Balestra Capital: "If Government Programs Were Cancelled, The Economy Would Collapse Back Into Severe Recession"Submitted by Tyler Durden on 03/12/2012 20:52 -0400
While hardly an opinion that would be questioned around these parts, it is still good to see that even some of the smart money shares our views about the Schrodinger Economy ('alive' and 'dead' at the same time, depending if the BLS or anyone else is observing it) and we are not totally insane vis-a-vis one-time, non recurring government bailouts, which just incidentally have become perpetual and endless: "The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings. So the next question has to be: Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt? We think that if government programs were canceled, the economy would collapse back into severe recession." And here Balestra's Chris Gorgone explains quite astutely why anyone betting on a decoupling or perpetual USD reserve status may want to reconsider: "the U.S. is no longer in complete control of its own destiny. We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc. What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes. The world is changing rapidly. The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II." Alas, this too is spot on.
While the recent employment report will most assuredly give the current Administration plenty to boast about the underlying trends are far more disturbing. The ongoing structural realities, the fact that many of the jobs that have been destroyed will never return, combined with the demographic shift make the headline number much less important compared with the emerging trends. Take a look at a recent Gallup Organization poll which polls weekly, rather than one week out of a month with BLS, in regards to the emerging trends of employment. The most recent poll update shows the trend of the percentage of unemployed rising. As you can see the Gallup survey tends to lead movements in the BLS poll by about 4 weeks or so. Therefore, it is highly likely that in the coming month as the massive seasonal adjustments in January and February fade out we will see the unemployment rate rise back towards 8.5%.
While largely uneventful to most, the tomorrow's FOMC statement redline to the January one will be promptly scoured by algos everywhere for even the tiniest mention of the word inflation, as that will not only push back any hopes for a quick QE episode, but may temper expectations that ZIRP will last through 2014 (as the shaky 3 Year auction earlier indicated). And if JPMorgan's Michael Feroli is right, inflation is precisely what will be Bernanke's oh so observant mind tomorrow. In which case at 2:15pm watch out: the Chairsatan may just pull the punchbowl away as the Hawkish dissent mounts... if only until the market has a downtick of course, which will threaten to destroy the ever flimsier hollow house of ponzi cards, or something, and the chief fireman comes scrambling back with the firehose spraying trillion dollar bills.
Fed To Take Propaganda To The Schoolroom: Will Teach Grade 8-12 Students About Constitutionality Of... The FedSubmitted by Tyler Durden on 03/12/2012 16:51 -0400
Back in September we noted a peculiar RFP by the Fed which sought to become a secret 'big brother' to the social media world, and to "monitor billions of conversations and generate text analytics based on predefined criteria." The Fed's desired product should be able to "determine the sentiment of a speaker or writer with respect to some topic or document"... "The solution must be able to gather data from the primary social media platforms – Facebook, Twitter, Blogs, Forums and YouTube. It should also be able to aggregate data from various media outlets such as: CNN, WSJ, Factiva etc." Most importantly, the "Listening Platform" should be able to "Handle crisis situations, Continuously monitor conversations, and Identify and reach out to key bloggers and influencers." While it is unclear just how successful the Fed has been in eavesdropping on various critical blogs, and divining "sentiment", it now appears that the propaganda masters at the Office of Central Planning have decided to go for young American minds while they are still pliable. It appears that as part of its reenactment of Goebbels "economic education" curriculum, the Fed will now directly appeal to K 8-12 student, in which it will elucidate on the premise of "Constitutionality of a Central Bank." You know - just in case said young (and soon to be very unemployed) minds get ideas that heaven forbid, the master bank running the US is not exactly constitutional - you know, that whole thing between Andrew Jackson and the Second Bank of the United States...
Global risk markets and US equity futures were drifting lower together (post China trade deficit data) into this morning's confusion in Europe but around 430ET, equities pushed higher, Treasuries rallied rapidly as we approached the US day session open and broadly speaking risk was off (in everything except stocks). Commodities dropped notably with Oil and Silver losing over 1.5% from Friday's close before heading into the US open. The across-the-board weakness in credit and our broad risk asset proxy (CONTEXT) reversed, as if by magic, as the day-session open in the US dawned and led generally by Treasuries, which staged a 4-5bps sell-off from overnight low yields (with 2s10s30s notably rising on 30Y outperformance and 10Y underperformance), we leaked back to unchanged in ES (the e-mini S&P 500 futures contract) having traded in a very narrow range all day on low volumes (across MAR and JUN). VIX made headlines for its low levels but the steepness of the term structure should be a much bigger concern. AUD weakness spurred much of the early risk-off but accelerated stringer into the US close to maintain equities as close to green as possible. A very noisy day given very little news/event risk and the general confusion in European sovereign markets which all leaked wider. Credit and the vol term structure remain notable canaries as it appears EURJPY has become carry trade-of-the-day once again.
In the spirit of George Orwell’s Animal Farm commandment: “all animals are equal, but some animals are more equal then others” comes the galling news that bankruptcy trustee, Louis Freeh, could approve the defunct, MF Global to pay bonuses to certain senior executives. This, despite the fact that nearly $1.6 billion of customer funds remains “missing” or otherwise partially accounted for, yet beyond the reach of those customers, perhaps forever, since before the firm declared bankruptcy on October 31, 2011... The Orwellian nature of finance is spiraling out of control. It was acutely demonstrated during the fall 2008, merge-and-be-bailed period, and subsequently, through mainstream acceptance that “too big to fail” validates the subsidization of reckless banking practices (bail first, ask questions or consider tepid regulation later), and the European debacle. Three wrinkles of audacity underscore the potential MF Global bonus approvals.
I hold up my hand, “One moment please” as I introduce you to the 800 pound Greek Gorilla that is about to enter the room. Allow me to now present to you the “OTHER” Greek debt that is outstanding and will have to be accounted for as the country defaults. Detailed below are some of the “OTHER” sovereign obligations of the Greek government which have now been submitted to the ISDA and I list some of them below. You will note that there are bank bonds, Hellenic Railway bonds, Urban Transportation bonds et al that are guaranteed by Greece. You will also note that there are bonds tied to Inflation, Floating Rate Notes, Asset-Backed securities and a whole mélange of other structured products with a Greek sovereign guarantee. What we all thought was fact is now clearly fiction and default will now bring “Acceleration” one could reasonably bet in all kinds of these securitizations and in all kinds of currencies. This could come from the ratings agencies placing Greece in “Default” or it could come from the CDS contracts being triggered depending upon each indenture and you will also note that a great many of these off balance sheet securitizations are governed by English Law and not Greek Law. You may also wish to consider the fallout to the banking system as the lead managers of all of these deals could find themselves behind the eight ball as various clauses trigger and as the holders of these securitizations line up at the judicial bench [ZH note: there is a reason why Allen & Overy is getting paid $1500 an hour to indemnify ISDA with a plethora of exculpation clauses - they know what is coming] The ISDN numbers are on all of these securities and the lead managers may be found on Bloomberg or other sources as well as the holders of the debt. The curtain just lifted and the show is about to get way too interesting!
A few days ago we noted that based on preliminary data, the February budget deficit would hit $229 billion (yes, nearly one quarter of a trillion in one month, about where real Greek GDP is these days) - the largest single monthly deficit in history. Unfortunately, this number was low: the final February deficit was just released and the actual print is $231.7 billion. It also means that in the first 5 months of the fiscal year, the US has raked up $580 billion in deficits, oddly matched by $727 billion in new debt issuance, 25% more new debt issued than needed to fund deficits... And that in itself would not be horrible - February is traditionally the worst month for deficits as the Treasury sees a surge in tax refund issuance - if it wasn't for something even more troubling. As the second chart below shows, through last Friday, and net of tax refunds, total US tax revenues were actually lower in the fiscal 2012 year to date period than compared to 2011, by just under $2 billion, at $625.5 billion. Which is the weakest link for any argument that the US is actually growing: what is growing is America's debt (now almost exponentially), while its revenues are at best unchanged. And the scariest: annualizing net tax revenues brings the number to $1.5 trillion. Which is just 50% more where total US debt interest will be in 2014 when debt is $20 trillion, assuming interest rates are somehow allowed to go back up... to the astronomical level of 5%.
This year has been characterised by a dash-for-trash as the flood of central bank liquidity sent the marginal dollar into every down-beaten, over-shorted, unprofitable, over-leveraged, illquid stock it could get its hands on. As Goldman notes today, however, this laggards-to-leaders strategy is starting to underperform in the last few weeks. Buying the trailing 12M laggards and selling the trailing 12M leaders had returned an impressive 7% YTD but since mid-February (which notably was when credit started to underperform equity markets more directly) performance of this 'pair' has lost almost 3%. It seems the liquidity-floats-all-boats mentality is indeed leaving the market and with a refocus on growth (that this likely implies) we suspect correlation will pick up once again to the downside.
You didn't think investors would voluntarily give up on the potential to generate returns between 50% and 333% now did you following the 'coercively voluntary' (aka Schrodinger Spanish Inquisition) Greek debt exchange? Because here they come. Reuters reports that a Hamburg law firm representing 110 Greek bond holders have formed a class action group and intend to sue banks and the Greek state following the Greek swap. It is unclear yet if there are any hedge funds participating in the group, or if these are the entities represented by Bingham. Most likely not: those will almost certainly seek non-class action status so as not to dilute the legal effort, if not fees. However, now that the precedent is set, look for the onslaught of lawsuits to start in earnest. What is probably quite important is that European taxpayers will now be delighted to know they are paying the Troika lawyers' $1000/hour legal fees (and uncapped expenses).
Since the Greek PSI deal was announced early on Friday morning, European credit markets have been underperforming European equity markets quite materially. Friday in the US held up in a narrow range for a short-period but once we discovered that the CAC was in fact a credit event thanks to ISDA, the US credit market deteriorated rapidly and remains weak as US equity indices are holding stable. We wonder, with CBs seemingly on the sidelines for now and fall-out from the Greek deal remaining uncertain, whether credit is once again reflecting market angst more efficiently than the marginal robot in equity markets.
The jump in yield from 0.347% to 0.456% may not sound like much, but that is what just happened following the pricing of the latest $32 billion in 3 Year paper, which came at the highest rate since October's 0.544%. And considering that anything under 3 years is virtually risk free courtesy of ZIRP, this move is actually far more pronounced than it appears on the surface. Also, that the auction closed with a 0.1 bps tail is hardly too notable, although it does show that gradually interest for short-term paper may be decreasing as the Fed may be forced to not only not do QE if inflation courtesy of all the other central banks persists, but have to shorten its ZIRP through 2014 forecast. Auction internals were broadly in line, with a 3.436 Bid to Cover coming in slightly above the LTM average of 3.356. Dealers took down 56.5% of the auction, with Indirects holding 34.6% and Directs left with 8.9%. So the questions begin: is this the auction that heralds concerns of imminent inflation through the bond market (sending the 10 Year lower), and is this ultimately the market negative event, because while stocks may be pushing higher on the rotation out of bonds, all this means is that there will be no more easing for a long time.
Just because being officially the first broke Eurozone country, having 50%+ youth unemployment, and a collapsing economy is not enough, adding absolutely insult to injury is the following chart from Reuters, which shows that compared to other European economies, Greece now has the highest gas price in the old continent. And indicatively while America complains over what is now the highest gas prices in 2012 per AAA, at $3.80 average for a gallon of regular, 30 cents higher than a month ago, and 35 cents higher compared to a year earlier, gas in Greece now sells for over $9.00/gallon. But at least the IMF's worst case projects that Greek economy will be flat in 2013. And that's the "worst case scenario." But at least Europe sure taught Iran a lesson by halting crude imports. Oh yes, that Iran just happened to be one of the biggest suppliers to Greece - oh well. At least Greece still gets to proudly say it is a European colony, everything else be damned.
While LTRO may have slowed the need for immediate asset sales and larger deleveraging in European banks, the two most significantly worrying trend concerns remain front-and-center - those of deposit flight and lending cuts. The latter remains a concern for the BIS, who note in their recent report, that lending curtailment by European banks focused primarily on risky (non-sovereign) and USD-denominated (EM mostly) debt as banks sought to reduce risk-weighted assets (RWA) to meet Basel III capital rules. It would appear though that banks remain in deleveraging (asset sale) mode, in anticipation of the end of ECB facilities down the road, which will become increasingly troublesome given the encumbrance of so many of their assets already by the ECB itself. What is most concerning though is the dramatic and accelerating deposit outflows from not just Greece but Italy and Spain (which just happen to be by far the largest 'takers' of LTRO loans). In other words, as more and more deposits outflow from these two major sovereign nations' banking systems (notably to Finland, Germany, and Luxembourg apparently), the only way to fund bank liabilities (as long as the interbank market remains dead - which is likely given everyone's self- and projected-knowledge) will be the ECB.