8.5%

Listen up, debt-serfs, you have it good here on the manor estate. You get three squares of greasy fast-food or heavily processed faux-food a day, and if Reverse Robin Hood and his Merry Band of Thieves is ripping you off it's for a good reason: the predatory Neofeudalist Financial Lords need the money more than you do, as they have a lot of political bribes to pay: it's an election year, and the bribes are getting increasingly costly. Poor things, we're sure you understand. Now go back to work or watching entertainment (or "news," heh) and leave the Lords alone - but answer these 11 questions first, before hailing the new hero.

The thoughts of the FOMC from a mere three weeks ago - before a 30bps rise in 10Y yields (40bps in 30Y), 5% rise in the NASDAQ, 8.5% rise in AAPL, and 85bps compression in Spanish bond spreads - are out. It appears little has changed in their muddle-through, always at-the-ready, wish-it-were-better view of the world. Via Bloomberg,

• *FOMC PARTICIPANTS SAW ECONOMY DECELERATING AFTER JUNE MEETING
• *MANY FOMC PARTICIPANTS SAID MANUFACTURING WAS SLOW OR FALLING
• *FOMC PARTICIPANTS DISCUSSED QE, EXTENDING 2014 FORECAST ON RATE
• *FED STAFF SAID MARKETS HAVE LARGE CAPACITY TO HANDLE MORE QE
• *MANY FOMC PARTICIPANTS SAW NEW QE AS BOLSTERING U.S. RECOVERY
• *MANY ON FOMC FAVORED EASING SOON IF NO SUSTAINED GROWTH PICKUP

Translation: "Many on FOMC want the S&P at all time highs without actually doing any QE, ever, because that will mean the Fed is officially out of bullets"

This morning's update on the ECB's FX swap usage confirmed what those who care about this kind of stuff already know: the USD shortage in Europe, all Libor and other manipulated and fraudulent signs to the contrary, is getting worse: in the week starting August 23, the number of banks demanding a 7 day USD swap with the NY Fed, and intermediated by the ECB, rose to 12, or the highest since February, while the amount requested was $8.5 billion, or the second highest in 2012 so far. In other words, while everyone knows the EUR interbank market in Europe is slammed shut, most likely in perpetuity, courtesy of the trillions in EURs raining from the ECB, it is now once again time for the USD market to implode, something it last did in the beginning of 2012 when the advent of the short-term benefit from LTRO 1 and 2 fixed the funding situation, albeit briefly.

Powerplant by powerplant

Tuesday has see little in the way of macroeconomic data, and much focus so far has remained on speculation over whether the ECB will buy periphery debt. Comments from the German ECB representative Jorge Asmussen overnight that he backs the ECB buying periphery debt as a means to prevent the "disintegration of the Euro", a seeming change in stance given that the Bundesbank continues to opposed such measures, lifted risk assets in early trade. As such, the Spanish and Italian spreads over the benchmark Bund are seen tighter by 12.9bps and 14.4bps on the day. Spain's 12- and 18-month T-bill was also well received, the country selling slightly more than the indicative range at EUR 4.512bln, with lower yields, though only the 18-month had a stronger bid/cover. Both the Spanish and the Italian 2-year yields have declined to lows last seen in May of this year. Similarly, two separate comments from German Christian Democratic Union (CDU) lawmakers concerning Greece and the possibility of making "small concessions" for the country so long as they lie within the existing programme also boosted risk appetite, as the probability of a Greek exit looks much less likely if it has the full support of Germany. Elsewhere, the UK unexpectedly posted a budget deficit in July as corporation tax receipts plunged, though this was slightly skewed due to the closure of Total's Elgin gas field in the North Sea. Today also saw UK CBI orders for August plunge, with the industrial order book balance at its lowest this year led by a weakening in the consumer goods sector.

"Greece set a precedent for 'Here's what you're going to get, take it or leave it'" is how the WSJ summarizes an analyst's 'shocked' thoughts on the growing game of 'call my bluff' being played among beggars being choosers. Belize is surprise surprise running out of money to pay its debts and is insisting that creditors forgive 45% of what they are owed - OR allow it to delay any debt payments for 15 years (yes, seriously, read that again) - leaving a default on the country's $543.8mm almost inevitable. Three things stand out to us: 1) the nation's government shunned bondholders by simply posting a note on its website that it would be 'skipping a payment' as opposed to telling creditors directly; 2) none other than 'Long GGBs are the slam-dunk trade-of-the-year' Greylock Capital are "mystified" that yet another trade has gone pear-shaped adding that they are "sure every country could benefit from not paying their debt but this isn't the way to do it!"; and 3) this would be one of the worst restructuring terms ever as the "Greek effect" could inspire other countries to pursue restructurings on more favorable terms - especially given that: "Even if you don't need a restructuring you can force one upon bondholders because it's so hard to recover money from a sovereign who won't pay,"

As Twitter and CNBC come alive with European banks ripping higher (short-sale-ban and trading a pennies will do that), Spanish and Italian equity markets ramping (to recent swing highs and the top of a four-month range on de minimus volume), while EGBs basically stagnate; we thought a little cooling reality on this white-hot exuberance was necessary. Without really wanting to steal the jam out of Draghi's donut, since LTRO2, Spain and Italy 10Y are 175bps and 71bps wider; Europe's VIX is unchanged at 23%, France's CAC and Germany's DAX equity indices are +1-2%; and Spain's IBEX and Italy's MIB equity indices are -13% and 8.5% respectively. Recency bias, summer doldrums, and an incessant hope that the status quo can really re-emerge (be printed back into existence) among what is increasingly a global balance-sheet-recession (and shadow-banking collapse) among advanced economies is indeed a powerful driver but context is key.

Active traders and professional money managers already know how the U.S. stock market actually works, but Joe and Jane Citizen, whose pensions generally depend on the market in some way, typically do not. This entry is for them. Today's financial markets are endlessly complex, and this complexity implicitly serves to mask the true nature of market operations. Most of this complexity can be boiled away with zero loss of understanding. Indeed, manipulating this complexity is what earns the big bucks on Wall Street, while boiling it away earns the big bucks for commentators and analysts. Thus complexity serves the financial industry extremely well.

• The first and most important thing to understand about the U.S. stock market is how few humans are actually involved in the decision to buy or sell large blocks of shares.
• The second important thing to know about the stock market is that central banks and governments intervene as buyers to trigger rallies and put floors under declines.
• The third thing to know about U.S. stock market is that their operations are opaque, invisible, and hidden from the citizenry and non-Elite human traders.
• The fourth and last thing to know about U.S. stock markets is that this skimming and intervention have left the markets extremely vulnerable to collapse.

It has been a quiet session overnight (and that will continue until the Germans come back from vacation) punctuated by Mario Draghi's attempt to jawbone the market into submission again, this time following the release of the ECB monthly report in which it basically regurgitated Draghi's still misunderstood speech in it said it may buy bonds if strict conditionality is ensured, the same conditionality that Spain said it would not comply with, yet which European bond traders continue to misunderstand, because Spain will not request a bailout as long as its 10 Years are trading below 8% yield. Of course, nobody wants to sell first, until the selling actually begins. Then it will be waterfall. In other news Greek industrial production rose by a tiny amount from below sea level, rising by 0.3% in June following a 2.9% decline previously. This however must be due to the Greek workers' enhanced efficiency - Greek unemployment just rose yet again to the mindblowing 23.1%, from 22.6% - a new all time high (with youth unemployment just 45% away from 100%). And so the race between Spain and Greece over who can hit 50% unemployment first continues. Another notable economic milestone was crossed after the IFO institute euro-area economic climate indicator declined for first time this year, pushing the EURUSD to just above 1.2300. There were also more bad news from the UK whose trade deficit widened more than expected hitting GBP10.1 billion vs GBP8.7 billion estimated, with a record GBP28.3 billion good deficit, led by oil, cars and chemicals. In other news the European collapse continues unabated, yet the market which has long been nothing but a central bank policy tool and no longer discounts anything is perfectly oblivious to what is happening. There was one notable final change: the Chinese economy accelerated its own deterioration, and this time, courtesy of the specter of soaring food prices and a CPI print above estimates, it is very much powerless to even threaten with more easing.

Back in 2009 when the world wasn't filled with HFT 'experts', we deconstructed the topic of High Frequency Trading on a daily basis, and predicted not only the flash crash, not only debacles such as the Knight trading fiasco, not only the death of capital markets as a fund raising vehicle for companies who wish to go public (i.e. the FaceBook IPO fiasco), but much more (all of which has yet to pass before the stock market, as it was once known, is no more). The reason why little if anything can and will be done to fix the persistent threat to capital markets that is HFT is two fold: i) none of the current regulators understand anything about modern market topology, and ii) HFT is so embedded in markets that unrooting it would result in a complete reboot of "fair" stock valuation: imagine what would happen to stock prices if Knight and its "buy everything" algos were no longer present. Mass hysteria as the realization that vacauum tubes are now TBTF. That said it is always amusing to observe as more and more people get in on the scam that is the "equity market", now completely dominated by robots which do nothing but accelerate and perpetuate momentum moves - after all it is all they can do in lieu of being able to read financials, or anticipate events. Remember: it is always the market that makes the news, never the other way around. So it was entertaining and informative to read the latest recap of all events HFT-related as narrated by Wired's Jerry Adler, whose write up "Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading" does an admirable job of showing how not only nothing has changed since those days in 2009 full of warning, but how in fact things are moving ever faster to what will one day be a trading singularity, limited strictly by the speed of light (and maybe even surpassing that). Of all the things in the article, the one we found most curious is that since 2009, the round trip from the biggest quant trading hub in Chicago to the exchange hubs in NY and NJ, has been cut by over 50%, or from over 13 milliseconds to just about 9 milliseconds, courtesy of Microwaves.

The company which has lately is best known as Amazon's physical showroom, aka Best Buy, is in play once again, this time on yet another highly dubious speculation of a takeover by the company's founder, Richard Schulze, who has offered to take the company private at $24-26/share. So far so good. The problem: a highly confident letter by Credit Suisse meaning zero fixed financing is in place. Frankly, it is surprising Jefferies did not engage here, because as those who have observed the kinds of "weak" MBO offers as this one will certainly be, "highly confident" financings almost never work out, especially those which assume to refi $1.7 billion in debt for a distressed company. It gets better: Schulze has not even done due diligence for which he is asking the board's permission. Expect the initial pop on the headline to fizzle very quickly the realization that the probability of this deal actually happening is negligible (see every other "highly confident" take over by Trian's Nelson Peltz virtually all of which have fizzled in the past 3 years).

Just after the GDP number was released, we joked that the only opinion on the sub-standard Q2 US economic growth that matters is that of Fed uberchairman Jon Hilsenrath:

Only Hilsenrath's take on the GDP matters

— zerohedge (@zerohedge) July 27, 2012

Turns out we were not joking: the Fed mouthpiece has just released his take on the GDP. His bottom line: Inflation Data Won’t Constrain Fed. In other words, the Fed ignores the modest beat to expectations, and has given the green light after all.

• Bundesbank Maintains Opposition to ECB Bond Buying (WSJ)
• Greek Budget Talks Stumble as EU Urges Samaras to Deliver (Bloomberg)
• Fortified by euro, Finns take bailouts on the chin (Reuters)
• China Job Market for Graduates Shows Stress on Slowdown (Bloomberg)
• China Exports Fade as Inflation Eludes Targets: Cutting Research (Bloomberg)
• Japan Falters as Ito Calls for Euro Buys to Rein in Yen: Economy (Bloomberg)
• Government weighs social insurance reforms (China Daily)
• Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010 (Bloomberg)

Too Big Leads To Destruction of the Rule of Law

To those that ask if PEI's preferred offering changes my outlook as the short of the year, let's pick up a pen and paper and do some math...