As usual, JPMorgan's Michael Cembalest cuts to the wick of the problems facing European leaders. This time with a rather sad analogy to that head-in-the-sand abomination of a bird called the emu. The Economic & Monetary Union (EMU) and its plethora of finance ministers, leaders, and bankers appears more and more similar to its aviary analogy. Cembalest notes, Europe’s long-awaited sovereign and bank bailout package will soon attempt liftoff; we will know more after yet another summit on Wednesday. There are flaws that may weigh this emu down, as annotated in the picture below. Why is this so important? Bank recaps in Sweden (‘92), the US (’92, ‘08), Japan (’99) and Asia (’98) were close to marking the bottom of the equity market cycle….but were not designed using the equivalent of the “Goal Seek” function in Microsoft Excel.
Chart Of The Day: All Aboard The Beta Train As Correlation Between Hedge Fund Returns And Market Hits All Time RecordSubmitted by Tyler Durden on 10/24/2011 - 09:49
For anyone debating whether or not it makes sense to pay some hedge fund manager 2 and 20 to "actively" manage their money, we have the definitive answer: no. As the following chart from BofA's Mary Ann Bartels demonstrates, the correlation between 1 Year rolling returns for the HF community and the S&P just hit an all time high of just under 100%! In other words, alpha is now officially dead - the only strategy left in a world in which all phone conversations with "expert networks" are bugged, and where hedge fund managers actually go to jail for insider trading, is chasing beta. The more levered the better. Which explains not only the dramatic surge in market vol in the past several months as the entire "hedge fund hotel" shifts from one side of the boat to the other at the same time to catch the next wave, but that anyone deluding themselves that there is any alpha left in this market which is now entirely controlled by the central planning authorities, should probably reassess their strategy. Bartels puts it most succinctly: "Hedge Fund 1-year rolling correlations to the S&P 500 are at historic highs. Sustainable high correlations to the equity market have not been a typical pattern. This begs the question: are there too many hedge funds chasing too few returns?" The answer is all too obvious, and absent something changing dramatically very soon, we believe this is the beginning of the great unwind for the nearly $2 trillion in AUM held by Hedge Funds, and their transition to passive strategies. After all why pay at least 20% of any upside, when one can hand over less than 1% in transactions costs to the SPY or ES or any of the 8 trillion other ETFs peddled by Blackrock?
Following four straight days of market intervention by the ECB through Italian BTP purchases, the European central bank, defiant of all market logic, decided to make it five out of five and once again stepped in with some modest buying in Italian bonds just as they were on the verge of taking out the Friday post-intervention support. Telegraphed buying also pushed up the EURUSD in the premarket session and sent the futures to the pre-opening highs. Granted this is nothing more than just another very short-term fix. What is is quite obvious, is that despite the relentless interventions by the ECB (and central planners around the world), a takeout of the 91 level on the 10 Years (and 6%+ corresponding yield) is a given, after which there is no technical support. By then a far, far bigger EFSF better be ready for deployment. Alas, it won't be.
This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.
Following the inevitable transition of Harrisburg, PA into bankruptcy once the realization that the can can no longer be kicked down the road, it now appears that even the formerly "safe" Jefferson County, which was expected to avoid default, may itself devolve into a Chapter 9 (Jefferson County Democratic Lawmakers May Derail Debt Deal) following another political SNAFU. So while we wait on whether another $3.1 billion in muni debt will go toward the ultimate validation of M-Dub's thesis (if not calendar of events), the next city already prepping to go down the tubes is long-troubled epicenter of the credit bubble: Stockton, CA. Bloomberg reports, "Stockton, California, which declared a fiscal emergency in May, warned it may default on redevelopment agency debt issued in 2006, citing a shortfall in tax-increment revenue. Debt service will exceed available revenue by about $858,000 in the North Stockton project area, according to an Oct. 12 filing with the SEC." As expected, just like in any other house of cards, once the first one goes, the next ones down realize that those who default first (or among the first) default best, as there will be no money left for the stragglers. Expect to see many more cities biting the bullet and making a mockery of all those who in turn mocked the bearish muni thesis.
So we are still in planning to plan mode. The markets remain calm in spite of the fact that any plan was delayed again, and it is perfectly clear no one in power in the EU had attempted to work out a single detail of any plan until last week. There is so much to say about the events of the past week, but I’m left with 4 questions, where we are being asked to believe something far different from the truth.
Growing optimism over the progress in tackling the Eurozone debt crisis together with higher than expected HSBC manufacturing PMI data from China helped risk-appetite in early European trade. In their weekend summit, the Eurozone officials said they planned to use the EFSF to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries. These developments provided strength to European equities in early trade, however appetite for risk was dented somewhat as the session progressed, weighed upon by lacklustre manufacturing PMI data from the core Eurozone countries, together with uncertainty surrounding the issue of losses incurred by the private sector investors on their Greek debt holdings. The private sector participants seemed to be willing to take upto a 40% haircut, however Eurozone leaders wanted a 50%-60% loss. This resulted in European equities to come off their earlier highs, which in turn supported Bunds, while the Eurozone 10-year government bond yield spreads widened across the board. Moving into the North American open, the economic calendar remains thin, however Chicago Fed report from the US is scheduled for later in the session, and markets will keep a close eye on developments in the Eurozone.
- US Treasury considers new debt security (FT)
- Obama to announce help on housing, student loans (Reuters)
- China on China: Double-dip recession unlikely in China (China Daily)
- Berlusconi calls crisis cabinet meeting (FT)
- Sarkozy yields on ECB crisis role, pressure on Italy (Reuters)
- France, U.K. Spar on Role of Non-Euro Nations (Bloomberg)
- Hong Kong looks to private IPOs from China (FT)
- Medicare Program for Doctor Groups Gets Looser Rules (WSJ)
- Banks must find €108bn in new capital (FT)
And so the second leg of the "triangle of terror" (recall Bank Funding Stress discussed earlier which is getting far worse by the day), "Sovereign Stress" returns with a vengeance. In other words, two out of three components of the European crunch have deteriorated to late September levels. Expect stocks and FX to follow shortly.
One of the major issues and talking points in the precious metal markets in recent years has been allegations by GATA and others that bullion banks and central banks may be intervening in free markets and surreptitiously manipulating gold and silver prices and keeping them artificially low. It is an issue that is quite divisive amongst investors and in the market - including in GoldCore where opinions differ. It is an important debate and one that has ramifications not just for the gold and silver market but for markets in general and for free market capitalism. The ‘Great Silver Debate’ took place at the Silver Summit in Spokane, Washington on Friday where Bill Murphy of the Gold Anti-Trust Action Committee (GATA) debated Jeffrey Christian of the CPM Group. The debate, hosted by Kitco, did not see a knockout blow with both contestants voicing their long held opinions regarding the manipulation of silver and precious metals. It was a bit short on time at just 30 minutes and a full hour may have been needed in order to flesh out some of the many issues raised. Christian recently accused GATA of being "a group that makes money by basically bilking gold investors out of fees to support GATA so they don't have to get legitimate jobs." In the aftermath of the debate, GATA secretary Chris Powell accused Christian of "graduating from his usual distortions to outright contrivance." Most of the mainstream media has ignored GATA’s allegations and the debate was not reported. However, an important development over the weekend was an op-ed piece by the respected Gillian Tett in the Financial Times.
This morning, the ECB announced that use of deposit facility as of Friday hit €202 billion (while use of the marginal lending facility jumped to €4.6 billion, confirming that in addition to the USD shortage expressed by the 50-somethingth sequential increase in USD Libor from 0.418% to 0.42%, European banks now have a EUR shortage as well, and hence the FX repatriation and EURUSD levitation). As the chart below reminds, the ECB deposit facility usage is already past the second highest MRO cycle peak, having now surpassed the August peak high of €198 billion. But it's worse than that, because while the events of September lead to the first week of October when the whole world appeared set to implode until the FT rumor (since mocked repeatedly) of a European bail out hit on October 4th leading to a relentless market melt up, in the current post reset cycle, things are coming to a head much faster. To wit, the number of days it has taken since the deposit facility usage reset post MRO, since the beginning of the cycle, is now a mere 11 days: this is how long it took to go from €62 billion to €202 billion. In the previous, September, cycle, it took double that, or 20 days, to get from €76 billion to €210 billion. It seems that for all talk of European improvement, the key angle of the European "triangle of terror" - Bank Funding Stress, is now the worst it has been in all of 2011 and the worst since the first, and very much unexpected, Greek bailout in May 2010.
Confirmation Of European Recession Following "Miserable" Composite PMIs Means French Downgrade ComingSubmitted by Tyler Durden on 10/24/2011 - 07:04
While the market continues to look forward to the latest Eurosummit on Wednesday (which rumor is may be postponed once again) with mouth-gaping expectations, the truth is that Europe "may have already entered a recession" as Goldman predicted some weeks ago, a prediction which was confirmed by today's miserable manufacturing and services PMI numbers. From Goldman: "The Euro-zone flash composite PMI came in at 47.2 in October, down from 49.1 in September. The October reading is below consensus expectations, which pointed to a somewhat more modest drop to 48.8. The decline was registered in both manufacturing and services, though it was slightly more pronounced in the latter (Manufacturing: down from 48.5 to 47.3, Services: down from 48.8 to 47.2). The pace of the decline in the headline output component of the Composite PMI accelerated in October. With its sixth consecutive monthly decline, the composite PMI has reached its lowest reading since July 2009." This is bad, and it gets worse. As Reuters concludes: "The euro zone's debt crisis might already have pushed the bloc's economy back into recession, according to business surveys that showed China's economy taking a stride forward in October." So why is this an issue? Simple - as a reminder in a little noticed statement last week, S&P said it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well there's you recession confirmation. So: where is the European bailout killing downgrade of France?
Dalio: "There Are No More Tools In The Tool Kit" - Complete Charlie Rose Transcript With The Head Of The World's Biggest Hedge FundSubmitted by Tyler Durden on 10/24/2011 - 00:02
When it comes to reading the world's "tea leaves", few are as capable as Ray Dalio, head of the world's biggest (macro) hedge fund, Bridgewater Associates. So when none other than Ray tells PBS' Charlie Rose that "there are no more tools in the tool kit" of fiscal and monetary policy to help America kick the can down the road, perhaps it would behoove the respective authorities to sit down and listen. Or not... and just to buy S&P futures in hopes that record career risk is big enough to force every other asset manager in the market to do the dumb thing and follow the crowd of lemmings right over the edge. Luckily, there are those who have the luxury of having both the capital and the time to not be drawn into the latest sucker's rally. More importantly, Dalio shares some truly unique perspectives on what it means to run the world's largest hedge fund, his perspective on Occupy Wall Street and demonizing wealth and success (in a way that does not imply crony capitalism unlike some others out of Omaha), his views on taxation, on China, on the markets, on Europe and its insolvent banks, most imporantly on the economy and why the much pained 2% growth (if that) will not be nowhere near enough to alleviate social tensions, such as those that have appeared over the past two months. Dalio's conclusion, in responding to whether he is optimsitic or pessimistic, to the current environment of broad delevaraging of the private sector, coupled with record releveraging of the public, is that he is "concerned." And that's why, unlike the recently unemployed David Biancos of the world, who never exhibit an ounce of skepticism, Dalio is among the wealthiest men in the world (and hence a prime target of the #OWS movement).