fixed

As we have vociferously warned since September 2011, and most recently as the Cyprus debacle exploded explained why it is just beginning, Germany's Council of Economic Experts (or so-called 'Five Wise Men') just confirmed a wealth tax is coming. As the Telegraph reports, confirming our expectations, Germany warns that states in trouble must pay more for their own salvation, arguing that there is enough wealth in homes and private assets across the Mediterranean to cover bail-out costs. They further added that targeting deposit-holders is also a mistake, since the "resourceful rich just move their money to banks in northern Europe and avoid paying," preferring instead taxes on property or other less-mobile assets, "for example, over the next 10 years, the rich should give up a portion of their assets." As we noted here and here, the differences between mean and median wealth in the peripheral nations suggest that people in the bailed-out countries are often better-off than those in Germany - - "this shows that Germany has been right to take a tough line of euro rescue loans." However, the implications of a wealth tax - implicitly impacting the pro-euro Southern European uber-rich - raises the specter of EU breakup once again.

The lesson from the events of 2007-2008 should have been clear: Boosting GDP with loose money can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover. The crisis that commenced in 2007 was therefore a massive opportunity: An opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance. That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

Yet another (one of the very few remaining) voice of reason calls it quits after 30 years of writing The Privateer, one of the best financial newsletters. At this rate there will be virtually nobody left to challenge the daily propaganda spew coming out of the mainstream farcism. As Bill says, "We have been analysing the idiocies and imbecilities of the financial and political "powers that be" for a long time.  And for an equivalent time, we have been watching the "markets" succumb to this detritus.  That process was completed with the global near death financial experience of late 2008 but it had been building up since long before we began to chronicle it in 1984.... we need a break."  Sadly, expect the amount of idiocies and imbecilities to rise exponentially in the near future as the insolvency of the dying status quo regime is exposed for everyone - not just rich Cypriot depositors - to see. As for Bill: enjoy the break, you have earned it.

For many decades, the IT sector was the goose that laid the golden eggs of US fixed investment, with CapEx spending on IT rising as a percentage of GDP every year since 1954: after all spending on improving overall efficiency and productivity seemed like the ultimate and best CapEx investment (at least before Bernanke's ZIRP came along and made dividends and stock buybacks the only excess cash allocation option), where compounded CapEx investments would generate returns orders of magnitude higher than the allocated capital. Or so the thinking went until the Internet boom. As can be seen on the chart below, the advent of the "next big thing" in IT (sorry, not iPhones) - Cloud Computing - may well have been the next step function in IT investments, but due to the decentralized nature of the high-capacity broadband and high levels of utilization, may represent the first time in the past 60 years of US economic history, where incremental investments in the Cloud will no longer be GDP "accretive". This can be seen be the lower CapEx spend on cloud in the past decade (2.9%) compared to the GDP CAGR which at least according to official US sources rose at a 3.9% rate.

Curious how Abenomics is progressing six months after its announcement? These charts courtesy of Diapason should provide a convenient status update.

Friday saw panic selling in gold as the metal broke $1,500 in a free-fall move. Is this a sign of “risk on” or something more sinister? Perhaps Cyprus is a major seller or there’s a large margin call somewhere. Some even assert some countries with debt problems are selling gold to raise capital to finance their country’s needs.

Earlier today, as part of our JPM earnings recap we observed that "VaR plunged from $106 to $62" and wondered if it was just just "another excel copy/paste error" which as we reported previously, is what JPM's internal audit attributed much of the confusion surrounding JPM's VaR calculation around the time the London Whale blow up nearly doubled the firm's VaR. Because it is always better to blame a clueless intern for botching Excel than to put the blame where it rightfully belongs.  It turns out that as frequently happens, there was a dose of financial surreality behind the humor. As Bloomberg reports, the reason for the nearly 50% collapse in the company's reported maximum value at risk was because of, drumroll, yet another change in the model. 'JPMorgan said today it employed a new formula to judge the risk of its credit derivatives position, at least the fourth such model it’s used since January 2012. The portfolio was built by Bruno Iksil, known as the London Whale because his bets were so big they moved markets."

If JPM and its "fortress" balance sheet and business model are supposed to represent Q1 earnings for US banks, it will not be a good start to the year. While EPS beat expectations solidly, coming at $1.59 on expectations of $1.39 print, this was largly driven by a bigger than expected loan loss reserve release in its real estate portfolios ($650MM pretax), and card services ($500MM pretax), which was the largest combined release number since the $2 billion reduction in Q1 2012. This took down total JPM total loan loss reserves to $20.8 billion, down from $21.9 billion in Q4, and down $5.1 billion from the $25.9 billion a year ago. This happened even though JPM's NPL declined far more modestly, from $10.7 billion to just $10.4 billion. It was the revenue of $25.12 that missed expectations of $25.85, down from $26.05 billion a year ago, and which is the bigger issue for the bank, driven by disappointing trading results with fixed income markets revenue of $4.8 Billion, down 5% YoY, equity markets revenue of $1.3 Billion, down 6% YoY, and Securities Services revenue of $974mm, flat YoY. Not surprisingly in order to maintain expenses, headcount continue to decline from 258,753 to 255,898.

It should come as no surprise that struggling retailer JCPenney, which has been burning cash at an unprecedented rate, and which just wasted two years of turnaround time following the sacking of its now former CEO Ron Johnson only to return to the same strategy that Bill Ackman blasted as recently as 2012, has been in dire cash straits. However, while everyone expected the company to announce that it would satisfy its immediate cash needs by drawing down in part or in whole on its recently amended and restated, and currently undrawn, $1,850 billion revolver with JPM as administrative agent (as every other company does when it needs a brief liquidity burst), nobody expected that JCP, whose stock yesterday hit a 12 year low, would be forced to hire Blackstone to advise in on raising cash. Which according to the WSJ it just did.

Futures green? Check. Overnight ramp in either the EURUSD or USDJPY carry funding pair? Check? Lack of good economic news and plethora of economic misses? Check. In short, all the ingredients for continued New Normal record highs, driven only by the central bank liquidity tsunami are here. The weakness started with Australia's stunning unemployment jump overnight which saw a 36,100 drop in jobs on just 7,500 expected. A miss in Chinese auto sales was next, with 1.59MM cars sole in March, below the 1.596 expected, and even despite the surge in M2 and loan data, the Shanghai Composite closed down once again, dropping 0.29% to 2219.6. Nikkei continued its deranged liquidity-fueled ways, rising 1.96% even as Kuroda is starting to become quite concerned about the rapid move in the Yen, saying he "may adjust policy before the 2% target is reached if the economy and other indicators are growing rapidly." They aren't, and won't be, but if the Nikkei225 is confused for the economy, he just may push on the breaks which would send the only reason for the latest rally, the USDJPY tumbling. Finally, looking at Europe, Italy sold well less than the maximum €6 billion targeted in 2016, 2017 and 2028 bonds, which dented some of the enthusiasm for Italian paper although with Japanese money desperate to be parked somewhere, it will continue going into European and all other fixed income, distorting market signals for a long time. In short, expect the central-bank risk levitation to continue as all the deteriorating fundamentals and reality are ignored once more, and hopium and P/E multiple expansion are the only story in town.

No news is good news apparently. European stocks had their best day in over seven months today. Spanish and Italian equity indices surged - now +4.7% on the week. Italian bank stocks were halted limit up. European bank stocks smashed 6% higher - the biggest rally day since early September. Sovereign bond spreads leaked lower (Italy/Spain -16-20bps on the week). EURUSD ended the EU session -20pips (but off over 65 pips from overnight highs). While stocks went out at their highs (and credit at its tights), Europe's VIX pushed notably off its lows into the close - ending at 19.2% (and Swiss2Y held near its lows of the year).

There was a brief period of confusion for a while when Goldman didn't have clear muppet-stomping trades on the book, and those who wished to frontrun the Goldman prop desk (and do the opposite of the muppet flow) were stuck furiously scratching their head. And granted while it's not a "Stolper", tonight we got two gifts (in the parlance of Whitney Tilson) with Goldman first telling its clients to sell gold following Goldman's lowering of its price target for the yellow metal (which as always means the hedge fund known as Goldman is buying what its clients are selling). And then, moments ago, we also learned that Goldman is also selling the 10 Year, which it advise muppets to buy.

It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE.  As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.

Perhaps the best measure to gauge the European recovery is by the soaring number of companies going bust, because only from this perspective is Europe finally "fixed." As Reuters reports citing a report by Axesor, a record 2,564 companies filed for "insolvency proceedings", a more palatable version of the word bankruptcy, in the first quarter - an increase of 10% from Q4 and up a whopping 45% from Q1 2012. The reasons given: "tight credit conditions and meager demand." Or in other words: no actual cash flow to fund demand for products and services. Obviously it will take some truly phenomenal massaging and manipulation to represent GDP as rising in this environment, but we are confident the Spanish authorities are already on it, and somehow the Spanish pension fund, already 97% filled with Spanish government bonds, will somehow have a finger in yet another completely unbelievable economic print which will fool most of the algos most of the time on flashing red Bloomberg headlines.

It seems, despite the constant "it's all fixed" banter, that Portugal's Constitutional Court decision that the Troika-imposed austerity is unconstitutional (as we discussed in detail here and here) has a few of the 'elites' nervous. And so, late on a Sunday night European time, they launch a press release that is about as passively aggressive as they come, "any departure from the programme's objectives, or their re-negotiation, would in fact neutralize the efforts already made and achieved by the Portuguese citizens, namely the growing investor confidence in Portugal, and prolong the difficulties from the adjustment... it is a precondition for a decision on the lengthening of the maturities of the financial assistance to Portugal." In other words, get your constitutional court in line or the OMT 'promise' get's it! Perhaps that explains why, unlike Spain and Italy who rallied in the last few days, Portugal's bond spreads are at the widest of 2013 (70bps off the tights of the year).