If you have to name one beneficiary of QE2, the collapse of the dollar, and a seemingly never ending “RISK ON” trade, it has got to be the euro. What happens when QE2 ends, and the movie runs in reverse? (FXE), (UUP), (EUO).
Domino #2: S&P Downgrades Largest French Retail Banking Group, Credit Agricole, To A+ From AA-, Due To "Greek Exposure"Submitted by Tyler Durden on 05/20/2011 12:32 -0500
Yes, banks are indeed on the hook should Greece file. Keep an eye on those Deutsche Bank puts. From S&P: "We consider that French banking group Crédit Agricole (GCA) has a significant sensitivity to Greece's creditworthiness and economic prospects, primarily through subsidiary Emporiki's funding needs and exposure to local credit risk. The downgrades reflect our view that reduced creditworthiness of the Greek sovereign puts pressure on GCA's financial profile, given its exposure to the troubled Greek economy, mostly through its subsidiary Emporiki Bank of Greece (not rated). The downgrade reflects our view that persistent deterioration of the Greek economy induces negative prospects for the local banking sector, which could translate into further material credit losses at Emporiki and/or a sharp decrease in its customer deposits. "
FITCH DOWNGRADES GREECE TO 'B+'; RATING WATCH NEGATIVE
The Greek CDS market is actually fairly small. According to DTCC, there is only 3.8 billion euro of net CDS exposure on the Hellenic Republic. That compares to almost 300 billion euro of debt outstanding. There may be some additional exposure to Greece cds since it is included in SOVX, but the Greek portion of net SOVX exposure is very low, and some of the exposure is offset by investors who trade 'cds index arb'. Not only is the 4 billion euro of exposure relatively small, most of it is held in mark to market accounts, so a lot of the loss to the system is already accounted for. Since the net exposure is small, banks are likely beneficiaries of a credit event, and markets will see through this feeble attempt at avoiding the stigma of a default, the EU finance ministers should stop worrying about how a restructuring will impact CDS. They should focus on restructuring in a way that provides the best possible outcome for Greece and creditors and not worry about what happens in the CDS market as a result. If after sorting out the Greek situation, they still have time to think about CDS, they should spend that time figuring out who sold the protection and why? For every evil, vile, nasty, hedge fund who had bought credit protection, someone took they other side and sold protection? If the purchasers are so evil, does that make the sellers angelic?
And here comes the first domino: according to Swiss journal NZZ, the Greek bailout is about to take a turn for the worse. "Norway will first stop all further financial aid payments to the highly indebted Greece. The reason is that Greece does not fulfill its obligations descendants, the Norwegian Foreign Minister Jonas Gahr Store said on Thursday before the Parliament." And with Norway which is a member of the European Economic Area, and actually one of the few solvent and non-basket case European countries saying let the chips fall where they may, it is just the first. Look for every other country currently on the sidelines vis-a-vis Greece (and just as insolvent) to follow suit as the European experiment falls apart.
It looks like the market will never – ever – learn a lesson. When there is easy money to be had, the market loses its mind, just like the Nasdaq did in 1999 and 2000. Prince wrote the song 1999, where he says “gonna party like its 1999.” That’s exactly what’s happening today. Like the Nasdaq in 1999 & 2000, when there were plenty of warning signs about the economy and WILDLY overvalued IPOs, Fraud Street partied on as if it would never end. One lyric from the 1999 song that most in the market forgot, however, was “party over, oops, out of time.” Most of the folks who believed in the moronic valuations that Fraud Street sold them ran out of time indeed; they bought the top and lost 90% or more of their speculation, err, pardon, “investments.” But the market didn’t learn a lesson in 1999/2000 because EZ-Al Greenspan flooded the market with “liquidity” and near-zero interest rates. His reason was, and this was admitted by Al “Bubbles” Greenspan in many interviews, to INTENTIONALLY BLOW A HOUSING BUBBLE so that the bankster pickpockets wouldn’t lose money on those horrible IPO speculations, err, pardon, “investments.” When Greenspan finally started raising interest rates, it was too late. The baton was handed to Ben “Helicopter” Bernanke who was now in charge of lying to Congress, as well as you and me, about the state of the economy. He said that the rapidly escalating economic problems, especially in Greenspan’s housing bubble, were “largely contained.” He forgot to tell us that he meant on Mars.
- Japanese economy shrinks in first quarter (FT)
- Power Shifts on Foreign-Policy Team (WSJ)
- Government Prays a Bigger Sucker Is Out There (Bloomberg)
- Row within Europe over Greece (FT)
- U.S. Hits Syrian President With Sanctions (Bloomberg)
- Think prices are high? Just wait ’til summer (Post)
- Top European Bank Officials Urge Greece to Persevere on Fiscal Overhauls (WSJ)
- Medvedev Makes a Slight Break With Putin (WSJ)
- U.S. Grants Asylum to Chavez Opponent (WSJ)
- Sex Scandal Is Another Travesty at IMF Door (Bloomberg)
Activity in spread land was very muted today with only a handful of names really making any moves. Equity outperformed credit but single-name credit was disappointing as up-in-quality continued. Primary issuance dominated thoughts today as 2s10s30s seemed to run S&P futures nicely up as credit ignored it.
And just as everyone was starting to bet on the great USD renaissance, here comes Thomas Stolper to spoil the party, by not only refusing to close out his EURUSD trade reco after losing 800 pips in two weeks (and still being profitable), but by actually doubling down: "We have changed our forecasts to project more Dollar weakness."The reason is that the US apparently has a thing called a massive trade deficit that has to be normalized: "Since the last revisions to our forecasts, the Dollar decline has roughly tracked the expected path. Large structural imbalances in the US are highlighted by weakness in the tradable goods sector.The outlook for monetary policy differentials and BBoP trends remains USD-negative. Dollar weakness is common during periods with slowing GLI momentum." The bottom line: "We now see EUR/$ at 1.45, 1.50 and 1.55 in 3, 6 and 12 months, and $/JPY at 82, 82 and 86". Oddly enough, there is no mention of the real reason to position for a USD plunge. (Hint: Hewlett Packard). On the other hand, this may be the time to go balls to the wall long the USD, as it appears that Goldman is doing another USD fundraising campaign courtesy of its clients. Oh, and speaking of Goldman's clients, it's best to baffle them with bullshit. Here is Goldman's Jim O'Neill with a blurb from his Sunday note on why China is going down (among other things): "it seems to me that a bigger risk premia is still necessary for the Euro. I can’t see how it can remain at about 1.40." Yes. From Sunday. If your head didn't go boom yet, that's ok. It will soon enough. And way to cover your bases there Goldman...
Take a moment and conduct a mini thought experiment. Imagine that you're from the future many hundreds of years from now, researching what life was like in the early 21st century. You pull up an archive of newspaper headlines from the year 2011 and read the following...
The “American Realist” Says: Past as Prologue – Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!Submitted by Reggie Middleton on 05/18/2011 10:39 -0500
Last night, I spent an interesting time with the esteemed and world reknown macro economist, entrepreneur, NYU professor and strategist, Dr. Nouriel Roubini. Nouriel is a very, very bright guy. He has to be, he agrees with many of my viewpoints :-) On a more serious note, this article is the first installment of the valuation of real world, real assets and properties that are actually up for sale. I plan to walk my readers through the potential absurdity that is investing in a bubble that has not finished popping.
- Al Qaeda names Egyptian militant Adel as interim chief - Al Jazeera (Reuters)
- Geithner: U.S. must deal with budget woes or pay more (Reuters)
- Pressure mounts on Strauss-Kahn to quit (FT)
- IMF issues stark warning to Greece on fiscal goals (Reuters)
- Europe Aims to Keep IMF Job After Strauss-Kahn (Bloomberg)
- The eurozone after Strauss-Kahn (Martin Wolf, FT)
- U.S. mulls White House aide Lipton for IMF No. 2 job (Reuters)
- Could Greece be the next Lehman Brothers? Yes – and potentially even worse (Guardian)
- Moody's Cuts Rating of Four Major Australian Banks (WSJ)
- Fed seeks annual US bank stress tests (FT)
- Mideast peace bid needed more than ever (Reuters)
- World Bank sees end to dollar’s hegemony (FT)
I am now of the opinion that the US will have to go back to fighting deflation soon and that Q/E (probably in a different form) will be needed. Massive inflationary impacts look to be delayed (for now): Whilst I am happy to accept that Bernanke may have delayed or stopped a deep depression for now and that he has made a lot of Wall St. guys very rich, the whole idea of the Q/E programme was supposed to be, if we are to believe him, to create growth and set the economy back on a sustainable growth path, reduce unemployment and cure the housing problem by getting banks to lend and the consumer spending. Mate, you failed! Unemployment is still at 9% (and a lot more if you look at the real stats), the participation rate is falling and the amount on food stamps is over 4mln! Housing is spiralling lower again as prices continue to fall and banks, whilst having their balance sheets ballooned by free money still sit on hidden toxic waste from the sub-prime issue and refuse to lend at competitive rates.
What happens to Europe when DSK isn't there to rescue them?