For our French speaking readers, this makes it all too clear: "Selon plusieurs sources contactées par La Tribune, l'agence de notation Standard & Poor's pourrait préparer la France à la perte de son "triple A"."
UPDATE: Post Fitch's US outlook change, TSYs are unch and Gold is +$7 (more likely on our SocGen QE3 post)
30Y Treasuries rallied 14bps from high to low yield today peaking at the US equity day session open and troughing just prior to the late day vertical ramp-fest that managed to turn what was heading to be a mediocre day into a headline-grabbing risk-fest. Unfortunately, stocks were the only asset class enjoying this exuberance as Oil lost over 2.5% from its highs, AUDJPY and FX in general drifted lower all day and copper and silver slid after Europe's close. The huge burst in volume which ripped us back to VWAP in ES and several of the financials (as BAC was heading towards a $4 handle) was very notable and dragged ES back away from a critically risk-off performance day in CONTEXT. Credit notably underperformed equity and did not partake in the screaming reach for risk in stocks at the close with financials actually much more aggressively net sold in corporate bond land and high-yield bonds seeing selling pressure also.
SocGen has released its much anticipated Multi Asset Portfolio Scenario/Strategy guide titled simply enough "Patience: bad news will become good news" where, as the insightful can guess, the French bank makes the simple case that the worse things get, the stronger the response by global central banks will be. Here is the key quote for those worried that : "A major liquidity crisis should not occur this time, as we think we are on the eve of major QE in the UK, US and (a bit) later on in the EZ." We don't disagree and if there is anything that can send BAC higher it will be the announcement of QE3. Of course, BAC will first drop to a $2-3 handle so question is who has the balance sheet to hold on to the falling knife. The next question is "How big will QE3 be"? Well, according to SocGen, the Fed will preannounce it in the January 2012 FOMC statement, the monetization will last from March 2012 until the end of the year, and will buy a total of $600 billion. We believe the actual LSAP total (not to be confused with the "sterilized" QE3 known as Operation Twist) will be well greater, probably in the $1.5 trillion range as the Fed will finally say "enough" to piecemeal solutions. As to what to do, besides going long some financial stock and hoping it is not the one that is allowed to fail, SocGen has some simple advice: "Buy gold ahead of QE3 as money creation has a strong impact on prices" - in other words just as we suggested yesterday courtesy of the Don Coxe correlation chart. Why gold and not BAC? Because, "Gold is highly sensitive to US QE, as every dollar of QE goes into M0, triggering the debasement of the USD. Gold = $ 8500/Oz: to catch up with the increase in the monetary base since 1920 (as it did in the early 80s). Gold = $1900/Oz: to close the gap with the monetary base increase since July 2007(QE1+QE2)." So go long a bank that may well go bankrupt and return nothing before it at best doubles, or go long a real asset, which will always have value and may quadruple in short notice? The answer seems simple to us...
French Fitch strikes back at the US for not pushing the Fed to do more to bail out Europe. Now it is US Moody's and S&P's turn..." The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon. Fitch will shortly publish its revised economic and fiscal projections for the U.S. and will conduct a further review of its sovereign ratings in 2012. However, in the absence of material adverse shocks, Fitch does not expect to resolve the Negative Outlook until late 2013, taking into account any deficit-reduction strategy that emerges after Congressional and Presidential elections."
Presented with little comment - except to say, financials are down more than twice as hard as any other sector from one minute after the open and healthcare is outperforming. Risk On?
Today's curious news report posted by Iran's semi-official news agency Fars, which was promptly muted, only to be republished by Israel's Haaretz, of a major explosion near the Iranian city of Isfahan, has left many scratching their heads. As Haaretz reports: "Speaking with Fars news agency, Isfahan’s deputy mayor confirmed the reports and said the authorities are investigating the matter. However, after the incident was reported in Israel, the report was taken off the Fars website." Which led many to wonder: is this a real event or merely a provocation designed to make Iranians believe they were attacked? Further complicating matters is the just released news from Washington Post which shows satellite images of the aftermath of another explosion in Iran, this time from two weeks ago at an Iranian missile base. "The image of the compound, near the city of Malard, doesn’t provide any clues as to what caused the Nov. 12 explosion, which Iranian authorities described as an “accident” involving the transport of ammunition. But it does make clear that the facility has been effectively destroyed. Paul Brannan, a senior analyst for the Institute for Science and International Security, which specializes in the study of nuclear weapons programs, said it’s impossible to tell from the image whether the blast was caused by sabotage, as has has been speculated in this explosion and others at transport facilities, oil refineries and military bases in Iran. Brannan said ISIS had recently learned from “knowledgable officials” that the blast had occurred just as Iran had achieved a milestone in the development of a new missile and may have been performing a “volatile procedure involving a missile engine at the site.” So the question stands: is Iran being systematically attacked with the news being covered up for fear that it can not retaliate and thus seem week; is it being sabbotaged on a weekly basis, or is everything just one big media disinformation campaign designed to provoke Iran to lash out? We will probably know very soon, today's "oversold" and now completely disconnected from reality rally notwithstanding.
The judge in the MF Global disaster just got real. The assignment of Louis Joseph Freeh, former Director of the the FBI no less, somewhat assures that Corzine and crew will get their day in court - or at least be vilified enough that someone pays the real price for the wrongdoings. He is the perfect man for the job having investigated, among others, mob connections to Italian pizza joints.
Earlier today, we presented a clip that showed how civilized Americans at a Wal Mart approach the opportunity to save a buck on a towel. Some may have been surprised by the raw and concentrated ambition and fury exhibited by these specimen who would put any rioter in Athens' Syntagma square to shame. Luckily, we have Douglas Adams of the Hitchhiker's Guide fame to explain the implicit fascination with "the towel." After all, when given the opportunity to face the Ravenous Bugblatter Beast of Traal with a cheaper than market price self-defense mechanism, who can possibly say no?
Ever the contrarian, we were somewhat taken aback by the overwhelming majority of respondents to JPMorgan's fixed income manager survey who expect LSAPs in 2012. With 80% expecting QE3, a majority expecting to add to Agency MBS (and high yield and investment grade credit), it seems the Fed's bang for buck from actually enacting the balance sheet expansion will be significantly lower than it hopes. Maybe third time is the charm but it seems evident from discussions that traders have become numb to this manipulation - even if it does have short-term portfolio rotation impacts - but the difference between managers who expect to reduce EUR assets and those that expect to increase USD assets suggests everyone and their cat is waiting to jump in. The diversification/currency trade seems popular as local denominated EM assets are among the classes managers expect to add the most to but duration risk seems very evenly split as the great majority expect 10Y to hold the 1.5% to 2.5% range. Given the survey results, it seems the lack of belief in any significant fiscal stimulus is being discounted by the strong belief that the Fed will ride to the rescue once again.
Almost without exception, the situation gets worse every year. People get bruised and bloodied as crowds battle each other for deep discounts. Last year several people died… and in response, most of the major retailers adjusted their specials and staggered their stores’ opening times to reduce the crowd levels. It didn’t help much, as this year’s barrage of Black Friday incidents underscores yet again how hopeless the mindless culture of consumerism has become. People still trample each other, fight each other, etc. Now they are pepper-spraying each other… or even waiting in the parking lots to mug each other as shoppers exit the stores. (A friend even told me one unconfirmed story of a group of Wal Mart parking lot muggers who themselves got mugged by a rival group of Wal Mart parking lot muggers.) Then there’s this video showing the utter chaos and calamity that ensued when shoppers were fighting over towels put on sale at $1.28 each. Towels.
Without doubt the primary topic of "serious" watercooler discussion in the last several weeks, and likely to last for many months, is whether or not the ECB will print, and if not why not. We have discussed this issue extensively in the past and are confident that the ECB will not be involved before there are at least 2 or 3 major bank casualties, which allows Goldman to step in and claim the wreckage at pennies on the dollar. Naturally, once the dominoes start falling, most likely early next year, the ECB will have no choice as Germany itself will be threatened once every neighboring country is collapsing left and right. But what happens in the meantime: what are the ECB's options short of outright monetization? Below we present the full list of ECB "support measures" that can be implemented that won't infuriate Angela Merkel, as compiled by Reuters. The question of course is not whether any of these can be implemented, but what and how long their impact will be before the dreaded "half-life" phenomenon exerts itself. The other question, of how one can claim the ECB is not monetizing when it is in fact doing not only that, but doing it 30% more on a monthly basis than the Fed as shown earlier, is a completely separate one.
My last article on debt forgiveness, Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy must have struck quite a chord in discussions of the future of the economy. It was re-posted on scores of websites and received over 20,000 reads on Zero Hedge. It also resulted in a reference on the Max Keiser Report and a subsequent interview with Max Keiser. This led in turn to a popularization of a term I used, “fake assets,” to denote the true nature of “toxic assets”. The good news is that people are talking, attempting to assess the situation in real terms, and looking for an alternative to the broken system. The bad news is that this discussion has not been turned very much toward practical directions. The main contention in my original article on debt forgiveness and subsequent interview was simply that ignoring the mathematics of debt (where debt grows exponentially and real growth is limited), especially when magnified by tens, if not hundreds, of trillions of dollars of additional fraudulent debt, is a dangerous fantasy that worsens insolvency and accelerates collapse. “Extend and pretend” cannot provide an answer but can only amplify current destructive trends and delay serious preparation of an alternative.
In the face of ponzi-enabling status quo adversity, Sean Egan is not one to mince his words. Sure enough, here comes today's downgrade of Italy from BB+ to BB, an event which has reminded BTPs, if not stocks for now, just what reality is. From the report: "La Acido Vita - from La Dolce Vita, life in Italy has become sour of late; even without the concerns about Greece, Italy is in miserable shape. Over the past 3 fiscal years, total debt has grown by 14.3% while GDP has shrunk by 2.4%. The annual government deficit of EUR68B and the debt to GDP of 119% place additional pressure on credit quality. Furthermore, Italy will probably have to provide additional support to its banks and will see some pressure on its economy. We expect that Italy's banks will continue turning to the ECB and Italy for support. In 2012, the Republic of Italy needs to finance EUR320B of debt and is likely to experience increasing yields and restricted access without external intervention. As of this weekend the yields on the 6 month notes were 6.5%; rates have been rising despite ECB purchases. The major issue is whether the IMF will become involved and if so, whether the face value of the debt will be cut. Italy cannot support all of its debt." And what is probably worse is that according to what are likely very optimistic projections, EJ sees Italian debt/GDP rising from 127% in 2011 to 157% in two years. Indicatively, the cutoff ratio for a CCC-rated sovereign credit in Egan Jones' view is 150% debt/GDP. Say hello to the triple hooks.