Market Conditions

The opposition seen in Germany in response to Mr Draghi’s preparedness to buy sovereign debt implies that current posturing in Spain will not wear well with the politics of signing a Memorandum of Understanding in Germany. As Goldman notes, the more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded. This would add to any existing tensions, given Spain’s opposition to conditionality. This is disappointing partly because it is avoidable if Spain were to accept the external support on the terms currently available. Spain will have the opportunity in the coming weeks and months to demonstrate that it wishes to avoid these incipient risks. But we, like Goldman, continue to believe that some of the incentives created by Mr Draghi's preparedness to act could prove difficult to resist- and will thus delay any real game-changer that is priced in.

Europe's chicken or egg problem is about to strike with a vengeance. As a reminder, the biggest paradox of the recently conceived "make it up as you go along" bailout of Europe is that "in order to be saved, Spain (and Italy) must first be destroyed". Sure enough, the markets have long since priced in the "saved" part with the Spanish 10 year sliding to multi-month lows, but in the process everyone forgot about the destruction. Because as has been made quite clear, secondary market bond buying will not be activated without a formal bailout request by a country, in essence admitting its insolvency, and handing over domestic fiscal and sovereign control to the IMF and other international entities. As a further reminder, many, Goldman Sachs especially, had hoped that Spain would request a bailout as soon as Friday. To wit: "With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support." Alas, as we expected, this is now not going to happen, and the pricing in of the entire "saved" part will have to be unwound as Spain is forced to accept being "destroyed" first. To wit: "I don't know if Spain needs to ask for it," Rajoy told parliament in a debate session, referring to an international rescue for Spain."

Yesterday, when Bloomberg leaked every single detail of today's ECB announcement, which thus means today's conference was not a surprise at all, yet the market sure would like to make itself believe it was, we noted that everything that was leaked, and today confirmed, came from a Goldman memorandum issued hours before. Simply said everything that happens at the ECB gets its marching orders somewhere within the tentacular empire headquartered at 200 West. Which is why when it comes to the definitive summary of what "happened" today, we go to the firm that pre-ordained today's events weeks ago. Goldman Sachs.Perhaps the most important part is this: "September 13-14: Spain to make formal request for EFSF support at the Eurogroup meeting. With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support." In other words, Rajoy has one more week before he is sacked and the Spanish festivities begin.

• The bankers are coming: Banker Plan Would Fund Super-PACs to Sway U.S. Senate Elections (Bloomberg)
• Risk Increases of Prolonged World Slowdown, BOJ’s Miyao Says (Bloomberg)
• Spain Seeks to Stem Its Banking Crisis (WSJ)
• Deadly shooting mars new Quebec premier's victory rally (NBC)
• Democrats Keep Tax-Raising Focus On Top 2% Of Households (Bloomberg)
• Merkel Swings Into 2013 Election Mode Evoking Crisis, China (Bloomberg)
• Europe’s money market funds future in focus (FT)
• Pressure Mounts on ECB to Bring Down Bond Yields (Reuters)
• Swiss bank vows to hold franc down (FT)
• Australia economy still solid in Q2 despite GDP miss, but threats mount (Reuters)
• Clinton Brings to Beijing Plea for Maritime Solution (Bloomberg)
• The End of a 1,400-Year-Old Business (BusinessWeek)

It is amazing how big an effect a rambling, sleep-inducing speech by a chief central planner can have on financial markets in the short term. Nonetheless, the speech contained a few interesting passages which show us both how Bernanke thinks and that people to some extent often tend to hear whatever they want to hear. Bernanke noted that although he cannot prove it, econometricians employed by the Fed have constructed a plethora of models that show that 'LSAP's (large scale asset purchases, which is to say 'QE' or more colloquially, money printing) have helped the economy. In other words, although no-one actually knows what would have happened in the absence of the inflationary policy since we can't go back in time and try it out, the 'models' tell us it was the right thing to do. However, some indications would suggest that mal-investment is higher than ever - and accelerating - as the production structure ties up more consumer goods than it releases, an inherently unsustainable condition; additional expansion of money and credit will only serve to exacerbate the imbalance.

Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster. This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

Playing the disconnect, for now. 

The thoughts of the FOMC from a mere three weeks ago - before a 30bps rise in 10Y yields (40bps in 30Y), 5% rise in the NASDAQ, 8.5% rise in AAPL, and 85bps compression in Spanish bond spreads - are out. It appears little has changed in their muddle-through, always at-the-ready, wish-it-were-better view of the world. Via Bloomberg,

• *FOMC PARTICIPANTS SAW ECONOMY DECELERATING AFTER JUNE MEETING
• *MANY FOMC PARTICIPANTS SAID MANUFACTURING WAS SLOW OR FALLING
• *FOMC PARTICIPANTS DISCUSSED QE, EXTENDING 2014 FORECAST ON RATE
• *FED STAFF SAID MARKETS HAVE LARGE CAPACITY TO HANDLE MORE QE
• *MANY FOMC PARTICIPANTS SAW NEW QE AS BOLSTERING U.S. RECOVERY
• *MANY ON FOMC FAVORED EASING SOON IF NO SUSTAINED GROWTH PICKUP

Translation: "Many on FOMC want the S&P at all time highs without actually doing any QE, ever, because that will mean the Fed is officially out of bullets"

It must be election season because moment ago Reuters just reported that the White House is "dusting off old plans on a potential SPR release as prices rise" according to a source with knowledge of the situation. This too, just like the earlier Corzine news, should not be a surprise. Obama made it expressly clear that with the election fast approaching, he would either force the CME to hike margins, which is also coming, or would proceed with the far dumber step of an SPR release, just so China can full up its own strategic release faster and at a lower cost. The spun version, of course, has to do with Iran, and the fear of "undermining" Iran sanction success. The same sanctions which the US granted key Iran client China a compliance waiver...

Even though in a centrally-planned world nobody cares about fundamental data anymore, and high frequency economics can't hold a candle to high frequency trading, today's Philly Fed was not good, missing expectations for the 5th month in a row, and printing in negative territory for the 4 month in a row, coming at -7.1 on expectations of -5.0, and down from -12.9. Sadly for the market, the data was not horrible enough to suggest that despite the seasonally adjusted economic data euphoria from earlier this wee, that the Chairsatan would surprise to the upside and preannounce MOAR NEW QE in 2 weeks. The data, however, was quite realistic, in that unlike BLS data which lately only keep track of part-time jobs, the Employment index in the Philly Fed printed at -8.6, the lowest since September 2009, and likely the most realistic indication of the jobs picture possible. And with prices paid soaring far over priced received, margins got crushed even more, as US companies continue to discover with every passing day.

We thought it timely to repost this oldie but humorous goodie on how bank style traders make their money. Ever wonder why Goldman, or BAC can have 90 straight days of profitable trading?  Don't wonder too much more, the answer is here.  The new reality is however, Banks are fast becoming utilities now that they cannot hide losses in mark-to-myth book keeping (whale legacy), and have removed (or renamed) their Prop trading divisions. The recent purge of prop traders and subsequent start up of unprofitable funds can be attributed to many things; among them market conditions, 100% correlated markets etc. But the biggest for a certain type of trader is a lack of flow, i.e. no clients to fleece or front run.

Will Germany leave the Euro? I believe so. The country is already  bordering on insolvency due to nearly €1 trillion in backdoor EU bailouts (pushing Germany’s Debt to GDP to 90%). Over 69% of Germans are worried about inflation. Angela Merkel is up for re-election next year (and has gained political points anytime she played hardball with Europe) and Germany has implemented steps to place a firewall around its financial system and passed legislation allowing it to leave the Euro if need be.

Presented in the usual manner of challenging the ENTIRE sell side of Wall Street to offer analysis anywhere near as cogent, honest, straightforward, accurate, complete and credible. Or put more succinctly, the Goldman and Morgan Stanley clients can tell their advisers that Reggie Middleton advised them to kiss his As

One didn't think that an economic event could come and go without some commentary from the WSJ's resident "Fed mouthpiece-cum-economist" who has rapidly become a caricature of himself, and is solely known for his heretofore programmed leaks of Fed policy, which tended to work until it didn't. In a normal day when newsflow or fundamentals actually mattered, we would focus on far more important things. However, since we are caught in the manic phase of the market's daily bipolar gyrations, and nothing can make a dent in sentiment at least until Monday when the market suddenly decides it was 100% wrong in its re-interpretation of Draghi's comments (last we checked there is still no press release from the Bundesbank saying it has agreed to any bond buying, let along short-dated) and decides to plunge all over again, here is Jon with more propaganda that today's NFP beat, which is still well below the 200+ needed to maintain the declining unemployment rate trendline, means nothing for the Fed.

• What's wrong with this headline: Obama authorizes secret support for Syrian rebels (Reuters)
• Hilsenrath promptly dusts off ashes of sheer propaganda failure, tries again: Fed Gives Stronger Signals of Action (WSJ)
• Fed Hints at Fresh Action on Economy (FT)
• Fed Poised to Step Up Stimulus Unless Economy Strengthens (Bloomberg)
• IMF Chief Lagarde Praises Greece, Spain for Efforts (Bloomberg) - efforts to beg as loud as possible?
• US sanctions against bank 'target' China (China Daily)
• Trimming China's Financial Hedges (WSJ)
• ganda central bank cuts key lending rate to 17 pct (Reuters)
• Greece Agrees €11.5bn Spending Cuts (FT) - Agrees? Or does what a good debt slave is told to do
• Germany Retains Stable AAA Outlook at S&P After Moody’s Cut (Bloomberg)
• Spain’s Bond Auction Beats Target as Borrowing Costs Rise (Bloomberg)