Credit Conditions

Last night it was uber-dove Janet Yellen, today it is uberer-dove, former Goldmanite (what is it about Goldman central bankers and easing: Dudley unleashing QE2 in 2010, Draghi unleashing QE LTRO in Europe?) Bill Dudley joining the fray and saying QE is pretty much on the table. Of course, the only one that matters is Benny, and he will complete the doves on parade tomorrow, when he shows that all the hawkish rhetoric recently has been for naught. Cutting straight to the chase from just released Dudley comments:"we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks... To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established.  But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery.  On the inflation front, the year-over-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012." Translate: NEW QE is but a CTRL-P keystroke away now that all the inflation the Fed usually ignores continues to be ignored.

In its latest note, Goldman is not providing any actionable "advice" which is naturally to be faded and would have been thus quite profitable, but merely updates its outlook for the second quarter, which is not pretty. The firm now expects a slowing down in the overall economy to a 2% GDP rate, and an "additional loss of momentum during the next few months", which is to be expected as every bank wants to keep the perception that NEW QE is just around the corner, as economic stagnation can rapidly become a contraction. Most importantly, the firm expects just 150,000 payrolls to be created every month, which net of the 90,000 monthly labor force increase (yes, forget what the BLS tells you - every month courtesy of demographics the American labor force grows by an average of 90k people) means that only 60k jobs will be added to offset the structural job collapse since December 2007. It also means that the pre-election rhetoric will change significantly as the economic strength from the start of the year disappears, and with it any hope of an economic upswing, providing additional ammo for exciting GOP pre-election theater.

The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.

All you need to read and more.

Last week, Bernanke's first (of four) lecture at George Washington University was entirely dedicated to attempting to discredit gold and all that sound money stands for. The propaganda machine was so transparent that it hardly merited a response: those away from the MSM know the truth (which, simply said, is the "creation" of over $100 trillion in derivatives in just the first six months of 2011 to a record $707 trillion - how does one spell stability?), while those who rely on mainstream media for the news would never see an alternative perspective - financial firms are not among the top three sources of advertising dollars for legacy media for nothing. Still, for those who feel like the Chairman's word need to be challenged, the following extensive and annotated reply by QBAMCO's Paul Brodsky makes a mockery of the Fed's full on assault on gold, and any attempts by the subservient media to defend it. To wit: "Has anyone asked why so many powerful people are going out of their way to discredit an inert rock? We think it comes down to maintaining power and control over commercial economies. After professionally watching Fed chairmen cajole, threaten, persuade and manage sentiment in the markets since 1982, we argue this latest permutation is understandable, predictable and, for those willing to bet on the Fed’s ultimate success in saving the banking system (as we are), quite exciting.... Gold is no longer being ignored and gold holders are no longer being laughed at. “The Powers That Be” seem to have begun a campaign to discredit gold."

You know there is a reason why Europe just came crawling with an advance handout looking for US assistance: Moody's just went apeshit on Europe.

• Austria: outlook on Aaa rating changed to negative
• France: outlook on Aaa rating changed to negative
• Italy: downgraded to A3 from A2, negative outlook
• Malta: downgraded to A3 from A2, negative outlook
• Portugal: downgraded to Ba3 from Ba2, negative outlook
• Slovakia: downgraded to A2 from A1, negative outlook
• Slovenia: downgraded to A2 from A1, negative outlook
• Spain: downgraded to A3 from A1, negative outlook
• United Kingdom: outlook on Aaa rating changed to negative

In other news, we wouldn't want to be the company that insured Moody's Milan offices.

Everything you always wanted to know about LTRO but were afraid to read.

Federal Reserve Board Chairman Ben Bernanke will testify at House Budget Committee (Chairman Paul Ryan, R-WI) full committee hearing on "The State of the U.S. Economy." The highlight of today's hearing will be watching Bernanke face his nemesis runner up, Paul Ryan, who will surely grill Blackhawk Ben with questions that are far more intelligent than the press corps could come up with during the last FOMC canned remark presentation. Watch the full testimony live at C-Span after the jump.

You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????

Festive Friday fun:

• FITCH TAKES RATING ACTIONS ON SIX EUROZONE SOVEREIGNS
• ITALY LT IDR CUT TO A- FROM A+ BY FITCH
• SPAIN ST IDR DOWNGRADED TO F1 FROM F1+ BY FITCH
• IRELAND L-T IDR AFFIRMED BY FITCH; OUTLOOK NEGATIVE
• BELGIUM LT IDR CUT TO AA FROM AA+ BY FITCH
• SLOVENIA LT IDR CUT TO A FROM AA- BY FITCH
• CYPRUS LT IDR CUT TO BBB- FROM BBB BY FITCH, OUTLOOK NEGATIVE

And some sheer brilliance from Fitch:

• In Fitch's opinion, the eurozone crisis will only be resolved as and when there is broad economic recovery.

And just as EUR shorts were starting to sweat bullets. Naturally no downgrade of France. French Fitch won't downgrade France. In other news, Fitch's Italian office is about to be sacked by an errant roving vandal tribe (or so the local Police will claim).

As of a few hours ago, Goldman's Francesco Garzarelli has officially told the firm's clients to go ahead and short 10 Year Treasurys via March 2012 futures, with a 126-00 target. While Garzarelli is hardly Stolper (and we will have more on the latest Stolpering out in a second), the fact that Goldman is now openly buying Treasurys two days ahead of this week's FOMC statement makes us wonder just how much of a rates positive statement will the Fed make on Wednesday at 2:15 pm. From Goldman: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year.

It has been a busy weekend for Wall Street, which has been doing all it can to spin the S&P downgrade in the best favorable light, although judging by the initial EURUSD and EURJPY reaction, so far not succeeding. Below we present a quick report written by Goldman's Lasse Nielsen on why in Goldman's view the downgrade's "impact is likely to be limited" and also the quick notes from an impromptu call MS organized for institutional clients (which had just two questions in the Q&A section, of which only one was answered - it appears virtually noboby believes that global moral hazard will allow anyone to fail at this point, so why bother even going out of bed).

All your questions about the historic European downgrade should be answered after reading the following FAQ. Or so S&P believes. Ironically, it does an admirable job, because the following presentation successfully manages to negate years of endless lies and propaganda by Europe's incompetent and corrupt klepocrarts, and lays out the true terrifying perspective currently splayed out before the eurozone better than most analyses we have seen to date. Namely that the failed experiment is coming to an end. And since the Eurozone's idiotic foundation was laid out by the same breed of central planning academic wizards who thought that Keynesianism was a great idea (and continue to determine the fate of the world out of their small corner office in the Marriner Eccles building), the imminent downfall of Europe will only precipitate the final unraveling of the shaman "economic" religion that has taken the world to the brink of utter financial collapse and, gradually, world war.

We have discussed the seemingly irrepressible demand to lend companies money (for the implicit FX trade) in Dim Sum bond format a number of times and in the last few weeks yields on these bonds have risen further as the reality of a notable contraction in mainland credit conditions (along with a rationalization of the lax restrictions within the bonds themselves) starts to hit investors. Overnight, Bloomberg reports that Shandong Helon, a Chinese fiber maker and the first to lose its investment-grade rating (fallen angel), missed a 397mm Yuan loan payment, only serving to further stoke fears of the knock-on effects of a slowing Chinese economy dragged lower by global growth fears (except for the US which is off in faerie land), as ratings downgrades surged last year. Incredibly, no Chinese company has defaulted on its domestic debt since the country's central bank started regulating the market in 1997, according to Moody's but as Bloomberg notes, there is some 2 trillion yuan of bank facilities set to mature in 2012, compared to 33 billion yuan of bonds - leaving a very crowded-out market of shorter-dated debt rolls soaking up what little credit is willingly available. With Dim-Sum bond yields (based on our index of sizable issues) up over 30% (80bps) from early September and European-based USD strength slowing any CNY-FX decay these holders hoped for, we agree with Gao Zhanjan (of Citic Securities), via Bloomberg, that "there will slowly be more substantive defaults in the future".

One of the reports making the rounds today is a previously little-known academic presentation by Princeton University economist Hyun Song Shin, given in November, titled "Global Banking Glut and Loan Risk Premium" whose conclusion as recently reported by the Washington Post is that "European banks have played a much bigger role in the U.S. economy than has been generally thought — and could do a lot more damage than expected as they pull back." Apparently the fact that in an age of peak globalization where every bank's assets are every other banks liabilities and so forth in what is an infinite daisy chain of counterparty exposure, something we have been warning about for years, it is news that the US is not immune to Europe's banks crashing and burning. The same Europe which as Bridgewater described yesterday as follows: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks." In other words, trillions (about $3 trillion to be exact) in exposure to Europe hangs in the balance on the insolvency continent's perpetuation of a ponzi by a set of insolvent nations, backstopping their insolvent banks. If this is not enough reason to buy XLF nothing is. Yet while CNBC's surprise at this finding is to be expected, one person whom we did not expect to be caught offguard by this was one of the only economists out there worth listening to: Ken Rogoff. Here is what he said: "Shin’s paper has orders of magnitude that I didn’t know"...Rogoff said it’s hard to calculate the impact that the unfolding European banking crisis could have on the United States. “If we saw a meltdown, it’s hard to be too hyperbolic about how grave the effects would be” he said. Actually not that hard - complete collapse sounds about right. Which is why the central banks will never let Europe fail - first they will print, then they will print, and lastly they will print some more. But we all knew that. Although the take home is the finally the talking heads who claim that financial decoupling is here will shut up once and for all.