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Diagnosing Liquidity Addiction

Over the last few weeks markets have recovered from the significant stresses that were building towards the end of May (until yesterday's slow realization). The recovery has been in no small part due to expectations of intervention and that fresh rounds of QE and their equivalents will soon be implemented around the developed world. Deutsche Bank believes that markets are now addicted to stimulus and can’t function properly without it. There is little evidence yet to suggest that markets in this post crisis world have the ability to prosper in a period without heavy intervention, though empirically asset prices benefit from liquidity but that the environment remains fragile enough for them to struggle to maintain their levels when the liquidity stops. Critically, they agree with us that the structural problems the West faces mean that QE and its equivalents and refinements will likely need to be around for several years to come to ensure that the financial system and its economies don’t relapse into a depressionary tail-spin. There is no evidence that we are currently close to being able to wean ourselves off our liquidity addiction. The hope would be that with further injections we can prevent the worst case scenario but the base case remains for the stress and intervention cycle repeating itself as far as the eye can see. Central banks still have much to do.



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The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap

When the US Dollar is ultimately dethroned as the world's reserve currency (and finally gets rid of all those ridiculous three letter post-Keynesian economic "theories") nobody will have seen it coming. Well, nobody except for the following headlines: ""World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees." And while the expansion of the "dollar exclusion zone" was actually quite glaring to anyone who dared to look, one thing was obvious: it was confined to Asia. No more courtesy of the following FT headline: "Brazil and China agree currency swap." More: "Brazil has provided a vote of confidence in China’s efforts to promote the renminbi as a reserve currency by becoming the biggest economy yet to agree a swap deal with Beijing. Brazil and China announced the R$60bn (US$29bn) local currency swap after a bilateral meeting between Wen Jiabao, the Chinese premier, and Dilma Rousseff, Brazil’s president, on the sidelines of the Rio+20 environmental summit in Rio de Janeiro."



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Waiting For Godot

In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.



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Frontrunning: June 22

  • Mario Monti: We Have a Week to Save the Eurozone (Guardian)
  • Europe Central Bank Prepares to Relax Collateral Rules (WSJ)
  • EU Banks' Risk in Eyes of Beholder: Worry Is That Lenders Are Boosting Gauge of Their Health (WSJ)
  • Europe finally learns about subordination: Bailouts' Creditor Hierarchy Scares Private Bondholders (WSJ)
  • Merkel Isolated in Race for Euro Crisis Solution (Spiegel)
  • Fed’s Re-Twist May Lift Treasury Repurchase Agreement Rates (Bloomberg)
  • China Said to Propose Keeping Limit on Local Government Loans (Bloomberg)
  • Moody’s Downgrade Hits 15 Top Banks (FT)
  • IMF Challenges Berlin’s Crisis Response (FT)
  • Colombia to Auction Rights in 2013 to Gold and Coal, Not Coltan (Bloomberg)


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Citi Doubles Down Goldman Sell Call, Says Market "Heading Lower... Liquidity Support Around 1285"

Even though it was one of the first to call for a coordinated market crash (remember XO going over 1000 bps?) last month before a coordinated policy response can come into play, today Citi's Mohammed Apabhai has doubled down on yesterday's market moving Goldman call, once again making it quite clear that only a collapse can bring the much needed policy "salvation." The bogey? 12% down according to Citi, before the "liquidity put" comes in play and 1285 could "indicate liquidity support." In other words: in order to go up, first the market must go down.



RANSquawk Video's picture

RANsquawk EU Market Re-Cap - 22nd June 2012



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Stuff My Co-Workers Have Said

Draw a Wall Street paycheck long enough and you will work with an amazing spectrum of personalities.  Today’s note from Nic Colas (of ConvergEx) is an homage to his past coworkers in the form of some offbeat comments that have stuck in his memory over the past 25 years on the Street (and will ring true to anyone who has spent more than a day on a trading floor).  On the psychology of money management: “Last year we made $360 million and lost $330 million."  On the importance of language in positioning an investment story: "The company’s revenues aren’t unpredictable; they are just chunky.”  And our favorite, from long ago: "Who cares if most money managers underperform.  They all seem to have big houses and pretty wives."  No, not all these quotes are exactly "Politically correct", but they all represent some useful truths about investing and capital markets.



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Propaganda, Lies, And War

Despite already being engaged in drone wars in Pakistan, Somalia, Yemen, and still occupying Afghanistan, the U.S. is being duped into yet another war based on shaky evidence and at the behest of deep-pocketed special interests.  This is coming even while a secretive cyber war already being waged to damage Iran’s nuclear capability.  According to the Pentagon, “computer sabotage coming from another country can constitute an act of war.”  Not only that, but the draconian sanctions thus far placed on Iran are doing enormous harm to the citizens who hardly have a say in what their government does.  The Belgium-based SWIFT payment system that facilitates most international payments has already denied service to many Iranian banks.  With the imposing of an oil embargo from the European Union just around the corner (July 1st) that will all but make it impossible for oil tankers to be insured by Lloyd’s of London, an actual naval blockade is being floated by U.S. lawmakers.  Much like the Antebellum South and Japan, Iran too is being pushed into a corner.... Then and now, wealthy special interests are a driving force behind American imperialism.  Lies will be spun till they are seen as facts.  When the truth comes out, the irreparable damage will already be done.  Like anything the state lays its filthy hands on, war is a racket.  The beneficiaries of the ruling class’s gleeful foray into mass murder are few in number.  The masses, still brainwashed into feverish nationalism, end up paying the costs with their pilfered income, eroded liberty, and, ultimately, their own lives.



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Was BlackRock's Permabull Bob Doll Fired For Stealing Financial Models?

Two weeks ago, when we remarked with great satisfaction that Wall Street's original pentagram of bull had now been cut to three, with the departure of BlackRock's hypermabull Bob Doll, we had one lingering question: why would a strategist, and not a trader, leave Wall Street in the "prime" of his CNBC prime-time years? After all, it is not like Doll ever was right, or was judged by the quality of his predictions - if that was the case he would have been fired years ago. Basically, there was a big question mark surrounding this departure. Today, we may have gotten our answer: as Reuters reports, it appears Doll may have been dipping into the wrong model. Financial model that is.



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Guest Post: Krugman Claims He Has Been Right About Everything

I don’t think Krugman’s descriptive work on global trade patterns is bad. I don’t even think he has been completely wrong about the post-2008 economic depression. He certainly hasn’t been wronger than the people who are in charge in Europe, or the people running the Fed; he did, after all warn in 2005 that the Fed was “running out of bubbles” to reinflate, while Bernanke was still claiming in 2007 that subprime was contained. I do think his defence of broken windows is facile, and I think the notion he has advanced that World War 2 ended the Great Depression is not just wrong but dangerous. He’s a good polemicist; he defines himself through big, bold, wildly partisan claims. But if he’s going to claim that he’s been right about everything — as he just did — he might want to make sure he’s not directly contradicting statements he made just a week previous.



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Surviving The Apocalypse... In A Lifeboat

No, this has nothing to do with uber ultra-rehypothecation, fractional reserve banking gone terminally nuts, gold being allowed to rise above $2000, or a second tier Keynesian economist in charge of the Fed's plunge protection team. For the doomsday prepper who has everything, WIRED magazine introduces the water-ready modular bunker (called STATIM pods). Designed to make sure you get through the first wave when the next big Tsunami hits, the 'inland lifeboats' are eerily reminiscent of the Movie '2012' or perhaps 'Waterworld'. "As the seas rise and cities fall, imagine a community of these built and arranged in new flood zones, perhaps for scientists seeking to learn about new littoral urban ecosystems or salvagers prospecting for the remaining treasures of a lost civilization. Every night, the tribe would return to their STATIM homes, sleeping soundly with the confident knowledge that when the next flood happens, everyone will be all right."



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Here We Go: Moody's Downgrade Is Out - Morgan Stanley Cut Only 2 Notches, To Face $6.8 Billion In Collateral Calls

Here we come:

  • MOODY'S CUTS 4 FIRMS BY 1 NOTCH
  • MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
  • MOODY'S CUTS 1 FIRM BY 3 NOTCHES
  • MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
  • MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
  • MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
  • MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
  • BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.



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Taibbi Is Back With The Scam Wall Street Learned From the Mafia

Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won't hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government's massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony "Tony Ducks" Corallo. But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.



RANSquawk Video's picture

RANsquawk US Market Wrap - 21st June 2012



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