Reality

S&P futures have moved more than 20 points since 3:30.  The first big move was on the back of a story that Greece really will commit to the whatever the EU demands.  The second move was after China re-pledged to invest in Europe.  IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning.  In Europe, Main is unchanged while stocks are up about 1% across the board.  Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%. Why? Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.

Greek "idiotic" 3:30 pm rumor undone-

• GREEK CONSERVATIVE PARTY SAYS POLICY MODIFICATIONS "MIGHT BE REQUIRED" FOR IMPLEMENTATION

But don't expect the market to give up the gains . After all, the market only goes up on rumors, but never down on refutation, or as it is otherwise known, reality.

We noted the particular shift in Europe's sentiment toward Greece back in January, observing that ever since the "favorable" uptake of the LTRO (all of which has since been recycled and parked at the ECB's deposit facility which was at €510 billion as of today), Europe has become convinced that letting Greece fail is not a bad idea (an idea which is so ludicrous, and so Lehman deja vuish it makes us shudder, and which CS' William Porter wrote his entire February 10 piece "The Flaw" on, an excerpt of which can be found here). This culminated with the following observations by UBS. Ever since then everything Europe has done has been in preparation of an "orderly" Greek default (odd - try as we might we fail to find that section in the MiniCode MiniRules) and all the posturing about Greece saving itself has been beyond a farce. Yet as has been beaten to death, the final outcome won't be certain until March 20, at which point the market may finally grasp the new reality. In the meantime, here is Peter Tchir explaining how Germany just broke up with Greece... via a text message.

While the government propaganda machine chugs along and tells us to move along, there is nothing to see in the plunging labor participation rate, it is just 50 year olds pulling a Greek and retiring (fully intent on milking those 0.001% interest checking accounts, CDs and 3 Year Treasury Bonds for all they are worth - they are after all called fixed "income" not "outcome") there is more than meets the eye here. Yet while we will happily debunk any and all stupidity that Americans actually have the wherewithal to retire in droves as we are meant to believe (with the oldest labor segment's participation rate surging to multi-decade highs), there is a distinct subset of the population that migrates from being a 99-week'er to moving to merely yet another government trough - disability. Art Cashin explains.

While we mock and ridicule the corrupt and often times purposefully obtuse Greek politicians, we often ignore the human cost in the equation (and so does the rest of the world). Unfortunately this is becoming an ever greater issue for a country that is rapidly devolving to sub-3rd world status. Because while we have previously discussed the miserable conditions for a country where ever more people are sliding out of the middle class and into poverty status, in reality it is far worse. Spiegel has profiled the new Misery in Athens where "aid workers and soup kitchens in Athens are struggling to provide for the city's "new poor." Since the economic crisis has taken hold, poverty has taken hold among Greece's middle class. And suicide rates have nearly doubled." Just like in the US, those in misery are growing exponentially, but the last thing anyone needs is a reminder of their existence. Yet perhaps they should, because when the Bastille moment hits, the spark to overthrow tyranny, especially that masking under the guise of democracy, will come precisely from the slums of the impoverished and disenfranchised, from those who have nothing left to lose. In Greece, with 28% of the population living "at risk of poverty or social exclusion" this moment may arrive any second.

It's getting to the point where the rating agencies are so far behind the reality curve that they are putting the system at risk again, and again, and again...

We noted last week that credit spreads (particularly for financials in Europe and the US) were deteriorating rapidly. In Europe we saw financial stocks hold and then drop to catch up and once again today we see them holding up as credit drops further. In the US, from yesterday's gap up open exuberance, the major financials are significantly underperforming as they catch up to the ugly reality of the credit markets. Morgan Stanley and Citi are  down 6% from yesterday's opening level, BofA and Goldman are down 3.5-4% and Wells Fargo is tracking the financial ETF (XLF) down around 2%. Even JPMorgan is down 1.4%. Several of these names are retesting their 200DMAs from above and volumes are picking up.

European (like US) stocks remain in a narrow range just above the cliff of the unbelievably good NFP print of 2/3. US and European credit markets have lost significant ground since then and it seems equity investors just want to ignore this 'uglier' reality for now. The BE500 (Bloomberg's broad European equity index) is unchanged from immediately after the NFP 'jump', investment grade credit is +10bps from its post-NFP tights, crossover (or high yield) credit is around 50bps wider, Subordinated financial credit is +50bps off its post-NFP wides at 382bps, and senior financial credit is an incredible 36bps wider at 225bps (by far the largest on a beta adjusted basis). The divergence is very large, increasing, and a week old now and perhaps most importantly as we look forward to LTRO Part Deux, LTRO-ridden banks have underperformed dramatically (40bps wider since 2/7 as opposed to non-LTRO banks which are only 10bps wider) - how's that for a Stigma? Some 'banks' have suggested the underperformance of credit is due to 'technicals' from profit-taking in the CDS market - perhaps they should reflect on why there is profit-taking as opposed to relying on recency bias to maintain their bullish and self-interest positioning as the clear message across all of the credit asset class is - all is not well.

UPDATE: EURUSD is sliding on our earlier note on German 'not so fast' comments

As we noted earlier, volumes in equity (cash and futures) were dismal today and yet we managed to close at the highs of the day after gapping up to open last night, sliding into Europe's close (as they derisked broadly) only to limp above VWAP and close just under 1350 in ES (the e-mini S&P futures contract) - right around the level of the open at the day-session - though we note that while financials outperformed, the majors all lost considerable ground from the open. Credit (HY and IG) tracked pretty well all day with stocks (and we heard liquidity was even worse over there) but maintains its underperforming stance post-NFP (especially high-yield credit). EURUSD was the standout today though as it leaked all the way back from a positive morning to close unchanged from Friday - just under 1.32 and at its worst levels of the day. Among FX majors, AUD outperformed but JPY's push after the European close held FX carry swings in check and provided little fillip for ES. Treasuries rallied well off early morning high yields, bounced after the European close and then rallied into the day session close in the US (ignored by stocks) to end mixed with the short-end higher by 1-2bps and the long-end lower in yield by 1-2bps as the flattening dragged an earlier ebullient CONTEXT (broad risk asset proxy) back down to earth again. Oil dominated chatter as the halt gapped up ETFs only to slide back after it reopened though ending +1.9% from Friday and above $100.5 at the close. Gold tracked the USD almost perfectly (ending unch) while Silver outperformed its precious friend modestly and Copper underperformed.

With nothing but mute silence out of Germany in the aftermath of last night's "historic" Greek vote, the EURUSD is getting nervous trading down to just above 1.3200 minutes ago, well below the level reached last night following the passage in the Greek parliament of the vote with 199 out of 300 votes. As such, everyone is starved for some clues of what Merkel and Germany thinks at this point - will they simply leave Greece to flounder, by demanding even more "reality" and implementation of measures from the first bailout - something Greece obviously can not do? Or will Germany relent for at least one more payment (of €210 billion). We don't know, at least not yet. But the following Spiegel interview with German Foreign Minister Guido Westerwelle may provide some insight. The key part: "Q. The second aid package will presumably be more expensive than anticipated, partly because the Greeks haven't kept their promises. How much longer will the German public put up with this?...Westerwelle: It's undoubtedly a moment of truth for Greece. If a sustainable and correct course is set in Athens now, Greece can expect our support -- but only then. There will be no more advance payments. Only actions count now." Like we said, hardly the ringing endorsement people expect. Then there's this: " I am more than dissatisfied with the political impasse in Greece in recent weeks. I'm also addressing the German opposition when I say this: You can't solve a debt crisis by constantly incurring new debts." And yet that is precisely what Bailout 2 is doing as we have patiently explained over and over. Yet Guido said something else which may be of interest to everyone else in Europe: "I don't want a German Europe. Q. What do you want? A. A European Germany." Aaaand, enter lost in translation interpretations.

The reality is that the Fed is stuck in ZIRP and will never be able to leave it. In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%. Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year (assuming of course that the current GDP growth projections are accurate...)

Okun's rule-of-thumb relates the long-term empirical finding that a country's unemployment rate is closely related to a country's output (or GDP) - perfectly sensible and comprehensible. In fact to be a little more explicit, it is the change in unemployment that is more notable in its relationship to the potential GDP (the output gap). His original work noted that a 3% increase in output corresponds to a 1% decline in unemployment rates (and/or rise in labor force participation, rise in hours worked, and rise in labor productivity) but as Goldman Sachs notes this week, Okun's Law has broken. As they point out, even though US real GDP growth has averaged a meager 2.5% pace since the end of the recession, the unemployment rate has fallen almost two percentage points from its peak. There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth). It seems to us that none of these are good for growth as the reality of a higher unemployment rate (BLS adjustments aside) is negative, lower potential for growth impacts earnings expectations (as we are already seeing in company and analyst outlooks which has perplexed those market watchers pinning their hopes on the jobless rate), and the balance sheet recessionary impacts of the 'employed' minimizing debt rather than maximizing potential gain is a further drag. Either way, as Goldman notes the potential growth rate going forward (2012 and 2013) is likely to remain quite weak, in the neighborhood of 2% in line with the CBO's dismal views and this could be further exacerbated by the drop in labor force participation we have noted vociferously.

Explain to me again, how often is EVERYBODY ALWAYS RIGHT? Finding value in not following the name brand following crowd...

Greece is the epicenter of a drama that threatens to unwind with all the intrigue and subterfuge of ancient Greek myths and tragedies. As with the legend of Icarus, big, and now bigger, transnational banks provoked the gods with their wax-and-feather financial fabrications to create the appearance of soaring wealth. Now that they have flown too close to the sun and their wings have melted, these banks are being brought to earth by the obligations and consequences imposed by their fabrications. Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves. They clothe themselves in their indispensability and shield themselves from accountability with tales about how many innocent citizens will be hurt if they don’t get their next bailout. It is as if they say, “We are above the law… We are the law.” Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris. In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart.

The rhetoric coming out of Greece has reached a fever pitch. Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants. If he isn’t the most conflicted politician of all time, he is right up there. Samaras may believe it, or may have decided this is his best route to power when the vote is passed and the Greek people decide to kick Papademos out (remember, he was never voted in). Either of them would be more credible if they made any attempt to explain why it would be so disastrous. So far, not one basic fact to support the chaos theory has been given. I will admit that if Greece defaults without any preparation, it would be extremely ugly, but there is no reason not to be prepared. So, if I was the Greek Finance Minister (I would probably have a longer last name, with more vowels) here is an outline of how I would prepare for default.