Remember when back in September 2010, David Tepper moved the market by nearly 2% when he told a stunned world that he is "balls to the wall" stocks because no matter what happens, stocks can only go higher (a ludicrous proposition in any other universe except perhaps for this one where the "Greenspan Put" has since been replaced with the "Bernanke Guarantee"). He did out perform the market that year. The next year he lost over 3%. Why? Was it because the Fed did not go through with promises of LSAP (even though it did engage in QE3 curve shifting by ZIRPing the short end in perpetuity, and buying 91% of long-end issuance). Or because the master can only create alpha when the puppet is flooding the market with liquidity. Whatever the reason, the Pavlovian creature known as the market, has been salivating for LSAP version 2012 since the beginning of January, courtesy of bearish remarks by the Chairman. And yet Tepper has yet to make a guest appearance on CNBC to discuss why the "balls" may make a repeat appearance next to the "wall." Because, as Morgan Stanley's Mike Wilson explains, instead of focusing on the means, investors should consider the end: "I think QE3 will end just as badly as QE2" and "I would feel better if earnings and economic growth were accelerating like during QE2. But they aren’t." Sure enough, one glance at the chart below explains not only why this time QE will be different actually applies, but also why when it comes to comparisons to Japan, the US may be lucky if ends up in the same condition as Japan, when the probability is one of a far worse outcome...
Update: it appears that the Guardian clip is from June when tempratures were a little warmer. That said, today's developments will likely not end in a very different fashion. For today's "riot" developments, follow kathimerini.
In a sad but entirely unsurprising turn of events, the people of Greece are indeed beginning to realize the dead end of their situation and what the politicians are about to do to them (sadly they also are not frontrunning the latest bevy of BS rumors out of Greece which have lifted the EURUSD by 110 pips on the same rumor rerun we have seen over and over and over and over and over and over and... so on ad inf). As the entire country strikes, the UK's Guardian notes that protesters in Athens are once again clashing with police as violence erupts outside the Greek parliament. After 30 years of Keynesian imbalance, is it any surprise that social unrest would once again erupt as austerity impositions are force-fed to a nation who recognizes the almost entire lack of benefits accruing to them from another Troika bailout.
While Bernanke's prepared remarks to the Senate today will be identical to those given to Congress last week, the Q&A session will be different. One notable difference will be Bernanke's take on the "huge jobs number" which was not public last week. He will likely be put to task to answer if and why he still expects QE when the economy is supposedly improving (on the back of a collapsing labor force, yes it makes no sense, don't ask us). We wonder what his non-answer answer will be to that one. Also we wonder if like last week, when answering Congressman Flores, he admits that the ECB collateral certification process is much better than that of the Fed when it comes to issuing cash under the discount window.
As US financials continue to surge, the far-reaching impacts of the simple-sounding-yet-inordinately-complex Dodd-Frank bill are perhaps still not appreciated by all. BusinessWeek have done us all a favor by creating the One Chart that explains it all (with a tongue-in-cheek overlay). Whether you are a B.S.D. prop desk, a homeowner, a filthy rich CEO, a bank, or a mortgage provider, there is a little 'shared sacrifice' here for everyone in the easiest-to-grasp graphic on the lengthy bill we have seen yet.
Not like it will make much of a difference, since whether striking or not, nobody actually pays taxes, but the symbolism of all of Greece being on strike lock down to protest austerity in a day when the latest Troika austerity ushering deal is due in "hours" is not lost on us. Here is Kathimerini (local translated edition) summarizing today's festivities: "According to data from the GSEE, participation in refineries, shipyards, and transport ships, reached 100%, banks, PPC, OTE and EYDAP, 80%, ports and construction 70% while 60% moved to participate in metal workers. About 15,000 workers and members of leftist organizations took part in the strike gathering held at 11 am in Syntagma Square. Despite the constant rain, the protesters staged a symbolic encirclement of Parliament until late afternoon." "One in two people and one in three women are unemployed, 12% of our citizens living with zero income and 50% below the poverty line," he stressed in his speech to the concentration of SHIFT and given the President of the SHIFT Panagiotis Tsarampoulidis , expressing the opposition of the unions' betrayal of the public property, "layoffs, cutting salaries and pensions and" policies that lead to poverty and misery." More details below.
EURUSD jumps 80pips on the Bloomberg headlines. So, what are the steps here? Approve it. Handholding press conference. Lots of "defining moment" and "mission accomplished" speeches. Then what? Rumors that 20 billion or more of bonds won't agree to the PSI (that is only 10%). Rioting in the streets? Then we wait to see the reforms fail? If the PSI works and the people accept their fate, at least we bought a few months in Greece because it takes some time to see the plans actually fail. It will be interesting to see if they try and jam in a retroactive collective action clause and what other details come out of this plan.
After the announcement of the Seaway reversal back in November 2011, a development which some say was oddly anticipated by the market, the Brent-WTI spread collapse from a near record $30 to just $7 in the span of three months. Further alleviating tensions was the fact that Italy is now once again back firmly in control of Libyan Brent production. Yet recent developments in the Persian Gulf, and elsewhere, have led to the Brent-WTI spread trade becoming an energy trader's widowmaker yet again, as it has doubled from $10 to $20 as of early this morning in less than a month. What happens next, and what are the implications for the energy market as a result of the violent move wider? Here is Goldman's David Greely with some observations and some suggestions.
In all the excitement over the December 21 LTRO, Europe forgot one small thing: since it is the functional equivalent of banks using the Discount Window (and at 3 years at that, not overnight), it implies that a recipient bank is in a near-death condition. As such, the incentive for good banks to dump on bad ones is huge, which means that everyone must agree to be stigmatized equally, or else a split occurs whereby the market praises the "good banks" and punishes the "bad ones" (think Lehman). As a reminder, this is what Hank Paulson did back in 2008 when he forced all recently converted Bank Holding Companies to accept bail outs, whether they needed them or not, something that Jamie Dimon takes every opportunity to remind us of nowadays saying he never needed the money but that it was shoved down his throat. Be that as it may, the reason why there has been no borrowings on the Fed's discount window in years, in addition to the $1.6 trillion in excess fungible reserves floating in the system, is that banks know that even the faintest hint they are resorting to Fed largesse is equivalent to signing one's death sentence, and in many ways is the reason why the Fed keeps pumping cash into the system via QE instead of overnight borrowings. Yet what happened in Europe, when a few hundred banks borrowed just shy of €500 billion is in no way different than a mass bailout via a discount window. Still, over the past month, Europe which was on the edge equally and ratably, and in which every bank was known to be insolvent, has managed to stage a modest recovery, and now we are back to that most precarious of states - where there is explicit stigma associated with bailout fund usage. And unfortunately, it could not have come at a worse time for the struggling continent: with a new "firewall" LTRO on deck in three weeks, one which may be trillions of euros in size, ostensibly merely to shore up bank capital ahead of a Greek default, suddenly the question of who is solvent and who is insolvent is back with a vengeance, as the precarious Nash equilibrium of the past month collapses, and suddenly a two-tier banking system forms - the banks which the market will not short, and those which it will go after with a vengeance.
Bernanke testimony before Senate will dominate the morning newsflow, with Greek headlines the usual risk of kneejerk reactions. Otherwise, we get JOLTs and Consumer Credit, hearing on a payroll tax-cut extension, and another GOP primary.
Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.
- Please - we beg you, help us - IMF Urges Beijing to Prepare Stimulus (WSJ)
- Stalemate in talks on Greek austerity measures (Telegraph)
- U.S. Sets Money-Market Plan (WSJ)
- Forty States Sign On to Foreclosure ‘Robo’ Settlement (Diana Olick)
- Greece bail-out funds could be split (FT)
- Japan Adopts Stealth Intervention as Yen Gains Hurts Growth (Bloomberg)
- Papademos to Meet Greek Party Chiefs as ‘Great Sacrifices’ Loom (Bloomberg)
- Glencore-Xstrata deal meets shareholder opposition (Reuters)
- Romney campaign takes aim at rival Santorum (Reuters)
The surge in the U.S. money supply in recent years has sent gold into a series of new record nominal highs. Money supply surged again in 2011 sending gold to new record nominal highs. Money supply has grown again, by more than 35% on an annualized basis, and this is contributing to gold’s consolidation and strong gains in January. The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion.
Overnight excitement from the RBA (no rate cut) and concerns at China's GDP growth given a European recession did nothing to initially slow risk markets early on as they reached up to yesterday's highs as ES (the e-mini S&P 500 futures contract) and BE500 (the broad Bloomberg equity index for Europe) pushed higher out of the gate (as AUD strength sustained carry trades - which appear now to be leaking back off). EUR managed to get back to yesterday's highs and found resistance and once it began to leak lower (and USD lower implicitly) then equities (and commodities on China un-easing concerns) started to stumble pretty hard. Following China's Shanghai Composite, European stocks are now down around 1% and credit is slowly gathering pace to the downside (though not as weak as stocks for now). Portugal showed some strength early on but has given that back as most sovereigns are trading 0-3bps wider in 10Y cash spreads for now (likely the trigger for non-sovereign credit). Some comments from Juncker on special Greek accounts and Klass Knot on the Euro's success top off a quiet morning with some risk off starting to gather pace.
Just a week ago we brought readers' attention to the fact that Francois Hollande, the Socialist Party candidate who is leading most opinion polls in the French presidential election, was extending his lead; well the lead is growing, to now 58-42 in the second round. In a must-read discussion this evening, George Magnus of UBS points to the significance of the French elections and how Hollande's victory could unleash 'a new wave of instability and uncertainty, and that the relative calm or optimism in financials markets since the turn of the year would prove short-lived'. Specifically Magnus highlights how the politics of Europe could well trump the liquidity of the ECB as the main determinant of the Euro Area's prospects. While not playing down the role of the initial (and forthcoming second) LTRO, the UBS senior economic adviser has grave concerns of the much bigger and less tangible issues of sovereignty and national self-determination that will not only impact Greece (very shortly) but also Germany, France, and the Euro-zone itself. The French election could be a catalyst for Franco-German (Merkande? Hollel?) divisions which 'would not sit comfortably inside the ECB or in the minds and actions of investors' and is evidently an unpriced and under-appreciated risk in global markets currently.