The publication, earlier this week, of the FOMC minutes seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne. Around the world, stocks sold off, and so did gold. The whole idea that a bunch of bureaucrats in Washington scans lots of data plus some anecdotal ‘evidence’ every month (with the help of 200 or so economists) and then ‘sets’ interest rates, astutely manipulates bank refunding rates and cleverly guides various market prices so that the overall economy comes out creating more new jobs while the debasement of money unfolds at the officially sanctioned but allegedly harmless pace of 2 percent, must appear entirely preposterous to any student of capitalism. There should be no monetary policy in a free market just as there should be no policy of setting food prices, or wage rates, or of centrally adjusting the number of hours in a day. But the question here is not what we would like to happen but what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense? Maybe, but we still doubt it. In financial markets the press, the degrees of freedom that central bank officials enjoy are vastly overestimated. In the meantime, the debasement of paper money continues.
This week's events show that the Chinese government realises that its stimulus efforts have got out of hand and its economy is in trouble.
While today's lower than expected LTRO repayment news was largely a strawman set by misguided expectations set under the impression that Europe is fixed (it isn't), and that the ECB is willing to witdraw excess liquidity (it isn't as the result was a spike in the EURUSD so high it got quite a few political officials talking the EUR down to prevent an export-sector crunch), there is a bigger issue facing Europe in the context of liquidity, and that is a maturity cliff of some €1.7 trillion over the next 3 years. As the chart below from Goldman shows, the excess LTRO cash remaining after today is a modest €807 billion, meaning that not even half the required prepayment capital can be funded outright. It is even worse when calculating the closed European Excess System cash in the second chart below, which also according to Goldman has declined to just under €400 billion. This means that while rolling the maturing debt is certainly an option, the incremental pick up in interest rates will mean far more cash leaves Europe's banks, which at a time when virtually not a single European bank can generate any positive cash from operations bank liquidity shortages will once again return.
Just in case anyone is confused about how fixed Europe is, insolvent Spanish TBTF megabank, which F'ed last year and had to be bailed out by the government, will post earnings (and in this case we use the term very loosely) next week at which time it will report the biggest corporate loss in Spanish history. From Telegraph: "On Thursday Bankia will report full-year earnings, including a €12.6bn provision taken at the end of last year. The writedown is a result of the lender moving assets into Spain’s “bad bank” at heavy discounts. Bankia, which is seen as a symbol of Spain’s financial woes, was created through the merger of seven smaller savings banks before being listed on Madrid’s stock exchange. When the company failed, hundreds of thousands of people who had been sold shares saw their savings wiped out. The collapse forced Spain to ask Europe for a bailout for its banking sector, which has meant the lender is subject to tight controls. Bankia is trying to sell its 12pc stake in International Consolidated Airlines Group, the parent company of British Airways, which is valued at about £510m, and 5.3pc of the power company Iberdrola, which is worth about €1.24bn."
When one thinks of the US banking system, the one thing few consider these days is the threat of a liquidity shortage. After all how can banks have any liquidity strain at a time when the Fed has dumped some $1.7 trillion in excess reserves into the banking system? Well, on one hand as we have shown previously, the bulk of the excess reserve cash is now solidly in the hands of foreign banks who have US-based operations. On the other, it is also safe to assume that with the biggest banks now nothing more than glorified hedge funds (courtesy of ZIRP crushing Net Interest Margin and thus the traditional bank carry trade), and with hedge funds now more net long, and thus levered, than ever according to at least one Goldman metric, banks have to match said levered bullishness to stay competitive with the hedge fund industry. Which is why the news that at noon the Fed reported that Primary Dealer borrowings from its SOMA portfolio, which amounted to $22.3 billion, just happened to be the highest such amount since 2011, may be taken by some as an indicator that suddenly the 21 Primary Dealers that face the Fed for the bulk of their liquidity needs are facing an all too real cash shortage.
You can choose to ignore this and believe that Europe’s Crisis is fixed just as EU political leaders claim. But Europe in general is out of options in terms of solving its debt crisis.
If it ain't broke, how do you fix it? Here are a variety of solutions from practictioners, academics and investors.
The Real Bill is quite different from the bond. It isn’t lending at all. It is a clearing instrument that allows the goods to move to the gold-paying consumer before said consumer pays with gold.
In April of 2010, Zero Hedge first brought up the topic of the Fed's DV01, or the implicit duration risk borne by the Fed's burgeoning balance sheet which at last check will approach 25% of US GDP by the end of 2013 (tangentially, back in 2010 the Fed's DV01 was $1 billion - it is nearly $3 billion now and rising fast). Recently, we have noticed that the mainstream media has, with its usual 2 year delay, picked up on just this topic of the implicit and explicit risk borne by Bernanke's grand (and final) monetary experiment. And slowly but surely they are coming to the inevitable conclusion (which our readers knew two years ago), that the Fed has no way out? Why? Ray Stone of Stone McCarthy explains so simply, a Nobel prize winning economist can get it.
The big story this past week, besides the annual State of the Delusion speech by Barack “It won’t add a cent to the deficit” Obama, was the fate of the passengers on the Carnival Triumph as their skyscraper sized ship was left adrift at sea for days without power. The ordeal at sea of the Carnival Triumph and the leadership displayed by the Carnival management and executive officers is a microcosm of our declining empire. Rather than deal with our reality, Obama chose the Carnival Cruise Line method of public relations - misinformation, denial and delusion. He has embraced the Big Lie concept as if he had created it. Our cruise of illusions and delusions is headed for troubled water. The math challenged citizens on this ship have been enjoying the 24 hour pizza buffet without the labor required to pay for the bounty. This voyage is reaching an end and the bill is coming due. The engine is on fire but the captain is telling us all is well. Eventually, everyone will know the captain lied.
At Deutsche Bank, the job title “risk manager” might be more appropriately characterized as “campaign manager.” That is, Deutsche Bank is no more concerned with the active mitigation of risk than the unscrupulous politician is with actively avoiding extra marital affairs. Like campaign mangers then, risk managers at Deutsche Bank must accept the fact that occasionally (or perhaps quite often) messes will be made and spin campaigns will need to be devised and deployed in order to keep public opinion from turning sour and in order to keep the few regulators who aren’t on the payroll
An over-indebted, overcapacity economy cannot generate real expansion. It can only generate speculative asset bubbles that will implode, destroying the latest round of phantom collateral. For those seeking a summary, here is the global endgame in fourteen points.
- G20 struggles over forex, at odds over debts (Reuters)
- Alwaleed Sells Airbus A380 to Invest in Middle East Firms (BBG)
- GOP Stalls Vote on Pick for Pentagon (WSJ)
- ECB officials rebuff currency targeting as G20 meets (Reuters)
- Not good for the reflation effort: Muto leads as Japan PM close to choosing nominee for Bank of Japan chief (Reuters)
- M&A Surges as Confidence Spurs Deals in Computers to Consumer (BBG)
- JPMorgan’s head of equity prop trading Gulati to launch own fund (FT)
- Tiffany & Co. sues Costco over engagement rings labeled ‘Tiffany' (WaPo)
- JPMorgan Said to Fire Traders, Realign Pay Amid Slump (BBG)
- Broker draws Tullett into Libor scandal (FT)
- Airbus drops Lithium-Ion batteries for A350 (Reuters)
According to dictionary.com, Deflation is “a fall in the general price level or a contraction of credit and available money.” Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase. But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease - St.Louis Fed: "...discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower price..." The problem with deflation, then - we are told, is that it feeds on itself, destroying the economy along the way. Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. In case you’re not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression. I hope that everyone is clear on this. Now that you understand the basics, I have some questions for the people who came up with this stuff.
European economies straight from script of Les Miserables. The dispensing of horsemeat on the Continent in food and otherwise. The oncoming of some sort of Asian Flu. Class warfare in America and the entire construct supported by a House of Cards relying solely on the printing presses housed in Washington, Frankfurt, London, Tokyo and Beijing. The beginnings of a small game of “Currency Wars” and the markets sit and ask the famous question; “What, me worry?” Getting it right is NOT as important as not getting it wrong. Besides an event then, the next Black Swan that may appear on the horizon, there is a fundamental mis-match now caused by the actions of the central banks. The money pours out like honey and must be used somewhere and so it is but the economic fundamentals are horribly out of tune with the next high notes that are being played in the markets.