While everyone was busy ruminating on how little impact a Greek default would have on the global economy, the IIF - the syndicate of banks dedicated to the perpetuation of the status quo - was busy doing precisely the opposite. In a Confidential Staff Note that was making the rounds in the past 2 weeks titled "Implications of a Disorderly Greek Default and Euro Exit" the IIF was doing its best Hank Paulson imitation in an attempt to scare the Bejeezus out of potential hold outs everywhere, by "quantifying" the impact form a Greek failure. The end result: "It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion." In other words, hold out at your own peril. Of course, what the IIF does not understand, is that for hedge funds it is precisely this kind of systemic nuisance value that makes holding out that much more valuable, as they understand all too well that they have all the cards on the table. And while a Greek default could be delayed even if full PSI was not attained by Thursday, it would simply make paying off the holdouts the cheapest cost strategy for the IIF, for Europe and for the world's banks. Unless of course, the IIF is bluffing, in which case the memorandum is not worth its weight in 2020 US Treasurys.
The following people are paid to have an opinion, whether right or wrong, so it is our job to listen to them. Supposedly. Reuters summarizes the professionals kneejerk reaction to the LTRO 2. Because when it comes to explaining why Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits soon to be handed over to the ECB, one needs all the favorable spin one can muster.
For a February 29, tomorrow will be even more remarkable, because while all eyes will be on the LTRO, just waiting for their chance to start fading the expansion of the ECB's balance sheet (which will hit a record €3 trillion+ as of market close tomorrow, or well higher than the Fed's $3 billion), some may be forgetting that across the pond, our own Bernanke will be holding the first of his biannual Humphrey Hawkins presentations to Congress hours after the LTRO news has printed. Expectations are high that despite $2 trillion in liquidity flooding capital markets in the past 6 months, that Bernanke will not dare to remove the punchbowl. Here is Citi's Steven Englander with a preview of what (not) to expect.
While the discipline of behavioral finance is relatively new, the performing art of magic has long exploited many of the same principles about human nature and decision-making. While much is made of the smoke-and-mirrors market we exist in, Nic Colas, of ConvergEx Group, reviews the 'Basics' of this ancient form of entertainment, courtesy of a recent Smithsonian magazine article by Teller (the quiet half of Penn & Teller), and draws some analogies to the modern world of investing and economic analysis. The seven crossover points include pattern recognition, overconfidence, and the illusion of free choice. It seems to us that investors can benefit from reminding themselves that their own powers of perception are severely limited. As Nic points out, if we can be regularly fooled by a Las Vegas magic act, then many of the same flaws in our thinking must be at play when we watch the screens at work. We seek out patterns that don’t really exist. We confuse choice with freedom. We grow emotional and limit our ability to process information. Watching a show, this is amusing. Making investment decisions, not so much.
No Matter How Much Room Some May Think Is Available, There Is But So Long One Can Play Hide The Greco-SausageSubmitted by Reggie Middleton on 02/28/2012 07:30 -0500
Yep! If you push that sausauge too far in an attempt to hide it, it's bound to start hurting someone... somewhere...
And not because his Rule doesn't have teeth.
Enough is enough, its already too much.
The better tone in risk markets is largely being driven by encouraging economic data from the US and Europe, which as a result saw Bunds trade in negative territory. Of note, ECB’s Liikanen has said that inflation is not a particular concern in Europe, adding that the ECB has never said that there is an interest rate floor. On the other hand, Gilts are being supported by comments from BoE’s Fisher, as well as less than impressive GDP report. Nevertheless, EUR/USD took out touted barrier at the 1.3400 level earlier in the session, while USD/JPY is trading in close proximity to an intraday option expiry at 80.60.
- U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut (BBG) -Expect one whopper of a seasonal adjustment to compensate
- European Banks May Tap ECB for $629 Billion Cash (Bloomberg) - EURUSD surging as all ECB easing now priced in; Fed is next
- Madrid presses EU to ease deficit targets (FT)
- Greek Parliament Approves Debt Write-Down (WSJ)
- Mentor of Central Bankers Fischer Rues Complacency as Economy Accelerates (Bloomberg)
- Draghi Takes Tough Line on Austerity (WSJ)
- European Banks Hit by Losses (WSJ)
- Moody's: won't take ratings action on Japan on Friday (Reuters)
- Athens told to change spending and taxes (FT)
Warning: Not for the faint of heart.
January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."
Today, without much fanfare, US debt to GDP hit 101% with the latest issuance of $32 billion in 2 Year Bonds. If the moment when this ratio went from double to triple digits is still fresh in readers minds, is because it is: total debt hit and surpassed the most recently revised Q4 GDP on January 30, or just three weeks ago. Said otherwise, it has taken the US 21 days to add a full percentage point to this most critical of debt sustainability ratios: but fear not, with just under $1 trillion in new debt issuance on deck in the next 9 months, we will be at 110% in no time. Still, this trend made us curious to see who has been buying (and selling) US debt over the past year. The results are somewhat surprising. As the chart below, which highlights some of the biggest and most notable holders of US paper, shows, in the period December 31, 2010 to December 31, 2011, there have been two very distinct shifts: those who are going all in on the ponzi, and those who are gradually shifting away from the greenback, and just as quietly, and without much fanfare of their own, reinvesting their trade surplus in something distinctly other than US paper. The latter two: China and Russia, as we have noted in the past. Yet these are more than offset by... well, we'll let the readers look at the chart and figure out it.
Ken Rogoff: Greece Should Be Given A "Sabbatical From The Euro" As Kicking The PIIGS Can Will Just Drag Germany DownSubmitted by Tyler Durden on 02/20/2012 11:03 -0500
There is nothing new in this interview of Spiegel magazine with Ken Rogoff, but it is refreshing to listen to a person who has at least some standing in the arena of grand self-delusion (i.e., economics and capital markets), telling it like it is. While he rehashes all the old points, these bear reminding as the key one is what happens to Germany as the can kicking becomes a new default exercise in preserving bank "solvency" at the expense of the last stable economy: when asked if in 2015 the Eurozone will be the same, his response: "It may well be the case that all current members remain in the euro zone, and that Germany keeps on shouldering the ever-increasing debts of other countries. But the price of such a scenario is very high for all involved: southern Europe would become embroiled in permanent stagnation and the German economy would eventually be dragged down to a slower growth trajectory." So even though everyone knows that Europe is doomed in its current configuration, let's all just pretend things shall be well, and keep the even more doomed banks alive for a few more quarters? Is the loss of a banker bonus truly such a great catastrophe to society that countries have to remain in a state of perpetual misery until it all finally unwinds? Judging by today's market action the answer is yes.
The Volcker Rule ignores the most basic and elementary facts about bank risk taking in the financial markets and must hurt overall liquidity among financial intermediaries and investors.
Now everybody's bank bashing, of course the reason to bash the banks is 4 years old, despite Bove-like analysis to the contrary. I will discuss this on CNBC for a FULL HOUR tomorrow from 12 pm to 1pm.