Sovereign Debt

The most dangerous organization is the now French led IMF with Christine Lagarde at the helm, which has presented a concept report in which 'debt cuts for over-indebted states are uncompromising' and are to be performed more effectively in the future by defaulting on retirement accounts held in life insurance, mutual funds and other types of pension schemes, or arbitrarily extending debt perpetually so you cannot redeem. Yes you read correctly, The new IMF paper describes in great detail exactly how to now allow the private sector, which has invested in government bonds, will be expropriated to pay for the national debts of the socialist governments. This far-reaching plan for the expropriation of savers, investors and retirees clearly shows the reality of socialism.

No change... no change. Draghi's back and, just like RBA's Stevens last night, is ready to talk (but not jawbone) his currency down; explaining that any day now we might - just might - unleash a treaty-busting monetization of more debt that won't actually reach the real economy but will provide more ammo for carry-traders to leverage longs in peripheral nations sovereign debt. Since the last ECB NIRP unleashing, things have got worse for Europe... but it will take time we are sure... just wait until H2 2014...

The holiday shortened, and very busy, week includes the following highlights: [on Monday] US Chicago PMI; [on Tuesday] US ISM Manufacturing, Construction Spending, and Vehicle Sales, in addition to a host of PMI Manufacturing in various countries; [on Wednesday] US ADP Employment, Factory Orders; [on Thursday] US Non-farm Payrolls and Unemployment, MP Decisions by ECB and Riksbank, in addition to various Services and Composite PMIs; [on Friday] US holiday, Germany Factory Orders and Sweden IP.

It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.

This week's "Things To Ponder" is focused on things that, in my opinion, far too many individuals are ignoring. Bob Farrell once wrote that "when all experts and forecasts agree; something else is bound to happen." Today, that is the case as much as it ever was. Despite rising geopolitical risks, weak economic data, deteriorating fundamentals and softer internals - the overwhelming belief is "equities are the only game in town." Of course, we have seen this mentality many times in past history whether it was 1929, 1987, 2000 or 2007. While every market peak was different, there were all the same.

Most market pundits have predicted higher bond yields (for months), yet unloved global fixed income securities have traded well all year. Even after the dovish FOMC reiterated its intent to maintain a highly-accommodative stance, bonds have stayed resilient. The main cause of market jitteriness might be that investors are beginning to sense the ‘time-inconsistency’ aspects of Fed policy.

Ahead of tomorrow's make-or-break FIFA World Cup game against Portugal, the Ghana "Black Stars" are not happy. Amid controversy over match-fixing, the players have demanded that the World Cup appearance fees they are owed be paid; and as Bloomberg reports, "The players insisted that they will want physical cash." The Ghanaian government has chartered a plane and the dollars are on their way to Brazil. Perhaps the players want to invest it in the latest grand idea - Ghana's first hedge fund has just been launched (prepare for more emails).

Long before there was a Greece (and its existential threat to world order), there was Dubai's sovereign crisis in 2009 with Nakheel; and Dubai World (the floating islands) faced with massive debt loads and interconnectedness were bailed out. Since then it's been nothing but ponies and unicorns... until now. The debt is all still there (and the interconnectedness)... and despite the mirage of wealth creation that equity's massive rally has created, the drop in Dubai's stock market we noted yesterday turned into a rout overnight as it dropped a further 8% as one of the countries largest companies (Arabtec - Dubai's largest builder) plunged after high-level executive dismissals. “This is indiscriminate selling,” Ramez Merhi, director of asset management at Dubai-based Al Masah Capital, said by e-mail. “The markets took the stairway up, and an elevator down.”

Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why does anyone take them seriously? Prakash Loungani, an economist working for the IMF, undertook a study (published in 2001 in the International Journal of Forecasting); there were no surprises in it. “The record of failure to predict recessions is virtually unblemished,” he reported. That was in 2001. Surely, by 2014, the experts had managed to stain their pathetic record with some success? Nope. Loungani and a colleague, Hites Ahir, took another look. They examined 77 different national economies, of which 49 were in recession in 2009. In 2008, how many economic forecasters saw the recessions coming a year later? Go ahead, dear reader, take a guess. The answer is zero.

As reported yesterday, The SCOTUS dealt a major blow to Argentina hopes it would avoid making payments on its "holdout" bonds when it enforced a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds headed by Elliott Management, best known for briefly seizing an Argentina ship in late 2012. The immediate result was a major rout in the country's sovereign bonds, which also sent Argentina CDS soaring. Sadly for Argentina, this would hardly be the end of it, and about an hour ago, Standard & Poor added insult to injury and lowered its long-term foreign currency rating on Argentina to CCC- from CCC+ citing a "higher risk of default on the country's foreign currency debt." As a result, yesterday's drop in bonds has continued, if at a more moderate pace, and the country's USD bond due 2024 hav continued to sink in intraday trading.  So what is next for the cash-strapped Latin American country for which the road ahead is suddenly quite "challenging" and default appears increasing like the only way out? For the answer we go to Citi's Jeffrey Williams who has laid out the five most likely developments.

The years-long court battle over Argentina's sovereign debt default appears to have ended... badly for Argentina (and apparently well for Elliott Management). As WSJ reports, the U.S. Supreme Court on Monday rejected Argentina's appeal (and mutually assured destruction threats that it "could trigger a renewed economic catastrophe with severe consequences for millions of ordinary Argentine citizens."; leaving in place a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds that refused to accept the country's debt-restructuring offers. Argentine USD bonds are down 10 points on the news ahead of President Cristina Fernandez addressing the nation at 9pm local time.

• Iraq Army Tries to Roll Back Sunni Militants’ Advance (BBG)
• Starbucks to Subsidize Workers' Online Degrees (WSJ)
• ‘Bitcoin Jesus’ Calls Rich to Tax-Free Tropical Paradise (BBG)
• Medtronic Is Biggest Firm Yet to Renounce U.S. Tax Status (BBG), Medtronic to buy Covidien for $42.9 billion, rebase in Ireland (Reuters)
• Oil Topping $116 Seen Possible as Iraq Conflict Widens (BBG)
• Putin Seeks Paris Landmark as Hollande’s Russia Ties Defy Obama (BBG)
• GM Says It Has a Shield From Some Liability (WSJ)
• BOJ’s Bond Paralysis Seen Spreading Across Markets (BBG)

This week’s news certainly WASN’T BORING.  Big events and small add up to unfolding CHAOS around the WORLD. This week’s subjects: American Empire on FIRE!,  Out on a LIMB: Credit Unions facing INSOLVECY,  Is rising indebtedness a sign of economic strength?,  Bond YIELDS continue to collapse as the race for yield INTENSIFIES,  George Orwell in Action, Showdown looming at the OK corral!,  Simply UNBELIEVABLE SOVEREIGN credit market action, PHANTOM GDP, Rare INDEED, Must watch video interview with Charles Nenner,European BANKING SYSTEM INSOLVECY

Last Thursday, the European Central Bank (ECB) took the historically unprecedented step of lowering certain of its interest rates below 0%. In a report immediately following the announcement, Peak Prosperity's Chris Martenson likened the move to the policy equivalent of dropping a neutron bomb. In the days following, despite the ECB attempting to clarify its stance further, many questions still linger; most notably: What exactly will the implications of this negative interest rate (NIRP) policy be? Alasdair Macleod lays things out in black as white as much as is possible; explaining exactly what steps the ECB is undertaking, what the most probable ramifications will be, and where the highest degrees of risk now lie..."The ECB now finds itself on the cusp of this failure. Remember, there are some very big banks with gearing over 40-50 times. All you need is a fall in prices of 1%, 2%, or 3% for a few companies to go bust, and then those banks are no longer solvent. It is a nightmare scenario. It really is."

The tidal patterns of this market have become so well-known to even the least observant: push the USDJPY (or other JPY carry pairs) higher starting around 6am Eastern, then ramp it just before US open to launch cross-asset momentum ignition algos in FX which then carry over to spoos and the broader "market." In the meantime, overnight selling of USDJPY allows a reset before ensuing buying during the US daytime session. Rinse. Repeat. Sure enough, just after 6 pm Eastern, the same USDJPY which catalyzed yet another all time high close had been sold off, leading to a 0.85% drop in the Nikkei and US equity futures which are showing an unprecedented ungreen color. Don't worry though: the pattern is too well-known and practiced by now, and we fully expect USDJPY levitation to pick up shortly, which is the only signal ES-algos need, trampling over any kind of newsflow both good and bad, and leading to yet another all time record high which it goes without saying is completely detached from any underlying reality at this point and at any time over the past 5 years.