Technically, a technical default may still be avoided, but it is now unlikely. As the following presentation from JPM's Vladimir Werning shows, the market has already decided what the "next most likely big picture step" will be. The big question is what the less than big picture next steps will be. And as the following flow chart of options to all "potentially" impaired parties shows, there are quite a few possible steps as the variety of causal permutations has suddenly exploded. For everyone who has gotten sick and tired with following the sovereign default story of one Greece and Spain, please welcome... Argentina, where things are about to get a whole lot more interesting.
That Greek suicide rates have exploded over the past two years is very much expected: after all, in order to preserve the sanctity of the failed monetary status quo, the Greek economy and its less than prosperous population have been sacrificed by the legacy elite and the wealthy. The socio-economic collapse has resulted in a total crash in economic production of goods and services, an nosebleed-inducing unemployment rate which increasing at a mindboggling 1% per month, and the rise of neo-nazism, with the Golden Dawn party now the third most popular political organization in the country (and rising rapidly). Sure enough, Kathimerini has confirmed that the" Greece's suicide rate increased by 37 percent between 2009 - 2011, To Pontiki newspaper reported quoting police data. The data, which was presented in Parliament by Public Order Minister Nikos Dendias following a request by SYRIZA MPs, showed that 3,124 suicides and attempted suicides have occurred in the debt-stricken country since 2009, the weekly newspaper said." As noted, no surprise in this very tragic headline on the day in which the world's still wealthiest nation gives gratitude for all its "wealth."
On occasions such as the increasingly binary-outcome world in which we exist today, it is perhaps more important to give thanks not for what has happened, but for what has not, such as this fictional and dramatic potential outcome.
S&P 500 futures limped 3-4 points higher from last night's close helped by a surge in EURUSD (and its correlated-ness). The most liquid FX pair in the world jumped like a penny stock up to a 1.2899 high this morning (up at three-week highs) just shy of its 50DMA. Merkel sprinkling some hope of a somehow favorable EU budget accord, no news is good news for Greece, and a Spanish reacharound auction seemed the catalysts for hope but we note two significant shifts today from the very recent risk-on regime: 1) credit markets in Europe diverged flat to lower from equities today; and 2) US equity futures also did not follow the path of least resistance higher with FX carry. Whether this is simple illiquidity is unclear; but typically on thin days, everything correlates and levitates - today in European corporate and sovereign bonds and US equities, that was not the case... and 2Y Bunds end the day back at 0.00%
Hopes for an early recovery in the global economy may be overoptimistic, according to CLSA's Russel Napier, as he notes the expansion of China's reserves, which has been an engine of global economic growth, is about to come to a shuddering halt. As eFinancial News notes, Chinese reserves have decelerated dramatically over the last five years and are now close to zero. Napier said of the graph: "It is the most important chart in the world. The growth in Chinese reserves has determined all the key developments in financial markets in the last two decades. It printed lots of currency and artificially depressed the US yield curve. It has been the cornerstone of global growth, and now it's over."
Argentina's bonds suffered one of their largest single-day price drops on record today as it appears ever more obvious that a re-default will occur. With Elliott still battling over holdouts from a prior life, it seems the smart-money is long-gone this time leaving the momentum-chasing yield-grabbing flow suddenly fully cognizant that the bonds are in fact dead. 'Acceptance' is upon us as we wrote a month ago: "As for the Argentina vs Elliott bare-knuckled match, enjoy it while you can: very soon the Latin American country will likely proceed with yet another round of creeping selective defaults, exchange offers, consent solicitations, and other debt reorganizations, which will make the current free-for-all into a total and epic labyrinth of creditors, interests, bondholder classes, general unsecured claims, and other total confusion."
On a day when many will gorge excessively, some will starve still. Giving thanks for the simplest of staples is hard for many (and getting harder). As a result of the drought this summer the Federal government ended up buying less food than normal, and because this excess food is used to provide assistance to the poor in many cases, there simply may not be enough to go around. This sets up a potentially tragic situation as we head into 2013, and is likely to bring heightened social unrest to our shores as we outlined in my recent article The Global Spring.
Most recently, in "Elliott Management Vs Argentina Round 2: Now It's Personal" we laid out the story of how in the ongoing legal fight between Argentina's prominent distressed debt creditor, and exchange offer holdout, Elliott Management (and to a smaller degree Aurelius), and distressed debtor Argentina, the moving pieces continue in flux, even as various US legal institutions have demanded that Argentina proceed with paying the holdouts despite the Latin American country's vocal prior refusals to do so, and most importantly, the lack of a sovereign payment enforcement mechanism. Last night, the fight escalate one more, and perhaps final time, before the Rubicon is crossed and Argentina either pays Elliott, "or else" the country proves all those who furiously bought up Argentina CDS in the past two weeks correct, and the country redefaults on $24 billion of debt. Because as Reuters reports, late last night, US District Judge Griesa overseeing the Argentina case, ordered the Latin American country to make immediate payment with a deadline for escrow account funding of December 15.
2012 was a tough year for some European government bond markets (Spain +100bps). Even with the rallies of the last few months, we remain dramatically wider than at the beginning and primary issuance is becoming increasingly reliant upon domestic bank reacharounds and/or ECB handouts. UBS expects 2013 to be similar in terms of gross supply to 2012 (around EUR 772bn) and aggregate net supply to fall slightly to EUR 208bn. However, these modest improvements overall (driven by drops in France, Germany, and Holland gross issuance) hide the biggest concern. Spain's gross (and net) issuance is likely to rise to EUR 124bn in 2013 (up 20% over 2012!) and Italy's net supply will rise notably next year (even with significant redemptions). Portugal, also faces a very significant increase in net supply in 2013.
About a month ago, in the third-quarter report of a Canadian global macro fund, its strategist made the interesting observation that “…Four ideas in particular have caught the fancy of economic policy makers and have been successfully sold to the public…” One of these ideas “…that has taken root, at least among the political and intellectual classes, is that one need not fear fiscal deficits and debt provided one has monetary sovereignty…”. This idea is currently growing, particularly after Obama’s re-election. But it was only after writing our last letter, on the revival of the Chicago Plan (as proposed in an IMF’ working paper), that we realized that the idea is morphing into another one among Keynesians: That because there cannot be a gold-to-US dollar arbitrage like in 1933, governments do indeed have the monetary sovereignty. It is not; and in the process of explaining why, we will also describe the endgame for the current crisis... "…We cannot arbitrage fiat money, but we can repudiate the sovereign debt that backs it! And that repudiation will be the defining moment of this crisis…"
The Austrian central bank keeps most of its 280 metric tons of gold reserves in the United Kingdom, Vice Governor Wolfgang Duchatczek was quoted as saying in the finance committee of the country’s parliament today, according to Bloomberg. Answering lawmakers’ questions, Duchatczek said 80%, or 224.4 metric tons of the metal was stored in the U.K., 17% or 48.7 metric tons in Austria and 3% in Switzerland, according to a summary of a closed-door committee meeting provided by the parliament. The reserve has been unchanged since 2007, Duchatczek was quoted as saying. The central bank has earned 300 million euros ($385 million) over the last ten years by lending the gold, he said.
With America shut for Thanksgiving today, what was going to be an abysmal volume day, coupled with the usual any news is good news levitation following the lowest volume day of the year, will be even worse. Sure enough, the overnight session started off with a bang, when in the vacuum of night, a lift everything algo sent the EURUSD soaring by 40 pips higher on no news. With the entire risk complex firmly anchored to the EURUSD pair as the key driver, it pushed risk across the entire market well higher to set the early session mood with the very first trade. Followed light trading and a gradual drift lower which could not be offset even with a China HSBC Flash PMI print of 50.4, up from 49.5 in October, and the first 50+ print in 13 month (to accompany the new political regime: after all, the US is not the only nation where economic data mysteriouly levitate with key political events). This continued until about Europe open, when the monthly release of European PMIs came out, which once again were confusing to say the least with France posting the biggest and most surprising pick up, after its Manufacturing PMI rose from 43.7 to 44.7, on expectations of 44.0, while the Services PMI increased from 44.6 to 46.1, well above the expected 45.0 print. Germany was less exuberant with manufacturing rising from 45.5 to 46.2, although the Services PMI dropped from 48.4 to 48.0, missing expectations of 48.3, sending the series to its lowest in 41 months.
The Telegraph reports that George Osborne thinks big banks are good for society. Why would Osborne want to see more of something which requires government bailouts to subsist? Because that is the reality of a large, interconnective banking system filled with large, powerful interconnected banks. Under a free market system (i.e. no bailouts) the brutal liquidation resulting from the crash of a too-big-to-fail megabank would serve as a warning sign. Large interconnective banks would be tarnished as a risky counterparty. In the system we have (and the system Japan has lived with for the last twenty years) bailouts prevent liquidation, there are no real disincentives (after all capitalism without failure is like religion without sin — it doesn’t work), and the bailed-out too-big-to-fail banks become liquidity sucking zombies hooked on bailouts and injections.
Green shoots, growth off a small base, and self-reported awesomeness notwithstanding, the crux of many investors' thesis for believing in a housing recovery is the fact that homebuilder stocks have risen so magnificently; after all the stock market is a 'discounting mechanism' right? (aside from September 2000 and October 2007) The funny thing is - we've seen this kind of 'rally' in homebuilder stocks before, and somewhat remarkably we are following its trajectory almost to the day. 284-days from the March 2009 trough, XHB (the homebuilder ETF) peaked and then lost 30% in the next 45 days. Today marked Day-285 of the current homebuilder rally (coincidentally running at around the same 120% annualized return and exhibiting similar short-squeeze tendencies). Add to that worrying analog, the third divergence between homeowner 'comfort' and renter 'comfort this year - each prior time ending in a rapid collapse in homeowner confidence; and we remain skeptical that the 'market' knows best in this case.