Sovereign Debt

Emergency resolutions and legislation would be likely in many countries in the event of another Lehman Brothers collapse and another global credit and financial crisis. 

Particularly vulnerable banks in each country are....

The WSJ has revealed the latest developments of tomorrow's "fluid" Volcker Rule vote on prop trading:

• Volcker Rule Will Bar Compensation Arrangements That Reward Proprietary Trading, Rule Text Says
• Rule Will Exempt Foreign Sovereign Debt From Proprietary Trading Ban, According To Rule Text Reviewed By Wall Street Journal

In other words, prop trading itself will not be explicitly barred, just associated compensation (and banks can still buy as much Italian and Spanish bonds for their accounts as they want). Which means banks can engage in as much prop trading as they wish (which courtesy of $2.4 trillion in excess deposits aka excess reserves is a lot) and bang as much VIX closes as they desire, they just need to have trader bonus "arranagements" to be tied to something else. Like make-believe flow trading which can be manipulated to show anything and everything.

"Just be long. Pretty much anything. So here’s how I understand things now that I am no longer the last bear standing. You should buy equities if you believe many European banks and their sovereign paymasters are insolvent. You should buy shares if you put a higher probability than your peers on the odds of a European democracy rejecting the euro over the course of the next few years. You should be long risk assets if you believe China will have lowered its growth rate from 7% to nearer 5% over the course of the next two years. You should be long US equities if you are worried about the failure of Washington to address its fiscal deficits. And you should buy Japanese assets if you fear that Abenomics will fail to restore the fortunes of Japan (which it probably won’t). Hey this is easy… And then it crashed"

- Hugh Hendry

In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming  under further scrutiny on their lending/accounting practices - the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something - something which the ECB, whose currency is at a 4 year high against Japan, may not like.

Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.” Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. The illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy.

This morning has seen a plague of talking-head-based soundbites propagated through the mainstream media as 'fact' and actionable. One that caught our eye, from none other than "largest asset manager in the world" Larry Fink of Blackrock, simply beggared belief:

• *FINK SAYS JAPANESE INVESTORS QUESTIONING INVESTING IN U.S. DEBT

As we recently noted, the Japanese bond market is now dead (for all intent and purpose) but a glance at the following chart of credit reality suggests those Japanese investors might stop to reflect a little on their own reality...

While today's big event is the October Non-farm payrolls print, which consensus has at 120K and unemployment rising from 7.2% to 7.3%, there was a spate of events overnight worth noting, starting with Chinese exports and imports both rising more than expected (5.6% and 7.6% vs expectations of 1.9% and 7.4% respectively), leading to an October trade surplus of $31.1 billion double the $15.2 billion reported in August. This led to a brief jump in Asian regional market which however was promptly faded. Germany also reported a greater trade surplus than expected at €20.4bn vs €15.4 bn expected, which begs the question just where are all these excess exports going to? Perhaps France, whose trade deficit rose from €5.1 billion to €5.8 billion, more than the €4.8 billion expected. Of note also was the French downgrade from AA+ to AA by S&P, citing weak economic prospects, with fiscal constraints throughout 2014. The agency added that the country has limited room to maneuver and sees an inability to significantly cut government spending. The downgrade, however, was largely a buy the EURUSD dip event as rating agencies' opinions fade into irrelevance.

Yeah, I know... It's different this time!

It was the deep of illiquid night when the momentum ignition trading algos struck. Out of the blue, a liftathon in all JPY crosses without any accompanying news sent the all important ES leading EURJPY surging by 50 pips, which in turn sent both the Nikkei up over 1% in minutes, and led to an E-Mini futures melt up of just about 8 points just when everyone was going to sleep. All of this happened completely independent of the actual data, which was chiefly European retail sales which missed (-0.6%, Exp. 0.4%, prior revised lower to 0.5%), Eurozone Service PMI which dropped (from 52.2 to 51.6) but beat expectations of 50.9 (notably the Spanish Service PMI of 49.6, up from 49.0 saw its employment index drop from 46.5 to 45.3, the lowest print since June), and finally, German Factory Orders which surged from last month's -0.3% to +3.3% in September. And while all this impacted the EUR modestly stronger, it had little if any residual effect on the ES. The bigger question is whether these slightly stronger than expected data point will offset the ECB's expected dovishness when Mario takes to the mic tomorrow).

• Investors are stampeding into initial public offerings at the fastest clip since the financial crisis (WSJ)
• Kerry hails disgruntled Saudi Arabia as important U.S. ally (Reuters)
• SAC Capital prepares for a second life (FT)
• BlackBerry's Fate Goes Down to the Wire (WSJ)
• Dutch Gamble on U.S. Housing Debt After Patience Wins (BBG)
• U.S. Wants Broad Divestitures From AMR, US Airways (WSJ)
• Tensions with allies rise, but U.S. sees improved China ties (Reuters)
• China berates foreign media for Tiananmen attack doubts (Reuters)
• China manufacturers squeezed as costs rise (FT)
• European Borders Tested as Money Is Moved to Shield Wealth (NYT)
• Zurich Probe Finds No ‘Undue Pressure’ Put on Late CFO (BBG)

How do we get a fundamental change away from this extend-and-pretend which prevails not only in Europe but also the world? History tells us that we only get real changes as a result of war, famine, social riots or collapsing stock markets. None of these is an issue for most of the world - at least not yet - but on the other hand we have never had less growth, worse demographics, or higher unemployment since WWII. This is a true paradox that somehow needs to be resolved, and quickly if we are to avoid wasting an entire generation of youth. Policymakers try to pretend we have achieved significant progress and stability as the result of their actions, but from a fundamental point of view that’s a mere illusion..

March 18, 1996. It was the height of the dot-com boom years. And gracing the cover of Fortune magazine was a photo of a rather smug looking Alan Greenspan, then Chairman of the US Federal Reserve.  The headline across the top-- "It's HIS economy, stupid". The inside story was entitled "In Greenspan We Trust".  And the article went on to suggest that, no matter WHO won the presidential election that year between Bill Clinton and Bob Dole, Greenspan would still be running the economy. And handily.  This is a major testament to the state of our financial system. We award a tiny banking elite nearly totalitarian control over our money supply... and by extension, the economy.  We're just supposed to trust that they're good guys. Competent guys. That they know what they're doing.  Fast forward almost two decades. Long Term Capital Management. The NASDAQ bubble. The real estate bubble. The credit crunch. The mortgage crisis. The banking crisis. The sovereign debt crisis.

Across the board, we are seeing European bank stocks (most notably Italian) trading halted. The 5-7% plunge in prices - just when everyone is proclaiming victory in Europe - reflects an apparent concern that the tougher-than-expected European bank stress-tests will expose the Italian banks for the bloated sovereign debt issuance soaks that they have become. As Draghi himself noted, in a desparate plea to maintain some credibility "banks do need to fail" to prove the credibility of the exercise, adding "if they do have to fail, they have to fail. There’s no question about that.". Spain is also under pressure and it would appear the "smart"money that chose to catch some knives in Greek banks may just lose more than one finger...

It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments.

The Bank of Japan will, for the first time in history, "own" all of Japan's GDP on its balance sheet some time in 2018 when its "assets" as a percentage of GDP surpass 100%, and then proceed in linear fashion to add about 10% of GDP to its balance sheet with every passing year until everything inevitably comes crashing down.