We Are On The Road To Serfdom

We are now five years into the Great Fiat Money Endgame and our freedom is increasingly under attack from the state, liberty’s eternal enemy. It is true that by any realistic measure most states today are heading for bankruptcy. But it would be wrong to assume that ‘austerity’ policies must now lead to a diminishing of government influence and a shrinking of state power. The opposite is true: the state asserts itself more forcefully in the economy, and the political class feels licensed by the crisis to abandon whatever restraint it may have adhered to in the past. Ever more prices in financial markets are manipulated by the central banks, either directly or indirectly; and through legislation, regulation, and taxation the state takes more control of the employment of scarce means. An anti-wealth rhetoric is seeping back into political discourse everywhere and is setting the stage for more confiscation of wealth and income in the future. This will end badly.

Fed's "Other Assets" Hit All Time High Of $205 Billion

Those looking for info on the Fed's now weely non-sterilized MBS purchases in the weekly H.4.1 update will be disappointed. The reason why the MBS line in the Fed's balance sheet will not move higher for a while is because, unlike TSYs, the settlement period for mortgage debt is usually many weeks and will months for all purchases already completed to appear in the "stock" total. One number, however, which may be of interest is the Fed's "Other Assets" because in the week ended October 10, this number hit an all time high of $205 billion and rising at an exponential phase.

Goldman's Cohn On The Fed's One Way Con

While stating the somewhat obvious - that the Fed's actions will cause 'pain' when they (try to) stop QE - when it comes from a high-ranking officer of the establishment elite (as opposed to a tin-foil-hat-wearing, BLS-exposing, HFT-undermining, fringe blog) such as Goldman Sachs' President Gary Cohn, perhaps more mainstream will begin to question the one-way path we are on. Cohn's interview on Bloomberg TV ranged from his reading habits (Greg Smith's tell-all) to the world's central bank printfest and how "we will have to go through the pains of stopping QE" and from his views of the election status quo to the global economic malaise, he does so well on the reality front - until he shovels undying praise on Mario Draghi's back for his "spectacular job" - though admits he has not solved Europe's real problems.

The Bump In The Night

We know it is sometimes difficult. Europe puts out the numbers which many assume are real. Then they talk about the data as if it was real. Then they point to the numbers time and time again as if they were real and finally people make decisions and act upon the figures thinking they are real and then the train begins to go bump in the night and derailment is possible on the next track and people wonder how it happened. We are at that point where “bump” is about to happen because there is nothing left that can happen. The dream is about over. Soon everyone will be waking up. It will not be a good morning.

The Collapse Continues: Greek Unemployment Rises For 35th Consecutive Month, Passes 25%

When we reported on the 34th consecutive month of Greek unemployment increases, following the June number hitting a record high 24.4%, the only good news was that the May number had been revised higher from 23.1% to 23.5%, making the monthly jump seem just under 1%. Well, that revision was re-revised, with Greek Statistic Service ELSTAT reporting that the original 24.4% number has now been revised to 24.8%, meaning in June unemployment rose officially by 1.3%. That's in one month! ELSTAT also reported the July number, and at 25.1% (pre-revision higher next month), it just hit a new all time high, increasing for the 35th month in a row. More than one quarter of those eligible for work in Greece (not many), are working. THis means labor related taxes are now being levied on a record low percentage of the population. Indicatively, Greek unemployment at the end of 2011 was "only" 21.2%. It also means that in order to restore even a tiny iota of confidence, the Greek labor department needs to hire a BLS consultant or two, or least license an old version of the ARIMA goalseek software, to find a seasonally adjusted decimal comma in there somewhere, and report that the jobless rate is really only 2.5%, which would be on par in credibility with everything else out of Europe these days. Finally, our question is at what point does anyone finally admit the Greek situation is not only a depression but outright economic death and the merciful thing to do at this point is to just pull the plug?

Overnight Sentiment: Short Squeezy

The overnight session started with broad weakness following last night's downgrade of Spain to BBB- by S&P, once again led by Egan Jones, due to fears that an outright junking by one or all rating agencies is on deck, now that the status quo means business and is hard pressed to advice Mariano Rajoy that the ECB will not be toyed with, and if need be the same tactics used to oust Silvio Berlusconi just under a year ago can be applied to Spain which is now proving very difficult to handle: all Spain needs to do to ensure at least a few more months of banker pay is to demand a bailout. And yet it remains unwilling to stick to the simple script so far. Sure enough, Spanish bond prices tumbled, as did the EURUSD. Yet sometime around 4 am Eastern, a levitation commenced across all risk assets, EURUSD, and US futures, with Spanish bonds retracing the entire earlier loss, showing that the ECB has now once again shot itself in the foot and that any attempt to recreate the same playbook as was used to remove Silvio, will be far more problematic when applied to Spain.

JPM's Dimon Builds Fiscal Cliff Bunker As CFO Exits "Balance Sheet Fortress"


Jamie "The Europeans have the will, but no way; The US has the way, but no will." Dimon had a very open and wide-ranging discussion with the Council on Foreign Relations today. The conversation ranged from the unfairness of the Bear Stearns' deal (poor chap - all that very limited downside from $2/BSC share, at least initially) to the immediate threat of the pending Fiscal Cliff - and his $100mm-debt-ceiling-preparedness war-room bunker, and America's longer-term fiscal profligacy (vigilantes moving against the US bond market is virtually assured - question is when and how). He also discussed the London Whale 'error' and went on to discuss the Greeks and the Eurozone's political and economic debacle in general. Some significant anti-administration rhetoric (ironic really), summed up with the veiled threat "Hey folks, if you think Washington and American Business can go to war with each other and it ends good - terrible error!"

DoE Dumps On Solyndra's Liquidation Plan

Just like a bad case of crabs, no matter how much you try to wash it away, it just keeps coming back to bite you. The U.S. Energy Department objected to Solyndra LLC’s bankruptcy plan, saying it fails to protect the government’s interest in collateral; via Bloomberg:


We are going out on a limb here but the over/under for a Solyndra 'recovery vs Greece 'recovery' is going the wrong way for the US government we suspect.

Frontrunning: October 10

  • U.S. Military Is Sent to Jordan to Help With Crisis in Syria (NYT)
  • IMF Weighing New Loans for Europe (WSJ)
  • Romney Targets Obama Voters (WSJ)
  • China’s Central Banker Won’t Attend IMF Meeting Amid Island Spat (Bloomberg)
  • Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ (Bloomberg)
  • German media bristles at hostile Greek reception for Merkel (Reuters)
  • The End Might Be Near for Opel (Spiegel)
  • IMF sounds alarm on Japanese banks (FT)
  • Cash Tap Stays Dry for EU Banks (WSJ)
  • Goldman in Push On Volcker Limits (WSJ)
  • IMF Vinals: Further Policy Efforts Needed to Gain Lasting Stability (WSJ)
  • King signals inflation not primary focus (FT)

Overnight Sentiment: Listless

The overnight session has been largely listless, with the market digesting a less than impressive start to earnings season by Alcoa, which reported declining cash flows, and various other negative earnings preannouncements out of major industrial companies. The IMF has not helped the somber mood with its analysis that by the end of 2013 European banks will need to dispose of up to $4.5 trillion in assets. Asian weakness (even the SHCOMP couldn't rally much on further easing rumors for the simple reason that the PBOC will simply not ease with QEternity out there and a food price hike over the horizon) has dominated the trading session so far. What little goods news there was came out ironically out of Italy and France, both of which reported better than expected August Industrial Production data. Italy IP rose 1.7% on expectations of a -0.5% drop, and up from -0.2% last, while the French Industrial Production posted a surprising surge, following weeks of poor data out of the country, with IP up 1.5% on expectations of a -0.3% print, and up from last month's 0.6%. However, even France warned not to read too much into a number driven by, well, cars and drinks.

The ECB-Driven Toxic Debt Loop At The Heart Of Europe's Misery

Just as we will not tire of pointing out the unintended consequence of the Fed's central-planning efforts, so it is time, courtesy of the IMF's latest missive, to point out the vicious circle that the ECB has created and encouraged in Europe. The unintended consequence of the ECB's intervention - as both perpetual backstop and lender of last resort - has created an ever-increasing fragmentation between the core and the periphery (exactly the supposed 'issue' Draghi is attempting to fix with his OMT). The toxic-debt-loop as capital leaves the periphery for the core, pressuring peripheral bond yields/spreads, and forcing private sector borrowing to be replaced by public-sector not only clouds the true picture for real-money investors or depositors (risk-based pricing has been destroyed) but encourages front-running fast-money flows which do nothing but provide short-term cover for banks/sovereigns to delay the inevitable (and potential market-clearing) deleveraging/restructuring that is required. Because the fundamental issue is one of solvency - not liquidity - the ECB's continued artifice of plugging liquidity shortfalls does nothing but lessen the confidence in the system and reduce any faith in price levels as without addressing the real insolvency, trust will never return.