Summit full life: One week. Literally. Last Friday morning speculation that Germany had "caved" to Mario Monti, somehow allowing beggars to be choosers, and would allow an unconditional and IMF-free rescue of Spain and Italy while the seniority of the ESM was eliminated, sending the Spanish 10 Year yield to under 6.2%. The same security is now back over 7%, where it was just before the summit, as Finland and Holland (or half of Europe's AAA-rated countries), and even Germany, made it quite clear, as we said all along, that stripping seniority of a piece of debt is far more complex than saying one wants to do it in a Memorandum of Understanding. The other thing pushing Spanish spreads wider was German FinMin spokesman Kotthaus saying that no decision on Spain can be taken on Monday as there is no Troika report on Spain bank aid yet, and that the European bailout activation, which was supposed to begin on July 9th, may be delayed until July 20. At that point it will likely be delayed again, only this time GSPGs may be trading wider than their lifetime highs of 7.285%. Finally, adding insult to Mario Monti "victory" is that Merkel's popularity rating just hit a multi-year high. So: who was last week's summit "winner" again?
The median estimate for tomorrow's all-important report is a +100k change in non-farm payrolls (up from last month's +69k) with Stone & McCarthy topping the table at +165k and Jason Schenker of Presitge Economics all doom-and-gloom at +35k. Everyone's favorite permabull-coz-of-QE3-advocate, Joe LaVorgna, is a more negative-than-consensus +75k and Hatzius et al. at Goldman just notched it up to +125k; but we focus on what Morgan Stanley's David Greenlaw has to say as they appear to have the best handle on just how significant an impact the weather has had on job growth data. Most importantly, given the Fed's admitted focus on the labor market, this is the last employment report before the End-of-July FOMC fireworks. There is a chance that the FOMC could conceivably take further action at the next meeting if Friday’s report is disappointing, but given that this is a divided FOMC which appears to be resigned to the status quo, the bar to such action seems relatively high at this point.
For better or mostly worse, the Federal Reserve has been governing the monetary system of the United States since 1914. The visual history below maps the rise of the Fed from its origins as a relatively minor institution, often controlled by Presidents and The Treasury to its supposedly independent and self-aware current position as, arguably, the most powerful entity in the world. And because we always like to be 'fair-and-balanced' we juxtapose this clarifying truth of the maniacal growth of the Fed's balance sheet and shift from passive to hyperactive - highlighting every major macro-economic and political event on the way - with G. Edward Griffin's 1994 speech on 'The Creature From Jekyll Island'.
The last time Mario Draghi made an unequivocal statement regarding his actions under exceptional circumstances, we pointed out the unthruthiness of his comment that LTRO borrowing in no way stigmatized a bank. That did not end so well for the LTRO banks. Today's ECB press conference perhaps sets him up for another banana-skin down the road. From the 20 minute segment, the ECB head describes the lowering of eligibility standards for ECB collateral to include assets that banks take as collateral in the real economy ("credit claims and ABS of lower rating", i.e. rusty old cars, empty coffee-shops, unkempt holiday homes). He describes the hypothecated-hell: "It's very useful [for the banks] to lend to the real economy; as the banks generate collateral that they can now use for funding themselves" - which sounds awfully like a ponzi scheme - is nothing less than a massive on-boarding of all European asset risk by the ECB (using the banks as a simple pass-thru). This would seem to dramatically lower the quality of the ECB balance sheet. But have no fear, for as the new maestro puts it "we want to do this in a way to keep the risks of the ECB balance sheet very very low". Low indeed.
Picture yourself walking into a department store to purchase some laundry detergent. As you approach the aisle stocked full of brightly-labeled containers, you come face to face with a crucial decision. Which detergent do you choose? Do you go with the tried-and-trusted brand? Do you save money with the generic variety? What’s on sale? What about the high-efficiency kind? The choice between something as inexpensive as laundry detergent seems trivial in a modern economy marked by mass production and the division of labor. But the large selection of goods that consumers are faced with today is an incredible betterment relative to the past thousand years of human existence. Indeed, the lives of even the most impoverished in Western economies far surpasses that of kings centuries ago. For all the condemnation it receives by those considered on the forefront of intellectual thought, capitalism is responsible for lifting mankind out of a dreary life of hand to mouth survival. Economic freedom is ultimately to blame for the higher standard of living the West enjoys compared to the once Communist East. Material prosperity is a phenomenon not brought to the world by governments but by entrepreneurial spirit. The state just is a reactionary institution that derives its power from the gun it puts to the back of public’s head. Those who succeed in the marketplace only do so by appealing to consumers. Businessmen force no one to purchase their wares less they play footsie with the political class for special privilege. The pursuit of profit is what drives competition and expanded choice. Without it, societal progress stagnates as living standards lower.
Barclays Wins Euromoney's Best Global Debt, Best Investment Bank, And Best Global Flow House Of The Year AwardsSubmitted by Tyler Durden on 07/05/2012 - 17:24
Financial magazine Euromoney, which in addition to being a subscription-based publication appears to also rely on bank advertising, has just held its 2012 Awards for Excellence dinner event. And in the "you can't make this up" category we have Barclays winning the Best Global Debt House, Best Investment Bank, And Best Global Flow House Of The Year Awards. Specifically we learn that "the bank’s commitment to the US is exemplified by the addition of another global senior manager to the country – Tom Kalaris is now going to be splitting his time between New York and London as executive chairman of the Americas as well as overseeing wealth management. Jerry del Missier, who has overseen the corporate and investment bank through its Lehman integration and was recently appointed COO of the Barclays group, says the bank is well positioned. "We came out of the crisis in a stronger strategic position and that has allowed us to continue to win market share and build our franchise. Keep in mind that the US is the largest investment banking, wealth management, credit card and investment management market in the world, and in terms of fee share will remain the most dynamic economy in the world for many years. As a strong global, universal bank operating in a competitive environment that is undergoing significant retrenchment, we like our position." That said, with the Chairman, CEO and COO all now fired, just who was it who accepted the various award: the firm's LIBOR setting team? And if so, were they drinking Bollinger at the dinner?
If you are reading this, you are probably a member of what the sociologists would term middle class (albeit at the upper end). This is precisely the segment of society which is poised to come off worst from what is coming. Here is a very disturbing idea. As this crisis develops, if you are an equity portfolio manager and you want to outperform the market, you are going to have to position your portfolio so that it benefits most from your own wealth destruction and that of your family, friends and colleagues. Almost everybody is going to lose and there aren’t many places to hide. This is deeply unpleasant but you can blame the central planners. I’ve written about my own investing, e.g. gold and silver, equities in terms of Maslow’s Hierarchy of Needs, etc. In this Thunder Road Report (below) and going forward, I will discuss this middle class theme and highlight positions I have in individual stocks, etc. The only good thing that can come out of this is a rise in awareness. It’s just awful.
Volumes were not that far below average today as the Dow and the S&P (but not the miraculous NASDAAPL - not that story again please!) ended the day lower after some significant intraday volatility early (around the ECB/BoE decisions and jobs/ISM data in the US). S&P 500 e-mini futures levitated off the day's early lows to stabilize around VWAP before testing up to unchanged and then losing it all into the close on heavy volume and larger average trade size. Financials were the biggest losers, as the big banks dumped off most of their EU-Summit gains (with JPM and MS down over 4% today), followed closely by Energy names - even with WTI basically treading water close to close (despite some +/-2% swings early on). USD strength saw Silver lagging on the day and gold dropped a little but rather notably since the EU-Summit, gold and the S&P have been trading more in lockstep (with Treasuries and the USD pointing to more risk-off perspectives). Elsewhere in commodity-land, corn continues its upsurge - now up 40% in the last 3 weeks. After falling off the 1.25 cliff as Draghi disappointed, EURUSD tracked sideways just under 1.2400 for the rest of the day; carry FX pairs tended to drift lower most of the day but the afternoon was quiet. Treasuries limped a little higher in yield into the close - led by the long-end - but ended the day down a few bps from Tuesday's close (with 7/10Y outperforming). Treasuries are unch from the last NFP report (as is EURUSD) while ES is 55pts higher - hhmm. VIX ended the day up almost 1 vol accelerating above 17.5% as futures dived after-hours and cross-asset class correlation remained relatively low today - though ES traded with CONTEXT - as Europe's tensions were once again shrugged off once it had closed and then remembered into the US close.
By now the world and their cat knows that Barclays' Lie-bor submissions were 'too high' for the powers that be in Whitehall and we suspect that given any chance or an 'out' to massage the numbers in order to appear stronger) just as they headed into a financing, the Barclays execs figured 'why not?'. For some context on just how much this mattered - quite a significant amount as it turns out - and upon which the basis of many bullish theses were based at the time (despite the fact that CDS markets were gapping wider and screaming reality), Bloomberg's Chart of the Day shows the huge variations from the BBA's LIBOR relative to the UK bank submissions (most notably Barclays) around the time of Paul Tucker's intervention.
It seems that governmental efforts to save the underwater and ineligible homeowner from his own fate are reaching fever pitch. Not only do we hear today of the up to $300mm in Agriculture Department Rural Housing Service loans that may have financed ineligible projects or borrowers with a high potential inability to repay the loans; but yesterday's WSJ reports on the growing call for 'eminent-domain' powers to be used by local government officials in California to stop the "housing bust's public blight on their city". In yet another get-out-of-jail-free card, the officials (helped by a friendly local hedge-fund / mortgage-provider) want to use the government's ability to forcibly acquire property to remove underwater homes, restructure the mortgage (cut principal), and hand back the home to the previously unable to pay dilemma-ridden homeowner. As PIMCO's Scott Simon puts it: "I don't see how you could find it anything other than appalling", as this would crush property prices further and drive up borrowing costs. As we noted earlier, until these mal-investments are marked to market, there will be no useful growth in our credit-bound economy but transferring wealth to the 'mal'-investor seems like a terrible idea.
Tomorrow's NFP may or may not beat expectations, following some modestly better than expected employment-related data points (then again last month NFP was again supposed to come in solidly above 100K only to cross below the critical threshold), but keep one thing in mind: with the average June seasonal adjustment being a deduction of over 1 million jobs, several tens of thousands in marginal absolute job numbers + or - will be nothing but statistical noise. Furthermore, with seasonality playing such a huge role tomorrow, it is quite likely that merely the ongoing seasonal giveback will result in June being yet another subpar month. And that does not even take into account the quality assessment of the job number, which if recent trends are any indication, will be another record in part-time jobs at the expense of full-time jobs. Yet no matter where the NFP data ends up, the following chart from David Rosenberg puts a few thousand job into perspective, showing that regardless of how many part-time jobs the US service industry has added, there is a far greater problem currently developing in the world: "We now have 80% of the world posting a contraction in industrial activity." This is the second worst since the great financial crisis and only matched by last fall, when in response Europe launched a $1.3 trillion LTRO and the Fed commenced Operation Twist. Now except the occasional rate drop out of the PBOC or modest QE expansion out of the BOE (not to mention the Bank of Kenya's rate cut earlier), there is no real, unsterilized flow of money coming from central bank CTRL-P macros to stabilize the global economy. Which leaves open the question: just where will the latest spark to rekindle global growth come from? And no, 10 hours a week waitressing jobs in Topeka just won't cut it.