Reality

Spain has already gone bankrupt. It is not spoken of in this fashion, no one mentions it in public but that is the truth of it. The money, some $172 billion, was funneled to the banks and not to the sovereign in one more European ruse to distract everyone but the results are the same. Now it is becoming apparent that even this amount of money was not enough so more will have to be given. The money will go to the Spanish banks, the debt will be guaranteed by Spain, the contingent liability will not be counted as part of Spain's debt to GDP ratio but we will know the truth of it. Whatever direct money from Spain that goes into their banks will be called an "investment" and put on the left side of their balance sheet as an asset and the mockery will continue but I can still read a ledger; thank you very much.

As we hinted last night, and as the market is starting to realize, one of the bigger downstream casualties of the first rumblings that Abenomics is starting to crack, have been peripheral bond yields, with Spanish, Italian and Portuguese yields all wider by 10 bps and rising. However, that is only half the story. The other half is that, with its usual 6-8 week delay, the market is finally grasping the biggest danger in Europe - one which we have been pounding the table on week after week after week (most recently here): the soaring non-performing loans held by European banks. In fact, it took the FT to confirm what we have been warning about all along. And just so the market has a sense of how much downside may be imminent if indeed reality reasserts itself and frontrunning the Japanese carry trade both occur at the same time, here is a rather unpleasant chart courtesy of Diapason, of what expects all those who bought up Italian bonds in the recent dash-for-trash, oblivious of the collapsing fundamentals, and driven purely by FOMO. The downside could be big to quite big.

The foundation of the Soviet model of trade and investment was centralization under the guise of "universal public ownership". The entire goal of communism in general was not to give more social and political power to the people, but to extinguish alternative options and focus power into the hands of a select few. The process used to reach this end result can vary, but the goal always remains the same. In most cases, such centralization begins with economic hegemony, and it is in our fiscal structure that we have the means to see the future. Sovietization in our financial life will inevitably lead to sovietization in our political life. Does the U.S. economy’s path resemble the Soviet template exactly? No. And we're sure the very suggestion will make the average unaware free market evangelical froth at the mouth. However, as we show, the parallels in our fundamentals are disturbing; the reality is that true free markets in America died a long time ago.

One can read "The Lethal Presidency of Barack Obama" to get a true sense of Obama's "the best defense is a relentless drone everyone offense, ignore collateral damage and take out a few Americans in the process" policy. Or one can stare at rising stawks and enjoy their Obamaphones. Obe can't have both.

Money doesn’t stop at borders or oceans; accounting does.

A data-based look at the financial context of the past 30 years from the perspective of Gen X.

Curious why in yesterday's FOMC minutes the following line "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant" received special attention? Here is the reason: as the chart below shows, according to the census bureau, the average new home sale price just hit a new all time high, rising by a record 15.4% to a record $330,800. In a country in which real disposable consumer income is flat at best and in reality declining, it only makes sense that the average new home price just hit a level not seen since the prior credit-bubble fueled housing peak.

In all the hoopla over Japan's stock market crash and China's PMI miss last night, the biggest news of the day was largely ignored: copper, and the fact that copper's ubiquitous arbitrage and rehypothecation role in China's economy through the use of Chinese Copper Financing Deals (CCFD) is coming to an end.

"Time in the digital era is no longer linear but disembodied and associative. The past is not something behind us on the timeline but dispersed through the sea of information." In effect, change no longer flows linearly like time anymore, it flows in all directions at once. History and meaningful context are both fatally disrupted by this non-linear flow of time and narrative. If the causal chains of history and narrative are disrupted, then how can anyone fashion a meaningful context for actions and narratives, and effectively frame problems and solutions? If everything is equally valid in a non-linear flood of data, then what roles can authenticity, experience and knowledge play in making sense of our world? "We're essentially the victims of a marketing and capitalist machine gone awry... we no longer are the active source of our own experience or our own choices. Instead, we succumb to the notion that life is a series of product purchases that have been laid out and whose qualities and parameters have been pre-established."

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

As the world of equity asset-gatherers is desparate to point out the 'bubble' talk must mean bonds, we offer a few charts as a gentle reminder of reality... And as Doug Kass noted the last two times the S&P 500 hit all-time high and closed down more than 1% from that high were 10/11/07 & 3/24/00... 330 Ramp Capital has their work cut out today with volume already near the highest of the year in the S&P 500 e-minis.

It appears (as we noted here) that the size of the balance sheet, difficulty of the exit, frothiness of markets, and not-totally-dismal labor headlines have even the doves a little more hawkish about the possibility of an exit at some point - though obviously the minutes are clear that the 'flow' can increase (as well as decrease) based on the data.

• FOMC MINUTES: MANY SAID MORE PROGRESS NEEDED BEFORE SLOWING QE
• FED'S BROAD PRINCIPLES ON EXIT `STILL VALID,' FOMC MINUTES SHOW
• SOME ON FOMC WILLING TO SLOW ASSET PURCHASES AS EARLY AS JUNE
• SOME SAID "CONDITIONS IN CERTAIN FINANCIAL MARKETS WERE BECOMING TOO BUOYANT"
  

Two things seem clear: 1) the Fed is explicitly forcing the market to hope for bad data to maintain gains as the gap between market and reality is now too large for a soft-landing; and 2) the Fed has explicitly admitted that it is the 'flow' not the 'stock' that matters - as we have been vociferous about for years. But what is worst, is that now that some at the FOMC are openly seeing asset bubbles, Bernanke is facing a mutiny on his hands!

MOAR Orderly... oops... Bernanke: "Fed could reduce bond purchases in the next few meetings if data supports it" and perhaps most disturbing is that reality is finally seeping into the corner offices of the Marriner Eccles building when Bernanke says that concerns about "frothiness" and "bubbles" has increased? Was it the sub-5% yield in high yield that tipped them off?

Or maybe this is a trick question, and the answer for the "New Normal", when all central banks are coordinating on reflating the biggest asset bubble of all time, is "all of them"...

Unless there's a shock to the system when people start seeking safety, there's not much upside momentum for gold.