ratings

While this kind of 'wealth tax' has been predicted, as we noted yesterday, this stunning move in Cyprus is likely only the beginning of this process (which seems only stoppable by social unrest now). To get a sense of both what just happened and what its implications are, RBS has put together an excellent summary of everything you need to know about what the Europeans did, why they did it, what the short- and medium-term market reaction is likely to be, and the big picture of this "toxic policy error." As RBS summarizes, "the deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date." And so we await Europe's open and what to expect as the rest of the PIIGSy Banks get plundered.

This is the third and last of three articles we are posting on the price suppression of gold. In the first article we showed that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome.  Mainstream economics, framed by the Walras’ Law, believes in global monetary coordination which, to be achieved, necessitates that gold, if considered money, be oversupplied. The second article showed, at a very high (not exhaustive) level, how that suppression takes place and how to hedge it (if my thesis is correct, of course). Today’s article will examine the systemic impact of this suppression and test the claim of the gold bugs, namely that physical gold will trade at a premium over fiat/paper gold, commensurate with the credit multiplier created by the bullion banks. (Hint - it is)

Here's a Cheat Sheet to Read While You're Listening to JP Morgan's "Whale" of a Tale Testimony to Congress

Retail investors are piling into the stock market again in the false belief that the worst of the economic crisis is over. Alas, those who are not properly diversified may again be in for a rude awakening.

In addition to the phenomenon of "foreclosure stuffing" described here extensively before, one of the main reasons for the artificial drop in housing supply has been the ongoing government-subsidized, GSE/FHFA endorsed REO-to-Rent initiative, through which large asset managers have been encouraged to take advantage of government funded, risk-free financing and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. The REO-To-Rent has traditionally been open to the biggest of financial companies, or at least those who don't have the stigma of legacy mortgage origination resulting in billions in litigation reserves, which means mostly hedge funds and PE firms. One of the main players in the space, Och-Ziff, decided to pull out of the landlord business in October of last year because, as Reuters reported, "the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." In other words, selling while the selling is good. Of course, there is another, far more traditional way to offload risk while preserving some of the upside: dump the balance sheet exposure to others while giving them a fraction of the potential upside yield. This is precisely what the big banks were doing during the last housing bubble when massive residential mortgage-backed security portfolios were packaged, spliced, securitized (sometime without the feedback of firms like Paulson pre-shorting the MBS courtesy of firms like Goldman) and sold off to other yield-starved investors. Everyone knows how that ended. So fast forward to today, when this final missing link from the credit and housing bubble is finally here too, following news that mega-PE firm Blackstone is pushing forward with the first ever REO-To-Rental securitization.

Three sticks and three chances for a poke in the eye. On the other hand they could be kindling for the fire or perhaps the first ingredients of alphabet soup. You see, this is what makes things so tough; we all stare at the same things, the same events and reach wildly different conclusions. The media hands out each stick as presented by the government, a corporation or someone else in a supposed leadership position. The somewhat wise can grasp that there are three sticks and not just one and the good minds recognize not only the three sticks but see that it can be made into the first letter of the alphabet. In this light then let us consider the recent proposal from the Federal Reserve Bank of Dallas. Under the banner of limiting the government’s support for the large U.S. banks in case one were to fail the Dallas Fed has proposed capping assets at $250 billion and of walling off investment banking from the bank...

Average daily trading combined volumes on the three main gold contracts on the Shanghai Gold Exchange in the first two months of the year jumped 24% on the year, according to Reuter’s calculations.  "The strong physical demand in China is the main reason behind gold's resilience," a Beijing-based trader told Reuters. Physical demand prospects out of China remain positive in the weeks ahead, UBS AG said  according to Bloomberg. China is very vulnerable to a property crash and its own economic crisis. The Chinese stock market has performed very poorly in recent years and Chinese people realise the importance of gold as a store of value.

Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading. To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.

Consensus suggests India is a basket case while China is recovering. We think both views are incorrect and therein lies opportunities for contrarian investors.

The France-based ratings agency has just joined China's Dagong, and US Moody's by Fitch-slapping Italy with a BBB ratings handle. Citing four main reasons: election results which and 'non-conducive' for further structural reforms, deeper than expected recession, greater than expected budget deficits, and a weak government less able to respond to shocks. But apart from all that, as we noted earlier, Italian stocks and bonds are bid.

A 'successful' Spanish auction and Draghi's reassuring anti-currency war chatter had little to no effect on Europe's equity markets but FX and bond markets moved quite significantly. A mix of small gains (CAC, DAX) and small losses (Italy, Switzerland) in stocks but Italian and Spanish bond spreads dropped 10-15bps further (down 30bps on the week) - back well below the pre-Italian election levels and Portugal goes from strength to strength on the small ratings upgrade last night (-50bps on the week). EURUSD was the story (and EURJPY) as a lack of concern over Euro potential strength by Draghi drove it to run stops above recent highs and end the day at 1.3100 (up around 130 pips on the day). EURJPY is now back to pre-Italian election levels.

In today's overnight trading, it was all about Europe (and will be with today's BOE and ECB announcements), where things continue as they have for the past six months: when it is a problem that can be "solved" by throwing bucketloads of money, and/or guaranteeing all risk, things appear to be better, such as today's EUR5.03 billion Spanish bond auction (the 0.03 billion part being quite critical as otherwise how will the authorities indicate the pent up demand by the Spanish retirement fund and various other insolvent ECB-backstopped Spanish banks for Spanish debt). And while events that can be "fixed" with massive liquidity injections are doing better, those other events which rely on reality, and the transfer of liquidity into the real economy, are just getting worse and worse. Sure enough, today we also learned that French unemployment rate just hit a 13 year high. But it wasn't only the French economy that continued to slide into recession: Germany wasn't immune either following "surprising" news that German January Factory Orders tumbled -1.9% M/M on expectations of a 0.6% rise, down from a revised 1.1% in December. The great equalization in Europe continues, as the PIIGS, kept still on artificial life support do everything in their power to drag down the core.

• As ZH has been saying for months... Draghi Will Need to Push the Euro Down Some More (WSJ) ... but careful with "redenomination risk"
• Senate Report Said to Fault JPMorgan (NYT)
• EU Opens Way for Easier Budgets After Backlash (BBG)
• China Moves to Temper Growth - Property Bubble Is a Key Concern (WSJ)
• China bets on consumer-led growth to cure social ills (Reuters)
• Italian president mulls new technocrat government (Reuters)
• Grillo says MPS won't back technocrats (ANSA)
• The Russians will be angry: Euro Chiefs Won’t Rule Out Cyprus Depositor Losses (BBG)
• China Bankers Earn Less Than New York Peers as Pay Dives (BBG)
• Investors click out of Apple into Google (FT)
• Community colleges' cash crunch threatens Obama's retraining plan (Reuters)
• Alwaleed challenges Forbes over his billions - Calculation of $20bn net worth is flawed, says Saudi prince (FT)
• Guy Hands Dips Into Own Pockets to Fund Bonuses at Terra Firma (BBG)
• North Korea to scrap armistice if South and U.S. continue drills (Reuters)

Will the Italian election impact ECB policy ?

As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.