Goldman Slams Abenomics: "Positive Impact Is Gone, Only High Yields And Volatility Remain; BOJ Credibility At Stake"Submitted by Tyler Durden on 06/18/2013 11:16 -0400
While many impartial observers have been lamenting the death of Abenomics now that the Nikkei - essentially the only favorable indicator resulting from the coordinated and unprecedented action by the Japanese government and its less than independent central bank - has peaked and dropped 20% from the highs, Wall Street was largely mum on its Abenomics scorecard. This changed overnight following a scathing report by Goldman which slams Abenomics, it sorry current condition, and where it is headed, warning that unless the BOJ promptly implements a set of changes to how it manipulates markets as per Goldman's recommendations, the situation will get out of control fast. To wit: "Our conclusion is that the positive market reaction initially created by the policy has been almost completely undone. At the same time, a lack of credible forward guidance for policy duration means that five-year JGB yields have risen in comparison with before the easing started, and volatility has also increased. It will not be an easy task to completely rebuild confidence in the BOJ among overseas investors after it has been undermined, and the BOJ will not be able to easily pull out of its 2% price target after committing to it."
It is all too easy to dismiss endless charts showing long-run correlations that have become useless in the current liquidity-fueled boom in stocks and real estate in the US with the "well, correlation is not causation" meme, but in Spain, we suspect, few will argue that the relationship between the surging unemployment rate of the OMT-bound nation and its delinquent loan growth is hard to argue with. With both at record highs (and the latter picking up once again after a temporary haitus of seeming banking delays offered some hope), it appears the southern European nation is going from worse to worst.
A mixed picture is starting to emerge from the Middle East in terms of oil production. Several members of the 12-member OPEC oil cartel are embroiled in turmoil or struggling to ensure post-war political gains. Oil production from the Middle East declined by 1.5 million barrels per day in 2009. Production from most Middle East countries has slowed down or leveled off, though gains from Iraq have offset some of those declines. With economic recovery seemingly on the horizon, a new OPEC may be developing from the ashes of the recession.
The FX and precious metals markets are swinging wildly around this morning (amid no news) as US equities remain anchored to hope (and VWAP) ahead of the FOMC tomorrow. Copper is also sliding quickly but WTI is back above $98 as the USD gets back to unchanged on the week. Treasury yields spiked early but have reverted to unchanged now. Credit markets have done nothing but widen (worsen) from the open this morning - also ignoring equity's stability - but hedgers are active as VIX remains higher on the day.
Starting momentarily, the Director of the National Security Agency, General Keith Alexander, will again testify on the Hill, this time before the House Permanent Select Committee on Intelligence about the value of the NSA surveillance program and the extent of the damage caused by leaks of top secret data. More importantly, as CNN reports, he is expected to reveal two previously classified cases in which secret surveillance programs thwarted terrorist plots. Supposedly this is to demonstrate that "inconveniencing" the general public by quietly taking over its privacy in order to preserve its "security", has positive results as well. Alas, preventing the Boston Bombing is not among such examples.
"Recent bouts of positive correlation between equities, bonds and commodities suggest that the Fed’s stimulus inflated prices of financial assets, and removal of the stimulus could create a tail event in which prices of most of assets could go down. To reduce this risk, investors could diversify ‘safe haven’ assets away from treasuries and into other assets that are at lower risk in case of tapering. For instance, investors could increase allocations to equity index put options.... we think that the quick increase of net margin debt, and high ratio of margin debt to S&P 500 do point to an increased probability of a market correction and volatility increase in the second half of the year." - JPMorgan
Derivative Losses, Bad Bets, And Aggressive Assumptions Leave Detroit's Pensions Massively UnderfundedSubmitted by Tyler Durden on 06/18/2013 09:52 -0400
Late last week, Detroit's emergency manager Kevyn Orr, outlined his plan to stop a disaster becoming a catastrophe in the slumping city. The initial suspension of payment on pension obligation bonds is just the start as Orr warns unsecured creditors may only receive up to 10 cents on the dollar as about $2.5 billion in general unsecured debt won't be recovered. Rather incredibly, the city's General and Police and Fire retirement systems have a combined underfunding of $3.5 billion made worse by "aggressive actuarial assumptions," and "investing in risky development projects around the city and loans that will never be repaid." Under more realistic assumptions the funding status of the two pensions drops from 83% and 100% to 65% and 78% and he notes that "if these pension funds' assets had just been invested in a conservative way," as opposed to the political and reach-for-yield driven extravagance, "they probably would be fully funded now." The bottom line is not just creditor haircuts but,"significant cuts in accrued, vested pension amounts for both active and currently retired persons."
Anyone holding substantial deposits (read over $/€100,000) in G-8 banks: consider this your formal warning All data about such deposits will soon be shared among all "developed" countries, and any (every) country which needs to "resolve" its failing banking sector will use the Cyprus bail-in model and use "tax evaded" deposits to provide a liquidity buffer to its crumbling, and NPL-impaired assets. Oh, and what insolvent socialist manifesto can be released to the public without at least one mention of the phrase "fair taxes." Welcome to the second ComIntern, this time with extra global oomph.
It started off a simple protest in Sao Paulo as a demonstration by students against an increase in bus fares from R$3 to R$3.20, and then quickly morphed into general demonstration of discontent with the nation’s political classes on both sides of the spectrum involving over 200,000 across the country, with those marching on Monday holding placards decrying everything from the enormous sums spent on the World Cup to the treatment by police of protesters last week. It got to the point where protesters invaded and occupied, peacefully, the roof of the national Congress complex in Brasilia. Then things turned less peaceful when a breakaway group from the main rally in Rio de Janeiro attacked the state legislative assembly building and attempted to set it on fire.
Hedonically-adjusted inflation is in check, and the housing "recovery" is in doubt: the perfect cocktail for Bernanke to announce no tapering... Or to shock the world and in just over 24 hours say that as we prepares to wave bon voyage he will start to reduce the liquidity injection into the markets as he has been warning for the past 3 months.
When the S&P, always so conveniently ahead of the curve, yesterday revised its forecast for Europe from growth in the second half of 2013 to 2014 one couldn't help but golf clap, as well as wonder if they finally started looking at the fundamental depressionary reality on the ground instead of the rating agency's infamous "models." A depressionary reality confirmed by the latest car sales number for May which just hit a fresh 20 year low.
- Obama Says Bernanke Fed Term Lasting ‘Longer Than He Wanted’ (Bloomberg)
- Merkel Critical Of Japan's Credit Policy In Meeting With Abe (Nikkei)
- China Wrestles With Banks' Pleas for Cash (WSJ)
- Biggest protests in 20 years sweep Brazil (Brazil)
- Pena Nieto Confident 75-Year Pemex Oil Monopoly to End This Year (Bloomberg)
- G8 leaders seek common ground on tax (FT)
- Putin faces isolation over Syria as G8 ratchets up pressure (Reuters)
- Former Trader Is Charged in U.K. Libor Probe (WSJ) - yup: it was all one 33 year old trader's fault
- Draghi Says ECB Has ‘Open Mind’ on Non-Standard Measures (BBG)
- Loeb Raises His Sony Stake, Drive for Entertainment IPO (WSJ)
There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.
Eventually the money runs out. Much of America was shocked when the city of Detroit defaulted on a $39.7 million debt payment and announced that it was suspending payments on $2.5 billion of unsecured deb. Anyone with half a brain and a calculator could see this coming from a mile away. But people kept foolishly lending money to the city of Detroit, and now many of them are going to get hit really hard. But what Detroit is facing is not really that unique. In fact, Detroit is a perfect example of what the future of America is going to look like. We live in a nation that is rotting, decaying, drowning in debt and racing toward insolvency. Just like Detroit, a day is rapidly approaching when America will not be able to kick the can down the road anymore. Sadly, our politicians don't seem inclined to do anything about it and most of the population seems to think that our exploding national debt is not a significant problem. By the time it becomes clear how wrong they were, it will be far too late to do anything about it.
When over four years ago we put together our "How To [Read/Tip Off] Zero Hedge Without Attracting The Interest Of [Human Resources/The Treasury/Black Helicopters]" Guide", many thought we were being paranoid. We weren't, as last week's revelations by Edward Snowden demonstrated to the entire world. And yet, besides those from the intelligence community, few realized just how deep the reach of the Turnkey Totalitarian Tyranny ("TTT" or the Orwellian Banana Republic) truly goes. So as the Snowden enthusiasm spreads and more and more insiders with intimate knowledge of the broken system step up to expose the unconstitutional actions and illegal deeds that occur each and every day in the dark corner of US society well on its route to inevitable dissolution (ref USSR and WB Yeats), the question arises: how to do it - How to leak information to the press and other distribution agents without tipping off the very espionage agency at the nexus of it all? Luckily while information may be intercepted at every electronic turn, it still is largely free (at least until the advent of the Internet kill switch). So for all you wannabe Snowdens out there, here from Wired's Nicholas Weaver, is the perfectly timed "The Whistleblower’s Guide to the Orwellian Galaxy: How to Leak to the Press", which should answer all the 30,000 foot-level questions...