Market Crash

You're about to hear a big boom come from across the Atlantic, but I've yet to hear a peep from the rating agencies. And many of you guys think they were delinquent during the other credit bubble!!!????

GGP part deux, as the hopium high sold by US regulators that allowed banks and borrowers to pretend bad loans were good wears off and reality sets in..

So, who're you gonna believe, your NYC broker or your lyin' eyes???? Another Reggie Middleton "I told 'ya so" exclusive...

We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.

Many still fail to understand the typical Wall Street bank business model! I have laid it bare in BoomBustBlog many a time, which is probably the reason why my blog is banned from more than half of the big bank intranets!!!

In a must read Op-Ed in the WSJ, Mark Spitznagel, founder of "fat tail" focused hedge fund Universa, where Nassim Taleb has been known to dabble on occasion, explains the fundamental flaw with central planning, and specifically why "moral hazard" or the attempt to avoid the destructive part of natural cycles, is the greatest unnatural abomination ever conceived by man. His visual explanation should be sufficient for even such grizzled academics who have no clue how the real world works, as the Chairsatan, to comprehend why what he is doing is an epic abomination of every law of nature: "Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire." Another way of calling this, is what we have been warning about for years: delaying mean reversion does nothing but that. And when the Fed finally fails to offset the inevitable, and it will - it is a 100% certainty - the collapse and destruction will be unprecedented. Ironically, the only way the system could have been saved would be by letting it fail in 2008. Now, we are sorry to say, it is too late.

Yesterday we charted the combined ECB balance sheet which showed that it had hit an all time record of €2.5 trillion, exclusing today's operation (to the stunned surprise of all those who scream that the ECB should be printing more, more, more). Today, we focus exclusively on the various forms of unsecured liquidity measures, such as today's 3 Year LTRO, because as the following chart from Bank of America shows, European emergency liquidity provisioning post today's liquidity bailout brings the total to €873 billion and is just shy of its all time record of €896 billion, a number which we expect will be taken out as soon as the next liquidity provisioning operation. In other words, European liquidity in euro terms, has virtually never been worse. And as today's additional drawdown of Fed swap lines indicates, the USD liquidity crunch is getting worse not better (confirmed by the rapid deterioration in basis swap levels). Perhaps the fact that not only is nothing fixed, but things are about as bad as they have ever been explains why Europe closed blood red across the board, and also why Bank of America continues to push for an outright crash in all risk (and some were doubting our earlier analysis that BAC is outright yearning for a market crash): To wit from Bank of America's Ralf Preusser: "The tender results do not however change either our longer term  cautious outlook on growth, or the periphery. We remain long 5y CDS protection on France, at 210bp (target 300bp, stop loss 175bp)." So let's see: BAC is shorting the EURUSD, which implies they are pushing for a market drop, and now they want French CDS to soar? Who was it that said the megabanks do not want a crash?

It is no secret that US banks are pushing hard for a big market dump: after all that is the only thing that could unleash QE either in Europe, or far more likely, in the US. Whether that means the Fed will much more aggressively monetize US or, as discussed yesterday European debt, remains unclear, but one thing is certain: US and European banks for the most part loathe the LTRO as it simply delays the day of printing and buys the banks time they don't need and can't afford. Which is why Bank of America, as it is the most exposed to a world without QE, was the first to jump in and demand the market crash itself, by presenting an FX note saying the EURUSD "squeeze has run its course" and is proceeding to sell the EURUSD at 1.3045 with a target of 1.2510. Whether or not the EURUSD gets there is irrelevant. What matters is that, as expected, the push for QE will be renewed with far greater vigor by the very entities that are supposed to benefit from the LTRO as paradoxically the banks now have to scramble to offset the favorable, if very short term, impact from the LTRO because they know it achieves nothing and the only savior is and has always been Ben.

The fact of the matter is that there is a very fundamental, and sparsely recognized reason for overbuilt retail commercial real estate to take a tumble - in addition to the more recognized massive headwinds.

To answer the question, do high energy prices cause recessions, I would say with full respect to uncertainty and causality, yes. Eventually, however, the energy transition away from fossil fuels will gather enough momentum that we will interpret high energy prices differently: we will say they forced (helpfully) a necessary transition. But as we are so early in any global transition to alternatives, it would be better for economists, policy makers, and business to consider the Douglas Adams quote that’s in the header of this essay. Trying to prove that black is white may be a noble effort -- in the fullness of epistemology and causality -- but in the short term it could get you run over in a crosswalk. We face a more immediate question: is the global economy headed back into recession in 2012? Almost certainly, I think.

Many don't understand how connected the financial fates of the US and the EU actually are. Those that don't have another think coming.

Evidence of bear raids causing the Crisis in 2007?

This tax is going to happen, and we're going to hate it.

A 787 point gain on the Dow this week, second only ever in absolute points gained to w/e 10/31/08, ended on a disappointing note as equities gave back significant early gains around the NFP print to end the day practically unch (128pts off the highs). Equities underperformed credit on the day with another strangely impressive (given NAV and HY spread differentials) outperformance by HYG. On a medium-term basis, equities began to revert back to where broad risk assets are more supportive but on a short-term intraday basis, risk assets (most notably EURJPY, AUDJPY, and TSY levels and curves) were in a more aggressive derisking mode. ES definitely maintained strength for longer than many expected today before giving it all back into the close, but financials (especially the majors) were surprisingly positive today even after such a good week - quite a squeeze.

If the mid-summer sell signal of 2011 plays out similarly to the one in 2008, there may be a long, dramatic decline straight ahead.