• Pivotfarm
    07/27/2014 - 17:57
    There never seems to be a day that goes by without someone predicting that China is going to go down the Yangtze and end up some creek without a paddle.

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Guest Post: To EFSF Or Not To EFSF - A Franco-German Drama

  • 4:05: “Direct help for bank recapitalization from EFSF is not at all doable” – German Economy Minister (Translation: “Frogs, I thought we told you already, your plan doesn’t fly”)
  • 6:00: “It is important to us that all banks are equipped for all eventualities and must go to market first for capital” – German Finance Minister (Translation: “May be they’ll understand if I say it – nobody seems to take Roesler serious”)
  • 6:19: “There is no doubt on the soundness of French banks” – French government (Translation: “Hopefully the dim-wits at Agence France-Presse will print my statement without embarrassing typos”)

    etc.



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Weak 10 Year Auction Saved By Primary Dealers Taking Down Most Since May 2009

Today's $21 billion 10 Year reopening was not pretty. First, the tail was a notable 3 bps with the When Issued trading at 2.24%, ahead of the auction pricing a disappointing 2.27%, well above the record low 2.00% from September, although still materially lower than average yields in the past year. As troubling was the Bid To Cover which came at 2.86 or the lowest since November 2010's 2.80 (compared to the LTM 3.10). Then looking at the internals should be a cause of concern for anyone who believes that China will not retaliate for the currency bill passed yesterday by Congress, after Indirects took down just 35.0% of the full $21 billion, the lowest since February 2010, at a 81% hit rate. Directs also showed very little interest in the bond taking down only 6.4% compared to an LTM average of 10.7% (and the previous 11%). Who was the savior? The recently expanded Primary Dealers of course, which took down 58.5, the most since May 2009. Overall, an ugly auction although whether the reason for the weak demand is due to inflation expectations returning, or a capital reallocation from bonds into other assets, is for now unknown.



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Banks, Credit Events, And Sovereign CDS

Maybe the moment we should be trying to avoid is the one that allows weak institutions to exist. The weak institutions do not provide loans because they are too afraid of losses since they mainly survive by the good grace (and money) from governments at central banks. That is bad enough, but they crowd out new money. Who is going to go after markets where even a sleepy BAC could briefly wake up and crush you before you ever got started. I have heard of some interesting companies out there trying to provide loans to those who need them, but they can’t get any traction. Too Big To Fail aren’t too sleepy to allow potential competitors to grow. Stocks can rally. Lehman Moment can be said 500 times today. Every politician can worry about the impact of triggering CDS. Every banker can claim the world would end if they are made to pay for their bad decisions. In the end, Iceland and Ireland both improved only AFTER they let banks fail. The US, for all the talk about Lehman, is only doing worse than that since it decided banks couldn’t be allowed to fail.



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Guest Post: Health Care Costs Got You Down? Try Internationalizing

I know that America’s politicians and crackerjack team of central bankers don’t see any signs of ‘non-transitory’ inflation, but anyone who has been to the doctor or written a check for an insurance policy knows otherwise. Hey, they’re on government health plans anyways, how could they know? The increase is usually in the ballpark of 10% to 20%. It’s crazy to think about the thousands of dollars each year that go out the door on a plan that I never use, all so that I don’t get stuck with a $200,000 emergency room bill in case of some highly improbable event. It makes no rational economic sense. In every other country that I travel to, I don’t have any insurance. If I go to the doctor, I pay cash. If I go to the emergency room (and it’s happened quite a few times), I pay cash. This is one of the great things about travel and living overseas– healthcare is usually quite reasonable, often downright cheap.



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Kiss Tax Revenues Goodbye - Greek Civil Insubordination Takes On A Surreal Twist

While we understand the motive of Greeks to cripple the financial nerve center of the country by effectively immobilizing the finance ministry and subjecting the country to a 9 day shutdown, we are yet to witness the ingenuity of the people, when angry, to completely lock down the country's financial apparatus, especially when it comes to the revenue side of the ledger. Behold the latest reason why the next time the Troika does its paper napkin "assessment" of the Greek deficit to GDP it will be double digits, and have a 2 handle.



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Pimco's Prediction For Pension Plans: "Pain"

While it won't say much new to those "stupid enough" to exist in the intersection of the "Retired" and "Alive" Venn circles under the Bernanke central planning regime, we suggest any pensioners who hope to see their life savings generate some...any... return (on capital, or of capital) in their lifetime, to simply skip this article and read some of our cheerier fare. So here is the punchline for pension fund managers which now predict an utterly insane 11% equity return which is the only thing that would make their Pension Plans whole: "In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11% is pure jibber-jabber. It is wishful thinking. I dare not predict the level of the S&P 500 ten years out, but an ERP this high suggests the S&P would have to reach unprecedented levels. If this is what plan sponsors are counting on, I, like Clubber Lang, predict Pain." And "Hope is neither a training plan nor an investment strategy." Uh, wrong. Have you seen the EURUSD these days?



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Fed Sells $8.870 Billion Bonds At 7.85 Bid To Cover

Well it wasn't quite the blow out we had expected but the BTC in today's "reverse" POMO, in which the Fed sold $8.870 Billion in 2013 bonds was still a whopping 7.85x following the receipt of $69.6 billion in bids. That said, this number was a dramatic plunge from the over $240 billion that PDs wanted to buy in the first Operation Twist bond sale and one certainly would be delighted to find just what it is that stopped dealers from going hog wild in bidding on this auction, especially with stocks so much higher, and hence the need for excess liquidity that much less. Anyway, the next sales operation will be on October 17 in the 04/15/12 - 07/15/14 TIPS sector. At that operation, the Fed expects to sell between $1 and $1.5 billion of TIPS. Today's sales operation was the first in the 1.5- to 2-year sector. There will not be another operation in this sector until November as the Fed will focus on the far shorter-end of the curve. Cumulatively, the Fed has purchased $12.681 billion of securities, consisting of $11.312 billion of nominal issues and $1.369 billion of TIPS. The largest purchase was $4.590 billion in the 11/15/19 - 08/15/21 sector on October 4. The Fed also sold $17.740 billion of securities.



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Credit Suisse Buries China's Banks

Wonder why China just bailed out its banks, preemptively, on Monday? Here's why. In a report issued by Credit Suisse's Sanjay Jain, the China strategist, who joins such now infamous skeptics as Bank of Countrywide Lynch's David Cui, has revised his base case Non Performing Loan ratio forecast from 4.5%-5.0% to 8.0%-12.0%: a unprecedented doubling in cumulative losses. Why unprecedented? Because as he explains, this could "would work out to 65–100% of banks’ equity." Crickets? Yes, Credit Suisse just singlehandedly said the equity value of the entire Chinese banking system is between 66% and 100% overvalued (with a downside case of $0.00). So for those putting two and two together, on one hand we have the four horsemen of the Chinese apocalypse, already presented visually before by Bank of America, consisting of i) a surge in underground lending, ii) a property downturn, iii) bad bank debt and iv) and "hot money" outflows, and on the other we have the vicious loop of what this means in terms of a central planning reaction. Simply said look for China to scramble to undo all the signals that it had been trying to spark while it was fighting with the Fed-inspired inflation bubble. Only problem is that like in the US and Europe, finding the Goldilocks point where all 4 are in equilibrium will be next to impossible, especially if investors in the country's banks realize the equity they hold is worthless and scramble to get the hell out of Dalian. Then the fears over a parliamentary vote in Slovakia will seem like a pleasant walk in the park.



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Will Today's Second "Reverse POMO" Serve As Merely Another Capital Transfer Mechanism From Taxpayers To Banks?

Last Thursday we observed the first "reverse" POMO event, in which the Fed sold $8.9 billion in sub 1 year bonds... on $242 billion of submitted bids, or a grotesque 27.4 Bid To Cover (aka Submitted to Accepted) ratio, for bonds that yield several basis point of interest, leading us to speculate that the only reason for this epic surge in buying interest is due to a levered ability to capture a taxpayer funded bid-ask spread courtesy of Primary Dealer BWIC-like collusion. A few minutes ago Ben Bernanke has commenced the second such bond sale as part of Operation Twist, this time selling bonds maturing between 03/31/2013 - 10/15/2013. So if indeed Operation Twist is nothing than a POMO-facilitated conduit to fund the Primary Dealers bond trading desks with precious, precious year end bonuses, what should we expect? Well, the most recent regular Treasury auction of 2 Year notes saw a Dealer Bid To Cover of 5.4 ($95.7 billion Bids tendered on $17.8 billion allotted). Assuming the same incremental efficiency pick up as seen last Thursday of 4.3x difference between the S/A ratio and the regular BTC, we would hope to see nothing short of 23.2 Submitted to Accepted ratio in today's POMO when it closes 30 minutes from now. It would also validate our theory from over a year ago, that no matter how it is structured, QE, Twist, or what have you, is merely a collusive way for Primary Dealers to extract a pound of flesh from US taxpayers via the Fed guaranteed bid-ask spread... With Bernanke's blessings of course.



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The Volcker Rule: Toothless Then, Even More Toothless Now

The Final Draft of the Volcker Rule was published for comment at the end of September. Even skipping our traditional rant about government bureaucracy, it is a document over 200 pages long, in which the word “exemption” occurs on no less than 100 pages (it is used 426 times in total). At a quick glance, each section starts with a fairly draconian statement. Then each subsection waters down the bold initial statement with exemption after exemption. As we began the daunting task of trying to make sense of these rules and what they might mean in practice, it became clear there was little point in rushing to do the work. Why is working through this doc largely pointless? Because it is unlikely to ever be implemented in anything that resembles the current form. The rules are meant to be in a final form by July 21, 2012. Assuming that deadline is met, the banks then have 2 years to conform with the provisions and can petition the board for up to 3 additional 1-year extensions. Which brings us to July 21, 2014 at the earliest, and possibly July, 2017.



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Guest Post: Big Trouble Brewing

I do not toss around the idea of a market crash lightly. If you've been following me long enough, you know that only in very rare instances do I issue a cautionary Alert (I've only issued four since my website launched in 2008), and I am generally not given to hyperbole. Let's be clear: I'm not issuing an Alert at this time. But I am concerned that a materially adverse disruption to the financial markets is increasingly likely in the near future. Perhaps a definition will be helpful as we begin. A 'market crash' is an event where there are no bids to meet a wall of selling. The actual amount of the percentage decline is less important to note than the amount of chaos, or loss of control, that a given market experiences. Some like to say that a market downdraft requires a decline of 10%, or maybe even 15% or 20% (or more), in order to qualify as a 'crash.' For me, the key factor is not so much the amount of the decline, but the pace of the decline. With perhaps a quadrillion US dollars of hyper-interconnected derivatives outstanding -- that's the notional value, but who really knows what the real number is? -- an orderly market is essential for knowing whether or not the counterparty to one's trade is solvent. During periods of intense price swings in the market, such things are simply not knowable, and spawn the fear and paralysis that really define a market crash.



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Put A Fork In It: Greece Effectively Shuts Down As Finance Ministry To Begin 9 Day Strike

Remember the country that started it all yet was "so small nobody should worry about it." Well, it turns out its size was juuuuust right, and while the Eurozone is now fighting contagion fires everywhere up to and including the heart of the core (thank you most-bailed-out-by-the-Fed-bank Dexia), Greece still has yet to see any benefits whatsoever from all the so called bailouts, including the 5 previous tranches from the US taxpayer funded IMF. Well, it appears Greece has effectively shut down, after the country's Finance Ministry - the nerve center coordinating not only the country's economy but its continued bailout requests, has announced the start of a 9 day strike beginning October 17. May as well call it indefinite, and may as well put a fork in it.



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Barroso's Reveals "Deus Ex Recapitalization" - Complete Talking Point Dud

The market was looking forward to Barroso's disclosure of more details of just what the Euro bank recap plan would look like. The answer: a complete dud.

  • Barroso says fully coordinated approach to European bank recapitalisation should be based on reassessment by supervisors of capital needs
  • Barroso says supervisors should use temporarily significant higher capital ratio of highest quality capital
  • Barroso says if government support is not available recapitalisation should be funded by a loan from the EFSF
  • Barroso says banks should first use private sources of capital, then government support if necessary
  • Barroso says sixth tranche of aid for Greece must be disbursed
  • Barroso says pending recapitalisation, these banks should be prevented from paying out dividends or bonuses
  • Barroso says the EU should agree on second financing package for Greece with adequate public and private financing
  • Barroso says launch of European stability mechanism must be accelerated to mid-2012 and mid-2013
  • Barroso says calls for integrated governance system combining ESM and EU budget rules


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