Despite economic miss after miss, the momentum players in the market continue unfazed, dodectupling down on Bernanke Put Double Zero, pushing stocks to new highs simply on continued hopes that something in Europe may have changed with Merkel's so-called defeat last week, even as Merkel's key CSU coalition partners voiced an open threat earlier today to no longer support Eurozone aid if there is no conditionality - supposedly Mario Monti's biggest victory (ignoring that the German constitutional court is also faced with a barrage of demands to undo the ESM), and on hopes that tomorrow the ECB will announce something more drastic than the now widely expected 25 basis point cut. In other words a hope rally, even as bonds, and FX have now diverged dramatically with the hope gripping the global stock market. And hope is good, however if it becomes an investing "strategy" total loss is virtually guaranteed. That said, perhaps for the first time ever, bonds are wrong, and stocks are right, and all the bad news has been priced in (unlike all those other times when everyone said the same, and when everyone was certain they would sell first ahead of the herd). Which brings us to the question that Citi's Steven Englander has just asked himself: "So what can go wrong?" Here is his answer (in five parts).
In honor of the FDIC releasing the living wills for banks, we thought we’d offer up a shorter version that the banks could use. You're welcome.
Starting from the level of global savings and forecasts by the IMF, Lombard Street Research's Charles Dumas explains to the FT's John Authers how this 'glut' of global savings exacerbated by 'accounting' of negative economic policies is choking economic growth. This fiscal responsibility versus growth (saving vs. investment) argument is nowhere more evident (for now) than in Europe, where the two chaps progress, in this worthwhile clip, to the extremely dispersed (and not at all united) unit labor costs of European nations as the crux of where Europe goes next. In Dumas' words: "people have got to make up their minds how much they are prepared to pay and for how long" and the longer the time where these relative costs diverge the greater the inevitable costs, leaving only two EU solutions: either the 'Irish' mass-emigration/devalue/economic-collapse in the hopes of improving competitiveness; or 'inflation in Germany' - which is abhorrent to the people of that country. The only possible route back to growth in the short-term is an 'amicable' break-up of the Euro - which as Dumas points out is attractive politically to Ms. Merkel heading into next year's election (as opposed to her keep having to back-down again and again). This is in line with our view that when push comes to a big shove, Germany will be the optimal defection from the game-theoretical game of chicken being played in Europe (and anyone who feels the technical measures from the last summit solve the problems, in Auther's words "is being very 'hopeful' indeed").
David Einhorn is kicking ass and taking names, currently in 4th at the WSOP 2012 with over $16 million in chips (having just won an all in with pocket Aces). Select US viewers can watch the live stream below direct from the ESPN2 website. To everyone else, we are confident a 3rd party livestream can be found elsewhere.
The past few years have produced an impression of the Chinese government that it is invincible, and it has miraculous control over the economic machine, that the slowdown is “intentionally” engineered by the government and everything within the economy is still very much under control. Unfortunately, most who use this argument to justify that the slowdown is not a big problem have all invariably forgotten that most economic slowdowns in recent memories started with central banks tightening monetary policy to control inflation and slow down the economy, and most, if not all, of the cases ended with recession that they did not want to get into. Many have also not realized how difficult it would be for China to relate its way out of a debt deflation. So how different China is in this regard is totally beyond our comprehension, and we are forced to suggest that the believers of China cult have gone delusional. As the economic slowdown becomes a reality and a hard landing unavoidable, more of the problems we have identified will surface. The cult will surely die within the next few years at most. The only questions are when it will finally die, and whether it will suffer a violent death or slow death.
As was first reported two days ago, and confirmed today, Barclays' natural response to allegations it single-handedly manipulated the interest rate complex for up to $500 trillion notional in IR-sensitive swaps and other products (it didn't - everyone else did it too), was to drag everyone into the scandal, starting off with the Bank of England (and about to drag Whitehall into it too), and specifically the man who was next in line for governorship of the English Central Bank: Paul Tucker. What does this mean? Well, as we suggested also two days ago, now that the natural succession path at the BOE has been terminally derailed, it brings up those two other gentlemen already brought up previously as potential future heads of the BOE, both of whom just happened to work, or still do, at... Goldman Sachs: Canada's Mark Carney or Goldman's Jim O'Neil. Granted both have denied press speculation they will replace Mervyn King, but it's not like it would be the first time a banker lied to anyone now, would it (and makes one wonder if this whole affair was not merely orchestrated by the Squid from the get go... but no, that would be a 'conspiracy theory'.) Yet the fact that Goldman is hell bent on global domination by stretching its tentacles into every monetary policy administration is no secret: it is only a matter of time before GS also runs the English CTRL-P macros. More interesting is that in addition to the BOE, Barclays today also dragged America's very own Federal Reserve into the fray.
The gold exchange standard period, which followed WW2, was a period of unprecedented and unparalleled expansion, productivity growth, technological innovation, and financial stability. The Bank of England’s recent report on the gold standard periods concluded:
"Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives."
The BBC concludes by quoting former Chancellor of the Exchequer Lord Lawson:
"You can’t force a government to stay on gold, so therefore gold has no credibility."
Do you see the cognitive dissonance here? If we are to believe Lord Lawson, gold has no credibility, because governments have previously proven themselves untrue to their word. Surely the thing that has no credibility is not gold, but government promises? And that is the answer to the BBC’s initial question.
An expectedly low volume day saw equity futures wiggle around VWAP until the day-session open at which time Energy and Materials sectors surged to lift stocks 10 pts higher into the European close. Commodities all surged - led by Oil with its 'Hormuz'-premium pricing in - and while the USD weakened after the European close ( driven by EURUSD bouncing off the 50% retracement of the EU Summit spike), equities also lost ground and rapidly reverted back down to VWAP. The strength in gold and silver was interesting as they extend their gains from pre-Summit lows (gold up over $70) and most notable to us was the recoupling of risk assets broadly with equities. Gold and stocks are seemingly back in sync and so are (separately) the USD and 10Y Treasury yields. After stocks hit VWAP they rapidly resurged back up to the highs of the day and closed there dragged up by a push into the green by HYG (with both stocks and high-yield seeing some sizable blocks going through at the highs). VIX closed down very modestly at 16.6% but most notably was the rise in implied correlation (and implicitly index vol - VIX - from around 1045ET into the close, even as stocks rallied). It would seem that the rise in WTI back over $87.50 (and Brent over EUR80) has been the 'risk-driver' for much of this rally (with CONTEXT - broad risk proxy - playing squeeze catch up to equity's health). In summary, equities are up over 5% as oil is smashing higher due to pending Hormuz strait closing and WAR; Germany and Finland basically saying NEIN to EU Summit deal as it stands; JPM in an energy market probe and BARC told to lower rates by the government!! All is well in nominal, central-bank, asset-value land.
The FDIC decided to wait with its dose of pre-holiday humor until after the Barclays fixing for today's market close turned out to be spot on. And by that we mean that official release of the US banks' "living will" statements, which as far as we know is about the most worthless exercise ever conducted, and about the dumbest thing to be conceived by that very undynamic duo of Barney Frank and Chris Dodd. Because last we checked, the treatment of living wills in bankruptcy court, where all these firms will end up eventually anyway, is... non-existent. But the real fun is when one actually reads this indicative statement from Citigroup: "Citi is today a fundamentally different institution than it was before the crisis." And that's where we stopped. Because it is banks wasting their time (and taxpayer bailout money) on gibberish like this instead of analyzing the risk inherent in their prop positions that guarantees the next CIO-like blow up will not be just $5 billion but far, far more, and will certainly prove that living wills when one has to equitize tens of billions in unsecured debt are worth exactly didely squat.
UBS' Art Cashin had originally intended to explore the scholarly give and take of both the opinion and of the dissent. Both have marvelous allusions to things like the Federalist papers and “original intent”. As he notes "a full reading is like a visit to the mind gym, a mental workout of the first order." However, the more he read the dissent, the more he saw the minority’s very evident concern that the Constitution was being weakened. On a very timely day, Art encourages one and all to read both the Opinion and Dissent as the venerable patriot adds: "It's important to all of us".
Despite this week's largest allotment to the ECB's 7-day tender in over 2 months, ECB collateral changes, a flat LIBOR, and endless game-changing summit conclusions, the market's most accessible source of term USD financing (the EUR-USD basis swap) has collapsed to its worst level in over three months. Even as the sovereign and bank spreads have compressed in the last few days, demand for this short-term financing has soared (i.e. banks are willing to pay quite a penalty for that access). Whether this is a cleaner signal than Lie-bor is unclear </sarc> but for sure between this and the fact that 2Y Swiss rates are reverting lower once again, all is clearly not well in Europe (despite what every talking head tells you) and these remain the two most critical stress indicators for now.
Two weeks ago, the ECB, which is now largely expected to cut rates by at least 25 bps imminently, announced it was aggressively expanding the eligible collateral pool of worthless "stuff" it would accept at face value in exchange for fresh EUR bills, in essence engaging in clear cut money printing with the footnote that it was really a loan. The only problem is the loan quality is absolutely worthless and the ECB knows this. Hence money for nothing. Today, the ECB has released another announcement on collateral eligibility, saying that "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances." However, lest it be seen as merely the latest confirmation that Europe no longer has money good assets, and the ECB is merely encouraging banks to pledge anything they can get their hands on in order to obtain a short-term liquidity injection, it also added the following rider: "[counterparties] may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this Decision enters into force." But before someone takes this to mean that the ECB actually cares what "assets" on its balance sheet make back its now record €3+ trillion in liabilities, it added Rider B: "Governing Council may decide on derogations from the requirement laid down in paragraph 1." Translated: the free for all rehypothecation race is on, and probably in its last lap, as once any and all collateral is already pledged, the ECB's only hope will be to allow already hypothecated collateral to be rehypothecated. Something which in a non-banana republic would have cost Jon Corzine his job.
EURUSD sold off back to retrace 50% of its post-EU Summit spike gains but thanks to a mini-ramp-fest in the last 30 mins of the European day, spiked back up nicely into the green for the day. The same was evident in Italian and Spanish sovereign bond spreads which had leaked ever so gently tighter all day until the last 30 mins where they compressed 5-7bps more - still hardly a ringing endorsement of the game-changing moment of last week (and still wide of their initial spike tights of Friday morning). European equity markets gained on average around 1% (with France and UK underperforming) - again helped by a late-day surge of risk-on-ness (which was miraculously evident in US equity markets also). Oil prices continue to surge (with Brent over EUR80 once again) and we suspect are as much a driver of correlated risk-on as anything else but perhaps most importantly - away from the squeeze fest in every other asset class - Swiss 2Y rates are pushing back lower once again back under -30bps (down around 4bps today) as it is clear that a bid remains for safe-havens (gold and silver also surging) despite the optics of improving spreads on sovereigns and a 10% rally in bank stocks (which remember will need to be 'resolved' before the ESM can step in at par).
The sensible Sausalitan is back and this time he is taking on the "baffle 'em with bullshit" conclusion of last week's "non-game-changer" EU Summit. After some self-congratulatory chatter on his timely call for markets to ebb from April, Charles Biderman (CEO of TrimTabs) chokes back the spittal as he reflects on what came out of the mouths of European leaders last week: "I cannot see anything new from last week's summit" as he summarizes the findings clearly "The ECB possibly will print more money and save some Spanish and Italian banks". We can't help but agree with Charles when he adds: "Where have I heard that before? Printing Money To Save Banks - wow, how original?". Biderman still believes the Fed will engage in more money-printing but the stock market's current rally is temporary and will falter once again until Bernanke pre-announces his next print-fest. "Money-printing is the only solution left for Central Banks and in reality without fundamental changes in the way Europe and the US is run, the best money-printing can do is keep the dieing alive a bit longer"