Normal. 7bps instaswings in 10Y Treasury yields and 10 point S&P 500 e-mini futures (ES) dips and rips makes perfect sense. In a desperate bid to get back to VWAP and to hold off a fifth day of red closes in the cash S&P 500 (most in two months), equities were ramped up into the green in the last few minutes of the day only to be sold into hard (on heavier volume and larger average trade size) ending the day down 0.02 points at 1341.45. Quite a day as the 10Y auction and FOMC minutes made for a tempest in a teapot close to close (but cardiac arrests for many intraday). HYG (the high-yield bond ETF) was outperforming most of the day and provided the 'target' for the ramp at the end of the day as VXX dumped (thanks to a more-than 1 vol snap lower in VIX - sell that short-dated vol!!!) and TLT was stable. Oil's surge (inventories) accelerated as the USD leaked lower after its post-FOMC spike and Gold/Silver/Copper all pushed higher also. We can only assume that the post-FOMC drop of around 10pts in the S&P 500 was what many investors believe is enough to prompt swift action by the Fed to NEW QE - though between Oil's move and Treasury yields rising post the the auction (and more post FOMC), broad risk assets actually signal a slightly higher ES - though we suspect the utter collapse in cross-asset-class correlations is the signal that coordinated QE hopes are indeed fading and that the algos late-day reaction (rip) to Treasuries will be recalibrated to new reality soon enough. Cash S&P 500 ended up bouncing off its 50DMA and while ES ended the day +1.25pts, VIX dropped a much higher beta 0.75vols to close just below 18% - wth Treasury yields up 1-2bps by the close.
There are those who say gold may go to $10,000 or to $0, or somewhere in between; in a different universe, they would be the people furiously staring at the trees. For a quick look at the forest, we suggest readers have a glance at the chart below. It shows that just in the first five months of 2012 alone, China has imported more gold, a total of 315 tons, than all the official gold holdings of the UK, at 310.3 according to the WGC/IMF (a country which infamously sold 400 tons of gold by Gordon Brown at ~$275/ounce).
Last week it was the Fairness Distributor In Chief threatening China with WTO action over its unfair duties on US car imports. Before that it was Europe trying to protect its crumbling trade at all costs with its primary trade partner. Now, it is China's turn to retort to the world's beggars, and all those who just happen to ravenously import its iWares with the reckless abandon of a gadget junkie. FT reports: "Beijing has threatened swift retaliation against a range of European Union industries if Brussels presses ahead with an investigation into government subsidies granted to two Chinese telecoms equipment companies. The Chinese threat was delivered at a meeting with EU trade officials in Beijing late last month that was arranged at the behest of Chen Deming, China’s commerce minister, to try to defuse a brewing trade dispute that is straining commercial relations between the two sides. Instead, it collapsed into acrimony, with the Chinese warning their EU visitors that they would respond to any investigation of Huawei and ZTE Corp by probing subsidies granted to European agriculture, automotive, renewable energy and telecoms companies. “Put it this way: it’s not like they went for a beer after and watched football,” one person briefed on the meeting said." None of this is new: recall China Lays Out Conditions Under Which It Will Bail Out Europe; Does Not Want To Be Seen As "Source Of Dumb Money" in which Li Daokui "added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners." Looks like we can scrap those "China bails out Europe" (ignore the fact that the Chinese economy itself is imploding for a second) rumor in perpetuity.
It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. As Jefferies David Zervos writes this weekend, money-center commercial banks did not want the “truth” of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses. When there are only 16 players – a “gentlemen’s agreement” is relatively easy to formulate. That is the way business has been transacted in the broader OTC lending markets for nearly 30 years. The most bizarre thing to come out of the Barclays scandal, Zervos goes on to say, is the attack on the Bank of England and Paul Tucker. Is it really a scandal that central bank officials tried to affect interest rates? Absolutely NOT! That’s what they do for a living. Central bankers try to influence rates directly and indirectly EVERY day. That is their job. Congresses and Parliaments have given central banks monopoly power in the printing of money and the management of interest rate policy. These same law makers did not endow 16 commercial banks with oligopoly power to collude on the rate setting process in their privately created, over the counter, publicly backstopped marketplaces.
In a classic example of "speak of the devil", we were barely done with hitting save on our earlier article (in a series going back to 2011) describing the relentless (and innovative) machinations conducted by GM to perpetuate the myth of swift sales absorption when in reality it is nothing the age-old gimmick of channel stuffing, that we got notice that General Motors was being sued by a group of IPO investors (nursing losses of about 40%), for precisely this: "In connection with the IPO, and in order to assuage concerns that GM was predicting revenue based on production rather than actual sales, GM falsely assured investors that it was actively managing its production by monitoring its dealer inventory levels. Additionally, GM assured investors that in 2011 it would improve inventory management, which would improve average transaction price. These statements were false when made. In July 2011, reports began to surface that GM had engaged in an extraordinary inventory build-up. In particular, an article published by Bloomberg on July 5, 2011 revealed that GM may have been unloading excessive inventory on dealers, a practice known as "channel stuffing," in order to create the false impression that GM was recovering and sales and revenues were rising." Luckily, since this is a class action lawsuit, anyone else out there who bought GM on the belief that the company would not engage in precisely the behavior that we have shown month after month to occur, is invited to enjoin the plaintiffs and to sue the company that exists only courtesy of taxpayer generosity (and more importantly, courtesy of labor unions subverting priority rights in bankruptcy, in exchange for presidential votes). Finally, and if nothing else, this lawsuit will certainly force the general co-opted media to pay some more attention to a topic that is quite sensitive for the administration: the business model of the one company that the president is so proud and happy to have saved from the clutches of evil bondholders.
If you are reading this, you are probably a member of what the sociologists would term middle class (albeit at the upper end). This is precisely the segment of society which is poised to come off worst from what is coming. Here is a very disturbing idea. As this crisis develops, if you are an equity portfolio manager and you want to outperform the market, you are going to have to position your portfolio so that it benefits most from your own wealth destruction and that of your family, friends and colleagues. Almost everybody is going to lose and there aren’t many places to hide. This is deeply unpleasant but you can blame the central planners. I’ve written about my own investing, e.g. gold and silver, equities in terms of Maslow’s Hierarchy of Needs, etc. In this Thunder Road Report (below) and going forward, I will discuss this middle class theme and highlight positions I have in individual stocks, etc. The only good thing that can come out of this is a rise in awareness. It’s just awful.
The American Chemistry Council's chief economist Kevin Swift created a 'Chemical Activity Barometer' which tracks chemical production and prices, hours worked at producers, and manufacturing output among other factors. As indicated in today's Bloomberg Chart-of-the-Day, this indicator, based on its 'earliness in the supply chain' provides a signal that "the outlook for the economy is slowing during the next six to nine months" since 96% of manufactured goods are derived in part from materials produced by the US chemical industry. Three-month declines of 3% or more have preceded all but one recession since 1947 and it is currently down over 2.5% from its highs in March suggesting sub-par growth is coming.
The long anticipated downgrade of the recently bailed out Spanish banking sector has arrived. Moody's just brought the hammer down on 28 Spanish banks. Also apparently in Spain banks are now more stable than the country: "The ratings of both Banco Santander and Santander Consumer Finance are one notch higher than the sovereign's rating, due to the high degree of geographical diversification of their balance sheet and income sources, and a manageable level of direct exposure to Spanish sovereign debt relative to their Tier 1 capital, including under stress scenarios. All the rest of the affected banks' standalone ratings are now at or below Spain's Baa3 rating." Can Spain borrow from Santander then? They don't need the ECB.
That the most important man in Europe is actually a woman is now understood by everyone. Yet behind even Merkel, sits another man: German finance minister Wolfgang Schäuble, who is truly the devious mastermind behind the European endspiel, in charge of playing it in a way that benefits Germany uber alles. Which is why what Schäuble says, unlike anything uttered by Europe's "beggar" states, is actually important. Today, he speaks with Spiegel magazine and discusses, among many other things, the topic that is the most sensitive for the rest of Europe, and which must be overcome if a united Europe is to work: the abdication of national sovereignty, and implicitly the accession of Germany to the head of the European pyramid. That this will never happen is precisely why the European experiment is ultimately doomed, but of course they can keep trying, and in the process transfer as much wealth as possible to the only beneficiary from an imploding EUR. Wild guess who that is... Because at the end of the day, it appears that Schäuble is just as wily as America's own Rahm Emanuel: "SPIEGEL: With all due respect to your vision, is there truly more willingness today among EU member states to give up sovereignty than there was in the 1990s? Schäuble: The recognition that this is necessary, and the willingness to do so, has certainly grown due to the crisis, and not just in Germany. I would much prefer that we not have so many crises, and particularly not such severe ones. But every crisis also includes the opportunity to recognize what is necessary [regarding European sovereignty]. That's what led to the fiscal pact, in which 25 EU countries pledged to improve their fiscal discipline. And that's also how the new Europe will come about." Is it finally becoming clear to even the most inept financial journalists what the German endgame is?
There are two significant events that will be decided in the forthcoming days. Each will change the face of the European Union. The first is Greece; a little country with a total debt of $1.3 trillion and likely to default. The calculations in Athens are how to get more money out of Germany and the calculations in Berlin is whether a default is less costly, both politically and economically, than giving Greece more money. Debt forgiveness has never even been mentioned so I think we can rule out this possibility as it would have been floated by the German public for review and reaction. The Troika shows up Monday in Athens, they will find all targets missed, all promises unkempt and all hopes for salvation dashed upon the Greek floor along with the plates. The Greeks will beg and plead and threaten and the Germans will decide. In the end I think Greece will be allowed to stay in the EU to preserve the dream, that they will default, that they will return to the Drachma and that they will receive some kind of debtor in possession financing so that the country does not collapse. That is my best guess. Cheaper tourism and cheaper ships will help with their competiveness but it will be years before Greece is allowed back into the Eurozone as a voting member. The second item on the docket is Spain. They need a total of around $350-400 billion dollars to straighten out their banking system and their regional debt. Money lent to the banks in some fashion, not currently allowable under the various policies but you never know, or money lent to the sovereign to be lent to the banks will be just the first tranche of funding. It will be followed by more money lent to the regions of Spain which may take another novel approach but no matter. Spain is about to be run out of Germany no matter how all of the trivialities play out and so the impositions of the Men in Black are about to be put in place. So long to the importance of Madrid and thanks for all of the entertainment. You have been caught and are about to be hung out to dry and enjoy the ice wine that Germany will provide for your congratulatory dinner. Rajoy was right, a “Great Victory for Europe;” serving ice wine in Madrid.
Despite already being engaged in drone wars in Pakistan, Somalia, Yemen, and still occupying Afghanistan, the U.S. is being duped into yet another war based on shaky evidence and at the behest of deep-pocketed special interests. This is coming even while a secretive cyber war already being waged to damage Iran’s nuclear capability. According to the Pentagon, “computer sabotage coming from another country can constitute an act of war.” Not only that, but the draconian sanctions thus far placed on Iran are doing enormous harm to the citizens who hardly have a say in what their government does. The Belgium-based SWIFT payment system that facilitates most international payments has already denied service to many Iranian banks. With the imposing of an oil embargo from the European Union just around the corner (July 1st) that will all but make it impossible for oil tankers to be insured by Lloyd’s of London, an actual naval blockade is being floated by U.S. lawmakers. Much like the Antebellum South and Japan, Iran too is being pushed into a corner.... Then and now, wealthy special interests are a driving force behind American imperialism. Lies will be spun till they are seen as facts. When the truth comes out, the irreparable damage will already be done. Like anything the state lays its filthy hands on, war is a racket. The beneficiaries of the ruling class’s gleeful foray into mass murder are few in number. The masses, still brainwashed into feverish nationalism, end up paying the costs with their pilfered income, eroded liberty, and, ultimately, their own lives.
The announcement by the UK Treasury and BoE to take co-ordinated steps to boost credit and with the central bank re-activating its emergency liquidity facility has resulted in a sharp move higher in UK fixed income futures. GBP swaps are now pricing in a cut of 25bps in the base rate by the end of this year and following on from Goldman Sachs, analysts at Barclays and BNP Paribas are now calling for an increase in QE next month. The new measures have seen the likes of Lloyds Banking Group (+4.3%) and RBS (+7.0%) outperform the more moderate gains observed in their European counterparts. Meanwhile in Europe the focus remains on the possibility of co-ordinated action from the major central banks. However, it would seem more realistic that any new measures will likely come after the Greek election results are known and once ministers have conducted their G20 meetings. Given that there is an EU level conference call this afternoon scheduled for 1500BST the likelihood of rumours seem high but as the wires have indicated already these conversations are purely based upon co-ordination ahead of the meeting which is usual practice. The yields in Spain and Italy have been a lot calmer so far with the 10yr in Spain at 6.88%, off the uncomfortable test of 7% seen yesterday.
Market Turbulence As Global Economies Falter: The European debt-crisis, the derailing of Chinese economic growth and an underemployed United States all point toward a “global crunch”.