As we have discussed extensively, and noted this morning specifically, the LTRO is stigmatizing credit markets in Europe, no matter what European leaders or bank CEOs tell you. European credit and equity markets dropped dramatically post LTRO 2 and accelerated on Bernanke's lack of monetary exuberance. Financials underperformed but most notably, subordinated credit spreads widened significantly more than seniors holding at yesterday's wide levels. The Stigma trade is occurring in single-name credit also with the spread between LTRO and non-LTRO banks widening once again after compressing for a few days but it is the Senior-Sub spread decompression that is the liquid trade for European bank's implicit subordination for now (as the entire capital structure of LTRO banks just became subordinated at best and more levered and subordinated at worst). The EUR tumbled over 100pips towards 1.3350 as the USD rallied back to the week's highs. Silver (and Gold) crashed into the European close (down over 7% on the day at one point) while Treasuries sold off and European sovereigns leaked wider (except Portugal which crashed and Italy which compressed modestly). Quite a day.
Ron Paul To Ben Bernanke: "People Lose Trust In The Government Because You Lie To Them About Inflation"Submitted by Tyler Durden on 02/29/2012 - 11:29
Anytime Ron Paul sits across from Ben Bernanke you know sparks will fly. Sure enough, they did: starting 3 mins 50 seconds into the clip below, Ron Paul, guns blazing, asks the Chairman if he does his own shopping, if he is aware of what true inflation is, and if he knows that Americans don't trust the government because they are being lied to about inflation. And it only gets better, once Paul starts brandishing a silver coin. The punchline: "The Fed will self-destruct anyway when the money is gone" - amen. And ironically letting the Fed keep on doing what it is doing will achieve that in the fastest possible way. In fact, letting the system cannibalize itself with no further hindrances may be the best option currently available - just go to town.
It seems the initial drop was merely the appetizer as Gold and Silver are now down considerably...
Pouring more gasoline on the fire (or, actually, quite the opposite), here is Goldman's Hatzius who confirms that anyone who wants their QuuEee3ee, will just have to wait.
The slightly delayed reaction to Bernanke's semi-annual report to Congress is now rather impressive as clearly the market is saying 'QE3-off' for now, in line with our expectation from earlier when commenting on the GDP number we said that "As for the reason why the market is less than delighted with this "beat" is that with EUR Brent at record highs, courtesy of everyone else but primarily the ECB doing the equivalent of QE 3 in 2011's biggest deception play, it firmly take the Fed's punchbowl away at least for 3 months. More at 10 am when Bernanke testifies." 10 came and went, and the heroin addict known as the stock market was less than delighted that the only drug promised by Ben is the ZIRP methadone which does absolutely nothing for incremental liquidity. The question then is - without more QEesing, where will the next trillion in liquidity come from?
Today's second most important event is the testimony of Bernanke before the House Financial Services Committee (yes, Maxine Waters will be there). Lawmakers will question him about the Fed's plans on avoiding inflation and the current unemployment rate. Committee members are also expected to inquiry about fiscal policy, the status of the nation's economic recovery, the impact of rising gas prices, and the debt crisis in Europe. Most importantly, Benny will be asked to testify on when more QEasing is coming as the markets need their fix. Watch it live at C-Span after the jump.
Earlier today, when forecasting the Chicago PMI, we warned to "expect another massive beat courtesy of consumers confident that they can have Apple apps, if not so much food, since they still don't pay their mortgages." Sure enough, the economic data is now straight out of China, with the Chicago PMI not only trouncing expectations, printing at 64, on consensus of 61 (the highest since last April when the peak of the liquidity bubble popped and the stock market rolled over), but, wait for it, the Employment index came at 64.2, up from 54.7, which was the highest employment print since April 1984! At this point it is no longer worth commenting on economic data, as between this, the NAR, the consumer confidence, it was all become farce of a blur. we now expect February unemployment to print negative as the labor participation rate slides to 50%, and seasonal adjustments and birth/date fixtures account for 5 million "additions" to jobs. One thing that is sure. There will be no more easing for a looooooooong time. Kiss any hope of more trillions in central bank liquidity goodbye.
For anyone who traded in the 2003-2007 interval (second liens what else - did anything else even trade in that period), the name DB Zwirn was synonymous with hedge fund perfection. In fact, the only name that stood above it was that of Phil Falcone's hedge fund Harbinger. Gradually, both of these high fliers were replaced in the awestruck trader lexicon with another "legendary" hedge fund, that of Paulson & Co. But for a brief period the Zwirn offce at 745 Fifth is where every fixed income trader wanted to reside. Yet as always happens, anything that is too good to be true, isn't. Below is William Cohan, who in a way that only he can, spins the tale of the the rapid rise and even more rapid fall of the hedge fund manager who had it all by his thirties, only to lose it (mostly) all shortly thereafter.
While the narrower spreads in Europe created the unintended consequence of perversely reducing the urgency for banks to delever their over-stuffed balance sheets (and in fact in many cases likely make them worse thanks to the ECB), the US Household continues to (sensibly) slowly but surely reduce their leverage. As today's Bloomberg Brief notes though, the slow pace of deleveraging will continue to weigh on growth over the next few years - even as they have drawn down debt as a percentage of personal income from its peak in June 2009 at 114.76% to 101.1% at the end of 2012. There is a long way to go to the apparent Maginot line of supposedly sustainable 90% and with wage growth stagnant, the bulk will come from debt reduction in true balance-sheet-recession style - putting still more pressure on a perniciously polarized government to do anything about it.
As if we didn't have enough news on this Leap Wednesday, here's this.
Dear Santa, I know Christmas is a long way off, but I was hoping that you could get me a European Bank License and another round of LTRO. I promise to be a good boy, and borrow as much money as the ECB will possibly give me, with minimal equity, and buy as much 3 year in and in paper as I can. I’m afraid I might not be able to bring myself to buy Spanish or Italian debt, but with the broad range of assets available against the money, I’m sure I can find something I like. I’m not greedy, I don’t need to make 2% of carry, I would be happy with 1%, after all, I my only qualification is having a bank license, and I have no real equity in the deal (though after 3 years if all goes well, I will be a very rich man, or bank).
Back on January 27, before the impact of the trillions in liquidity injections by the central banks was fully appreciated, the advance Q4 GDP print came in below estimates of 3.0%, printing at 2.8%. Today, we just got the flip flop to that, after the second revision just printed at 3.0%, on expectations of an unchanged print at 2.8%. The reason: a fine-tuning, whether seasonally adjusted or not, which improved 4 of the components of Q4 GDP (Fixed Investment, Personal Consumption, Imports, Government Expenditures), while reducing two (Inventories and Exports) nominally. Net result, a slight bump from 2.8% to 3.0% for the second Q4 GDP print. The final GDP revision will be made public on March 29 - if history is any precedent, it will be back down to 2.8%. As for the reason why the market is less than delighted with this "beat" is that with EUR Brent at record highs, courtesy of everyone else but primarily the ECB doing the equivalent of QE 3 in 2011's biggest deception play, it firmly take the Fed's punchbowl away at least for 3 months. More at 10 am when Bernanke testifies.
Just like the first time around, the net gain from the LTRO when taking into account rolling off instruments, will be lower than the Gross amount. How much? According to SocGen, the final number by which the ECB's deposit account will increase will be about €210 billion less than the overhead number. From SocGen's Lauren Rosborough: "The LTRO outcome: €529.53bio was allocated to 800 institutions (compared with €489.19bio allocated to 523 institutions in Dec). The net increase, according to our economists, is €311bio (adjusted for yesterday’s MRO reduction, 3m LTRO allotment this morning, and the roll-off of the 3m and 6m LTROs tomorrow). The allocation was above our and at the upper end of the market range of expectations. After a brief and limited positive risk move (AUD/USD spiked to 1.0857), currencies are broadly unchanged and the EUR/USD is lower, possibly reflecting positioning unwinds. The LTRO outcome opens the way for further positive risk moves (high-beta, non-Japan Asia, lower DXY) but recent price action suggests to us that the rally is fatigued." Net: this means that following settlement, European banks will park not €500 billion but up to €810 billion with the ECB, on which they will collect 25 bps (while paying 1%, aka inverse carry as described here first). It also means that in three years Europe's bank will have to not only pay the ECB €1 trillion in case (assuming there is no perpetual rollover of the LTRO, which there will be), but also delever by another €2.5 billion, for net asset drop of €3.5 trillion. Good luck building up shareholder equity by the same amount to offset unchanging liabilities.
As the ECB has stopped its SMP bond-buying and now the LTROs are all done (until the next one of course), Portuguese bond spreads have been increasing rapidly and post-LTRO today even more so. While broadly speaking European sovereign risk is modestly higher this week (and notably steeper across the curve) leaving funding costs still very high for most nations, Portugal has exploded over 100bps wider (and almost 70bps of that today post-LTRO) to back over 1200bps wider than Bunds. Only Italian bonds are better and even there they are leaking back to unch from pre-LTRO. Perhaps, shockingly, more debt did not solve the problem of too much debt and with growth and deficits being questioned in Ireland and Portugal (and Spain), it's clear the newly collateralized loan cash the banks have received won't be extended to the medium-term maturities in sovereign bonds.