I just finished Days of Destruction, Days of Revolt by Chris Hedges and Joe Sacco. It is superb, and I've spent a fair amount of time typing in passages from the book below in order to capture some of its theme.
In addition to the compelling evidence that more active monetary and fiscal policy involvement did not produce beneficial results over the short run, three recent academic studies, though they differ in purpose and scope, all reach the conclusion that extremely high levels of governmental indebtedness diminish economic growth. In other words, deficit spending should not be called "stimulus" as is the overwhelming tendency by the media and many economic writers. Whereas government spending may have been linked to the concept of economic stimulus in distant periods, these studies demonstrate that such an assertion is unwarranted, and blatantly wrong in present circumstances. While officials argue that governmental action is required for political reasons and public anxiety, governments would be better off to admit that traditional tools only serve to compound existing problems.
There is no mystery to the “headwinds” that continue to plague and mystify monetary policymakers. The global economy is not pulled into re-recession by some unseen magical force, conspiring against the good-natured efforts of central bankers. Instead, the very thing central banks aspire to is the exact poison that alludes their attention. Conventional economics will continue to believe and empirically “prove” that the theory of the neutrality of money is valid, giving them, in their minds, unrestricted ability to intervene and manipulate over any short-term period (though it is getting harder to argue that these emergency measures are “short-term” nearly five years into their continued existence). The occurrence of panic in 2008 and the unresolved and unremoved barriers to recovery in the years since, however, fully attest to nonneutrality, an ongoing form of empirical proof that their models will never be able to refute. And we are all condemned by it.
In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:
Need a Hilsenrath rooomer
— zerohedge (@zerohedge) July 6, 2012
Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.
In a move not too surprising to those who have followed the Egyptian presidential election, the candidate who is now president of the country one year after its "liberation" is the Muslim Brotherhood-backed Mohammed Mursi (for an extended interview with Mursi delineating his views read this ), who has won with over 13 million, or 51.73% of the votes. This means that at least superficially the Egyptian military is being pulled back from power, and instead the Islamist forces will be in control. How this ultimately impacts the region, and especially Egyptian neighbor Israel, remains to be seen, although a major Islamist power ascending in control of a formerly secular nation will hardly be very beneficial to Israel, especially in the long-run even if the just elected president has pro-western beliefs.
The revaluation that is underway now is beyond the simple scope of corporate earnings valuations, going to the very core of the system itself. Just like the equity pricing regime (and investor expectations for equity assets) needs to adjust to the twelve-year-old bear market reality, pricing within the global banking system as a whole needs to adjust to the reality that the artificial growth of the economic textbook is not replicable. The economic truth of 2012 is that much of the science of economics, and the foundation that gives to finance and financial pricing, was a temporal anomaly befitting only those specific conditions of that bygone era. In other words, the entire financial world needs to reset itself outside the paradigm of pre-2008. The secular bear market in US equities is one strand of this changing landscape, perhaps the first stirring of the collapse of the activist central bank experiment. In the end, the potential selling pressure of the dollar shortage is irresistible, no matter how “cheap” stock prices are to earnings, but none of it may matter in the grander scheme of a dramatic reset to the global system. The inability of that global system to escape this critical state, to simply move beyond crisis and function “normally” again, demonstrates conclusively, in my opinion, the foundational transformation that is still taking place well beyond the stock bear. Everything is a locked feedback loop of negative pressures in this age, no matter how much we want to see “value” where and how it used to exist.
Paradigm shifts are rarely orderly, but there are warning signs.
- With big conditions, China Offers $43 Billion for IMF Crisis War Chest (Reuters)... US offers $0.00
- Mexico is not Spain: Mexican Yields Drop to Record as Spain’s Borrowing Costs Soar (Bloomberg)
- And live from Las Ventanas al Paraiso: G-20 Leaders Focus on Banks as Spain's Woes Challenge Merkel (Bloomberg)
- German Constitutional Court Gives Victory to Opposition in ESM Suit (WSJ)
- EU Europe’s Leaders Urged to Resolve Crisis (FT)
- Backing Grows for One EU Bank Supervisor (FT)
- Greek Leaders Close to Coalition, Aim to Ease Bailout (Reuters)
- China Economy Improves in June, Commerce Minister Chen Says (Bloomberg)
- China Looks for Loan Boost (WSJ)
The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner.. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.
- Obama Seeking Ally on Europe Finds Merkel a Tough Sell (Bloomberg) - but he has an election to win
- China rate cut sparks fears of grim May data (Reuters)
- China faces stimulus dilemma (FT)
- Papademos warns of Grexit vortex (FT)
- China’s Shipyards Fail to Win Orders as Greek Owners Shun Loans (Bloomberg)
- Rajoy Holds Bank Talks With EU Leaders as Fitch Downgrades Spain (Bloomberg)
- Capital Rule Is One Size Fits All (WSJ)... now the modest question of where to get the $3.9 trillion in capital
- Merkel Pokes at Cameron With Backing for Two-Speed Europe (Bloomberg)
- City safeguards set Britain at odds with EU (FT)
- Bernanke says Fed to act if Europe crisis deepens (Reuters)
U.S. Labels ALL Young Men In Battle Zones As “Militants” … And American Soil Is Now Considered a Battle ZoneSubmitted by George Washington on 05/31/2012 20:20 -0500
All Military-Age Men Are Labeled “Militants” In Areas of Conflict ... Including Inside the U.S.?
Three weeks ago, when the hit campaign on Chesapeake was in full swing, we made a simple prediction: hate the company for whatever reasons but not because of the balance sheet. We explained that "under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant." Alternatively, some other, far bigger, company with a pristine balance sheet and lower quality assets could swoop in and do a full management purge, removing the Mclendon overhang, firing the disgraced Board and commingling liabilities while boosting the quality of its assets. Think the TBTF putches from September 2008. Because at the end of the day, it is all about the quality of the assets. And the reality is that CHK has some quality assets, which, however, are burdened by many legacy issues. There is of course the issue of near all time record gas prices. But there in lies the rub: the prices are already at near all time lows. They could continue sliding, or in a world in which hard assets (and even gaseous) are becoming more and more precious by the day, they could go up. In which case CHK would be a very interesting bet. Needless to say, two weeks after our preliminary CHK assessment, Carl Icahn put his money, or rather $775 million of it to be precise, to essentially confirm what we had said previously. Which brings us to the next question: is CHK really worth more? Well, in keeping with the tradition of keeping it simple, we have decided to present one delightfully simple chart from Bloomberg, which shows where the biggest downside in the stock comes from - it's well-known leverage - as well as where the upside is hiding - its asset base - which has the lowest valuation of its peers.
- Finally, even the NYT gets it: Most Aid to Athens Circles Back to Europe (NYT)... compare to ZH from February
- It took less than 2 weeks: Zuckerberg Drops Off Billionaires Index as Facebook Falls (Bloomberg)
- Morgan Stanley derivatives switch hits hold-up (FT)... MS prevented from having non-existant deposits backsto $52 trillion in derivatives
- Solyndra goes global: Spain Ejects Clean-Power Industry With Europe Precedent (Bloomberg)
- Investors may be stoking the volatility they fear (Reuters)... Zombie Catch 22
- Facebook shares plumb new depths, valuation questioned (Reuters) shouldnt this have been questioned before?
- Italian auction reinforces eurozone woes (FT)
- Visa Beats JPMorgan as Cards Wage War on Cash (Bloomberg)
- Sweden Escapes Recession as Growth Returned in First Quarter (Bloomberg)
Presenting How Carl Icahn Accumulated A 7.5% Stake In Chesapeake In 18 Days, And His Letter To The CHK BoardSubmitted by Tyler Durden on 05/25/2012 15:38 -0500
Recall when Zero Hedge said two weeks ago that in the age of ZIRP, corporate balance sheets simply do not matter. The reason for that conclusion were of course the endless public debates over whether Chesapeake's massively overlevered capital structure would lead to its demise. Our view was that while balance sheets certainly matter in a normal market, one not dominated by central planning and endless hunger for yield, in the new ZIRP normal, none of the old school metrics of solvency, viability or even profitability matter. One person who appears to have agreed with our assessment, and put his money where his mouth is, or $775MM more specifically, is none other than legendary corporate raider Carl Icahn, who minutes ago announced that funds controlled by Icahn have raised their stake in CHK to 7.56%, making him the second biggest holder of the stock, and in a letter just sent to the CHK Board, in rather angry tones, demanded 2 board seats for his own representatives and 2 for Chesapeake's largest shareholder Southeastern Asset Management. Below we chart just how it is that beginning on April 19 at a price of $18.03, Icahn's funds accumulated over a period of 18 days, a total of 49.4 million shares of stock at what appears to be a Volume Weighted Average Cost of $15.70/share, meaning that as of the stock spike on this announcement he is currently in the money.
Imagine, if you will, a fantastic near future in which the United States is facing an unmitigated economic implosion. Not just a mere market crash, or a stint of high unemployment, but a full spectrum collapse driven by unsustainable debt spending and hyperinflationary printing. The American people witness multiple credit downgrades of U.S. Treasury mechanisms, the dollar loses its reserve status, devaluation of the currency runs rampant, and the prices of commodities and imported goods immediately skyrocket. In the background of this disaster, a group of financial elite with dreams of a new centralized economic and political system use the chaos to encourage a removal of long held civil liberties; displacing Constitutional protections they deem “outdated” and no longer “practical” in the midst of our modern day troubles. This group then institutes draconian policies through the executive orders of a puppet president, including indefinite detention, assassination, and even martial law against citizens... With modern computer driven weaponry at their fingertips, any resistance appears futile. Some Americans, though, do their homework, and discover that most successful revolutions against better equipped opponents utilize low tech methods in highly intelligent ways. They study the inherent weaknesses of the enemy weapons platforms using readily available online manuals and scientific journals. They realize that these pieces of equipment costing millions of dollars each can be defeated using methods that cost little more than pocket change. A war of economic attrition ensues.