While some have discussed the game-theoretic dilemma that Germany faces relative to the 'rest' of Europe, David Santschi of TrimTabs (Biderman's balder buddy) digs into the details of a potential solution (hard as it may be) as Europe's fatal flaw (the currency unionization - but not fiscal or banking union - of a group of nations with strong sovereign identities) becomes all too real. The imbalances are so great right now that the only solution David sees is to breakup the Euro-zone, and simply put the best way to achieve a break up would be for Germany to leave voluntarily - establishing a strong currency and in turn saving itself financially. While not minimizing this as a 'good' or 'easy' solution - many people would lose their livelihoods and many would lose a lot of money - it is the only practical solution that he sees (as Eurobonds, banking unions, and fiscal unions are simply impractical in terms of both effect and timeliness). Quoting W.C.Fields with regard the European press' and politicians' efforts towards investors: "If you can't dazzle them with brilliance, baffle them with bullshit!", they correctly explain that Europe is a solvency problem and not a currency problem. In one of the sanest (and least hyperbolic) discussions of the reality in Europe, Bidermantschi note that it appears investors have finally wised up to the fact that "bailout loans are nothing but a shell game replacing old debt with new debt" and the heretical proposition that central banks perhaps cannot solve all the world's problems.
We were wondering how long Europe's insolvent, and very much scorned, banks would take the constant downgrade abuse (or reacquaintance with reality as we like to call it, but that is irrelevant) by the rating agencies without retorting. After all the same organizations that allowed bank "credit analysts" to pretend they did work for years, when they all merely fell in place in some lemming-like procession, patting each other on the back, pocketing record bonus after record bonus and praising groupthink encapsulated by the made up letters AAA, are now largely non-grata first in Europe, and soon, following the imminent downgrade of American banks, in the US as well. It appears that the response is finally coming. Sky News reports that "some of Europe's largest banks are intensifying discussions about a move to reduce their co-operation with the big three credit ratings agencies amid widespread dissatisfaction with their decision-making." After all, when all they do is downgrade, as opposed to the old standby, upgrade, who needs them. In fact, why not just shut their mouths entirely. Sadly, this is precisely what is on the horizon.
If we understand the difference between parasitic wealth and real value/wealth creation, we can properly align the tax structure to reality: the tax on authentic wealth creation should be low, to encourage wealth creation and the employment (broad-based wealth creation) generated by legitimate value creation. We must also understand that the Central State now protects and enables parasitic skimming as the primary function of the nation's financial system. Thus the entire financial system is parasitic on the wealth of the nation. Financial parasitic incomes should be taxed at 99%. If Mitt Romney reshuffles assets created by others and skims $100 million, 99% of that parasitic wealth should be returned to the nation via taxes. The parasite still gets to keep $1 million, more than enough to live well but not enough to buy the presidency, the Congress and the regulatory machinery of the Central State.
It is really rather pathetic. The Prime Minister of Spain today called for a deposit guarantee fund, pleaded for the EU to take over the budget of Spain and said Spain would cede its sovereignty over its banks. This is all just one thing; a cry for money and money at any cost. The poor fellow has obviously lost whatever self-respect that he had and is behaving no differently than some street urchin begging for alms. What can be seen from this kind of behavior is the desperate state that Spain is in and it is reflected in his desperate pleas for help. I would speculate that so much has been hidden and so many balance sheets falsified that Spain has suddenly found itself in a sea of their own making which could be termed, “Dire Straits.” When Rajoy termed the bailout for Spain as a “Victory for Europe” I knew that he had left “sense and sensibility” behind and headed into the land of Don Quixote where windmills were imagined to be giants and fantasy had replaced reality. The problem is, unlike the creation of Miguel Cervantes, this guy is the Prime Minister of Spain and not some aged senior chasing after the Knights Templar in his later years.
If yesterday was a repeat of the market action from that day three weeks ago before the last FinMin conference, when everyone expected Germany to announce it had agreed to a bank deposit guarantee, then today is, logically, day after. Because just like back then, so now, Germany has once again made it clear that it will first see the EUR crushed, and all off Europe begging for a bailout (as in the case of Spain - when presented with reality, they all will beg the one with the cash to come to the rescue). To wit from the German Finance Minister, via Stern magazine:
- Schaeuble Rejects European Redemption Fund: Stern Magazine
- German finance minister says redemption fund would violate EU treaties, in interview with Stern magazine
The situation in Europe goes from bad to worse. Gluskin Sheff's David Rosenberg is back to his bearish roots as he remind us that 'throwing more debt after bad debts ends up meaning more debt'. As he notes, the definition of insanity is (via Bloomberg TV):
When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.
Jose Manuel Barroso, President of the European Commission, thinks Europe needs a unified banking system.
But how can financing be a solution for a Zone with a fatal fundamental flaw? Banking cannot save the euro-Zone. This proposal is only the distraction du jour.
Europe continues be unable and unwilling to look at the core problem in the Zone which has morphed into huge competitiveness differences that are creating havoc.
The easiest fix for this is a break up. For the Zone to survive this will require a lot of cooperation and frankly it does not seem close to doing it.
Just as Patton surveyed Rommel's battlefield of Panzers and assumed he knew his plan (since he had 'read the book'), so UBS' Art Cashin reminds us that traders trust implicitly that Bernanke is an assumed tactical genius - capable of deploying his monetary troops at will and in a perfectly timed manner. This trust (and hope) is based on Bernanke's early speeches and one in particular - “Deflation: Making Sure 'It' Doesn’t Happen Here” (here). It was delivered back at the National Economists Club in November 2002 (Before Bernanke became Fed Chair). As Wall Street ponders what form or format the next level of quantitative easing might take, Cashin is taking time off from the fermentation committee to sift through the speech, looking for clues to the next Fed move. The primary complication is the turmoil in the European banking system. That may force Mr. B to include things like currency swap facilities in any new comprehensive easing effort. While QEx is certainly coming, we remain highly cognizant of the reflexive market reaction to any 'decent' dip as hope remaining too alive-and-well that the Bernanke-Put strike is considerably higher than it is in reality.
What are capital controls? Simply, capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:
- Setting a fixed amount for bank withdrawals, or suspending them altogether
- Forcing citizens or banks to hold government debt
- Curtailing or suspending international bank transfers
- Curtailing or suspending foreign exchange transactions
- Criminalizing the purchase and ownership of precious metals
- Fixing an official exchange rate and criminalizing market-based transactions
Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders. This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.
Lesser Of Two Evils? There’s No Such Thing…
First of all, asserting that there is such a thing as a “lesser of two evils” is an act of naivety. It relies on a very dangerous assumption; that one can somehow quantify which candidate is going to hurt the country less. I’ve even read essays by people who pretend they can mathematically delineate the “more evil” of the evils! Not surprisingly, their “logic” invariably leads them to proclaim the lesser evil to be the candidate of the party they happen to belong to. Ignorant Republicans always see the Democrat as the greater evil, while ignorant Democrats always see the Republican as the ultimate monster. Here’s some math for you: there are two candidates for President of the United States, one is a cannibalistic serial killer who plans to murder 20 more people with his own hands while in office. The other is a cannibalistic serial killer who only plans to kill 19 innocents personally. Which candidate do you support?
The correct answer is NEITHER.
One day ahead of Jamie Dimon's blockbuster appearance before the Senate Banking Committee, Bloomberg has released the definitive timeline infographic of who knew what, when, together with damning evidence that, contrary to what has been represented by JPM execs, the firm knew about the massive risk, which an in house risk manager described as "trying to land a Boeing 747 without flying lessons", as far back as 2010. Not only that but the firm was actively engaged in fudging its VaR for years in an attempt to hide the monster in the closet which we dubbed, long before the details were exposed, the "world's largest prop trading desk". Well, now the monster is out, and nobody wants to come within one bid/ask spread of it. And tomorrow, Jamie will have a fun time explaining just how he let all of this happen for years while potentially engaging in material 10(b)-5 fraud in his public filings and statements.
As Many Have Predicted for Years
The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.
After opening over 1% higher, S&P 500 e-mini futures plunged to close at their lows of the day (down 1.5%) amid the widest range day in six months. Volume was heavy after ES touched up to its 200DMA at the Sunday night open slide along with Europe's weakness, stabilized at Thursday's closing VWAP around the European close, only to dump in the afternoon (as financials, materials, and AAPL led the plunge). The major US financials lost 5-7% from their opening ticks of the day with Citi, BofA, and MS the worst performers (as AAPL ended -1.5% after being up over 1%). Gold back at $1600 (and Silver) rallied 0.4% (diverging from recent sync with stocks) even as USD strength kicked in - ending the day +0.17% (from a -0.85% low in early European trading). Oil meanwhile ended down over 3% (ending below $81.50) from up 3% in early trading on OPEC chatter and global growth concerns (and we assume correlated risk liquidation). Credit underperformed - leading stocks once again - with IG back to last Wednesday's wides (as cheap macro overlays were laid out). Stocks and HYG (the high-yield bond ETF) plunged into the close to catch up to HY credit. Treasury yields dropped, along with stocks, down 2-5bps from Friday's close, as the 7Y segment outperformed (but were down 11-13bps from their opening high yields). VIX saw a huge range day of around 3.6 vols as we closed back above 23.5% and implied correlation soared almost 6pts to 74.5 (biggest pop in 7.5 months). Realized cross-asset class correlation rose significantly and remained extremely high into the close implying very systemic market movement - which given the weakness after-hours seems worrisome.
The bailout bullishness half-life is shrinking - dramatically - as it appears traders have become more aware of reality (and unreality). As we have noted again and again, the self-referencing, self-aggrandizing, self-pleasuring European government and banking systems are becoming more and more symbiotically linked. As JPM CIO Cembalest notes for Spain, Plan A was the 2010 announcement of government austerity targets. Plan B was the 2011/2012 ECB lending program to Spanish banks - to the point where Spanish banks now own around 50% of Spanish government debt. Neither plan worked and so on to Plan C - recap Spanish banks to cover the expected losses forthcoming. Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. As Credit Suisse noted this weekend... "Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.” Or, the credit of the EFSF/ESM, if called upon to provide funds in large size, either calls upon the credit of Germany, or fails; i.e., it probably cannot fund, to the extent needed to save the credit of one (and probably imminently two) countries that had hitherto been considered 'too big so save', without joint and several guarantees."