Guest Post: So Why Is The Initial Reaction Of The S&P Downgrade Of Treasuries For Treasury Bond Prices To Go Up?Submitted by Tyler Durden on 08/08/2011 13:59 -0500
The S&P downgrade was not as much a comment on the numbers of credit service as a comment on the political process. The political process is about confronting the probability of a hyper-inflationary collapse of our currency if fiscal irresponsibility, entitlement spending and bank bailout mentality are not addressed. If the credit rating firms had continued the charade of AAA quality, it would merely enable the not sustainable march toward hyper-inflation. Ultimately, the S&P downgrade of Treasuries is a downgrade of all dollar denominated assets. If we can print dollars to pay Treasury debt, it is the currency that is at risk. A nominal default of Treasury obligations is not going to happen. Yet, a real default as a currency event is the risk. In order to save the currency, we must sacrifice the money center banks. A sacrifice of the international banking system is a deflationary event. For Treasuries to rally in a flight to quality as a market reaction to their own downgrade is a flight to the relative safety that remains. Anticipation of the deflationary political discipline of an S&P downgrade is the rational reaction of capital flight away from securities propped up by the reflationary status quo.
Former PBOC Member: "The Situation Is Unsustainable. The Longer It Continues, The More Violent And Destructive The Final Adjustment Will Be."Submitted by Tyler Durden on 08/07/2011 12:07 -0500
Yesterday it was an editorial piece in the main Chinese media outlet Xinhua. Today, China brings its message of helpless (for now) fury to the FT, where Yu Yongding, a former member of the Monetary Policy committee of the Chinese Central Bank has just said what everyone who realizes that mean reversions after 30 years worth of a "great moderation" can and will be a nasty, nasty thing, thinks. Namely: "the situation is ultimately unsustainable. The longer it continues, the more violent and destructive the final adjustment will be. " He is referring to the relentless recycling of Chinese trade surplus in the form of US paper which is increasingly looking like it will never get repaid. His chief rhetorical question is key: "The question is: what losses is China willing to bear in its foreign exchange reserves in order to slow the pace of the renminbi appreciation?" And that's the ballgame. Just like in Europe the question is what amount of gross economic loss is Germany willing to sustain in order to backstop Europe's insolvent countries (and with an imminent French downgrade looming, it will be the only country doing so in the form of sole EFSF funding) simply to keep the euro up and running, and its export sector humming courtesy of no return to a DEM, so in China the question now is how much risk is the country willing to take with its US-based paper holdings in order to keep its own export sector moving along courtesy of a weak CNY. Ironically, the longer Germany and China pretend all is good, the greater the impairment of their natural import partners. And in a globalized economy, even having the cheapest (no matter how artificially contrived) currency does nothing if the global economy tanks and import level implode. Alas, it will be too late for Germany and China to do anything about their flawed mercantilist policies at that point, as the third and final depression will be here. And what is the right move? The former PBOC member spells it out: "The danger for China is that it does not learn the right lesson – namely, that now is the time to end its dependency on the US dollar." And therein lies the rub.
Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA.
Time for deeply introspective Op-Eds galore. Not too surprisingly, the first one comes from blogging powerhouse Pimco, and its chief literary superstar, Mo El-Erian, titled "U.S. Downgrade Heralds a New Financial Era." While Mohamed's outlook is mostly politically correct fluff, he does bring up the absolutely spot on point that FrAAAnce is about to become FrAAnce, which also means that Germany's worst nightmare: that of backstopping the EFSF entirely on its own, is about to become reality.
Italy and Spain, and now France, CDS hitting all time highs? Been a few hours since Unicredit was last halted? Europe looking like it is about to implode all over again (and nobody even remembers Greece any more)? Have no fear. President (he was elected?) Barroso is here, telling us all the imploding sovereign bond markets of Italy and Spain are "unwarranted." All this and many more jokes in the full just released statement which confirms that Europe is starting to freak out all over again.
China Boldly Goes (Again) Where Moody's Has Never Gone Before, Downgrades US From A+ To A, Outlook NegativeSubmitted by Tyler Durden on 08/02/2011 19:39 -0500
As was predicted last week, China's rating agency Dagong, unlike its worthless western counterparts, has come through on its threat to downgrade the US in the event a subpar debt ceiling deal was hammered out. As Xinhua reports, 'Dagong Global Credit Rating Co. said Wednesday it has cut the credit rating of the United States from A+ to A with a negative outlook after the U.S. federal government announced that the country's debt limit would be increased." Confirming that not being branded a NRSRO is the only thing that allows a rater to still think straight (and not in terms of lost client revenue if one goes ahead and tells the truth), Dagong's decision was spot on: "The decision to lift the debt ceiling will not change the fact that the U.S. national debt growth has outpaced that of its overall economy and fiscal revenue, which will lead to a decline in its debt-paying ability, said Dagong Global in a statement." So while Moody's, which is now certified as the laughing stock of the sheep herd (sorry Mark Zandi, you will never be promoted to anything in this administration - we promise you), pretend that all is well and that the only thing better than $14.3 trillion in debt is $16.8 trillion, China demonstrates what happens when a rating agency actually knows how to do addition and/or long division.
In his latest letter, Kings of the Wild Frontier, crushes the optimism of all those, roughly 4 altogether in the entire world whose combined IQ barely breaks into triple digit territory, who believe that the debt ceiling "compromise" does anything at all for US spending patterns, weather it is for total marketable debt, or the $66 trillion in NPV of future liabilities. Gross, however, does show us the 5 ways (well, 4 plus default) that the "debt man walking", aka Uncle Sam and his tens of trillions of future liabilities, plans to rob from you: dear taxpayer, in order to minimize the present value of these unmanageable future liabilities. To wit:
- Balance the budget and/or grow out of it
- Unexpected inflation
- Currency depreciation
- Financial repression via low/negative real interest rates
All of these guarantee that investor pocketbooks will be dramatically affected... Adversely. Let's dig in...
It's not Jefferson County, yet, but it could certainly be seen as the precursor to the first domino. "The state-appointed receiver overseeing the cash-strapped Rhode Island town of Central Falls has filed for bankruptcy on the city's behalf in an effort to help it get back on its feet. Receiver Robert G. Flanders and Rhode Island Gov. Lincoln Chafee announced the step - which Flanders has described as a last resort - at a news conference at City Hall. Flanders filed the legal paperwork seeking bankruptcy protection Monday. "From the ashes of bankruptcy Central Falls will rise again," Flanders said." The biggest losers: unions. "With the city now seeking bankruptcy protection, Flanders said he plans to reduce pension benefits beginning in late August. He has asked the federal court to immediately reject collective bargaining agreements. He said the next set of pension payments will reflect at least the cuts he outlined to city retirees. In addition, he said city workers will face layoffs. Flanders called the step unavoidable, as taxes have already been raised and city services have been cut "to the bone." Expect Barack Obama to thaw Steve Rattner from carbonite explain to creditors, using a variety of four letter words, that they will be last in line of payment after every single union claim has been satisfied, with the resultant husk of a town reverse merged with GM.
When one things of Europe's default contagion, one traditionally thinks of the Club Ded countries along the Mediterranean. It may be time to change that after Denmark's CDS has surged by nearly 20% overnight, from 74 to 88, and by over a third since June 7, making it the worst performing government in the past month. The reason for this is that the country, which unlike other European nations, has allowed its insolvent banks to actually fail without masking their poor state. This in turn prompted S&P to come out with a report yesterday that as many as 15 more banks could default. In its report, S&P said that "In our base-case assumption, we estimate the gross loss due to additional bank failures to be Danish krona (DKK) 6 billion-DKK12 billion over a given three-year period. If the losses are larger than we expect, we would have to reassess our ratings on individual Danish banks, based on the impact of the fallout on each. Eleven banks have failed in Denmark since 2008. Although the banks were small by international standards, it is nevertheless an unusually high number for a developed market where bank defaults are generally rare events and extraordinary government support mostly averts losses to senior creditors. While the Danish regulatory authorities accept the concept of systemically important institutions, they have so far given no formal indication of which institutions fall under this definition. In our opinion, the banks we rate would be considered systemically important and therefore may receive extraordinary government support, beyond that defined in the country's established bank resolution scheme." So according to the rating agency any country that dares to avoid the Paulson-Summers TBTF doctrine is in prompt need of annihilation if we read this right. Either way, this latest black swan means that the crisis is creeping ever closer to German, which now has to fund two insolvency fronts: a southern and a north one. And when S&P finally puts France on downgrade review, the time to panic will have come and gone.
Things are getting real. After all the bluffing, huffing and puffing by Geithner, the rating agencies, and anything with a pulse and a TV or radio pulpit has failed, the last trump card is coming down. While yesterday the Treasury informed that it would not disclose any details of its contingency plan, Bloomberg has just learned via a Treasury leak that the US government will give priority to bondholders. From Bloomberg: "The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90b in debt matures on Aug. 4 and more than $30b in interest comes due Aug. 15. Overall, more than $500b matures in August." And so it begins: while the Treasury has not yet pushed the big red flashing button, this leak is nothing but it latest and greatest bluff. It also means that America will, indeed default, next week, as the absence of a contractual payment is a default. And then we get into the fine print with the rating agencies whether or not X is default but Y is not. At that point however it won't matter: every form of intermarket liquidity will be permanently gone as Lehman will be a cherished walk in the park. Thank you Tim Geithner and your total lack of contingency plans.
The global financial planners of the world look skilled to the common man as they juggle the manipulation of several markets with dexterity. This begs the question - "What Happens When That Juggler Gets Clumsy?" Herer's to you Fed and ECB, as TBTF banks are transformed into Too Big To Save. Reference Deutsche Bank's profit warning spoken in Sanskrit, and our apt translation.
Tax Cuts for the Middle Class and Poor STIMULATE The Economy, But Tax Cuts for the Wealthy HURT The EconomySubmitted by George Washington on 07/28/2011 02:13 -0500
This is actually a very simple concept, although some politicians and economists unintentionally or intentionally muddy the waters ...
We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full. While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.
Relevant news by www.thetrader.se
As anyone who follows the restructuring process (and religiously reads debtwire) will tell you, the first sign of smoke is when a creditor retain legal bankruptcy counsel, promptly followed by financial, which in turn, or at least 95% of the time, leads to a dropping off of bankruptcy docs at the local bankruptcy court, or Southern New York. And where there's smoke, there's Alabama fire. According to blog al.com, the Jefferson County Commission has just retained the services (at $975/hour) of Ken Klee, of LA-based Klee Tuchin, best known for advising Orange County on its Chapter 9 filing back in 1994. And with this the probability that Jefferson County will conclude that the time to file its own Chapter 9 in two days, is virtually a certainty (and sorry, no bankruptcy lawyer will advise his clients not to file for bankruptcy. Hourly retainer, remember?). And with the US debt situation still unlikely to be resolved within 48 hours, the last thing the market needs is to worry not only what known on effects this mega-municipal bankruptcy case will end up generating, but who else will file after. That said, we are confident the market will surge even more as it digests these news. Why? Two words: Bernanke Put.