New Day, Same Stuff

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

Once again equities are responding to events with more excitement than the credit markets.

Yes, Germany approved the changes to EFSF first announced back in July.  That was fully expected and a No vote would have been a shocking disaster at this stage.  The level of cynicism has hit a new high.  I have heard a lot of chatter that now that Germany has jammed this through, they can stop pretending that they are against levering up the funds.  I am not a fan of the politicians or political process, but betting money that Schaeuble and Merkel made such bold-faced lies seems like an act of desperation.  The risks from pursuing the leveraged EFSF strategy are real and high - downgrades of all the top European countries and inability to stop any renewed selling pressure in the future.  Germany has the sense not lose their rating in a futile attempt to defend a perimeter that can no longer be defended.

We had a bit of positive data today.  Though the fact that the usually optimistic BLS took the time to point out the data may have had a weird seasonal adjustment should dampen the enthusiasm.  This is a group that has under-reported intial claims so many times in a row that is beyond comical, so they have a tendency to sugar coat the truth - and here they took the time to downplay a good number.  The market loves discarding the number when it is bad but affected by things like the weather, but is happy to ignore today's caveat.

Taking a look below the surface reveals that the credit markets are still struggling.  Bond volumes are low and are not participating in rallies.  This is in part because of continued supply pressures.  Corporations need to come to market, as do companies.  The secondary bond market can remain in limbo and quote prices that make everyone comfortable.  Down enough that no one is too eager to short an individual bond but not cheap enough where real demand would come.  New issues are coming at concessions, and until the market can absorb a new issue without a significant concession, spreads will not perform particularly well.

HCA came with a 8% 7 year bond on Tuesday.  It was priced at par and is now trading at 98.5.   It was only a $500 million issue.  To put that in context, back in July HCA priced a 7.5% 10 year bond.  It was a $2 billion issue and traded up.  So the bond was bigger, had a lower coupon, far lower spread (treasury yields were higher than), and longer maturity, yet the market absorbed it and wanted more.  A lot has changed in two months and equities are free to resume their march back to 1,200 but I think this HCA deal is a great example of how weak credit really is.  If you want to get long risk, high yield seems more attractive than stocks.  That market is down almost as much year to date as the SPX, and yet does have downside protection.

Over the past two years we have seen story after story about how much cash companies have on their balance sheets and how robust the corporate bond market has been.  A portion (I think large portion) of that cash has come from issuing bonds.  Those bonds have maturities and have to be re-financed.  That will be a source of supply in addition to those companies that actually need money.

The weak Italian auction is also another source of overhang.  How can an auction be a sign of more supply coming?  Italy did not raise all the money they wanted or needed.  They will be back for more.  They didn't want to pay the premium required to get a bigger deal done.  They still need the money and will be back, and given their ability to "time the markets" they may regret not taking money at these rates when they could have.  They too are waiting for the EFSF to lend them money.  Yes, Italy can't wait to guarantee the EFSF so that the EFSF can borrow money and then lend it to Italy.

The CDS indices, which are about equally correlated with stocks as with corporate bonds in these hectic times are not responding well again today.  Main is unchanged and IG and HY are only a tiny bit better on the day.  For all the feelings of relief, BAC CDS remains at 400.  That is still close to its widest levels and is there because of its US problems, not because of Europe.  Yes, in spite of the focus on Europe, we have our own problems here and those have not been fixed by levered EFSF.

Some consistent good data, that doesn't rely on inventory build or weird seasonal adjustments would make me change my view.  Real strength and a deep bid in the credit markets would make me change my view.  Actual progress in European debt reduction or GDP growth would make me change my view.  Until I see at least one of the above I will continue to be bearish US stocks at these prices.

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Ancona's picture

I belive they will kneel before their banking masters, who have explained to them in explicit detail what they must do or they will implode it all.

PivotalTrades's picture

So Germany decides to help provide more gasoline and matches for the fire that rages in Europe. The socialist(communist) are in power and will use the current events to strengthen that power. How will bailing them out help. The more debt we create the longer this will be dragged out and the more wealth will be vaporized as this debt is either defaulted on or inflated away!

kridkrid's picture

But absent the creation of more debt you get implosion.  This is what credit/debt money with interest attached at its creation gives us.  The creation of money is really just the creation of debt.  Only the interest that begins to accumulate when the money is issued doesn't exist.  The only way to create the money that must be paid in interest is to create more money (i.e. issue more debt).  This is the system that has been chosen to facilitate economic growth.  When the system can't juice the creation of more debt, you'll have cascading defaults and total destruction.

It's fine for people to want to argue the question of whether or not social security is a ponzi scheme, but the real ponzi scheme is our monetary system.  More debt is issued on a continual basis in order for interest to be paid on debt previously issued.  And that debt is money.  The entire system is a ponzi scheme.  And just like a ponzi scheme, nobody notices much or care much when everyone is getting paid.  In fact, the architects may even look like heroes to some.  But when it starts to crumble, everyone in it gets wiped out. 

Right now it is only a question of how many more rungs are left in us.  Collapse in enviable.  Timing is a little harder to call.


PivotalTrades's picture

"But absent the creation of more debt you get implosion." Only when true growth is unattainable as it is now. Debt is only a problem when it grows and attains a size  that the servicing can not be met from current revenue. The problem we face (Europe and the US) is that socialist in both countries took advantage of the demographics and technological fueld growth to pile on government largess to purchase votes above and beyond the ability to pay. As the demographics continue to worsen the problem will get worse. 

kridkrid's picture

The problem is partially the gov't in that they are the thug enforcement arm of the monetary system, but it isn't the SOCIALISTS (oh the horror).  That's the narrative provided to make it political.  It keeps people comfortable inside one camp or another, but it isn't what lies at the core of the problem.  As for Gov't debt, that is just one piece of the perpetual debt growth puzzle.  Aggregate debt must increase (consumer, corporate, gov't).  Gov't debt is really nothing more than a lever to pull if the other two credit markets start to wobble.  This is what we are experiencing today; the last gasps of air in the system that requires debt to always grow.  How much longer the facade can hold, I'm not sure.  I think longer than many people here think, mostly because most people want to believe the fantasy.   

PivotalTrades's picture

Absent the socialist robbing Peter tp pay Paul and provide Paul with all kinds of goodies debt would remain managable. Your refusal to identify the problem is the reason we are at this crossroad.

kridkrid's picture

I'm telling you the problem, you replying with a narrative.  The problem is a monetary system that uses debt instruments as money and that ties interest to that debt whenever money is created.  In that system, debt will appear manageable during some period of time while that debt grows.  When the cost associated with maintaining that debt becomes too big of a burden, the system will collapse.  This cycle can't be changed any more than you can make 2+2 equal 5.  Credit/debt money requires aggregate debt to continually increase. - I haven't read this article... I mean only for you to look at the graph.  This is math, not politics. 

I'm not in favor of robbing peter to pay paul, but that isn't the problem.  Like I said before... gov't debt is only one piece of the puzzle and right now is only being used to keep things from outright collapse.  And don't hear me wrong, I'm not arguing in favor of it.  I merely want to point out what the actual problem is... even if you tell me that by doing so, I'm not actually identifying the problem.  That seems a little odd.  Maybe you just don't like my answer.  And perhaps that's because it doesn't fit well with the bogeymen you've been given.


PivotalTrades's picture

So what your telling me is that you personally (since you use debt instruments as money), have or would have put yourself in a posituion where you were unable to or are unable to service your debt. Or have you conducted your finances in a prudent fashion? The problem is not debt it is the ability to create debt with out regard to how it will be repaid. 

kridkrid's picture

You are conflating two different topics and creating one straw man.  Debt in and of itself isn't bad.  Money as debt is, IMO.  Fiat money combined with fractional reserve banking (our monetary system) is bad.  Virtually all money created in our system begins as debt with interest.  The problem... there isn't enough physical money in the system to pay both the interest and the principle.  So debt not only can't be eliminated, it very mathematically must continually increase.  As the debt increases the interest burden increases until the interest burden overwhelms the productive capability of the system.  You then face cascading defaults and deflationary depression (option A) or you QEX to death to try to stop it, creating inflation in the things that people need, and most likely not having any real effect on prices of things that people own (see housing... and eventually other things as well, I'm guessing).

The straw man is my personal finances. That really has nothing to do with anything in this discussion.  But yes... by virtue of living in a society that doesn't understand what money is, I have put myself in a position where I face the same pending collapse as do you.  I currently have no creditors... but I don't know if that really matters.


PivotalTrades's picture

In the same way "Debt in and of itself isn't bad." "Fiat money combined with fractional reserve banking (our monetary system) is bad." , Fiat money in and of itself isnt bad, in both cases its the misuse. Fiat is more easily abused because it does not posess a self regulating mechanism that a hard currency (gold or commodity backed)  does. Socialist governments missuse the debt because they create the debt for their constituants while expecting some one else to pay their fair share! 

Panafrican Funktron Robot's picture

I'm glad that you specifically pointed out fractional reserve banking as the mechanism of eventual destruction.  I agree that paper/digital money works correctly in the absence of leverage.  Closely related to this, I would suggest that the one thing the islamists got correct was the tyranny of interest.  In this country we refer to it as the "miracle of compounding interest".  Well, it's not really a miracle to the one paying the interest.  Parallels abound in the proverb "borrower is slave to the lender" / Jesus throwing out the moneychangers.  Conceptually ancient and eternally accurate observations.

PivotalTrades's picture

The money changers were fee operated only certain coinage was exceptable for sacrafices. Again "interest" is not tyranny interest above ability to pay is. Self discipline is the key!

snowball777's picture

Shut up and cut me another line; I'm starting to come down. ;)

SirIssacNewton's picture

The creation of money is really just the creation of debt.  Only the interest that begins to accumulate when the money is issued doesn't exist.  The only way to create the money that must be paid in interest is to create more money (i.e. issue more debt).

I do agree with the general statement about how the creation of money is really just the creation of debt.  The interest, though, can be paid through two ways.  One way, and the most prevalent, is exactly as you stated...that more debt must be created in ever increasing amounts.  The other way interest is paid is through the creation of commodities.  The productive difference between the cost of extracting or growing the commodity is truly new money and that's why governments want to know how much is produced or extracted as an input into the monetary formula.  For example, the cost to grow corn is X and the market will pay Y (Y being the money created through debt), but the remainder is Z and contributes to the interest portion of a Debt Monetary System.  The problem with produced commodities, like corn, is that once it is consumed and the remainder ends up at the sewage treatment plant......this interest payment is destroyed and, thereby, has only a temporary span as interest.  Extracted commodites have a longer lifecycle as interest depending on their servicable span and/or recycling, but, once it ends up in a land fill, its value as interest is also extinguished.  The one exception, historically, was gold (and in some ways silver) because it was considered money itself and didn't take new debt to circulate as interest or new money.  That's why it was de-monetized, but that's a different discussion.

kridkrid's picture

But is it not debt that underwrites that system?  If you acknowledge that additional debt needed to be created in order to create the money that was needed to purchase the corn, the fact remains that debt will still grow, regardless of the farmer's ability to turn a profit, no?  Our monetary system doesn't preclude people from building profitable businesses.  In fact, if one wanted to argue that the current system is better than a system of sound money and 100% reserve banking, they might even have the better position.  Perhaps we simply need to recognize that every 60 or 70 years there will be global upheaval and some sort of system reset.  Regardless, the math will take our current system down.

By the way, I didn't vote your post down.  It's interesting.  I need to think about it some more.

SirIssacNewton's picture

Like I said.... I don't disagree that our monetary system is based upon money being created by debt.  I was trying to add to the discussion that interest is the exception in that it call be created without debt but not to the same extent.  We all know that we are reaching a critical stage in this monetary system.  This system makes all, but a few, debt slaves and beholden to behemoth banking cartels.  Truly the law of the exponential will take us down eventually without a major structural change or revolution.  The timeframe for this the battle that is being waged before our eyes.....can it be contained and kicked down the road.....or will it explode and cascade.  Since I am not a fortune teller, I can only surmise that its timeframe is close because I am tired of all the bullshit.  Remember, though, the system which may replace this one may actually be even more oppressive than the one we have today.

PivotalTrades's picture

Not when payments include principal. The debt is retired as payments are made.

MachoMan's picture

We've opted for the boom bust cycle...  (or it has been chosen for us?)  We get to start the next cycle with the residual technology and whoever was lucky enough to win the last cycle gets to be king in this one.  The problem I see with this approach, as a strategic maneuver, is that world killing technologies keep increasing...  whether it be oil wells out in the ocean, nuclear plants, designer diseases, or anything else...

I'll posit, like you, that the whipsaw of the boom/bust cycle creates a cumulative residual that is greater than if we had kept sound money throughout the same period.  The problem, of course, is when we get a darkages or the like and get a wipe of the residual technology/knowledge.  The gains from the boom/bust cycle are ultimately made upon shaky foundation...  great as they may be.

Not necessarily a right or wrong answer...  although, I think these cycles are more easily perverted to personal gain than their counterpart...

RobotTrader's picture

Commodities getting destroyed again today.

Everyone is fleeing into USDX, TLT, VXX again.

achmachat's picture

you know what would really make my day?

If for once you'd say: "TOMORROW...."

I don't need you to see what's happening right this moment.

SheepDog-One's picture

RearviewTrader is the Howard Cosell of the market world, saying mostly obvious and usually irritating things he pretends to be an expert about, but has never actually played in the game himself.

If you read RearviewTrader posts with a nasally Cosell accent, it always fits perfectly and is pretty amusing.

topcallingtroll's picture

Bought my one true love, my brazilian hotie, EWZ at 53.70 last week and posted it guys.

You should copy the trades of anonymous internet trolls if u wanna get rich.

topcallingtroll's picture

Tomorrow precious metals largely flat to down. Dollar and bonds flat to slightly up. And stocks up.

Yes it doesnt make much sense but that seems to be the world we live in.

Zero hedge.....where u see tomorrow, today!

jdelano's picture

pains me but I'd agree with that call.  the window dressing must hold up through Friday.  But I'd add that next week the balloon rises to the spiked ceiling and pops again.  

HelluvaEngineer's picture

+1 looks like 30 is holding.  Oh please god, hold 30.

WonderDawg's picture

I wouldn't bet on it. In fact, I'm not betting on it. I'll buy the f'ing dip, when the dip is in.

Au_Ag_CuPbCu's picture

Let it tank...I have plenty of FRN$ I will happily trade for really cheep Au and Ag.  This is a nanosecond in a long timeline; in the long run the PMs are heading much higher.  Maybe not tomorrow but I am buying and holding physical so I don't care.


buzzsaw99's picture

There is no way in hell you turn a profit trading.

Long-John-Silver's picture

In the military we referred to it as SSDD Same Shit Different Day.

BrocilyBeef's picture


Technically, Different Shit Different Day Same Smell.

zorba THE GREEK's picture

Germany saw what almost happened in 2008-2009, they will print to avoid the abyss, even if it only delays it.


BrocilyBeef's picture

Stupid acts of men. Decentralized govt is the best course. Scrap the UN, EU and shutter most of the US Federal govt.

WonderDawg's picture

Yeah, didn't our founding fathers have some ideas about a large centralized government? They were against it, or something, I think.

snowball777's picture

Some of them were; you'll notice that we have a Senate.

oogs66's picture

IMF and World Bank should be shuttered too

jkjacksonhole's picture

Perhaps they realized that printing Euros devalues the Euro. Slow learners.

The4thStooge's picture

what's going on with ukrain? that has the potential to be quite intersting.

jdelano's picture

thank you tylers. faith restored.

youngman's picture

I to feel news to jump on....just noise...IMHO...but the trend is to still print..and not to cut still happy with my gold and silver...

SheepDog-One's picture

We certainly havent suddenly printed any LESS, thats for damn fact.

The Axe's picture

CHINA   is the real story.....TYLER....China in slow down  big time.....OIL   I am short oil big.....china stocks getting kicked like a dog.......a ugly dog