vote Will Test Berlusconi’s Majority (Bloomberg)
  • BOJ Should Seek 10-Fold Easing, Yen at 100, Ex-Board Member Says (Bloomberg)
  • France unveils five-year €65bn savings plan (FT)
  • China’s exporters see slowing growth (MarketWatch)
  • Financing Markets Tighten Spigots (WSJ)
  • MPs demand ‘radical overhaul’ of BOE (FT)
  • Obama to attend Asian economic summits (WaPo)
  • China wealth fund prepares to restructure (MarketWatch)
  • Schapiro Floats Money-Fund Fix (WSJ)


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Italy: The Final Countdown (With A Credit Suisse Voiceover)

Yesterday, when describing the situation in Europe, Robert Rennie, chief currency strategist in Sydney at Westpac said, "with Italy we’re talking about the third-largest government bond market in the world going into a meltdown situation." That meltdown situation could commence as soon as a few hours from now when the 2010 budget review is voted on. Here is Credit Suisse Giovanni Zanni summarizing the probability outcome matrix for Italy between today's key vote and the November 15 multi-year budget votes, both of which are implicit votes of confidence in Italian PM Silvio Berlusconi, whose position over the past month or so has been controversial, to say the least. In summary the outcome probability is as follows: no elections and new "national unity" government: 30%; no elections and broad center-right coalition government: 30%; early elections: 30%; and Berlusconi stays: 10%.



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ECB Deposit Facility Hits €299 Billlion, And Other Key Overnight Session Updates

With few notable highlights in the overnight session which has seen futures do the good ole' melt up, the key event being the Italian 10 Year hitting a new all time record yield of 6.73% and a spread to bunds of just under 500 bps, since retracing following even more alleged ECB intervention, the market is in wait and see mode in expectation for the main event of the day: the vote on the Italian budget plan, which will most likely confirm that Berlusconi has far more than 9 lives, if only for the time being. Attached is Bloomberg's TJ Marta summary of the relevant other overnight events as well as what to expect. And while we know that facts don't matter, here is the main chart we could find to start the day, which summarizes why things in Europe are unlikely to get better any time soon: the amount of cash parked by European banks with the ECB just hit €299 billion, the highest since May 2010.



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Where Are We Now? A Comparative Timeline Approach

Let's assume that the statement "its never different this time" is there for a reason, and is fundamentally correct. In which case this time is just like some other previous time. Furthermore, considering that the underlying reasons for the Great Financial Crisis of 2007 never went away but merely saw their symptoms masked by trillions of dollars in monetary and fiscal stimulus, it is safe to say that what is currently happening in Europe, accompanied by financial failures in the US, is merely a continuation of that epic collapse that started all the way back in 2007 with the failure of New Century. And since history always rhymes, and all too often it is easy to ignore the big picture of the past, we would like to remind readers of precisely what the key events in the first great collapse were, transpose these to the present, and attempt to predict the future. The questions are: who is next, when, where and how. To help us with the answer, here is a brief history of two timelines...



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Euro And Futures Slide As Schaeuble Admits Germany Faces Potential Further Costs From Greece Fallout

EURUSD and US equity futures slid lower this evening as late day exuberance leaked away. This was then accelerated briefly by comments from Germany's FinMin Schaeuble in a German newspaper that Germany faces additional costs should Greece go bankrupt or bondholders face a larger write-down on GGBs. Bloomberg notes the comments suggest additional costs potentially amounting to billions stemming from losses at WestLB and Hypo RE. While this seems like a 'worse-not-worst' case scenario concern, it does suggest that even the venerable Germans do not see the EU Summit (10/26) solution as the endgame in the charade of European sovereign debt and politics.



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Guest Post: Central Asian Setback For The U.S. Military

The last few weeks have seen the U.S. Department of Defense suffer a number of setbacks in its effort to retain military influence overseas. First came the startling announcement on 21 October, when President Obama announced that all American troops would be withdrawing from Iraq by 31 December under the terms of the Status of Forces Agreement. Accordingly, 39,000 U.S. soldiers will leave Iraq by the end of the year. The deal breaker? Washington’s demand for continued immunity for any remaining U.S. troops, and the Iraqi government of President Jalal Talibani couldn’t, or wouldn’t, deliver. Now the handwriting’s apparently on the wall further east, as Kyrgyz president-elect Almazbek Atambaev firmly told the United States on 1 November to leave its Manas military air base outside the capital Bishkek when its lease expires in 2014.



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Swing And A Miss: Complete Hedge Fund October Score Card

With the near record October hope rally a distant memory now, the hope that hedge funds participated in it is also just that. Alas, while most hedge funds exhibited a more than 1x beta on the way down in August and September, most were lucky to get half the upside on the way up in October at best. While there are some outlier surprises, unfortunately it is the ones with an abysmal Sharpe Ratio, so for investors who enjoy huge drawdowns and massive month-to-month vol, they probably lucked out in October. Everyone else: better luck next time. Some very notable let downs: Brevan Howard: -1.25%, Tudor: -2.44%, Moore Global: -2.23%, Landsdowne: -0.50%, Bluecrest: 0.43%, Perry: 3.39%, King Street: -0.04%, Blue Mountain: 0.73%, Fortress Macro: -2.19% and last and probably least JAT Capital: -13.7%.



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Guest Post: Too Big to Fail: Championing the Slow Decline

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The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.  Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested.  Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.



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Presenting The Latest Eurodebt Exposure Masking Scam Courtesy Of Morgan Stanley: Level 1 To Level 2 Transfers

For the latest gimmick to mask PIIGS sovereign debt exposure (where we already know that the traditional fallback of "gross being irrelevant and only net being important" crashed and burned today after Jefferies offloaded precisely half of its gross exposure, while raising net, thereby confirming that gross exposure is indeed a risk), we turn yet again to Morgan Stanley. As a reminder, despite our note that the company's gross exposure (which is now a major risk factor, thank you Rich Handler for proving our "bilateral netting is flawed" thesis) to French banks alone is $39 billion, Morgan Stanley downplayed this by saying that only $2.1 billion is the actual net funded exposure to Peripherals Eurozone countries. We'll see if Jack Gorman will have to revisit his defense after today's Jefferies action. Well as it turns out, we now have gimmick number two, one which will surely delight the bearish investors out there looking to find a bank doing all it can to mask not only its gross but net exposure (and wondering why it has to resort to such shenanigans). Presenting the Level 1 to Level 2 switcheroo, courtesy of, who else, Morgan Stanley.



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