The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.
- Dublin in final push for EU treaty Yes vote (FT)
- Spain cries for help: is Berlin listening? (Reuters)
- Crisis draws squatters to Spain's empty buildings (Reuters)
- EU World Bank Chief Urges Euro Bonds (WSJ)
- but... EU: Current Plan Is Not To Let ESM Directly Recapitalize Banks (WSJ)
- Graff pulls Hong Kong IPO, latest victim of weak markets (Reuters) - was MS underwriter?
- EU Weighs Direct Aid to Banks as Antidote to Crisis (Bloomberg)
- Dewey's bankruptcy: Let the rumble begin (Dewey)
- More are cutting off Greek trade: Trade credit insurers balk at Greek risk (FT)
- Rosengren wants more Fed easing; Dudley, Fisher don't (Reuters)
- EU throws Spain two potential lifelines (Reuters)
- Fed's Bullard says more quantitative easing unlikely for now, warns on Europe (Reuters)
Due to lack of apocalyptic headlines in the overnight session, and some speculation that Spain will get a one year reprieve in hitting its fiscal pact targets, risk has seen a modest rebound, even if the economic data across Europe was sideways at best, and Goldman even released a note titled "Increasing signs that the improvement in the German labor market is coming to an end." Yet the market, desperate for good news, took reports of German retail sales and French consumer spending, which came slightly above expectations, as an indication that somehow, somewhere Europe may be getting better and ran with it. Of course, with the EUR oversold to record levels, not much is needed for a brief covering spree. That said, with lots of economic news on the docket, including the Irish Fiscal Pact referendum, expect much headline kneejerk reactions during the trading day, which will likely make for a very volatile session.
Plus 5% or minus 5%? That is the question and frankly it hinges far more on central bank and political policy than on any economic data, earnings, new products, etc. So it feels like TARP week all over again. We may not get the 8% swings we got then, but the volatility is picking up and it is difficult to do much in the short term when the real driver, like it or not, will be what decision a bunch of politicians and central bankers, each with their own agenda, goals, and baggage come up with.
It seems the Muppets have been well-and-truly Oscar'd this time. Combining Goldman's once-in-a-lifetime equity buying opportunity position recommendation with their short Treasuries trade has produced an astoundingly un-positive return of -29% in just 48 days (based on SPY (stocks) and TBT (ultra-short TSYs given duration and beta). Extrapolated using the only tool that counts (Birinyi's famous ruler) this means your account is Corzined by Thanksgiving - happy holidays.
"People need to stop expecting simple solutions" is how David Santschi succinctly describes to Charles Biderman the delusion that so many European leaders (and seemingly US and European investors) perceive our world. The prevalence of lying and delusion in Europe is what worries the TrimTabs' chaps the most - especially since in a Fiat money system (where money is backed by nothing but confidence) - with the people running the system lying on a grand scale, the chance of systemic failure are very high. He is careful to point out that this is not just a European issue, we in the US are just as delusional, but the European issues are simply more acute. Simply put, "losses have to be recognized honestly" and Biderman's bro' asks rhetorically "why on earth are we five years on still trying to bailout bondholders and banks so they don't lose money on their crappy debt - it's crazy." The two gentlemen of the Bay Area then describe why money-printing does not solve the problem as Europe faces solvency, not liquidity, problems (detailing exactly our thoughts on the fact that so many of the supposed solutions have/will fail and "there aren't any painless solutions to a debt problem". Avoiding all EUR-exposure, holding USD cash/TSYs short-term, and gold as a long-term insurance cover is how they suggest one is positioned. While the tone is less 'ranty', the content is just as pithy - six minutes well-spent for a summary of why Europe's (and the US) problems are far from over - no matter how much hope is placed in CB largesse.
The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default SwapsSubmitted by Tyler Durden on 05/30/2012 - 19:00
As anyone who has ever traded CDS (or any other OTC, non-exchange traded product) knows, when you have a short risk position, unless compliance tells you to and they rarely do as they have no idea what CDS is most of the time, you always mark the EOD price at the offer, and vice versa, on long risk positions, you always use the bid. That way the P&L always looks better. And for portfolios in which the DV01 is in the hundreds of thousands of dollars (or much, much more if your name was Bruno Iksil), marking at either side of an illiquid market can result in tens if not hundreds of millions of unrealistic profits booked in advance, simply to make one's book look better, mostly for year end bonus purposes. Apparently JPM's soon to be fired Bruno Iksil was no stranger to this: as Bloomberg reports, JPM's CIO unit "was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter. The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter. "I’ve never run into anything like that,” said Sanford C. Bernstein & Co.’s Brad Hintz in New York. “That’s why you have a centralized accounting group that’s comparing marks” between different parts of the bank “to make sure you don’t have any outliers” .... Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm.
Bankia is done: at this point the only questions left are i) what will be the final bailout cost ii) who will pay for these costs, and iii) whether the bank has enough beach towels to satisfy the onslaught of manic Spaniards desperate to hand over their €300 euros to the insolvent bank in exchange for some Spiderman-embossed linen. Oh, there is one more question: who is next. Now, as we showed earlier today, in the aggregate the answer is simple: everyone. But, in a very Stalinesque sense, where everyone is merely a statistic, that is essentially the same as saying no one. It is also certainly not helpful to any Spanish readers who may be worried about their deposits (and investments) which in a world of total disinformation, will first be lost before the government advises caution and safety. So instead we go to Goldman Sachs which has conveniently constructed the following analysis, which replicated the loss provision calculation of Bankia, and applies it to the other listed banks. The result: in addition to the €19 billion in bail out costs for Bankia, Spain will need to spend at least another €25 in bailout funding for six other listed banks which include CaixaBank SA, Banco Santander, Banco Popular Espanol, BBVA, Banco Espanol de Credito SA, Bankinter SA.
Between headlines of Bankia's demise and the growing deposit outflows from Spanish banks, perhaps the market is doing its job. According to the EC's Stability Report, via UBS, one measure of bank sector capacity and efficiency (population per bank branch) shows Spain in a dismal worst place with the least efficiency (or highest over-capacity). Of course, we would suspect that whatever state-funded reach-around bailout the Spanish government comes up with next will not contain a 'revert staff/branch levels to European norms' provision - better to pay up for mis-allocation of capital. Nonetheless, the large number of local bank branches in countries like Germany, France, Italy and Portugal indicates a potential for further consolidation and restructuring there also.
We know the U.S. is a big and liquid (though not really very transparent) market. We know that the rest of the world — led by Europe’s myriad issues, and China’s bursting housing bubble — is teetering on the edge of a precipice, and without a miracle will fall (perhaps sooner, rather than later). But we also know that America is inextricably interconnected to this mess. If Europe (or China or both) disintegrates, triggering (another) global default cascade, America will be stung by its European banking exposures, its exposures to global energy markets and global trade flows. Simply, there cannot be financial decoupling, not in this hyper-connected, hyper-leveraged world.
All of this suggests a global crash or proto-crash will be followed by a huge global money printing operation, probably spearheaded by the Fed. Don’t let the Europeans fool anyone, either — Germany will not let the Euro crumble for fear of money printing. When push comes to shove they will print and fiscally consolidate to save their pet project (though perhaps demanding gold as collateral, and perhaps kicking out some delinquents). China will spew trillions of stimulus money into more and deeper malinvestment (why have ten ghost cities when you can have fifty? Good news for aggregate demand!).
Time To Load Up On Denmark CDS - Moody's Cuts Nine Danish Financial Institutions: Luxor Thesis In PlaySubmitted by Tyler Durden on 05/30/2012 - 15:35
Last time we looked at Denmark it it was in the context of Luxor Capital which had some very ugly things to say about the Scandinavian country in "Rotten Contagion To Make Landfall In Denmark: CDS Set To Soar As Hedge Funds Target Country." Now, 6 months later, Moody's has finally gotten the memo: "Moody's Investors Service has today downgraded the ratings for nine Danish financial institutions and for one foreign subsidiary of a Danish group by one to three notches. The short-term ratings declined by one notch for six of these institutions. The rating outlooks for five banks affected by today's rating actions are stable, whereas the rating outlooks for two banks and for all three specialised lenders affected by today's rating actions are negative The magnitude of some of today's downgrades reflects a range of concerns, including the risk that some institutions' concentrated loan books deteriorate amidst difficult domestic and European conditions, with adverse consequences on their ability to refinance maturing debt. The latter concern is exacerbated by structural changes in the terms of Danish covered bonds and the mix of underlying assets that lead to increased refinancing risk. While Moody's central scenario remains that financial institutions show some resilience to what will likely be a prolonged difficult environment - and the revised rating levels for most Danish financial institutions continue to reflect low risks to creditors - today's rating actions reflect the view that these risks have increased."
If we had a penny for every equity rally away from credit reality that converged back to credit's less-hopiness, we would now have made 5 pennies in the last 6 trading days. We pointed out last night that equities surged into the close on small average trade size as credit remained far less sanguine and the now-ubiquitous open in Europe started the reversion as stocks fell rapidly, below Friday's close - tracking back with high-yield credit's deterioration. HYG gave up yesterday's gains and pops back under fair-value but rather notably, investment grade credit (IG) underperformed significantly today - which is unusual in a sell-off day and signals either more fallout from JPM reaching for hedges (IG9 10Y 166bps offered +5bps) or investors grabbing the cheapest macro overlay from a carry perspective. Gold and Silver outperformed admirably on the day, however the upward move appears to be more of a reaction back to equity, treasury, and USD reality as the afternoon saw the 4 markets recouple and trade together (after disconnecting notable yesterday). Treasury yields dropped the most in 7 months to new record lows in 10Y and close for 30Y. Both implied correlation (systemic risk) and VIX (normal vol) jumped higher today as the latter moved almost 3 vols to close above 24% (its biggest pop in almost 3 months). A heavier volume open at highs, close at lows day for stocks with little to signal capitulation in terms of trade size - and across broader risk-assets, stocks appear to have room to fall - even after ES suffered its worst loss of the year today.