The ascendency of behavioral economics over its “Classical” cousin is one of the more notable effects of the market turmoil of the last five years. Simple constructs like “Every marginal dollar has utility” have given way to more nuanced explanations that incorporate how human beings really make decisions about the tradeoffs between money and deeply held emotions and beliefs. But even with this realization, academia still seems to have a choke hold on the studies that expand our knowledge of this new discipline. Nic Colas, of ConvergEx, adds to the discipline’s canon with some examples of common street scams around the world. The comparisons he makes to recent events in the capital markets are fairly obvious, whether they be failed IPOs or the strategies used by weaker sovereign nations to negotiate with stronger ones. The point here is not to call out anyone as inherent ‘Criminal.’ There are plenty of laws – and diligent regulators - surrounding the capital markets, after all. Rather, the examples here are simply a lens that allows us to examine the nuances of human behavior with greater understanding. As the old saying goes, 'The proper study of mankind is man.' Even when it is a con man. And in the case of behavioral economics, perhaps especially so.
The state purports to represent the people when all it does is leech off their labor in order to commit crimes at home and abroad. Under the auspices of keeping democracy safe around the world, the foreign policy of the U.S. government has been one of bombing, killing, and overall domination. Meanwhile, anti-American sentiment continues to spread by instances such as the C.I.A. targeting civilian responders to drone strikes who attempt to aid those who were attacked. In some cases, the C.I.A. even launches drone attacks at the mourners in funerals held for those in earlier strikes. These are the measures under which the American people are told they are being kept safe. What would be constituted as war by any other nation is not so when carried out by the U.S. government. But it’s all just another facade through which Washington pretends to serve the people when in reality it puts them in even more danger.
Three months ago, just when things looked like they were about to turn south, the Fed's trusty mouthpiece, Jon Hilsenrath, made it clear that the market can stop falling as the Fed was "considering" sterilized QE, or more Twist, something we explained later would be impossible in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: "Fed Considers More Action Amid New Recovery Doubts." And as it has been leaked (now that people have actually done the appropriate math), so it shall be.
Sometime in 2042 the CBO will need a bigger chart to represent US public debt because per the just updated Extended Alternative Fiscal Scenario, which the CBO itself admits " is more representative of the fiscal policies that are now (or have recently been) in effect than is the extended baseline scenario," this is when it literally falls off the chart. And it is to ridiculous debt load that Keynesian lunatics want to add MORE debt? Actually why not, it is not as if the US will ever repay any of these exponentially-rising obligations.
First Moody's cut the most prominent Austrian banks, and now it is Germany's turn, if not that of the most undercapitalized German bank yet: "The ongoing rating review for Deutsche Bank AG and its subsidiaries will be concluded together with the reviews for other global firms with large capital markets operations." Punchline: "Frankfurt am Main, June 06, 2012 -- Moody's Investors Service has today taken various rating actions on seven German banks and their subsidiaries, as well as one German subsidiary of a foreign group. As a result, the long-term debt and deposit ratings for six groups and one German subsidiary of a foreign group have declined by one notch, while the ratings for one group were confirmed. Moody's also downgraded the long-term debt and deposit ratings for several subsidiaries of these groups, by up to three notches. At the same time, the short-term ratings for three groups as well as one German subsidiary of a foreign group have been downgraded by one notch, triggered by the long-term rating downgrades."
For the first time on record (based on Bloomberg's data) 5-year / 5-year forward inflation expectations turned negative today. This kind of deflationary impulse has occurred twice in recent years and each time has been accompanied by dramatic Federal Reserve easing. The anticipation of the move by the Fed has caused Gold each time to surge higher on yet more expectations of the fiat-fiasco unwinding. Given the 5Y5Y inflation print currently, we would expect action from the Fed and one could argue that this would cause the price of Gold to rise to $2200 per ounce as the deleveraging continues.
At this moment, the news media is constantly clamoring about the "Three Ds" that are buffeting the markets: debt, deleveraging, and deflation. We intuitively sense that they're linked -- but how, exactly? Understanding this linking is critical; as debt has fueled the global expansion, it will also dominate its contraction. To illustrate the forces of debt and deleveraging, let’s consider a home mortgage....
Cash and Futures S&P 500 managed to close back above the 200DMA after a dismally low-volume melt-up supported by a reversion to fair-value in HYG but diverging from most other asset classes. Having pulled away from Treasuries, Gold, and the USD, stocks (led by financials) roamed higher on lower and lower comparable volumes to manage their best gain in a week with a generally low average trade size overall. Credit markets were quiet and reluctant to follow stocks but were reracked up (though IG underperformed HY's exuberance). However, the pop in JNK and HYG dragged them from the quite notably cheap levels they were at up to their intrinsic value and they anchored there (so not really a confirming strong rally). HY and HYG are in line also. Oil and Copper dropped early and then leaked back higher for the rest of the day as Silver and Gold end close to unch for the week - with the USD also close to unch as EURUSD round-tripped its gains from yesterday. Treasuries lagged the move in stocks but leaked higher in yield also in the afternoon - except notably 5Y which outperformed (reminding us of the 7Y outperformance aberration yesterday) as we suspect end-of-Twist is being priced in. After the day-session close, ES limped back towards VWAP on heavier volume and average trade size but didn't make it as we note VIX fell back below 25% (down 1.25 vols today) ending the day a little rich still to equity/credit fair-value. Lots of rumor-driven knee-jerks today but once the momentum had set in for stocks, we limped along to crack that 200DMA giving hope before Draghi's reality check tomorrow - though we note that ES stopped almost perfectly at Friday's closing VWAP (as did the major financials).
As a guy who is living in a taxpayer-funded villa after his bank-insurance-derivatives-hedge fund-ponzi company blew up, we know Benmosche is a hypocrite. In my view, management should be held personally liable a long time before taxpayers. That’s right, I believe in personal responsibility and that means no hiding behind limited liability and bailouts, no matter how “systemically important” you claim to be. But let’s set aside disgust at government for first setting up this scenario via Gramm-Leach-Bliley, and then in 2008 throwing money at hypocritical grifters like Benmosche.
Is he wrong about social security and medical services?
As we look forward to tomorrow's scorched-earth policy-fest from Draghi-et-al., Jefferies' David Zervos, in his typically understated manner, notes "I love the smell of napalm in the morning. We are back in the kill zone - Apocalypse Europe." There will be no more strategizing, no more war games, no more speeches imploring the politicians to act. This is the real deal - a full scale European led global financial crisis that requires immediate and aggressive response from the only entities with the authority to act in the world financial "theatre". We should all keep in mind that the Europeans have not been able to generate an effective response to their debt/deflation crisis as of yet, and of course it is having global consequences. This is why we are here again looking into the deflationary abyss. The ECB was only set up with a price stability mandate, and its leaders are hence much more constrained than Federal Reserve officials. Simply put, the European armies were not set up with effective weapons.
In keeping with our long history of noting every handle change in Failbook, we just passed into the $25 range (heavy volume came throuygh as we touched $25.88). With a post-IPO VWAP at $34.85, that's a 25% drop from the average trade alone and volume remains active (over 30mm shares today). Calls are slightly ahead of Puts today but Open Interest remains biased to 6:5 in favor of Puts.
Recent housing data have been generally been encouraging. However, the large number of residential properties that are "underwater"—meaning the borrower owes more on the mortgage than the property is worth—casts a long shadow on the sustainability of the housing recovery. Goldman estimates that approximately 10 million properties are currently underwater. Although this number has not changed much during the past three years, there is much divergence across the nation: California, Michigan, and Arizona, for example, experienced significant improvement, while Georgia, Utah, and Missouri saw many more properties falling underwater during this period. Given that there are 3 million first-lien mortgages that have LTVs of 125% or above as of April 2012, whether or not a large fraction of these mortgages will default in the near future has important implications for the housing market recovery.
Just when Spain thought that by admitting it is broke, Germany would finally turn a blind eye and let it have whatever money it requested directly at the bank level, instead of boosting its sovereign leverage even more, thus putting it at risk of long, long overdue Moody's and Fitch downgrades, here comes the Germany, adding insult to humiliation. From the FT: "The parliamentary leadership of Germany’s ruling Christian Democrats – the majority party in Angela Merkel’s centre-right coalition government – has flatly rejected the use of eurozone rescue funds to recapitalise Spanish banks directly. Instead they called on the Spanish government on Tuesday to decide urgently whether it will seek money from the €440bn European Financial Stability Facility according to the fund’s normal rules, requiring agreement on a proper rescue programme negotiated with its European partners." In other words Germany has laid out the choice: bail out your banks with our help, and be downgraded, pushing Spanish sovereign yields into the 7%+ range, or do nothing, and prepare to hand out an infinite amount of Spiderman beach towels.