recovery

Chiswick's (and, of course, Goldman's) very own European permabull, Erik Nielsen, who just like his other N-11 permabullish colleague is sorely lamenting the Hand of Clod, is back to discuss the merits of flying transatlantic coach, the wonderfully sound economic edifice that is Europe, and the "overblown" concerns over the Swiss National Bank building up an FX reserve position that is approaching one half of Swiss GDP. As Erik observes: "now there is someone – appropriately – not worrying about their balance sheet!" - indeed, why worry. When the time to really worry comes, it will be far too late.

What's another $50 billion?

Spreads were mixed this week with indices modestly tighter but intrinsics notable wider as our view of the overlay unwinds into idiosyncratic derisking appears to be playing out in cash and synthetic credit. Europe outperformed US this week with help broadly from FINLs and Sovereigns but the same theme of underlying name underperformance against index outperformance was evident everywhere (especially at the HY/XOver end of the credit spectrum). Watch this week for further bond underperformance and/or skew compression - there is much more going on down here in the weeds than is evident at the aggregate levels and we suspect sooner rather than later this sentiment will spread back up to the indices (and the realities of short- and longer-term funding markets).

In Chapter 4 we look at the concept of control and how fear is used to control us while we use fear to control ourselves. We learn we make reality fresh every day and we examine the dynamic of apathy. For those of us who come up short, we learn it’s not what you have but how you use it and we visit with the Nailman, who explains that there's no trying, just doing.

• That’s enough ‘kicking ass’, Mr President: Barack Obama’s attacks on BP may play well at home, but they are damaging millions of British people (London Times)
• Banks with state debt ignore not-if-but-when default (Bloomberg)
• As reported, Caja Madrid, Bancaja start moves to form Spain top savings bank, as BBVA says Spain may need €50 billion of capital to infuse into insolvent banks (Bloomberg)
• BP weighs cutting dividend (WSJ)
• Kerviel co-worker says SocGen should have known about trades (Bloomberg)
• Waiting for inflation? It's already here (Minyanville)
• Enough with the economic recovery. It's time to pay up (WaPo)

• China May retail sales surge 18.7% from year-ago.
• China's consumer inflation breaches 3% level- govt's annual target.
• 'Circuit Breaker' set; rules to ease stock volatility on S&P 500 to begin today.
• ECB plans new loans, raises 2010 f'cast.
• Euro climbs to $1.2103 after ECB expanded efforts to make credit available.
• Geithner says China yuan policy is 'impediment' to global economic growth.
• Loans in Fed Reserve program aimed at easing European crisis fall to $1.24 billion.

Lenders are just starting to face up to their bad CRE loans and the decline in CRE values doesn't look encouraging for debt that will roll over from now until 2013. Investors are starting to pick at the market, but can they provide a floor?

Are you ready for interesting times and an exodus from the United States? A possibly apocryphal ancient Chinese curse goes "May you live in interesting times." Those words may derive from an authentic Chinese proverb: "It is better to be a dog in a peaceful time than be a man in chaos." Either way, the message is easy to understand for anyone living in the summer of 2010. As I look over at Lucky, my golden retriever whose only concerns are when do we eat and when do we go back in the ocean to play ball, I can see the advantages of being a dog. But as a man I know it is time to defend my freedom and secure my wealth for myself and for my posterity. The U.S. is wandering through a fake recovery, an expanding sovereign debt crisis, a stock market downturn and a double-dip real estate collapse. Meanwhile, the Swiss franc is moving to historic highs to the euro. And what does the conventional press want to tell us about? The "strong" dollar, who's to blame for the oil disaster, the newest episodes in a host of foreign and domestic political soap operas and – a fresh diversion – which politicians are telling the biggest lies about their military records.

Bottom line - while a 3% rally in stocks and the best performance day in IG and HY credit since 5/27 hide what we think is going on under the covers. Breadth was much more mixed in single-names and the unwinding of index overlays and single-name longs (bonds or CDS) that was evident today seem to signal a risk-off sentiment from the top-down (with technicals dominating index moves today). The increasing correlation (and again we are careful to avoid using the term dependence) between stocks, credit indices, and carry currency crosses appears to be getting tighter (with EURJPY and ES_F hardly leaving each other's side today) but for the third day in a row, stocks have outperformed credit.

In today's letter, David Rosenberg, among other things, answers the question of where demand for gold is coming from. For many this is rhetorical: a mere glance at ETF gold accumulation, and PHYS' recent follow-on are sufficient. Today, GLD alone bought 8 tons of gold to hit a new all time record of 1,306 tonnes. Yet for some, like the author of the WSJ's ongoing hit piece on gold, this is not sufficient, so here is Rosie, patiently explaining to the cheap seats, that even at record prices, demand for gold is not going away.

Florida AG Bill McCollum has officially escalated the BP fiasco to the next level. In a post on his website today, McCollum announces that  he has "sent a letter to BP asking the company to deposit no less than $2.5 billion into an interest-earning escrow account so Florida can be assured of its availability to the state and its citizens and businesses over the long-term recovery period." And now that BP is perceived as the surrogate replacement of the "all free lunch all you can eat" US government, McCollum concludes: “Based on recent estimates from an economist, Florida could ultimately see losses as great as $2.2 billion, as well as a sharp decline in employment in the industries directly impacted by the Deepwater Horizon oil spill. As Florida braces for what will likely be a staggering blow to its economy with significant impacts to our state’s workforce and the revenues of the state and local governments, it is essential that BP establish immediately a dedicated escrow account solely for the purpose of paying claims and damages to Florida and its citizens.” In other news, the Florida economy is strong and vibrant according to the Beige book.

A few weeks ago Zero Hedge offered a modest critique of Jeffrey Sachs after his disastrous performance in a round table debate with Hugh Hendry and Gillian Tett, in which the Columbia professor came out sounding as clueless as a first year economics major. It now appears that Mr. Sachs may be attempting to atone for his myopia memorialized by the BBC, in the following FT Op-Ed in which he unabashedly lashes out at Keynesianism. In it we read: "Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery." Such words of caution from a man who as recently as two weeks ago was encouraging precisely the very steps he is now purporting to be against. Nonetheless, we greet with open arms this most recent act of contrition by yet another economist who leaves the warm innards of the corpse of the economic false religion, and finally sees the light. Welcome Jeffrey.

• Asian shares were modestly higher with resource stocks leading, but for China.
• Bank of Korea keeps rate at record low 2 percent amid strong recovery.
• Bernanke: US recovery on track despite European crisis, high unemployment.
• Brazil central bank lifts rate to 10.25%, meeting expectations.
• China posted a trade surplus for a second straight month in May on higher export growth.
• Euro climbs to $1.2039 on Bernanke remarks, raising hopes in global economy.
• EU's Internet chief warns states against choosing proprietary software as standards.

IG is at its widest (on-the-run adjusted) since 5/28/09 today (and we note that the last time IG was here, HY was over 1000bps) - but different portfolios make the comps a little tricky. Across the broad universe of credit, 5Y was pretty much unch on aggregate as 3Y underperformed with APC, RIG, and HAL the worst performers on a DV01-adjusted basis (along with UAL and CONTI). No clear ratings-related theme today as cohorts were very mixed as we saw bond volumes low once again but underperforming where we did see them (smells like Monty Python's Holy Grail - investors bringing out the dead as markets show any appetite for risk). FINLs and Energy were the worst performing sectors by far today with Utilities and Capital Goods the best performers. One day to go til the greatest sporting event in the world (aside from my eldest daughter's U10 Soccer matches) and we have started to prepare ourselves - bets placed (in my home country of course or that would be illegal) and Fantasy Squad selected. Ennngggeeerrrrlaaannnddd.

As usual, Pento's TV appearance are about as contained and demure as Alan Greenspan on Ambien: "[Bernanke's statement that the economic recovery is intact] guarantees that we are going to have a double dip recession, because his track record is 100% accurate, but it is 100% accurate in the wrong direction. I look at markets and I look at economics, and since this whole rebound was derived by artifical means, why would I ever believe that we are not going into double dip recession. Should I listen to Ben Bernanke or should I listen to the price of oil which contracted from $85 to $72 a barrell in few weeks, should I listen to the 10 Year that went from 4% to 3.2% in a few weeks, should I listen to Doctor Copper that went from $3.50 a pound to $2.77 a pound: where would I want to put my allegiance with, markets or Ben Bernanke. We need to sell assets, and we need to allow the deleveraging process to consummate. We are going in a wrong direction and that's the double dip recession is virtually assured. 2008 taught us very clearly that decoupling is a dodo bird's philosophy. The US is headed down. You'll see home starts, permits, sales plummet in the next few months, that's going to add more supply to the housing market, that's going to put bank assets under duress, that's going to put their capital under duress, and that's going to help bring us into a double dip recession." Pento's asset allocation advice: high levels of cash, hide in the short-end of the Treasury curve, and own gold, precious metals and high-paying dividend commodity stocks.