Something strange has been happening in India in the last year: while the rest of the "developed" world has been doing all in its power to crush its currency in order to promote exports within a globalist mercantilist system suddenly gone haywire, India has had the opposite problem: with its economy slowing down even as rampant inflation persists, its currency has been sliding against all other currencies. But probably more importantly: plunging against gold, as can be seen on the chart enclosed. It appears that finally after months of "being long of Gold in Indian Rupee terms" having proven to be quite a resilient and profitable strategy, the Indian state has also figured it out. And they are unhappy. Because to them, the key reason for the rupee weakness has nothing to do with the actual economy, and all to do with the Indian population trying to protect against currency debasement coupled with inflation: i.e., purchasing gold. And they will no longer allow it.
In an excellent summary of the world's interconnected nature, reliance on everyone else to solve their problems, and Europe's epicentric catastrophe, Nouriel Roubini joined Bloomberg TV's Tom Keene for some serious truthiness and doomsaying. From the 'slowdown/recession becoming a depression' to 1930s CreditAnstalt comparisons and Germany's lack of trust that a few years of abstinence will regain peripheral Europe's virginity, the original Dr. Doom along with Ian 'G-Zero' Bremmer offer much food for thought as to the various scenarios as investors anxiously await an expected central bank response to the 19th failed summit and how "we will be lucky if we end up like Japan" as he concludes: "It’s getting worse, there’s already a sovereign debt crisis, a banking crisis, a balance of payment crisis, an economic crisis and all of those things together are getting worse."
Germany keeps being told that it must pay up to save the euro. But how much can Germany pay? No-one seems to have thought about that, but there is already concern about the possible size of bill – German bond yields rose soon after news of the Spanish bail out, even before it was announced where the money was going to come from. (And it was of course a bail out for Spain, regardless of what Spain’s prime minister says. If I borrow money and then lend it to someone else I’ve still borrowed it.) There is though a more basic question. How much does it make sense for Germany to pay? What sort of bill would it be reasonable to present to them? In fact the best approximation one can arrive at is a bill of zero. Why zero? What about all these exports that have been produced because Germany has a currency whose value is determined not just by Germany but also by less productive, higher cost, economies? That link has artificially depressed the prices of German exports. These net exports resulting from Germany’s Eurozone membership are actually the problem.
The two presidential candidates may be neck and neck in most (un)popularity polls, and according to some metaphorical sources are even the same person just with different Wall Street backers, but when it comes to the critical topic of resisting an alien invasion, Obama is far better prepared, according to two thirds of the population.
Another interestingly odd day. One of the lowest (non-holiday) volume days of the year but a big pick up in average trade size as the S&P 500 e-mini futures shrugged off Treasury strength, USD strength, and Gold's somnambulism seemingly led by an energy sector focused on only one thing - the bounce in WTI. Copper also drifted higher even as the USD leaked modestly higher (as assume the two got some hopium-infusion from China RRR cut rumors early on and sustained momentum as liquidity disappeared in many risk markets. Credit once again was a split-decision with the CDS markets underperforming (and notably thin from our discussions) while HYG (high-yield bonds) decided to lead the way (also on one of its lowest volume days of the year). Treasuries remain in a tight range over the last few days, as EURUSD limps lower, but VIX had a high vol day with its move higher in the face or rising stock prices (up to 20% vol at one point) providing some ammo for the late day surge in stocks as it was sold hard to close -0.25 vols only around 19.5% (as implied correlation broke 71% before plunging into the close).
While it is seeming common knoweldge that the state of the economy has a significant bearing on the outcome of the presidential election in the US, Barclays notes that in the case of an incumbent running, economic performance appears to be most important. The three presidents who failed in a re-election bid in the post-war period (Gerald Ford in 1976, Jimmy Carter in 1980 and George Bush, Sr. in 1992) did so against a backdrop of weak growth, high unemployment, and low consumer confidence. These same factors all pose significant headwinds to the current incumbent. To overcome them, history suggests that unemployment would need to keep trending down and consumer sentiment would need to strengthen prior to the vote in November.
Game Over for the once high flying hedge fund manager: "“Today’s charges read like the final exam in a graduate school course in how to operate a hedge fund unlawfully,” said Robert Khuzami, Director of the SEC’s Division of Enforcement."
The last few minutes of the European day ended with a resplendent surge in stock prices in the face of sideways to wider credit markets and deteriorating sovereign and FX markets. Not to be outdone, US equities remain in a world of hope of their own today having disconnected shortly after the US day-session open as Treasuries, Gold, and the USD have all moved in a more derisking mode. Also, despite S&P's 0.6% gain, VIX has just pushed higher into the green for the day.
Cliff Asness, head of the quant hedge fund AQR, has been known to be a vocal opponent of various failed governmental policies in the past few years. Today, he has shared his "dictionary" (of "humorous" persuasion as he himself notes, with definitions "written sarcastically as a faux left-winger, some just conservative/libertarian interpretations of what the left really means.") of the key terms dominant in Progressive America right now. In a world in which other people's money has pretty much run out, and ahead of a rather historic Supreme Court ruling tomorrow, we believe some of these are quite relevant.
Earlier we noted that while the rhetoric on a European debacle is particularly negative, it appears positioning for it is actually considerably less bearish in FX markets. From a credit perspective, based on Citi's investor survey, it appears we have a similar picture of breathless anticipation and front-running of some central-planning solution to save the day. As they note, almost all respondents expected spreads, even in USD credit, to widen notably in the event of Spanish and Italian bond yields continuing to crack higher; and yet there was relatively little change in investors' overall net long position - and in USD credit it actually increased. One piece of reality is in European banks where real-money remains notably underweighted, and while leveraged money (hedgies) remains overweight, they have reduced their exposure somewhat recently. Leveraged accounts have reduced their short positions recently in peripheral Europe while real-money accounts are still avoiding it like the plague. The point being that fast money is certainly not going to be the ammo for a short-squeeze in European credit (or FX) that everyone appears to believe it to be.
There was nothing pretty about today's 5 Year auction, which confirmed the trend of weak bond auctions started with yesterday's 2 Year issuance. Pricing at 0.752%, superficially it was only the second lowest yield ever for a 5 Year bond. However, with the When Issued trading at 0.734%, the tail was surprisingly wide for US paper which had not seen a such a big miss from market implied prices in many months. Add the Bid To Cover of 2.61, which was the lowest since June 2011, and things start to get really ugly. Finally observe the take down which saw Indirects account for only 35.1% or the least since February 2011, forcing Directs to load up with even more paper they don't want or need courtesy of the Twist extension through year end (meaning Dealers are stuck buying up all the Fed's unwanted paper in the short-end), forcing them to take down 54.1% of the auction, or the most since February 2011 also, and one can see why Rick Santelli gave the auction a barely passing grade of D. And with these two auctions, and tomorrow's 7 Year issuance, net US debt will be a solid $50 billion greater next week when all the bonds price, and rapidly on its was to $16 trillion, which should be breached in just under 6 weeks time.
Because once you pop, you can't stop.
It's another one of those hope-fueled days in Europe as European stock indices across evey nation close comfortably in the green as the EU Summit begins. Germany has taken all the substantive things off the table and Cyprus and Portugal threw in the towel but nevertheless, stocks are 1-2.5% higher (with Italy and Spain outperforming). We assume this is reflexive pricing of 'the crisis is now so scary that the ECB will have to do something' but it seems the FX and Sovereign bond market missed that pre-emptive hope-driven view as Portugal yields/spreads spiked, Spain pushed back up to 6.93% and saw further flattening in its yield curve (as short-dated LTRO-enthused bonds underperform dramatically) as 2s10s is almost back to six-month pre-LTRO levels. Italian spreads pulled off their worst levels to close mixed but remains over 40bps wider on the week. EURUSD closed down over 35 pips at 1.2450 and stocks were in a world of their own also relative to credit markets today.
Europe faces three systemic risks: Sovereign (GRExit vs. GERxit), Liquidity (unsustainable refinance rates and foreign capital outflows), and Banking (insolvency and under-capitalization). All of these can fundamentally be traced back to an era of excessive over-indebtedness, which as Pictet notes, leads to required deflationary policy responses that are incompatible with developed market government targets (of re-election, Keynesian pro-growth fiscal policy, and satisfying financial market's expectations). While LTRO did indeed address liquidity risk in the very short-term, it is now painfully clear (just look at European bank stock prices) that financials are driven by sovereign risk (not so much liquidity risk) at the margin. The following three charts provide a roadmap to Nirvana or Samsara (hell). With the Summit underway, Pictet's path to catastrophe roadmap (tactical and strategic) is critical to comprehend.