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.
On this leap day, we have a busy schedule which includes the second Q4 GDP revision, Chicago PMI (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), various Fed speakers, of which most important will be Ben Bernanke who takes the podium in Congress at 10 am for his semi-annual monetary policy report.
So far there are no dramatic consequences of the Greek default. The ECB did say they couldn’t accept it as collateral, but national central banks (including Greece’s somehow solvent NCB) can, so no real change. We will likely get a Credit Event prior to March 20th once CAC’s are used to get the deal fully done. Will the market respond much to that? Probably not, though there is a higher risk of unforeseen consequences from that, than there was from the S&P downgrade. It just strikes us that Europe wasted a year or more, and has created a less stable system than it had before. Tomorrow’s LTRO is definitely interesting. It seems like every outcome is now bullish – big take up is bullish because of the “carry” trade. Low take up is bullish because “banks are okay”. Any weak bank looking to borrow from the LTRO to buy sovereign debt would be insane to buy bonds longer than 3 years and take the roll risk, but on the other hand, the weakest and most insolvent, got there by doing insane things in the first place.
We have repeatedly voiced our views on Buffett's relentless bashing of the only asset that is a guaranteed protection against now exponential currency debasement and central planner, and other PhD economist, stupidity, most recently here. We are happy that other, more politically correct asset managers, have decided to share how they fell, and take the crony capitalist to task. The first (of many we are sure), are Lee Quaintance and Paul Brodsky of QBAMCO who have just penned "Golden Boy" or the much needed "high society" response to the old man from Omaha: "Buffett may be a sage, a wizard, and an oracle when it comes to nominal relative value pricing of financial assets, but it is well worth noting that Buffett’s proclamations are not necessarily worthy of being considered “fact” in matters unrelated to finance, just as the legendary Joe Paterno’s judgment seems to have been sorely lacking when it came to sorting out matters unrelated to a winning football program....We must assume his aggressive gold comments have been meant to force the price of gold lower. (We do not know why he is so interested in doing so though we do have a reasonable theory, for another time). We strongly disagree with Mr. Buffett’s views and we thought it would be best to explore his comments and provide our counter-arguments."
The “Placebo Effect” is fascinating. In a typical drug testing trial, one group of patients will receive the actual drug being tested, and a “control” group will be given an “inert” medicine (or “sugar pill”) that shouldn’t do anything for the patient, but the patient doesn’t know that. So much of what I find wrong about “economics” is that it masquerades as far more of a science than it actually is. It doesn’t have theories that can be “tested” in a real world, where 2 similar situations are treated differently to see which “treatment” works better. Each economy and each situation is so different that it is IMPOSSIBLE to determine why policies failed or what should have been done differently. It is possible to come up with reasonable ideas and theories of what could have been done or should have been done, but they are only theories. The systems are so complex that finding situations with similar starting conditions with similarly motivated entities involved is simply impossible to find. The fact that so much of our policy seems to be based on research into what should have been done in the Great Depression and what has been seen in Japan is frankly scary. There is no way to “know” how the Great Depression would have turned out with a different set of policies. We can make conjectures, but that is all they are – conjectures. The LTRO was designed to support the market, the market is up, so the LTRO must be working. That at least is the logic many investors are applying. They see the improvement in sovereign debt yields, the avalanche of “positive” (if unfounded) headlines, and the relentless march higher of the stock market. So the plan is working? Not so fast.
While hardly discussed broadly in the mainstream media, the top news of the past 24 hours without doubt is that in addition to losing its fiscal sovereignty, and numerous other things, the Greek population is about to lose its gold in a perfectly legitimate fashion, following amendments to the country's constitution by unelected banker technocrats, who will make it legal for Greek creditors - read insolvent European banks - to plunder the Greek gold which at last check amounts to 111.6 tonnes according to the WGC. And so we come full circle to what the ultimate goal of banker intervention in the European periphery is - nothing short of full gold confiscation. So just how much gold will be pillaged by the banker oligarchy (it is amusing how many websites believe said gold is sacrosanct by regional national banks, and thus the EUR is such a stronger currency as it has all this 'gold backing' - hint: it doesn't, as all the gold is about to be transferred to non-extradition countries)? As the World Gold Council shows in its latest update, between all the PIIGS, who will with 100% certainty suffer the same fate as Greece (which has shown that unlike during World War 2, it is perfectly willing to turn over and do nothing) there is 3234 tonnes of gold to be plundered. And likely more as further constitutional amendments will likely make the confiscation of private gold the next big step. how much does this amount to? At today's prices this is just shy of $185 billion. Of course by the time the market grasps what is going on the spot price of the yellow metal will be far, far higher. Or, potentially far, far lower and totally fixed as the open gold market is eventually done away with entirely in a reversion to FDR gold confiscation and price fixing days.
- IMF Official: 'Huge' Greek Program Implementation Risks In Next Few Days (WSJ)
- European Banks Take Greek Hit After Deal (Bloomberg)
- Obama Urged to Resist Calls to Use Oil Reserves Amid Iran Risks (Bloomberg)
- Hungary hits at Brussels funds threat (FT)
- Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage (Bloomberg)
- Germany fights eurozone firewall moves (FT)
- New York Federal Reserve Said to Plan Sale of AIG-Linked Mortgage Bonds (Bloomberg)
- G-20 Asks Europe to Beef Up Funds (WSJ)
- New Push for Reform in China (WSJ)
To all those who stayed up until 6 am local time yesterday to hear Europe announce that the Greek deal is done, Europe is fixed, and that a pot of gold was found at the end of the rainbow, our condolences. Sorry, no isn't. Following up on our earlier post about the potential of UK-law bondholders to once again scuttle the deal, here comes none other than the IIF's Charles Dallara who basically says that the fate of Greece, the Euro, and the Eurozone, are in the hands of Greek creditors as we have been cautioning all along. And after all why on earth would hedge funds who just lost over 70% of their recoveries bear a grudge whatsoever...
As markets replay the same identical reaction to the same identical Greek news that we saw back on July 21, 2011 (and we all know where that went), something else entirely and more troubling is going on behind the scenes. Because as the world was transfixed on regurgitated news out of Greece, which will without a shadow of a doubt end up with a far worse 2020 debt/GDP scenario than the IMF's downside case per the sustainability report (first posted in its entirety here on Zero Hedge last night, and which assumes just a 1% decline in Greek 2013 GDP), China just escalated currency wars into outright trade wars. Because as China Daily reports, "Chinese exports are set to get a tax boost." Translated: even as China pushes the CNY higher in infinitesimal and irrelevant increments to appease US Congress, it has just taken out the trade stimulus bazooka. Why? "Export tax rebates will be increased this year in response to an export decline triggered by the European debt crisis. The move, which Commerce Ministry officials said will be implemented when the time is appropriate, will be the first increase since 2009." Still think Europe is fixed? China's answer: nope.
Those who have been correct about the crisis in recent years question whether a new Greek government will stick to the deeply unpopular program after elections due in April and believe Athens could again fall behind in implementation, prompting lenders to pull the plug once the eurozone has stronger financial firewalls in place. The much used phrase "kicking the can down the road" underestimates the risks being created by European and international policy makers. Some have rightly warned that we will likely soon run out of road. Rather than "kicking the can down the road" what politicians in Europe, in the U.S. and internationally are actually doing is "kicking a giant beer keg down the road". The giant beer keg is the continual resort to cheap money in the form of ultra loose monetary policies, QE1, QE2, QE3 etc, money printing and electronic money creation on a scale never seen before in history. The road is our modern international financial and monetary system. The risk is that attempting to kick the giant beer keg down the road will lead to many broken feet and a destroyed road. A European, US, Japanese and increasingly global debt crisis will not be solved by creating more debt and making taxpayers pay odious debts incurred through massively irresponsible lending practices of international banks. The likelihood of continuing massive liquidity injections by the ECB next week and in the coming weeks will help keep the opportunity cost of holding bullion the lowest it has ever been and likely contribute to higher bullion prices especially in euro terms in the coming months.
Nothing appears as ugly as unmasked raw propaganda, or seems as fashionable as well-crafted deception. Yet, the catwalk for both forms of propaganda is one and the same, deception wearing the most titillating togs provided by the top fashion house, the House of Public Relations. And the deceptive PR isn’t limited to multinational firms or businesses in general; it is part and parcel of our daily existence, having infiltrated most if not all institutions, totally poisoning politics, and eroding away whatever little honesty might still be left in our elected officials. During the past century we have seen the transformation of the raw epithet known as propaganda, and all its implied vilification, to that of an accepted social science with full academic accreditation, unashamedly sitting at the same table with all reputable and time-honored professions. We, members of society, have swallowed lock, stock and barrel the presumed need by notable individuals and institutions to receive help from specialized professionals to show us all the good things about them, their positive contribution to society. But much of what we get is tainted with deceit.
When the prospect of a nation being unable to roll over a paltry few Euros of maturing debt is enough to galvanise the entire financial world into monetary excess exceeding anything imaginable as recently as late 2007, one must conclude that the markets are skating on the thinnest ice in their entire existence. But skate they are.
What a difference a quarter makes: back in Q4 2011, in light of the imploding global economic reality, the only recourse equity bulls had to was to point out that corporate profitability was still at all time highs, and to ignore the macro. Fast forward a few months, when Europe's economic situation continues to deteriorate with the recession now in its second quarter, China's home prices have just slumped for a 4th consecutive month (forcing the PBOC to do only its second RRR cute since November), Japan is, well, Japan, yet where the US economic decoupling miracle is now taken at face value following an abnormally high seasonal adjustment in the NFP establishment survey leading to a big beat in payrolls and setting the economic mood for the entire month (with flows into confidence-driven regional Fed indices and the PMI and ISM, not to mention the Consumer Confidence data) as one of ongoing economic improvement. That this "improvement" has been predicated upon another record liquidity tsunami unleashed by the world's central banks has been ignored: decoupling is as decoupling does damn it, truth be damned. Yet the bullish sentiment anchor has flip flopped: from corporate profitability it is now the US "golden age." How long said "golden age" (which is nothing but an attempt to sugar coat the headline reality for millions of jobless Americans in an election year) lasts is unclear: America's self-delusion skills are legendary. But when it comes to corporate profit margin math, things are all too clear: the corporate profitability boom is over. As Goldman points out: with the bulk of companies reporting, in Q4 corporate profits have now declined by a significant 27 bps sequentially, and an even more significant 52 bps excluding Apple.
And just a little bit more on yesterday's story of the day, which a few recent journalist grads took as positive having absolutely no clue about the very basics of a simple restructuring process, and in turn fed it to the 18 year old math Ph.Ds who program FX trading algos that ran away with it in the form of a 150 pip gain, when in reality it was all negative. As the WSJ reports, the only sane person in Europe, did get it: Bundesbank's Jens Weidmann "voted against the proposal, according to a person familiar with the matter." As we expected. Why? Go back to our story on subordination and what it means as the ECB creates an ever more junior class of bond holders. For those who hate long sentences, the WSJ gets it right this time: "The move could rankle investors and turn them away from the peripheral euro zone bond market, blunting the impact of a possible approval of a Greek aid deal and plentiful cash from the ECB." Of course, those who don't react to idiot headlines, and every upticks courtesy of algobots, knew that long ago. But in this stupid market, it takes hours, if not days, for the progressively dumber investor base to comprehend what is going on.