Reality

There is literally no difference between Obama and a moderate Republican when it comes to the truly important policies governing the nation's insolvent finances, its predatory financial sector, its corrupt and fraudulent sickcare system or its sprawling Empire. Obama's policies have all aided and abetted existing Status Quo cartels and fiefdoms. He has changed absolutely nothing of import except further eroding civil liberties. President Obama can be charitably characterized as an ineffectual Demopublican. From those demanding more, then he can be accurately described as a well-meaning puppet of Wall Street and the rest of the Status Quo cartels and fiefdoms.

Those waiting on edge for HSBC hedge fund report #53, aka the year end edition, can now relax: here is the full list of winner and losers. Keep in mind, the Paulson HF update is as of November 30, which explains why Advantage Plus (or is that Minus) still shows it down only 48% when in reality it closed the year more than half down according to preliminary reports. Also, momo superstar JAT Capital is nowhere to be found. That said, the carnage of the year is more than evident. And to think everyone could have just bought gold and gone on a long vacation...

In his latest letter, Bill Gross, obviously for his own reasons, essentially channels Zero Hedge, and repeats everything we have been saying over the past 3 years. We'll take that as a compliment. Next thing you know he will convert the TRF into a gold-only physical fund in anticipation of the wrong-end of the "fat tail" hitting reality head on at full speed, and sending the entire house of centrally planned cards crashing down. "How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012...For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk."

Is idiosyncracy the substitute for a fledgling Sovereign Bond Market?  Including our recommendations for 2012

We are always amused by technicians trying to predict what the market will do based on something that may have happened some time in the past, when in reality the only thing that matters is the distinction: "Pre-Central Planning" and "Post-Central Planning" or PCP (for both) - in other words, anything prior to 2009 is completely irrelevant when it comes to analyzing the market. Yet people continue doing it. And while the predictive pattern of such formerly "self-fulfilling prophecies" is now gone, courtesy of whatever side the Chairman wakes up on, traders habits die slowly. Here is Art Cashin with his summary of what trading patterns are relevant for the new year. That said, we remind readers that the first trading day of 2011 saw the S&P rise from 1257 and close at 1272, something which #CarbonCopy2012 seems dead set on imitating. After all, with central planning, why recreate the wheel - Brian Sack can just hit the "repeat 2011" program button and all shall be well. All the way up to a 2012 year end close at 1257.

"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."

When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality. To be sure, vast amounts of popular folkflore has been expounded into the public arena, with most of it being shot down simply due to it assuming conspiracy theories of such vast scale that the human mind is unable to grasp the complexity, and ultimately the inverse Gordian Knot makes an appearance with the claim that vast conspiracies are largely untenable simply because it is impossible to keep a secret from so many people for so long. Yet what if the secret is not a secret at all but is fully out in the open, and is only a matter of interpretation, and contextualizing? Why just 3 years ago it would appear preposterous to allege the capital markets are a ponzi and that the Fed does everything in its power to keep stocks higher. Well, what a difference three years make: now the Chairman himself in a Washington Post OpEd has admitted that the sole gauge of Fed success is the loftiness of the Russell 2000, neither unemployment nor inflation really matter now that the Fed's third mandate has been fully whipped out. Furthermore, Keynesian economics, and the entire top echelon of the educational system have also been accurately represented as a paradigm which merely perpetuates the status quo as the alternative is the realization that the whole system is a house of cards. As for the global capital markets being nothing short of a ponzi, we merely point you to the general direction of Europe, the ECB and the continent's banks, where the monetary interplay is nothing short of the world's biggest pyramid scheme. Yet the PPT, or whatever it is informally called, does not exist? Consider further that only recently did it become known that the former SecTres Hank Paulson himself was exposed as presenting material non-public information to a bevy of Goldman arb desk diaspora hedge funds, headed by with none other than the head of the President's Working Group on Capital Markets Asset Managers committee David Mindich. So, if contrary to all the evidence that there is some vast underlying pattern, if not a conspiracy per se, one were to take the leap of faith and take the next step, where would one end up? Well, most likely looking at the Exchange Stabilization Fund, or ESF, which Eric deCarbonnel has spent so much time trying to unmask. Is it possible that the ESF, located conveniently at the nexus between US monetary policy, foreign policy and last but not least, a promoter of the interests of the US military-industrial complex, is precisely the  organization that so many have been trying to expose for years? Watch and decide for yourself.

It is always amsuing to listen to market narratives, however goal seeked they may be, when presented by market veterans such as Art Cashin, who in this case deconstructs the violent clash between reality and post-summit hype as represented by yesterday's amusing market action.

ES tumbled back down to its VWAP at the close of the day session after mounting a run back towards 1200 in the afternoon. This equity move was the second total disconnect from credit markets of the afternoon and reverted back to credit's sanity though HYG was clearly the instrument of choice (once again) for credit hedgers looking for lower cost shorts or liquid hedges. The USD was modestly higher from Friday's close and Oil rallied back this afternoon to almost perfectly match the USD shift. Gold, Silver, and Copper all lost significant ground (around 2.5%) though all were well off their early European-close-liquidation lows. TSYs rather interestingly closed near the high yields of the US day-session - though well down on the day - as 2s10s30s and Oil were the main drivers of broad risk-asset strength. CONTEXT remained notably below ES all day - maintained by the weakness in Gold, 10Y, and AUDJPY as the EURJPY ripfest into the EU close helped the risk-on crowd modestly. It was a muddled day with correlations breaking down and dramatically illiquid-looking moves as the late-day drop on very large volume suggests some sense of sanity with the uncertainty we face was priced in.

Last night we discussed the repeated regime that has occurred in equity markets over the last few days where we ramp in ES away from any other asset class (FX, credit, TSY, commodity) only to fade overnight. This morning's abrupt diminution of hope has once again caused ES to revert back to its CONTEXTual reality - trading more in line with broad risk assets for now. It appears that again and again we are seeing the buy-the-dips beta-chasing that Art Cashin so eloquently pointed out this morning - and that is not working as the overwhelming macro/systemic conditions favor risk-off.

As the market marinades in the latest confusing Bernanke Q&A aftermath, we get two very disturbing headlines. The first:

• China’s Zhu Says ‘Too Soon’ to Discuss Further EFSF Purchases
  
• While there are proposals to revamp the European Financial Stability Facility, “there’s no concrete plans yet so it’s too early to talk about further investments in these tools,” Zhu Guangyao, Vice Finance Minister, told reporters in Cannes today.

This goes hand in hand with the disaster that was the overnight news on the EFSF pulling a meager €3 billion bond auction. If you gave us Jefferies' rolodex, we could probably raise more for a bankrupt MF Global in ten minutes (kinda like what they did). Oh well, so much for Europe.

And in other news, and confirming what we have been saying over the past two weeks, namely that foreigners are dumping US bonds to shore up emergency balance sheet capital, we get the following confirmation from Dow Jones:

• IIF Sees Euro-Zone Banks Selling Govt Bonds To Meet Capital Targets

That's right: government.

Wondering why the future for housing as an asset is so bleak, why median housing prices continue to tumble and recently saw their biggest three month drop ever, and why there is no bottom in sight? Simple: the American public appears to have woken up to the reality that homes are no longer a flippable asset, and in fact continue to drop in price, an observation that is obvious to virtually all now. So what happens next? Why renting of course. Here is Morgan Stanley explaining (granted in a pitchbook for REITs but the underlying data is quite useful) why the Housing 2.0 paradigm is all about renting.

Citi's Steven Englander summarizes last night's 4 am Eurosummit announcement, the kneejerk reaction in the all-important EURUSD, and what to expect both over the immediate future and the longer term: "We would expect the next 24 hours to be driven by how the Sarkozy call to China President Hu Jintao goes, how investors analyze the sustainability of Greek debt under this program, and the reception that the EFSF proposal will get. We are a bit surprised by the enthusiasm given the lack of detail and lack of surprise. We are also wondering how seriously investors will take the EFSF guarantees (which only apply in the event of a default), given that the banks were strongly encouraged to declare the current restructuring voluntary. Investors may fear that the EFSF - guaranteeing - governments will similarly contrive to avoid paying out on their first-loss guarantees."

As the euphoria of a Bundestag vote begins to fade and the reality of the need to reduce Greek debt by more than 21% (or whatever the ridiculous number the entirely independent think-tank called the IIF is pushing now), we note that almost perfectly tick-for-tick the price of EFSF bonds today are inversely correlated with the EURUSD. It seems evident that our fears (oft discussed here) over the actual increased contagion and concentration risk that EFSF will withstand should it be more levered are clearly being gradually priced in - despite what every other correlation-driven momentum junkie asset class is saying. Perhaps buying EFSF protection (we are sure it will be quoted soon) is the new EUR hedge for all those stuck short?

As the sheer mathematical certainty of the event horizon that is Europe these days is slammed at light speed into the foreheads of the European cognoscenti, we finally see some actual frustration, foot-stomping, and 'throw-your-teddy-bear-out-of-the-pram'-ness. The Telegraph reports on some choice turns-of-phrase among the leading players, our favorite being:

"It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister.

But it only got better from there, with several of the major movers feeling the need to express their frustration (and what is German for Schadenfreude?).