2013 already saw violent unrest in some of the most stable countries in the world like Singapore and Sweden, all underpinned by absolute disgust for the status quo. Whether today or tomorrow, this year or next, there will be a reckoning. The system is far too broken to repair, it must be reset. It’s simply absurd to look at the situation objectively and presume this status quo can continue indefinitely... that this time is different… that we’re somehow special and immune to universal principles.
Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But... what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.
When it comes to key players in a global fungible monetary system, a far more important decision-maker than the US government is the FDIC-insured hedge fund that controls all central banks: Goldman Sachs. Which is why it is certainly notable that moments ago none other than Goldman effectively downgraded Russia's sovereign risk by announcing it is "shifting from constructive to neutral view on Russian sovereign risk." With the legacy rating agencies now largely moot and irrelevant, what the big banks say suddenly has so much more import. But when the biggest - and most connected - bank of them all, outright lobs a very loud shot across the Gazpromia Russian bow, even Putin listens.
- China cash injection fails to calm lenders (AFP)
- European Union Stripped of AAA Credit Rating at S&P (BBG)
- Last-Minute Health-Site Enrollment Proves a Hard Sell (WSJ)
- Bernanke’s Recession-Fighting Weapon Developed by 1900s Banker (BBG)
- Asia Stocks Are Little Changed Amid China Funding Concern (BBG)
- Regulators' Guidance on Volcker Rule Gives Banks Little Relief on Debt Sales (WSJ)
- On one hand: Man Who Said No to Soros Builds BlueCrest Into Empire (BBG); on the other: Michael Platt's BlueCrest Capital Poised for Rough Close to 2013 (WSJ)
- BOJ Keeps Record Easing as Fed Taper Helps Weaken Yen (BBG)
- Bank of England becomes more cautious on economic predictions (FT)
- Gold Climbs From Lowest Close Since 2010 as Goldman Sees Losses (BBG)
- Fed’s $4 Trillion Assets Draw Lawmaker Ire Amid Bubble Concern (BBG)
- Ex-Goldmanite Fab Tourre fined more than $1 million (WSJ)
- EU Banks Shrink Assets by $1.1 Trillion as Capital Ratios Rise (BBG)
- Japan to bolster military, boost Asia ties to counter China (Reuters)
- China condemns Abe for criticizing air defense zone (Reuters)
- Insider-Trading Case May Hinge on Phone Call (WSJ)
- Republicans Gird for Debt-Ceiling Fight (WSJ)
- Mario Draghi pushes bank union deal (FT)
- German Coalition Plans More Pension Money (WSJ)
- Oil Supply Surge Brings Calls to Ease U.S. Export Ban (BBG)
It it walks like a duck, quacks like a duck and looks like a duck... Is it really a platypus? After all, this time is different... Right?
A dispassionate overview of the investment climate and what to expect this week.
Usually what goes up normally ends up coming back down to Earth with a damn great thud. Well, that was long ago with good old Isaac Newton and the apple story.
There are people in the world that go to work every day to end up stating the damn obvious.
The rest of the world has had enough of the monopoly of the credit-rating agencies that are largely biased towards the US economy and it’s about time that it all came to an end.
Since all US rating agencies (Fitch is majority French-owned) have been terrified into submission and will never again touch the rating of the US following the DOJ's witch hunt of S&P, any US rating changes on the margin will come from abroad. Like China's Dagong rating agency, which several hours ago just downgraded the US from A to A-, maintaining its negative outlook. The agency said that while a default has been averted by a last minute agreement in Congress, the fundamental situation of debt growth outpacing fiscal income and GDP remains unchanged. "Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future."
Understanding the complexities of the sovereign CDS market is tricky... so we are constantly bemused by the mainstream media's constant comment on it as if they have a clue. The fact is that the USA CDS market is indicating a higher risk of imminent technical default now than in 2011. As we explained in painful detail previously, you cannot compare a 71bps (+8 today) 1Y USA CDS spread to a 1200bps JCPenney CDS spread - they are apples and unicorns. Having got that off our chest, the fact that the cost of 1Y protection is at 2011 extremes (implying around a 6.5% probaility fo default) and has been higher (inverted) relative to 5Y now for 3 weeks is a clear indication that investor anxiety is very high this time (just look at T-Bills!).
If one looks at various sovereign states, it seemingly doesn't matter that their public debts continue to rise at a hefty clip. The largest ones are considered to have economies that are big and resilient enough to be able to support the growing debt load. Part of the calculus is no doubt the notion that they contain enough accumulated wealth to allow their governments to confiscate even more of their citizens property and income in order to make good on their debts. Then there are the small and mid-sized states in the EU that are getting bailed out by their larger brethren, or rather, the tax payers of their larger brethren. However, things are different when the territories or municipalities concerned are considered too small and have no such back-up. Detroit was a recent case in point, and it seems that the US territory of Puerto Rico is the next domino to fall.
Yesterday we described the various scenarios available to Treasury in the next few weeks should the shutdown and debt ceiling debacle carry on longer than the equity markets believe possible. As BofAML notes, however, the most plausible option for the Treasury could be implementing a delayed payment regime. In such a scenario, the Treasury would wait until it has enough cash to pay off an entire day’s obligations and then make those payments on a day-to-day basis. Given the lack of a precedent, it is hard to quantify the impact on the financial markets in the event that the Treasury was to miss payment on a UST; but the following looks at the impact on a market by market basis.
With short-term Treasury Bills starting to price in a missed payment possibility and USA CDS surging (though still low), the debt ceiling (and implicit chance of a technical default) is nigh. As we approach yet another debt ceiling showdown (especially in light of the seeming congruence of a CR and debt ceiling debate in an entirely divided Washington), market attention will turn towards a possible US sovereign rating downgrade. In this article, we provide an outline of the likely actions by the three rating agencies (S&P, Moody’s and Fitch).