ratings

Starving a skinny man doesn't make him healthy, but then again neither does shoving 30lbs of food down his throat. When will TPTB start using their heads? As long as policy mistakes are made, contrarian profits can be made as well.

The U.S. Presidential race is now behind us. And this morning the world woke up and realized that all the issues the election postponed now lie before us. It's becoming increasingly clear the way our leaders will "address" these challenges will be to throw increasing gobs of our citizens' current and future wealth at them. Until, of course, that simply doesn't work anymore...

"Pinball Wizard" (Bunds 1,38% -5; Spain 5,68% +4; Stoxx 2486 -1,8%; EUR 1,276)

By now we are confident that everyone is sick to death and beyond of listening about elections, polling, conditional probabilities, permutations, (confusing) statistical sampling and heuristics, and all those other things that the vast majority of the population fail in STAT 101 yet somehow end up as experts in during cocktail hour, on TV, on Op-Ed columns and, of course, on twitter. Which is why we are delighted to bring you this comic interlude. Presenting Donald "The Hairpiece" Trump vs Mark "Avion Tequila" Cuban.

Egan Jones may be a registered NRSRO, but that doesn't matter to the global status quo perpetuation syndicate ("SQPS" or "the syndicate"). Why? Because the small rating agency misplaced a comma when it was filing its NRSRO application with the SEC and has infuriated the same clueless and corrupt SEC, which 2 years after the flash crash still allows the high freqs to make a total mockery of the market (as seen here). Another reason: it recently downgraded Spain to a CC rating, the lowest and thus most accurate of all rating agencies, with a C rating projected, which means if its rating were to be taken into account by the ECB, the result would be massive margin calls amount to 10% or higher of all the Spanish bonds repoed at the ECB. Instead, the SQPS is delighted to have Canadian-based DBRS on its side. Why? Because the tiny firm's A-rating obviates all others' sub-A ratings, this includes Moodys, S&P and Fitch, at least in the eyes of the ECB and thus Mario Draghi has an alibi to not demand an additional €17 billion collateral call from Spain, which would send its banking system on full tilt (this is money neither Spain, nor its banks has to spare). Which is why we wish to present to our readers the man behind the Spanish A-rated myth: Fergus McCormick (Reed College; BA, with honors, French), formerly of Spanish bank BBVA (surely BBVA is not calling in any favors from its former employee currently head of sovereign ratings at DBRS; none at all).

As reported over the weekend, the German press did some work and discovered that despite Spain being rated practically junk across the board, its bonds pledged as collateral with the ECB had virtually no haircuts, despite as we said back in April, them needing to be haircut by a solid 5% or more an amount which would force the Spanish banko-sovereign system to scramble to procure the critical €17 billion margin call. Well, moments ago the Bank of Spain (not the ECB) came out and said that the ECB had applied collateral rules correctly. However, by that they meant not that the ECB had demanded the needed 5% haircut due upon a downgrade into sub A-range, but that the rating agency which absolutely nobody has every heard of, Canadian DBRS, has a "rating that needs to be taken into account." In other words, Spain's collateral call is now dependent not so much on Moody's downgrading the country to junk, which likely will happen soon if Rajoy does not demand the bailout which has been priced in for about 3 months now, but on what a tiny Canadian ratings firm, which has most certainly not gotten any quid pro quo from Europe to keep Spain at is A-low level (for long-term debt, not so much short-term) says is the Spanish rating quality.

Mario Draghi has reassured the world that no matter how much 'crap' collateral is taken on to the ECB's balance sheet, their risk management process is rigorous and ensures the safety of the entity's capital thanks to well-devised haircuts and collateral. Once again, it appears from a report in Die Welt (via Bloomberg), Draghi lied, as the ECB is now checking terms on some lending to Spanish banks that may have already contravened the ECB's mandate allowing overly generous terms to be offered on the Spanish banks' collateral. As Bloomberg notes, the issue surrounds EUR80bn relatively short-dated T-Bills which were wrongly classified as rated 'A' instead of the 'B' that agencies - except DBRS! - had assigned (a vast difference) - which would imply (if the ECB re-assigns the correct rating) the affected Spanish banks would have to produce up to EUR16.6bn in additional collateral (cash or quality collateral that is non-existent in Europe). This of course "casts doubt on the quality of the ECB's risk management" and merely serves to confirm the Juncker-ian lies we have come to expect from Europe's leaders (economic and political). As Die Welt notes: "Critical observers ask: who actually controls the ECB?"

Self-sufficiency matters. Bridgewater's Ray Dalio sees this logical concept as consistently an important ingredient for individuals, and even more so for societies as a whole, to become successful. As he notes in a recent missive, "self-sufficiency encourages productivity by tying the ability to spend to the need to produce," adding that is likely not controversial to state that people spend money they earn differently than money they are given (i.e. the connection between working hard and spending is a healthy one). By quantifying 'self-sufficiency' as one of the parts of 'the formula for economic success', Dalio shows that "Societies in which individuals are more responsible for themselves grow more than those in which they are less responsible for themselves." The nine-factor gauge of self-sufficiency provides some interesting insights into those nations most likely to experience above-average growth going-forward and those that are not; as European countries, notably Italy, France, Spain, and Belgium, all ranking at the very bottom on self-sufficiency. Perhaps, in order to encourage growth, these nations must enable their citizens' self-sufficient animal spirits by removing their pacifying nanny-state support?

What's happening is that Facebook is realizing the advert model of revenue is fatally limited. Adverts just don't generate billions of dollars in profit, even with 1 billion users. So it was inevitable that those using the FB platform to generate revenue in some fashion would be squeezed to "share" their revenues with FB. Previously "free" distribution would no longer be free, and users would face a stark choice: either start paying for distribution or lose 85% of their audience. The response depends on the users' level of dependence. Those who are well and truly hooked on the FB platform can either make ineffectual protests and end up paying to reach their former audience, or they can quit: cold turkey, baby. So FB will eventually have to decide if it can profit with a customer base in which 99% don't pay anything. They could try squeezing users in more "stealth" ways, for example, making the first 10 friends and first 10 posts a week free, and charging for useage above a low threshold. If it follows this revenue model, it will follow MySpace down the path to hosting tens of millions of zombie users. Or FB (and Wall Street) could accept that it is fundamentally a low-profit utility and always will be. It could charge individuals $1 a month--a utility fee, in effect-- $10 a month for groups and small enterprises and $100/month for corporations and large organizations. This model would recognize FB is basically offering server space. If users aren't getting $1 a month in value, then why be users at all? How addicted are we? It's a good question of all social media, especially the (currently) "free" stuff. How many people would click "abandon FB" if that were offered alongside the new "promote" button?

A cyber attack does not have to be limited to a single country and its networks.  It could be used to strike multiple countries and fuel a global firestorm of systems failures.  Globalists need a macro-crisis, a world-wide catastrophe, in order to present their “global solution” to the desperate masses. This solution will invariably include more dominance for them, and less freedom for us.  A global crisis can also be used to manipulate various cultures to forget concerns of sovereignty and think in terms of one-world action.  Surely, a worldwide breakdown can only be solved if we “all work together and all think alike”, right...? Without a doubt, a cyber attack serves the interests of elitist entities and banking monstrosities like nothing else in existence.  Set off a nuke, start WWIII, turn the U.S. dollar into stagflationary dust; a cyber attack tops them all, because a cyber attack can lead to them all while maintaining deniability for the establishment.  The fact that whispers of cyber threats have turned into bullhorn blasted propaganda should concern us all.  Are we being conditioned for a cyber event in the near future?  That remains to be seen.  However, none of us should be surprised if one does occur, especially in light of the many gains involved for globalists, and all of us should be ready to dismantle and expose any lies surrounding the event before the American public is whipped into a 9/11 style frenzy yet again

Defending the indefensible? In the past weeks, there has been a 'revival' of news related to high-profile inside trading cases. Insider trading is accurately pictured in that great movie called "Wall Street", by a famous line of Gordon Gekko to Bud Fox. Gordon said: "If you’re not inside, you are outside". Gordon was right. If only people understood that this is just a natural thing... It has nothing to do with ethics. Yes, we know that there is something in our argument that may not make sense to you... and we dare to guess that it is because you expect fairness when you invest your savings in a public security (i.e. a stock or a bond). But in all honesty…have you ever asked yourself why you expect fairness? We are not implying people should not trust those who issue or market these securities. But if they do, they should recognize that there is the risk that they may suffer a loss due to insider trading. Public securities, ceteris paribus, should trade at a discount to private securities, to compensate for the risk of lack of control and transparency. Yet, today, the opposite applies.

S&P recently acted to markedly downgrade Spain, and Moody’s has ended its recent ratings review, leaving Spain at Baa3; and while ratings could remain largely stable in the short-term (supported by OMT's promise and the possible delay of GRExit), there are a few exceptions such as France and and the UK that Citi's Rates group expect to see downgrades on in the short-term. The following table provides the full breakdown of Moody's and S&P's ratings for the advanced economies along with Citi's model views - which imply weak outlooks for most of Europe in the medium-term as Greek reality hits home.

Credit-rating cuts were made on more than $200 billion of municipal securities in the first nine months of this year, exceeding the total for 2011, and there’s no end in sight. Bloomberg Brief also notes that it is not just the weaker Californian cities (such as Fresno) but even Los Gatos (an affluent town about 50 miles south of San Francisco, where Apple's Steve Wozniak lives) is facing possible rating downgrades. Moody’s is concerned that cities might skip debt payments in a cash crunch to preserve services and meet payroll. The decisions to seek bankruptcy “provide some indication that willingness to pay debt obligations may be eroding in the U.S. municipal market,” according to the Moody’s report, especially since California municipalities have limited ability to boost revenue. They can’t impose higher sales taxes without going to voters. Meanwhile Chapter 9 Muni petitions are now above 2011's YTD equivalent as California’s Mendocino Coast Health Care District became the 12th Chapter 9 petition filed year to date and the fourth from that state - up from just 5 Chapter 9s in 2010. Paging Ms. Whitney...

It seems engines are revving and it may be time to go forward to the past. Earlier this month, a large and well respected asset manager that has begun taking positions in gold expressions issued a report in which it began to justify gold’s relative value. One metric it used was comparing the quantity of currency in the world to the quantity of gold. The report concluded that using this metric, the relative value of gold would be about $2,500/ounce, a significant premium to its current spot price. The analysis posited gold’s value upon a return to the gold standard, posing the question: “what if the entire world’s gold were used to back the global supply of fiat currency?” We agree with the logic of dividing base money by gold holdings to find gold’s “intrinsic value” (as per Bretton Woods and our Shadow Gold Price), but we believe the reasonable value upon conversion to a gold standard would be many multiples higher than $2,500/ounce.

The 2012 US presidential election is perhaps one of the most unique and important elections in recent history from an economic perspective (with the time-line rapidly approaching). In choosing its leader for the next four years (for which we provide a handy 'where-do-they-stand' cheatsheet), we agree with Goldman that the country will likely be determining the path for near-term economic growth, medium-to-longer term fiscal stability and monetary policy at a time when the stakes are exceptionally high - whether or not the US economy returns to recessionary conditions in 2013, the US sovereign debt rating and the broader credibility of the US government to Americans and foreigners alike all hang in the balance. Goldman sees three factors that set the 2012 election apart.