Central Banks

The reality is that the Fed is stuck in ZIRP and will never be able to leave it. In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%. Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year (assuming of course that the current GDP growth projections are accurate...)

Stocks advanced today after Greek lawmakers finally approved a new austerity package aimed at averting a default. As a result, it now looks like that the country will get the next bailout tranche and avoid failing to meet debt redemptions in March. The draft legislation published by the Greek government showed that the EFSF may provide EUR 35bln to help Greece buy back bonds held by euro-area central banks as collateral, while Greek finance minister said that EUR 70bln in bonds are to be issued in the swap and Greece needs to make debt swap offer by Friday Feb 17th at the latest. Credit metrics such as Euribor and Euribor/OIS spreads continued to improve, which in turn supported financial sector. Looking elsewhere, comments from Iranian President Ahmadinejad over the weekend who said that Iran will soon reveal "very big new achievements" in its controversial nuclear programme, together with comments from China’s Wen who said the country will begin to fine tune its economic policies in the Q1 of this year supported both Brent and WTI crude prices today. Going forward, there are no major macro-economic releases this afternoon, but both the BoE and the Fed are due to conduct another round of Asset Purchases.

The rhetoric coming out of Greece has reached a fever pitch. Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants. If he isn’t the most conflicted politician of all time, he is right up there. Samaras may believe it, or may have decided this is his best route to power when the vote is passed and the Greek people decide to kick Papademos out (remember, he was never voted in). Either of them would be more credible if they made any attempt to explain why it would be so disastrous. So far, not one basic fact to support the chaos theory has been given. I will admit that if Greece defaults without any preparation, it would be extremely ugly, but there is no reason not to be prepared. So, if I was the Greek Finance Minister (I would probably have a longer last name, with more vowels) here is an outline of how I would prepare for default.

To confirm a reversal in Treasuries we need a bona fide breakout. 

While Obama may or may not be on the way to winning his reelection, courtesy of a GOP field that is, to say the least, limited, and where the only worthy candidate is more ostracized by the right than even anyone on the left, the bottom line is that whoever wins the presidency, it will matter precisely didley squat. As the US debt clock shows, fast forwarding 4 years, or to February 2016, when the next presidential race will be in its final stretch, America will have $24.1 trillion in debt, about $9 trillion more than it does, now on $17.4 trillion in GDP, for a gross debt to GDP ratio of 138.9% (and Apple's $1 trillion market cap will account for 150% of the Nasdaq... just as IBM is 125% of the DJIA). Needless to say, it will be long past game over at that point confirming that the current presidential race, with its exciting tangential detours into female fertility, moon bases, LBO IRR maximization courtesy of cost-cutting, is completely and utterly meaningless. Also, keep in mind, "at current rates" for an endspiel that has now entered the exponential phase in virtually every category, is to say the least, optimistic. Yes, interest rates may be negative in 2016, but that means that the liquidity trap endgame has not only begun, but is well on its way to ending, and mercifully putting an end to this whole Keynesian "sustainability" charade. Remember: Japan's debt-deflation lasted for 30 years only thanks to new pockets of incremental global leverage and inflation: China and the PIIGS. This time, absent the levering of the entire continent of Africa, there is noone who can take the releverage baton and run. Which means the only "buyers" will be the central banks. At least back in the day, Weimar just one nation. This time, it will be the "Weimar World."

Some of our German readers may be laboring under the impression that following the €110 billion first Greek bailout agreed upon and executed in May 2010, the second Greek bailout would cost a "mere" €130 billion. Alas we have news for you - as of this morning, the formal cost of rescuing Greece for the adjusted adjusted adjusted second time has just risen to €145 billion, €175 billion, a whopping €210 billion, bringing the total explicit cost of all Greek bailout funds to date (and many more in store) to €320 billion. Which incidentally is a little more than Greek GDP (which however is declining rapidly) at 310 billion, only in dollars. So as of today, merely the ratio of the Greek DIP loan (Debtor In Possession, because Greece is after all broke) has reached a whopping ratio of 136% Debt to GDP. This excludes any standing debt which is for all intents and purposes worthless. This is secured debt, which means that if every dollar in assets generating one dollar in GDP were to be liquidated and Greece sold off entirely in part or whole to Goldman Sachs et al, there would still be a 36% shortfall to the Troika, EFSF, ECB and whoever else funds the DIP loan (i.e., European and US taxpayers)! Another way of putting this disturbing fact is that global bankers now have a priming lien on 136% of Greek GDP - the entire country and then some now officially belongs to the world banking syndicate. Consider that when evaluating Greek promises of reducing total debt to GDP to 120% in 2020, as it would mean wiping all existing "pre-petition debt" and paying off some of the DIP. Also keep in mind that Greece has roughly €240 billion in existing pre-petition debt, of which much will remain untouched as it is not held in Private hands (this is the debt which will see a major "haircut" - or not: all depends on the holdout lawsuits, the local vs non-local bonds and various other nuances discussed here). If you said this is beyond idiotic, you are right. It is not the impairment on the Greek "pre-petition' debt that the market should be worried about - that clearly is 100% wiped out. It is how much the Troika DIP will have to charge off when the Greek 363 asset sale finally comes. This is also what Angela Merkel will say tomorrow when Greece shows up on its doorstep with the latest "revised" agreement from its parliament to take Europe's money ahead of the March 20 D-Day. Because finally, after months (and to think we did the math for Die Frau back in July) Germany has done the math, and has reached the conclusion that letting Greece go is now the cheaper option.

For the last thirty years economic policy makers have been in the business of promoting asset prices higher through easy credit. Global policy makers are meddling in markets so that the economies they feel responsible for can achieve what seems to be a consensus objective of muddling through. A policy of meddling to muddle, if you will. QBAMCO's critical 'inflation' insights, and Tourette's-ridden ranting, reflect the simple realities of what real-world consequences occur when policy makers succumb to the perceived political imperatives of perverting economic data. In this combined note, Brodsky and Quaintance scrub away at the misconceptions related to inflation, raise doubts as to the incentives of central banks to share the true loss of their currencies' purchasing power with the public, and extend this to try and get a truer sense of money, inflation, and real value today - all of which seem grossly misunderstood, despite our best efforts, in the marketplace. Simply put, they point out that, "It should not be considered acceptable to be in a profession – as a political economist, policy maker or investor – in which self-delusion has become a necessary requirement for success and perpetuating that delusion is harmful to the broad economy over time. Yes, but the “public good” you say? Ah, but for how long?"

Lots of motion, little progress. 

Hands up anyone who is surprised that the Bank of England has added another £50 billion to the quantitative easing pot? The same hands will also believe that the Greeks have agreed terms for the next bail out tranche with the Troika (the European Union, the IMF and the European Central Bank). This ongoing epic odyssey of the voyage to nowhere has grabbed the headlines, but the BoE’s quiet announcement is equally significant to us Brits. Central banks never utter the words quantitative easing, so the Bank calls it an addition to its “asset purchase programme”, which was only hiked to £275 billion back in October. The accompanying rhetoric states that inflation is on the way back down and may fall below their target of 2%, mainly as a result of the VAT increase last January falling out of the equation and lower energy prices, (despite Brent crude being over 10% higher Y-o-Y in sterling terms..); a convenient excuse perhaps.

FX Concepts' John Taylor is out with today's slam dunk de-noisification of all that is irrelevant with the following summary of what is really going on as the world's central banks embark on the latest and hopefully final attempt to reliquify everything. All we can add to Taylor's analysis, especially in light of today's incremental easing in ECB collateral requirements, is that the biggest beneficiary by far of what in a few months will be another multi-trillion balance sheet expansion, is and continues to be hard, non-dilutable, i.e., real, money. Because as fiat currency loses all relevance in a world in which it is printed on a daily basis by the central banks, whether or not we end up with a Weimar scenario, the cash thrown out by the even profitable companies will be increasingly more meaningless. Yet the take home message is that banks will never, ever stop diluting existing money. They simply can't as the past few months have so vividly demonstrated.

It takes a central banker from Goldman Sachs to conceive of the world's largest CLO, and enlist the Eurozone's central banks to do the credit analysis.

While a lot of the just completed Draghi press conference was mostly fluff, the one notable exception was the announcement that the European central bank would "approve eligibility criteria for additional credit claims" (see below). While purposefully vague on the topic, Draghi noted that the step is one of onboarding even more risk: "Sure, it's going to be more risky. Does that mean that we take more risk? Yes, it means we take more risk. Does it mean this risk is being unmanaged? No, it is being managed. And it's being - it's going to be managed very well because really there will be a strong overcollateralization for the additional credit claims. The conditions will be very stringent." While it remains to be seen just how stringent the conditions will be, but a bigger question is what is the total pool of eligible claims that can be used to flood the ECB in exchange for freshly printed cash. For that we go to Goldman whose Jernej Omahen a month ago calculated the impact of the expanded collateral pool which was formally confirmed today. To wit: "Scarcity of collateral was becoming an evident problem for a large number of banks, especially smaller and medium sized. In our view, the ECB’s collateral pool expansion was therefore a critical decision. Select corporate loans – which form over >€7 tn, or >30% of total balance sheets – will now be admissible for refinancing operations, through national central banks. Criteria on eligibility have yet to be determined – we are therefore not able to quantify the actual expansion of collateral pool at this stage. That said, the €7 tn starting points suggests it will be significant." In other words, and this is excluding anything to do with the LTRO, the ECB just greenlighted a potential expansion to its balance sheet all the way up to €7 trillion. Will banks use this capacity to convert "trash to cash" - why of course they will, and this goes to the very heart of the biggest problem with Europe: the fact that there are virtually no money good assets left as collateral, which requires the implicit rehypothecation of bank "assets" back to the ECB, to procure cash, to pay out cash on liabilities. How much will they do - we don't know yet. We will find out very soon. What we do know is that the ECB's €2.7 trillion balance sheet is about to expand dramatically, pushing the European central bank even further into bad bank status. And this is excluding the upcoming new usage of the Discount Window known as the LTRO in three weeks. Trade accordingly.

Mario Draghi has just begun his press conference in a more upbeat tone than recent months. EURUSD is limping back from its last try at 1.33 but only modestly as he sees inflation risks 'broadly balanced' and reminds us all of the 'transitory' nature of his temporary non-standard measures, as Bloomberg notes. The main thing is that the ECB is once again easing collateral demands and will now accept credit claims. This simply proves that Europe is running out of any money good assets to pledge to the ECB as "collateral." Before the European (and thus global) ponzi is over, the central banks will accept Mars bars wrappers as collateral at 100 cents on the freshly printed dollar/euro.

First, small momo-favorite companies. Next: entire nations. Finally: the all-seeing, all-dancing central banks. Today, Diamond Foods just fired its CEO and CFO after the audit committee found its books have been cooked, only phrased more politically correct: "the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers. The Audit Committee has concluded that a "continuity" payment made to growers in August 2010 of approximately $20 million and a "momentum" payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company's internal control over financial reporting." Cue the class action lawsuits. When everything is said and done, the US investor will find that the Madoff M.O. of "doing business" has simply shifted to corporate America, where courtesy of non-GAAP BS one can report whatever the investing public wants to believe, until it all blows up. In other news, the now fired executives were stunned to discover they are not getting an extra bonus for cooking the books, last heard mumbling "double standard" under their breath. And if anyone wonders why despite the confirmed "bull market" in stocks (driven entirely by the nearly $1 trillion liquidity injection from the ECB in the past 6 months), investors just pulled $1.8 billion out of US mutual funds yet again, this is your answer.

Sudden collapse in withholding taxes... so now we can get back to the normal state, where the government borrows more than expected.