Don’t believe the EIA’s gentle forecast.
The Financial Services Authority (FSA) primary role is to make retail markets for financial products and services work more effectively, and so help retail consumers to get a fair deal. In June 2006, the FSA created its Retail Distribution Review (RDR) programme which they are enacting in order to enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012. The RDR is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. The primary delivery mechanism of financial services to retail customers is via approximately 30,000 Independent Financial Advisers (IFAs) who are authorised and regulated by the FSA. They are expected to bear the brunt of the force of the RDR. Gold bullion is set to benefit from the axing of commission for IFAs and the implementation of the RDR “should be regarded as a game changer” for gold as an investment in the UK, according to the World Gold Council. Managing director of investment Marcus Grubb, says: “These extremely challenging times mean it’s impossible to quantify the risks for UK investors. They are facing an unprecedented combination of threats to their assets including extreme and unexpected market shocks that can trigger widespread value destruction.” “As UK investors reduce allocations to traditional investments such as equities and bonds and increasingly dash to cash, they face a double whammy, with the potential for stagnation of capital due to the lack of returns from cash and the increased possibility of inflation as a result of ongoing monetary stimulation.”
During an economic boom, exuberance finds itself lodged in all types of industries. When profits soar, so does the public’s disregard for prudence. And as tax revenues rise, politicians can’t help but give in to their bread and butter of buying votes. In the case of a credit-expansion boom fueled primarily by fractional reserve banking and interest rate manipulation through a central bank, the boom conditions are destined toward bust. Liquidation then becomes necessary as the bust gets underway and malinvestments come to light. What the city of Scranton has in common with San Bernardino, Detroit, et al. is that its dire fiscal condition is due to one thing and one thing only: benefits promised to unionized workers, and, it appears, "the salad days of the government employee are coming to an end, as they have already in Greece, Italy and Spain." To those sick and tired of the tax-eater mentality that is destroying the very core of society’s productive capacity and moral base, those days can’t come soon enough.
The Fed is caught between a rock and a hard place. If they inflate, they risk the danger of initiating a damaging and deleterious trade war with creditors who do not want to take an inflationary haircut. If they don’t inflate, they remain stuck in a deleveraging trap resulting in weak fundamentals, and large increases in government debt, also rattling creditors. The likeliest route from here remains that the Fed will continue to baffle the Krugmanites by pursuing relatively restrained inflationism (i.e. Operation Twist, restrained QE, no NGDP targeting, no debt jubilee, etc) to keep the economy ticking along while minimising creditor irritation. The problem with this is that the economy remains caught in the deleveraging trap. And while the economy is depressed tax revenues remain depressed, meaning that deficits will grow, further irritating creditors (who unlike bond-flipping hedge funds must eat the very low yields instead of passing off treasuries to a greater fool for a profit), who may pursue trade war and currency war strategies and gradually (or suddenly) desert US treasuries and dollars. Geopolitical tension would spike commodity prices. And as more dollars end up back in the United States (there are currently $5+ trillion floating around Asia), there will be more inflation still. The reduced global demand for dollar-denominated assets would put pressure on the Fed to print to buy more treasuries.
Citi, Bank Of America, And JPMorgan Enter Lieborgate: Congress Expands Libor Probe To Big Three Domestic BanksSubmitted by Tyler Durden on 07/17/2012 19:40 -0500
When the Fed released its "trove" of materials confirming that the Fed indeed knew that the Barclays was manipulating its Libor submissions (amusingly explained by Ben Bernanke before Senate today that "the employee had no idea what Libor is in that case"), few were surprised, but more were confused why the congressional inquiry focused solely on the Fed's interactions with British Barclays, instead of focusing on the three domestic banks that were part of the BBA's USD Libor fixing committee.Sure enough, the 3 US banks on the USD Libor fixing committee were just dragged into the fray: "Representative Randy Neugebauer, a Texas Republican and chairman of the oversight and investigations panel of the U.S. House Financial Services Committee said he intends to request correspondence between the Fed and the three U.S. banks on the Libor-setting panel, JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp., according to a congressional aide, who spoke on condition of anonymity because the details were not yet public."
Wealth has become stateless, and as a consequence it is becoming increasingly less accountable to any state’s laws or tax codes. Over the last quarter century it has become increasing easier to transfer large sums of money, what is more, large financial institutions find it far easier today to relocate to a different legal and tax jurisdiction than at any previous time, because it is easier to re-establish the necessary business infrastructure, the cost of relocation has lessened. Recognising this trend over the last quarter century, and being desirous of any slice of revenue they can get their hands on, governments around the world have competed with each other, to provide the ‘best business environment’ for those financial institutions. Let’s not delude ourselves about this, the ‘best business environment’ is the least regulation and the most advantageous tax breaks. And by competing with each other in this way, governments around the world created the regulatory environment which was, in part, responsible for the current financial crisis. And then there are the ‘Tax Havens’
Equities managed to rally after slumping on heavy volume to the 1340 level (scene of crime for Greek election, Spanish bailout, and EU-Summit) pushing up to close at the mid-June swing high levels and post EU-Summit close levels around 1358 (back over its 50DMA). Total volume for the S&P 500 e-mini (ES) was just below average but the average trade size was dismal - around the lowest of the year. Whether due to VIX options expiration squeeze sending VXX and other derivatives tumbling (with VIX almost testing a 15 handle intraday); or a safety 'algo' running things up and over VWAP; or a reflexive reaction to bad is good and Bernanke has our backs no matter what happens, equities pushed 20 points off their lows but stagnated for much of the afternoon. The surge in stocks far outpaced risk-assets and what was more worrisome was the notable divergence in gold as the afternoon wore on - if this was QE-hope then the main QE-sensitive asset class of choice was not playing along at all into the close. Gold and Silver ended the day down modestly, Copper worse, but WTI ended the day up 2.3% on the week and back over $89. Treasuries pushed higher in yields (oh yes very QE-on?) - no higher in yield on the week with the long-end underperforming. FX markets were a little more aggressive - like Treasuries - and extended their rallies relative to USD with AUD now up almost 1% and the USD now down 0.36% on the week - which is interesting given Gold is also down around 0.5% on the week.
There have been quite a few stories comparing the post-WWII American economic "renaissance" with expectations that the same confluence of beneficial circumstances may repeat now, resulting in the same benign outcome. Many of these stories touch upon the key points debated in today's everyday politics: taxes, massive debt overhang, and the treatment of private business. Sadly, most of these stories are also just that: mythical representations of an idealized reality, which however have no analogy to what actually happened in the 1950s. In other words, none of the conditions that were in place in 1950 which allowed net US debt to decline from 80% of GDP to just 46% in one decade, are here now.
Since the financial crisis hit and exposed the reality of a credit-fueled economic growth strategy, Americans have tried to maintain any kind of quality of life. With the HELOC ATM empty, they switched to Credit Cards and once limits were full, there was only one place left - their retirement plans. As the LA Times reports today, Americans are borrowing huge amounts of money from their 401(k) retirement plans - and then having big trouble paying off their debt. Stunningly, in recent years 20% to 28% of people eligible to borrow from their 401(k) accounts have an outstanding loan at any given time, the Navigant Economics study said, having borrowed a collective $105 billion from their 401(k) accounts as of 2009 - and likely considerably more since. Estimating the 'leakage' from these retirement funds, they see loan-loss rates typically double that of the average unemployment and estimate up to $37 billion of loan defaults per year. In the 12 months through May 2012, they estimate the 401(k) default rate hit 17.4% - more than double its pre-crisis average and only marginally lower than its peak in 2009. As they note, many people use the money to pay off other debt or to meet day-to-day expenses, and "Of course, participants are not deliberately defaulting," the study said. "They only do so when they have no other option." As unemployment rates look set to rise, one can only imagine that these 401(k) loan losses, based on their study, are set to rise significantly.
Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under SocialismSubmitted by Tyler Durden on 07/17/2012 12:41 -0500
With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past 4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.
In a follow-up to Liesman's earlier rebuttal, CNBC's Rick Santelli just reiterated his earlier sentiment that the comments that Mr. Bernanke made earlier were indeed the "Libor Smoking Gun". While Bernanke tried to eschew the matter by claiming the low-level Fed employee was clueless (which from the transcript she was seemingly clued in enough to understand the rate was not 'accurate'). As Rick notes in Bernanke's own words: "the manipulation of rates was a little bit low by certain banks but they just wanted to show they were healthy during the crisis" - unbelievable! "What are regulators for?", Santelli exclaims: "manipulation is manipulation!" Indeed, Rick, indeed.
As S&P 500 e-mini futures (ES) slumped this morning as Bernanke appeared to disappoint (and the rest of the risk-on asset classes all tumbled with it), we saw heavy volume and relatively large average trade size. Once the edge of glory from Friday at 1340 was hit, it seemed the magic Potter-esque fairy was back at play. Immediately, VIX was hammered from 17.5% to 16.1% - its lowest in almost 3 months as the bottomless pit of capital that feels comfortable selling vol (or perhaps using a levered approach to ramping stocks) drive ES back up an impressive 14 points on low volume and low average trade size. Yes, we crossed VWAP, yes we crossed unch, and now we are testing highs back above the 50DMA. It seems VIX once again is the ramping tool - and now is significantly dislocated from any equity or credit sense of reality. We presume that OPEX will clean up some of this exuberance but for now, it is the tail wagging everything's dog.
Quickly following up on Rick Santelli's epic rant (which CNBC decided not to publish) on the 'smoking gun' reality of Bernanke's testimony this morning: that they knew that rates were being manipulated but it was for the good of the people - and asking rhetorically, we assume, "Why Do We Have Regulators? Manipulation Is Manipulation!"; Steve Liesman has been brought out to relay the party line to the citizenry - that there is no smoking gun. Furthermore, Liesman sees a 1-2bps compression in Treasury yields as signalling the market's belief that NEW QE is indeed still on and the drop in stocks is merely a lack of instant gratification. It seems to us that Santelli's perspective that Bernanke knows he is at his limit with regard to efficacy of measures seems much more realistic than Liesman's re-iteration of the Fed-Watcher's desires and his own incredible cognitive dissonance - just what happens if the Fed is not omnipotent?
The can has been kicked. The austerity has been implemented. The revenues have fallen. And as we see in the chart below, the pace of local government distress is accelerating. As has been made so clear in the past, defaults cluster; and sure enough it is starting, as tensions between unions and city managers become irreconcilable.
While there was little surprise in today's Industrial Production report, which rose 0.4%, on expectations of a 0.3% rise, however offset by last months' revision from -0.1% to -0.2%, it was the critical Capacity Utilization data that has some analysts concerned. But first, and continuing with the theme of "housing has bottomed", it is worth noting that of all the major market groups contributing to the overall index, only Construction saw a decline in June industrial production, dropping by 0.3%, following another drop of 1.4% in May. As for Capacity Utilization, it missed expectations materially, printing at 78.9% on expectations of the first 79%+ print (post revision) in 2012. In other words, the June number is the same as February's, following full year revisions that have taken down the maximum to 78.9 reached in February and April, and now June. In yet other words, even as the US continues stocking up on record amounts of inventory month after month, the business verticals are simply unable to expand. So with Cap Utilization having plateaued, will all the excess LIFO inventory be remarked to fair value? And what happens to corporate equities when a valuation allowance is taken to finally reflect reality?