Certainly no one should expect Europe’s banks to suffer their own losses after making idiotic loans to corrupt governments. It’s much easier to stick the people with the bill by establishing a trillion dollar bailout fund with taxpayer money. Problem is, people in Europe are starting to wake up and get it. The anti-euro “True Finn” party in Finland recently surged in the polls to become the country’s third-largest political party and a major obstacle for any European bailout. This weekend, Spain’s ruling Socialist party was hammered with losses as voters voiced their utter disgust with the current government’s handling of the economy. In Germany, this year’s state election results are showing that voters are sick and tired of shouldering the financial burden for the rest of Europe. Chancellor Angela Merkel’s ruling party is losing miserably, though in a pathetically desperate move, some local governments are changing suffrage limits and allowing 16-year olds to vote. This is the strongest indicator yet of how bad the situation in Europe has become: German banks are so over-exposed to the PIIGS sovereign debt that, in the face of political revolt all across Europe, German politicians have resorted to recruiting the Justin Bieber crowd to maintain the status quo.
What a difference a year makes. It was just over a year ago that Greece received its first (and certainly not last) $1 trillion + bailout package from the EU, the ECB and the IMF. Just over 12 months later, all those who peddled Greek bonds to the rest of the world (ahem Germany) are now furiously backtracking, having finally realized what we, and everyone else with half a brain realized from the beginning: it's over for the euro. But fine, let's kick the can down the road for a few more months, which will allow banks, with access to interest-free central bank capital, to literally steal Greece's soon to be privatized assets for pennies on the dollar, and then send the carcass, now picked dry, to the international bankruptcy court. In the meantime, we would like expose all the idiots who like various anchors on Comcast's bubblevision channel, pitched Greek paper to hapless investors, only to see losses (this is not some speculative asset - this is fixed income) of over 40% in one year, and for some reason continue to have a podium from which to spread their lunacy, greed and outright stupidity.
When it comes to currency warfare, one can be polite and gentlemanly about it, like Brazil for instance, which every day, and sometimes on several occasions during the day, will proceed to buy dollars in an attempt to keep one's own currency lower. Or one can do what the Belarus central bank just did, and officially devalue one's currency, in this case the Belarus ruble, by 56% overnight, against every currency out there.
At this point, it sucks to be holding any exposure in BYR. Luckily for those who held their "money" in the form of gold and silver, they just got an instantaneous 56% value preservation and a relative boost in their purchasing power with just one central bank announcement. Also, any and all indebted parties who have BYR-denominated debts are throwing one big party tonight, as their debt was just cut by more than half. And yes, the Greeks are jealous with envy.
Conventional wisdom continues to believe that soon enough, as has been paraded by the various Fed presidents, the Fed will commence various tightening steps, commencing with the termination of reinvestments of various maturing securities holdings, a process that would lead to gyrations in the IOER (and thus the IOER-GC spread which as has been discussed recently has gone negative due to the FDIC assessment fee). Following the reinvestment decision, the Fed would next proceed to drain excess reserves using various operations such as reverse repos, term deposits, and SFBs (a process which many doubt would success when the total amount of excess reserves is set to hit $1.6 trillion shortly). The last step in the Fed's balance sheet renormalization would be to proceed with outright asset sales of its $2.6 trillion in Treasury and agency holdings (as for those billions in Other Assets, nobody knows). Barclays' Joseph Abate does a great summary of the pitfalls attendant each and every step in the process: "In asserting the supremacy of the Fed funds rate as the primary policy tool, the minutes outline the central bank’s longer term objective. The Fed hopes to eventually establish a corridor system – where the FF target is set between a lower bound of IOER and an upper bound of the discount rate. This would require the Fed to drain enough and to shrink its balance sheet sufficiently to push the effective funds rate over IOER and not merely eliminate the current -16bp spread. This might take a few years to accomplish. And in the process, the Fed would probably need to restore bank confidence in the discount window, which was shaken after the central bank was forced to disclose who had borrowed from the facility during the financial crisis." Abate concludes: "Taking all these into consideration, the April FOMC minutes indicate the Fed faces a pretty complicated task." Luckily, the Fed is most certainly aware of this complexity awaiting it as things return to normal. Of course, this whole discussion will be moot if and when the Fed, instead of tightening, proceeds with another monetary loosening episode, which as Jim Grant explained will go from QE 3 to QE n, in which case none of the below is even remotely relevant.
Well, it's all Greek to us, but even if we understood it, the informational value of this presentation (net of lies) is zero at best. It does have some pretty charts.
Just because the US is having so much success convincing the world its debt is money good (but don't anyone dare count the $6+ trillion in GSE debt to the total US debt), the good old US of A has now decided to backstop the debt of... Egypt. Bloomberg reports: "Egypt plans to raise $1 billion by selling Eurobonds this year to diversify borrowing and finance a widening budget deficit after its economy was rocked by the worst political crisis in 30 years. The five-year bonds will be backed by a U.S. “sovereign guarantee,” Finance Minister Samir Radwan said by telephone from Cairo today...President Barack Obama promised last week $2 billion in loan guarantees and debt forgiveness." And when it comes to Uncle Sam giving his assurances to the developing world, size does not matter: "The size is not significant but the backing from the U.S. will help raise the money at a relatively inexpensive cost." Uh, should Congress perhaps have something to say about the fact that America is now somehow the guarantor of recently revolutionary African countries? Because if, heaven forbid, should the extremely stable and economically viable, but otherwise revolutionary Egyptian country suffer default and bondholders demand to be made whole, guess out of whose pocket the deficiency claims will have to be funded...
Two weeks ago we speculated that S&P would downgrade Belgium next as the peripheral fire makes inroads to the core. Turns out Fitch is taking charge on this one. Expect S&P to follow shortly. From the just released Fitch statement which revises Belgium's outlook to negative: "In Fitch's view, without political agreement over constitutional reform, it will be difficult to achieve a balanced budget at general government level as laid out in Belgium's Stability Programme. This would require budgetary surplus at lower levels of government and/or significant social security reform, either of which would likely become entangled in Belgium's linguistic-community dispute. Sustained debt reduction will require fiscal reform as well as fiscal discipline over the coming years, which in turn requires a new government with a fresh mandate." EUR for now pretending it doesn't care.
2, 5-Year Spec Treasury Long Positions Surge, 10 Year Shorts Highest Since August: Is Major Curve Flattening Next?Submitted by Tyler Durden on 05/23/2011 - 11:47
Back on March 18, Goldman Sachs advised clients to do an outright shirt on the 5 Year treasury (with a 2.3% target). And while our skeptical approach to Goldman recommendations has been no secret for a while (as in do the opposite), little did we realize just how pervasive the counter-squid trade has become. Amusingly, since Goldman recommended putting the trade on, net non-commercial speculative contracts (longs minus shorts) have surged to a multi-year high of 265,550 as of May 17. This is nearly double the 137,765 in net contract positioning when Goldman put its recommendation on. While it is unclear how much of a factor, if at all, Goldman's reco has been in this inverse trade recommendation (it appears even the dumb money among Goldman's clients is doing what the smart money and its prop desk is engaging in: namely doing the opposite of what the sell-side recommends), it is very clear that traders have congregated in the short end of the curve, with both 2 and 5 year net exposure near multi year highs, even as the 10 Year, which has seen a rise in yield over the past month, has just tumbled to the highest short exposure since August 2010. That said, will specs again be carted out head first as they were recently in the EUR and USD mauling? And if so, will the ensuing curve flattening result in another major leg down for the financials. The answer is certainly yes, as soon as pain thresholds on either side are breached and the profit taking begins (or the CME hikes Treasury margins).
Watch As O'Bama Goes To An Irish Pub For A Pint Of Guinness (And As His Car Breaks Down While Leaving US Embassy)Submitted by Tyler Durden on 05/23/2011 - 10:37
US President Barack Obama and First Lady Michelle Obama have arrived in Moneygall, Ireland, officially, for a short visit and to visit his ancestral home. Follow live coverage here. Good thing the world is not imploding in the meantime.
Attention Shifts To Rip Van Eric Holder, Who Contrary To Conventional Wisdom, Is Not Frozen In CarboniteSubmitted by Tyler Durden on 05/23/2011 - 10:28
Finally, with about a two year delay, popular opinion has finally caught up with the fact that America has an Attorney General, and that Attorney General is not getting paid $186,600 a year merely to conduct medical research on the dangers of carbonite freezing. In its headline article "Prosecutors Faulted for Not Catching Credit-Crunch ‘Bandits’" Bloomberg has done what every other media was supposed to do years ago, namely ask the well-rested Eric Holder what the hell is the reason that not a single criminal investigation being launched against an entire generation of criminal and corrupt bankers (granted, not all of them....just the multi-millionaires). "In November 2009, Attorney General Eric Holder vowed before television cameras to prosecute those responsible for the market collapse a year earlier, saying the U.S. would be “relentless” in pursuing corporate criminals. In the 18 months since, no senior Wall Street executive has been criminally charged, and some lawmakers are questioning whether the U.S. Justice Department has been aggressive enough after declining to bring cases against officials at American International Group Inc. (AIG) and Countrywide Financial Corp." It is stunning that this is only the first time someone in the mainstream media has had the temerity to actually wonder why nobody had previously thawed Holder from his resting place deep in the nether regions of Jaba's barge where his carbonite statue is publicly presented for all to enjoy.
Greek CDS-Buying Villain Hellenic Postbank To Be First Casuality Of Hellenic "No Bid" Privatization RealitySubmitted by Tyler Durden on 05/23/2011 - 09:56
A little over a year ago, when the Greek CDS scapegoating campaign was in full swing (you see, the reason why the first $1 trillion Greek bailout failed is because of those evil, evil CDS traders: it had nothing to do with Greece being, well, bankrupt), one of the most hilarious discoveries was that among the chief speculative villains was none other than the state-owned Hellenic Postbank. That's right: the government of Greece was profiting by betting on its own demise even as it was making a stink about others doing the same. Well, justice for the insolvent is short, swift and quite poetic. According to Reuters, the first entity to fall to Greece's privatization ambitions will be the very same bank. (Granted, this is not really news: Greek Reporter noted this some time ago, see below). What will be funny is when Greece puts up its insolvent banks on the block and discovers that nobody wants to come within 10 feet of them, unless, of course, it is JP Morgan buying it up with the assistance of Maiden Lane IV, also known as My Big Fat Greek Bailout Taxpayer Funded Conduit, for 2 drachmas per share.
Grimsvotn Ash To Reach UK Tuesday, Civil Aviation Authority Sees "Likely Disruption" To Flights; France, Spain NextSubmitted by Tyler Durden on 05/23/2011 - 09:33
Call it Eyjafjallajokull part two, or, more pronouncedly, Grimsvotn part one. Just like last year, when the unpronounceable Icelandic volcano erupted and covered Europe in ash, grounding flights for about a week, so the 2011 vintage of Icelandic pyroclastic goodyness, contrary to "expert" predictions, is about to cause widespread havoc within European air traffic control. According to Eurocontrol, The European Organisation for the Safety of Air Navigation, whose twitter account is about to become all the rage all over again, "By 08:00 CET #gromsvotn #ashcloud to cover Scotland." In other words, expect massive plane delays, outright cancellations and another round of completely unexpected losses for airline carriers.
Following Saturday's eruption of the Grimsvotn volcano, whose ash cloud is expected to hit the British Isles within 24 hours and create havoc for flights, another natural disaster has struck Missouri, after a tornado ravaged Joplin, where according to press reports at least 89 people have died and 75% of the town has been leveled, making it the deadliest tornado storm since 1953 when 90 people were killed in Worcester, MA. Below we present some of the videos of the devastating aftermath which will likely have ramifications on existing municipal bonds and future issuance.
Jean-Claude Juncker - Europe Is Doing God's Work By Lying About Greek Insolvency, And Keeping EURUSD Longs ProfitableSubmitted by Tyler Durden on 05/23/2011 - 08:51
A few weeks ago, the entire world was made aware that nobody in Europe is to be trusted any longer after Jean Claude Jun(c)ker admitted he lied to the media ahead of what Spiegel had leaked earlier was a "secret" meeting to kick Greece out of the eurozone (turned out to be only half true - Greece was not and will not be kicked out... voluntarily). The purpose for the lie: "self-preservation." Today, in a much anticipated showdown between the magazine (which Greece said would sue for spreading salacious, yet true, rumors), and the bureaucrat, we learn that it is not Goldman, but Europe, that is doing God's work by lying on a daily basis about the Greek insolvency: "The most important commandment is not to inflict harm on others. Although it isn't stated quite that way in the Ten Commandments, it follows from them. The finance ministers of several Euro Group nations had agreed to meet on Friday with the president of the European Central Bank (ECB), Jean-Claude Trichet. Because the financial markets in Europe were still open and trading was still underway on Wall Street, we had to deny the existence of the meeting. Otherwise the course of the euro against the dollar, which had already fallen as a result of your report, would have plunged disastrously." Ah yes, doing God's will by focusing on the greater good, which is making sure those EURUSD longs are not impaired. If this is not confirmation that Europe is run by sociopaths, then nothing is. All this, and much more, including such pearls as "If the donkey were a cat it could climb a tree. But it is not a cat" read the full surreal interview below.
Chicago Fed National Activity Index Drops To -0.45, Lowest Since August 2010, Economy Enters "Below-Average" GrowthSubmitted by Tyler Durden on 05/23/2011 - 08:40
Another diffusion contraction confirms the stagflation thesis is playing out just as expected. "Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010. Three of the four broad categories of indicators that make up the index deteriorated from March, but two of those three categories made positive contributions to the index in April." And more truthiness courtesy of a tumbling Japanese economy and European contraction: "The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year." And the admission: "Parts shortages that resulted from the earthquakes in Japan contributed to a decline in motor vehicle and parts production." But no, GM and Ford are both not seeing any impact from Japan...