recovery

While it is early to determine if the ongoing breakout is finally in anticipation of upcoming episodes of direct and indirect monetization by the Fed, ECB, or any of the many other pathological currency diluters in circulation, it is obvious that precious metals have found a new bid in recent days. Is this then, the beginning of the next surge in gold and silver to record highs? It remains to be seen, but one entity, the Duet Commodities Fund which was one of last year's best performers, has already made up its mind. 'Our central forecast in gold remains constructive as our long term view targets $2,500 in 2012. Our core view is that gold will head higher to the $2,500 range driven by consequential USD weakness once the EU crisis dissipates and the US steps into the limelight. A weaker USD is not undesirable in the world order as everyone (especially China) understands that the US consumer is the driver for global consumer confidence and consequential consumption led demand." Wow - someone in this market can actually think one step ahead of the inevitable ECB LTRO/monetization, and realize that the Fed will in turn have to escalate to that escalation. Gold, er golf clap.

Present-day journalism in America has an unspoken double-standard. Any "news" story or analysis based on press releases from Central State fiefdoms such as the CBO, Medicare, BLS, etc. is accepted without reservations or independent inquiry, or indeed, even basic journalistic skepticism, while any reports that are critical of the Status Quo are treated quite differently: sources are treated as suspect, critical comments are always countered with official assurances, high-visibility "experts" are tapped to dismiss the criticism, and finally, the story is buried: it runs on a public-service broadcast in the wee hours of the morning, it is relegated to page B-19 in the newspaper, and it briefly appears at the bottom of a list of web stories that is quickly "refreshed" before too many people can spot it. This gives the Corporate Media "plausible deniability" when critics question the veracity and quality of its analysis. The Corporate Media digs up the buried story and presents it as "proof" of hard-hitting journalism. We now live in an era of unmitigated propaganda that is accepted much as propaganda in wartime: we all know it's been censored or gussied up with positive spin, but we accept it as "necessary" because the Status Quo is under threat.

Call Your State Attorney General and "Just Say No"

From Kyle Bass / Dylan Grice prognostications on Japan as poster-boy for the end-results of a desperate central bank / government cabal to Richard Koo's perception of the land of the rising sun as a great example of how to get out of a depressionary funk, no one can argue with the facts that Japan's debt situation and total lack of financial flexibility is a ticking debt-bomb (with a fuse varying from 3 months to infinity given market participants' pricing implications). McKinsey provides some clarifying perspective on the Lessons from Japan today suggesting the country provides a 'cautionary tale for economies today'. Noting that neither the public nor the private sectors made the structural changed that would enable growth (a theme often discussed here) with public debt having grown steadily as economic stimulus efforts continue. But, as they note, the price - two decades of slow growth - has been high, and the final resolution of Japan's enormous public debt has yet to come.

Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked: 1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.... The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and  bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won't end any time soon.

One won't find many orthodox strategists who believe that currency printing, and thus dilution, is favorable for said currency. Yet they do exist (as a reminder, this is precisely what saved the REITs back in early 2009, who came to market with massively dilutive follow on offerings, but the fact that they had market access was enough for investors to buy the stock despite the dilution). One among them is Citi's Steven Englander who has released a rather provocative piece in which he claims that as a result of reduction in tail risk, or the possibility of aggressive ECB bond buying (and implicitly, Englander suggests that what we believe is a core correlation: between the sizes of the Fed/ECB balance sheets and the relative value of the respective currencies, is not as important as we suggest), the "EUR will be stronger if the ECB compromises its ‘principles’, but succeeds in convincing investors that the sovereign risk is limited to the smaller peripherals, rather than the core." Currency stronger on central bank printing? And by implication, an x-trillion LTRO being FX positive (and thus risk-FX recoupling)? We have heard stranger things. And remember it is the bizarro market. And finally, Morgan Stanley, which won that shootout with Goldman's Stolper two months ago on the EURUSD, has just turned tactically bullish on the currency (more shortly). For now, here is how Steven Englander explains his contrarian view.

Bob "The Bear" Janjuah may appear a little greyer than his previous appearance on Bloomberg TV but his thoughts on the 'weaker-for-longer' recovery are as clarifying as ever as he sees Q2 as payback time for the misunderstanding of a mini US business cycle as a real sustainable recovery. Noting that the LTRO does not fix Europe, he sees the worst still ahead for the 'Eurozone mess'. Discussing expectations for Fed QE3 and moderating growth in Asia/EM, he believes that markets are likely to get ahead of themselves (or have done) even as he recognizes his potential underestimation of the market's perception of LTRO's impact on sentiment (pulling forward risk appetite from a QE-driven Q2 rally to the current Q1 ripfest). As we have argued, Bob notes that we are simply not addressing growth or solvency and Q2 will be the payback (looking for a 1000 print in the S&P 500 index by quarter-end) for the policy- and liquidity-driven rally we are undergoing.

One reason for the severity of the financial crisis, and the losses incurred by banks, is that bankers and financial analysts were using linear tools in a non-linear, highly complex environment otherwise known as the financial markets.The models didn’t work. The problem we face now as investors will end up being existential for some banking institutions and sovereigns. Our (uncontentious) core thesis is that throughout the west, more debt has been accumulated over the past four decades than can ever be paid back. The question, effectively to be determined on a case-by-case basis, is whether bondholders are handed outright default (which looks increasingly like the case to come in Greece) or whether the authorities, in their understandable but misguided attempts to keep the show on the road, resort to a policy of inflation that could at some point easily spiral out of control. As Rothbard wrote, “The longer the inflationary boom continues, the more painful and severe will be the necessary adjustment process… the boom cannot continue indefinitely, because eventually the public awakens to the governmental policy of permanent inflation, and flees from money into goods, making its purchases while [the currency] is worth more than it will be in future.” “The result will be a ‘runaway’ or hyperinflation, so familiar to history, and particularly to the modern world. Hyperinflation, on any count, is far worse than any depression: it destroys the currency – the lifeblood of the economy; it ruins and shatters the middle class and all ‘fixed income groups;’ it wreaks havoc unbounded… To avoid such a calamity, then, credit expansion must stop sometime, and this will bring a depression into being.”

Last week we heard from Nomura's bearded bear as Bob Janjuah restated his less-then-optimistic scenario for the global economy. Today his partner-in-crime, Kevin Gaynor, takes on the bullish consensus cognoscenti's three mutually supportive themes in his usual skeptical manner. While he respects the market's potential view that fundamentals, flow, valuation, and sentiment seem aligned for meaningful outperformance, it seems actual positioning does not reflect this (yet). Taking on each of the three bullish threads (EM policy shift as inflation slows, ECB has done and will do more QE, and US decoupling), the strategist teases out the reality and what is priced in as he does not see this as the March-2009-equivalent 'big-one' in rerisking (warranting concerns on chasing here).

All you neewd to read.

Here are today's economic highlights, for anyone who cares and is deluded to think that any economic numbers actually still matter and drive the market and not vice versa.

• Here we go again: IMF Said to Seek $1 Trillion Resource-Boost Amid Euro Crisis (Bloomberg)
• China said to Tell banks to Restrict Lending as Local Officials Seek Funds (Bloomberg)
• EU to Take Legal Action Against Hungary (FT)
• Portugal Yields Fall in Auction of Short-Term Debt (Reuters)
• US Natural Gas Prices at 10-Year Low as Warm Weather Weakens Demand (Reuters)
• German Yield Falls in Auction of 2-Year Bonds (Reuters)
• World Bank Slashes Global GDP Forecasts, Outlook Grim (Reuters)
• Why the Super-Marios Need Help (Martin Wolf) (FT)
• Chinese Vice Premier Stresses Government Role in Improving People's Livelihoods (Xinhua)

While his diagnosis of the balance sheet recessionary outbreak that is sweeping global economies (including China now he fears) is a useful framework for understanding ZIRP's (and monetary stimulus broadly) general inability to create a sustainable recovery, his one-size-fits-all government-borrow-and-spend to infinity (fiscal deficits during balance sheet recessions are good deficits) solution is perhaps becoming (just as he said it would) politically impossible to implement. In his latest missive, the Nomura economist does not hold back with the blame-bazooka for the mess we are in and face in 2012. Initially criticizing US and now European bankers and politicians for not recognizing the balance sheet recession, Koo takes to task the ECB and European governments (for implementing LTRO which simply papers over the cracks without solving the underlying problem of the real economy suggesting bank capital injections should be implemented immediately), then unloads on the EBA's 9% Tier 1 capital by June 2012 decision, and ends with a significant dressing-down of the Western ratings agencies (and their 'ignorance of economic realities'). While believing that Greece is the lone profligate nation in Europe, he concludes that Germany should spend-it-or-send-it (to the EFSF) as capital flight flows end up at Berlin's gates. Given he had the holidays to unwind, we sense a growing level of frustration in the thoughtful economist's calm demeanor as he realizes his prescription is being ignored (for better or worse) and what this means for a global economy (facing deflationary deleveraging and debt minimization) - "It appears as though the world economy will remain under the spell of the housing bubble collapse that began in 2007 for some time yet" and it will be a "miracle if Europe does not experience a full-blown credit contraction."

The modern world depends on economic growth to function properly. And throughout the living memory of every human on earth today, technology has continually developed to extract more and more raw material from the environment to power that growth. This has produced a faithful belief among the public that has helped to blur the lines between human innovation and limited natural resources. Technology does not create resources, though it does embody our ability to access resources. When the two are operating smoothly in tandem, society mistakes one for the other. This has created a new and very modern problem -- a misplaced trust in technology to consistently fulfill our economic needs. What happens once key resources become so dilute that technology, by itself, can no longer meet our growth needs?  We may be about to find out.

Last year it was bank posturing, coupled with Germany and the rest of the Eurocore countries, when it comes to Greece. Now it is the hedge funds. Bloomberg has reported that the Greek private creditors have "reached a deal" with Greece on existing debt which "would give creditors 32 cents per euro", or a 32% recovery according to Marathon Asset Mgmt CEO Bruce Richards, who until recently was a bondholder, but recently has been rumored to have dumped his holdings, which makes one wonder why or how he is talking for the creditor committee. Of course, with Greece now a purely bankruptcy play, we expect various ad hoc splinter "committees" to emerge, coupled with an equity committee as well (yes yes, we jest). Bloomberg reports also that Richards is "highly confident" a deal will get done. Nonetheless, the Marathon CEO expects Greece won’t make the €14.5 billion ($18.5billion) bond repayment scheduled for March 20. However, he does see a deal with creditors to be in place before then. For now the Greek government has declined to comment. We fully expect the IIF's Dalara to hit the airwaves shortly and to make it all too clear that the implied 68% haircut is sheer lunacy. Naturally, should this deal come to happen, we can't possibly see how Portugal, Spain or Italy would then sabotage their economies just so they too can enjoy 68% NPV haircuts on their bonds. Finally, even if Marathon likes the deal, all it takes is for one hedge fund hold out to necessitate the application of Collective Action Clauses which would blow the deal apart, create a two-tiered market, and effectively create the perception that the deal was coercive.