Despite an overnight surge in the Chinese markets, with the Shanghai Composite closing up 2.4% following reports that China will not only continue with its "liquidity tightening" operation by, paradoxically, cutting RRR for smaller banks, but launch a stimulus for several Chinese provinces and city governments "on the quiet" in the form of jumbo-sized bank loans, and GDP news in Japan that were so bad they were almost good (although not bad enough to close the Nikkei in the green) US futures continue to take on water following the second worst week of 2013 as the market now appears resigned to a Taper announcement in just over 5 weeks (as we have claimed since May). News in Europe continues to be bipolar, with the big picture confirming that only dark skies lie ahead following yesterday's news that a new Greek bailout is just around the corner, or rather just after the Merkel reelection (even though Kotthaus perpetuated the lies and said a second cut in Greek debt is not on the agenda - although maybe he is not lying: maybe only Greek deposits will be cut this time), offset by on the margin improvements in the economic headlines, even as credit creation remains not only non-existent but as the FT reports (one year after Zero Hedge), some €3.2 trillion in financial deleveraging is still on deck meaning an unprecedented contraction in all credit-driven aggregates (one of which of course is GDP).
No one can predict accurately at what point slower growth will start producing political turmoil on a scale that’s unprecedented in the China that Deng made, what the magic number is, or even whether there’s an iron connection between economic and political crises. Yet the increase in capital flight from China and soaring applications for American and European residential visas by well-heeled Chinese suggest that the elite is hedging its bets. Some may be overstating things, but the rebalancing camp is too sanguine.This much is certain: China’s leaders are in uncharted waters, and because of the diminishing utility of the established formula for rapid growth their maps may be of questionable value.
With all of the problems afflicting the world economy nowadays, inflation seems to be the least of our worries. In addressing the post-2008 economic malaise, which stems from over-indebtedness, policymakers are correct to focus on the threat of debt deflation, which can lead to depression. But dismissing inflation as “yesterday’s problem” could undermine central banks’ efforts to address today’s most pressing issues – and, ultimately, facilitate inflation’s resurgence. Understanding how the Great Inflation from the late 1960’s to the early 1980’s was tamed offers important lessons for addressing far-reaching economic problems, however different ours may be, and provides insight into the dangers that may lie ahead.
Since Detroit’s Chapter 9 filing in late July, it has slipped off the front-pages to some extent. The Chapter 9 process is underway and Barclays provides a deep-dive look at the various liabilities involved in the bankruptcy. From the pension obligation certificates (POC), which they believe could be subject to the most volatility over the course of the bankruptcy process and will likely recover no more than 30 cents on the dollar, Barclays' muni team expands on the various aspects of the eligibility process, historical precedents (such as Stockton, CA), and the tough decisions that investors face in deciding between short-term goal of certainty of payment or a long-term goal of maximizing returns. The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment.
Back in May 2011, together with forecasting Japan's most epic case of quantitative easing ever unleashed, we presented the absurd, if inevitable, thought experiment of a country that would soon cross into the twilight zone of total sovereign debt numbers that no longer even fit on a simple pocket calculator. The country of course is Japan, and the debt number is one quadrillion. As of last night, the absurd has become real as Japan has officially announced its total government debt rose by 1.7% to ¥1,008,600,000,000,000.00.
- JPMorgan Nears Settlement With SEC on London Whale Loss (BBG)
- Without even a wristslap: Iksil to face no U.S. charges in 'Whale' probe (Reuters)
- China’s Credit Expansion Slows as Li Curbs Shadow Banking (BBG)
- China slowdown shows signs of abating (FT), even as...
- Australia central bank Lowers Growth Outlook as Economy Transitions From Mining (BBG)
- SAC Business Plan Goes to Judge, Plan Would Allow Firm to Maintain Business Operations but Restrict Its Ability to Move Assets (WSJ)
- Another buyer of Herbalife? - Norway’s oil fund plans to turn active (FT)
- Mark Carney plays down scepticism over interest rate policy (FT)
- Orders Evaporate for Celebrity Perfumes (WSJ)
Impatient Ackman Sacks Interim JCP CEO Ullman, Approaches Ex-CEO Questrom As Chairman, Demands New CEO StatSubmitted by Tyler Durden on 08/08/2013 11:12 -0500
CNBC reports that Ackman, apparently disgusted with the performance of JCP stock, has just sacked the interim CEO, Mike Ullman, he appointed in April and has sent a letter to JCP that a new CEO should be in place in 30-45 days, and also that former CEO Questerom has agreed been approached to return as Chairman. That's all great but we have two questions:
- Shouldn't the next CEO of JCP be really the Chief Restructuring Officer, and as such be appointed by the ad hoc or official, committee of unsecured creditors (aka the post-petition equity)? After all everyone knows how this story ends. And in that regard, we are confident Alix Partners has quite a few retail Chief Restructuring Officers in its rolodex.
- Has Ackman sued Ullman? Considering the petulant hedge fund manager's recent M.O., this would be the logical move.
- Finally, if Ackman is so confident in the retailer, instead of diluting others perhaps he should just invest his entire net worth and prefund the company's cash burn for one more year. After all, what's the risk, right?
That said, providing shorts with a higher point from which to reshort JCP is always a welcome development.
As Detroit begins to sort through the ill-begotten public liabilities that have driven it to bankruptcy, an important opportunity is at hand to revitalize the city that was once the epicenter of American entrepreneurship and manufacturing, while setting an example for other municipal governments that appear to be headed toward a similar fate. Here is an “Austrian moment” in the making, a potential libertarian awakening guided by the market-oriented, non-interventionist principles of the Austrian school of economics. For years, Detroit’s expenditures vastly exceeded its revenues. But, as long as investors were willing to purchase risky bonds, neither politicians nor unions would admit how unsustainable Detroit’s situation was. Detroit’s bankruptcy is thus exactly what the financial system needs.
The problem is clear; every level of government has promised too much and is now faced with the politically unappealing prospect of either drastically increasing taxes for the working age population or significantly reducing benefits for the retired (or future retired). As evidenced by the Detroit bankruptcy, the longer we wait, the worse it will get. The greater the delay, the more pain and suffering citizens will face when the benefits and safety nets they have come to expect from the government suddenly disappear. Over time, politicians from all stripes have proven adept at cognitive dissonance, but these increases in taxes and cuts to benefits will have to happen, one way or another; it is just a matter of time.
Greed; corporate arrogance; lobbying influence; excessive leverage; accounting tricks to hide debt; lack of transparency; off balance sheet obligations; mark to market accounting; short-term focus on profit to drive compensation; failure of corporate governance; as well as auditors, analysts, rating agencies and regulators who were either lax, ignorant or complicit. This laundry list of causes has often been used to describe what went wrong in the credit crunch crisis of 2008-2010. Actually these terms were equally used to describe what went wrong with Enron more than twenty years ago. Both crises resulted in what at the time was the biggest bankruptcy in U.S. history — Enron in December 2001 and Lehman Brothers in September 2008. Naturally, this leads to the question that despite all the righteous indignation in the wake of Enron's failure did we really learn or change anything?
- Headlines only idiots, Schrodinger and Goebbels could love:
- For nuns and analysts alike, bank commodity earnings are a mystery (Reuters)
- US spying comes under fresh attack (FT)
- Summers Backed Yellen for Fed Before Rivals Now Prove More Alike (BBG)
- Good Luck Leaving Your Wireless Phone Plan (WSJ)
- Spain's Rajoy says he was wrong to trust treasurer in party funding scandal (Reuters)
- Shell's Profit Falls on Shale Write-Down (WSJ)
- Why Rand Paul and Chris Christie went to war (Politico)
- Sony Returns to Profit Aided by TV Business (WSJ)
Here’s a question– if you’re in the Land of the Free, do you think those green pieces of paper in your wallet are dollars? They’re not. Those green pieces of paper are Federal Reserve notes. “Notes” in this case meaning liabilities to the central bank of the United States. That makes you, me, and anyone else holding those green pieces of paper essentially creditors of the Federal Reserve, whether we signed up for it or not. And at this point, thanks to a long-standing policy of wanton money printing, the Fed has more liabilities than ever before in its history. By an enormous margin. Given that the Fed’s assets are so closely tied to the finances of the US government, the outlook should concern independent, thinking people. The US, Japan, and Europe are already too indebted to bail out their central banks. An insolvent government cannot bail out an insolvent central bank.
- More Doctors Steer Clear of Medicare (WSJ)
- Syrian Looters in Bulldozers Seek Treasure Amid Chaos (BBG)
- Siemens CEO Peter Löscher Is Set to Leave His Post After Series of Earnings Misses (WSJ)
- Silver Vault for 200 Tons Starts in Singapore as Wealthy Buy (BBG)
- Omincom and Publicis merger shows that advertising is now firmly in the business of Big Data: collecting and selling the personal information of millions of consumers (NYT)
- Apple supplier accused of labour violations (FT)
- 'BarCap was the Wild Wild West – that’s what we called it’ (Telegraph)
- P&G chief seizes opportunity in era of three-day stubble (FT)
- Federal Reserve 'Doves' Beat 'Hawks' in Economic Prognosticating (WSJ) - LOL: Fed "hawks"
Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market. In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.
We need to think about lessening the economic “skin-in-the-game” for RMBS and focusing anew on enforcing US securities laws...