Fail

The bond market has always had clever names for bonds in specific markets.  Eurobonds, Yankee bonds, Samurai bonds, and now, Ponzi bonds.  I’m not sure what else to call these new bonds, but Ponzi bonds seems as good as anything. NBG issued these bonds to themselves, got a Greek government guarantee (how can a country that can’t borrow, provide a guarantee?) and took these bonds to the ECB to get some financing.  The ECB won’t buy National Bank of Greece bonds directly, they won’t buy Hellenic Republic bonds in the primary market, but they will take these ponzi bonds as collateral?  Greece, and Italy, is sacrificing the people and the country for the good of the bank. The market had made some attempt to charge banks with bad risk management, awful assets, and opaque books, more than they charged the country they were domiciled in.  But rather than let the market (and common sense) rule, a mechanism to let banks fund themselves cheaper than the countries they rely on, was created. Asides from giving Ponzi a bad name (at least until the ECB just admits that they are printing faster than even Big Ben) this is tying the banks and the countries ever closer.  A long, long, time ago (1 month) it was conceivable that a bank could fail and the sovereign survive.  That is becoming less clear.

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.

The American ability to delay the lag with the rest of the world persists for one more month, as December's ISM printed just better than expectations, coming in at 53.9, on expectations of 53.5, and compared to 52.7 in November. This was the best manufacturing data since June. As it turns out in December virtually every single component of US manufacturing improved, even as Customer Inventories somehow declined contrary to what retailer data has been indicating, and even as Europe went further into its recessionary shell following the 5th consecutive month of PMI contraction, and China saw a dramatic drop in the trade balance. But why bother to debate the numbers: here they are: New Orders rose from 56.7 to 57.6, Employment rose from 56.5 to 59.9, and so on. From the PMI: "The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey." Oh well - the banks will need to get even more apocalyptic with their forecasts if they want the Fed to start printing as +250 DJIA up days will not help the cause.

The iconoclastic outcast being called in to shake things up a little. I'll appear on CNBC @2:30 with my outlook for 2012. I'm not shy about my track record & here's what I'll have to say.

When losing is "winning".

One of the topics touched upon by Eric deCarbonnel in the earlier article discussing the potential, if not necessarily probable absent further validation, implications of the Exchange Stabilization Fund, is that of the nature of AIDS. Which got us thinking. While we won't necessarily go into the implications proposed by none other than Chuck Palahniuk in his book Rant (word search Kissinger, especially what Neddy Nelson has to say on the topic), it made us recall that particular National Security Study Memorandum, aka NSSM 200, better known as "The Kissinger Report" authored on December 10, 1974 and immediately classified under Executive Order 11652 until 1989, titled simply, "Implications of Worldwide Population Growth For U.S. Security and Overseas Interests." What did the report say and why is it relevant, especially in our day and age when so many believe that all important substance - black gold - may have peaked? Well, since it has 123 pages full of very, very curious information as pertains to how US foreign policy is truly styled, we will leave it up to our readers to make their own conclusions, but here are some preliminary observations to help them on their way...

Continuing our tradition of listing what according to Zero Hedge readers were the key news events of the year for the third year in a row (2009 and 2010 can be found here and here), we present, as is now customary, the most popular posts of the year as determined by the number of page views, or said otherwise - by the readers themselves. So without further ado, here are this year's top 20.

Something is decidedly strange in Europe today: while there has been a favorable shift in bond spreads with the 10 year BTP dropping to 6.4% (although still waiting for LCH to react to its margin cut even as spreads are 100 bps wider) it is the 3M EUR/USD cross currency basis swap that has us confused as it has mysteriously moved violently tighter, from -140 bps to -121 bps overnight, indicating someone may know something in advance of yet another central bank liquidity infusion. As for the catalyst why one may be needed, we go to Hungary where we learn that "rescue" talks with the IMF and EU "on securing some form of backing to reassure investors" have broken down. As a reminder, should Hungary go, Austria and its billions in CHF-denominated mortgages will almost certainly be next, and with it a test of the SNB's EURCHF floor.

Following a series of modestly successful debt auctions out of Europe, primarily in Spain and Greece, the morning capped its positive tone after the EFSF managed to sell €2 billion of 3 month deals: an event to which the EURUSD popped by 40 pips as apparently investors do not expect the EFSF to go insolvent in 91 days. However, the positive mood was quickly wiped out after Reuters reported minutes ago that private bondholders have concluded talks in Athens without reaching a deal, which confirms that that very basis of the July 21 deal, not to mention its October revision, the NPV "trim" of Greek notional bonds, is and continues to be elusive, which means that Europe's banks are certainly unable to still take even a 50% haircut, despite all protestations to the opposite namely that everyone has cut their Greek exposure. In other words, Europe's banks have, once again, lied to everyone. And rounding up the sour note of the morning is the breaking out of Liege, Belgium where one or more attackers are said to have thrown Grenades at a bus stop, with at least 2 people confirmed dead and 10 wounded. Unfortunately, the deadly anger is spreading ever closer to the core of Europe.

Need a reason to explain the massive central bank intervention from China, to Japan, Switzerland, the ECB, England and all the way to the US? Forbes may have one explanation: "It appears that a big European bank got close to failure last night.  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  It appears that a major bank was having difficulty funding its immediate liquidity needs. The cavalry was called in and has come to the successful rescue." Granted the post is rather weak on factual backing and is mostly  speculative, but it would certainly make sense. That said, it harkens back to our original question: just how bad was the situation if the global central banking cabal had to intervene all over again, and just what was not being told to the general public? Lastly, and most important, slapping liquidity bandaids on solvency gangrenes does nothing but buy a few days at most. Furthermore, we now expect the stigmata associated with borrowing from the Fed to haunt each and every European bank as vigilantes will now use the weekly ECB update on borrowings from the Fed as a signal to hone in on this and that weak Italian and French, pardon, European bank.

Time to start stocking up on those long term, OTM armageddon puts yet?

The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.  Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested.  Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.

So the EFSF is supposedly going to raise 1 trillion Euros… in an environment in which it struggles to even stage a five billion Euro bond offering?  Give me a break.

UPDATE: BTPs trading with an 88 handle!

All it took was 30 minutes of reality-soaked headlines from Cannes and Draghi's heroic efforts to hold 10Y BTPs below 450bps have failed. BTPs have reached almost 456bps over Bunds now - only 6bps tight of all-time intraday record wides.

We find it supremely ironic that one former Goldmanite, in this case the CFTC's Gary Gensler, takes credit (doing the people's work this time?) for allowing the failure of what is now a documented criminal enterprise, MF Global, run by another former Goldmanite, Jon Corzine, and claiming this was nothing less than an example of "Freedom To Fail". The NYT quotes Gensler: "This was an example of a financial institution having the freedom to fail,” he said in response to questioning from Senator Carl Levin, the Michigan Democrat who chairs the Permanent Subcommittee on Investigations. “I don’t think there’s any taxpayer money behind this.”" No, Gary, there is just client money behind this. Anywhere between $700 million and $1.5 billion. Money that was stolen, and had MF global been bailed out, you, the CFTC and the US Government would have been complicit in a prima facie felony. So please - no need for the pathetic pandering to the lowest common denominator that only years of Goldman tenure can hone to this level of perfection. The only question is whether the CFTC, together with that other corrupt regulator which oddly enough is not yet run by a third Goldman alum, has the "freedom to jail."