I applaud Smith's decision to bring the nature of Goldman's profit-making strategies to the forefront of the global population's discourse, as so many others have been doing through books, investigative journalism, and the Occupy movements over the past decade since my book, Other People's Money, was written after I resigned from Goldman. It would be great if Smith's illuminations would serve as the turning point around which serious examination and re-regulation of the banking system framework would transpire.
While it is difficult to properly attribute blame for the collapse of the US economy, which commenced in the early 1980s, on either the Fed's policy of easy money starting with Alan Greenspan (and terminating with today's statement by Goldman that merely a suggestion of "not easing" may be equivalent to "tightening" - a symptom of a terminal junkie), or the resultant self-indulgent lifestyle of the maturing baby boomers, one thing is certain: the paradigm downturn of the United States began in the early 1980s. And here we are willing to break the cardinal rule of statistics and assume that correlation does imply causation. Because the 4 simple charts below don't lie: the US economy, as represented by its Balance of Payments, the profligacy of the US consumer, the massive expansion of consumer leverage, and the collapse in US manufacturing jobs, and specifically its current near-terminal state, is as much as legacy of the baby boom generation's actions (and lack thereof), as of everything else that has already been mulled over and scapegoated an infinite number of times in both the mainstream and fringe media.
The first session of this 112th Congress was spent with Democrats and Republicans at loggerheads over the debt ceiling, taxes, spending cuts, the deficit super committee, appropriations bills and finally the extension of unemployment compensation and a two-month extension of the payroll tax cut. Standard and Poor's downgrade of the United States' federal debt was due in part to all the haggling over how, and actually whether, to reduce the debt. No One Is Willing to Pay the Political Price to Cut Spending This year Obama asked Congress for, and was given, an additional $1.2 trillion of borrowing authority, which will increase the debt limit to $16.4 trillion, just enough to get him past the 2012 election. It could be close, however. If budget projections prove to be overly optimistic, Obama could face another cliffhanger over a further increase in the debt ceiling in the midst of the presidential election in November. How embarrassing to have to say "re-elect me – and by the way, I need to borrow some more money to pay this month's bills."
When it comes to the New Normal, there are just two precedents: complacent and doomed debt slaves, such as Greece, which continues to voluntarily hand over any and all of its real assets to the vampiric banking oligarchy in exchange for simply being the member of a doomed club, while trembling at constant threats of fire and brimstone if it dares to split away from its monetary parasites (and where unemployment rises by 3% in one quarter), or the rare success story such as Iceland, which showed the bankers a middle finger, took the red pill and disconnected from the globalization matrix. And while even Bloomberg recently extolled the virtues of the Iceland "case", which will likely be solitary until the entire ponzi scheme comes crashing down, we are heartened when we observe all incremental milestones of further economic and financial success by the one country that dared to call the banker bluff, and won. Such as this press release from the IMF.
Between our overnight discussion of the size of the Fed's QE and Goldman's call for QE as soon as April, risk assets all synced and surged today as the USD gave back most of the week's gains. The S&P 500 managed to close above 1400 for the first time since June of 2008 on decent volume - even as AAPL closed down 0.7% (and -2.5% from the $600 threshold it peered over) as financials once again took the lead. BofA is now up 13.6% from pre-JPM-dividend news (more than double its peers) while GS and C languish up only around 2% from that point. High-yield credit markets were nothing like as QE-ebulient as stocks today as investment grade outperformed (more up-in-quality rotation) and the last 45mins actually saw active selling in HY and HYG while IG and the S&P leaked higher. Treasuries steepened very modestly with the long-end maybe 1bp higher in yield close-to-close but the 7-8bps compression off overnight high yields is noteworthy and brought the broad risk asset complex back in CONTEXT with stocks (after yesterday's dislocation). The USD lost around 0.4% from late last night on the day (though still stronger on the week) as EUR and JPY tracked it broadly but higher yield AUD outperformed handsomely (more QE-funding currency needed). Commodities bounced nicely with Copper the day's winner followed closely by Gold and Silver (up around 0.9%) and Oil practically unchanged after dipping over 1% on the SPR chatter and recovering on the denial. VIX ended the day (spiking) higher and the term structure very slightly flatter. After spiking Friday and Tuesday (as we broke the uptrendline) average trade size has drifted notably lower and was its lowest in over a week today suggesting less institutional buying here.
Confused why every asset class is up again today (yes, even gold), despite the pundit interpretation by the media of the FOMC statement that the Fed has halted more easing? Simple - as we said yesterday, there is $3.6 trillion more in QE coming. But while we are too humble to take credit for moving something as idiotic as the market, the fact that just today, none other than Goldman Sachs' Jan Hatzius came out, roughly at the same time as its call to buy Russell 2000, and said that the Fed would announce THE NEW QETM, as soon as next month, and as late as June. Furthermore, as Goldman has previously explained, sterilization of QE makes absolutely no difference on risk asset behavior, and it is a certainty that the $500-$750 billion in new money (well on its way to fulfilling our expectation of a total $3.6 trillion in more easing to come), in the form of UST and MBS purchases, will blow out all assets across all classes, while impaling the dollar. Which in turn explains all of today's action - dollar down, everything else (including bonds, which Goldman said yesterday to sell which we correctly, at least for now, said was the bottom in rates) up. Finally, as we said, yesterday, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals." Because when the market finally understands what is happening, despite all the relentless smoke and mirrors whose only goal is to avoid a surge in crude like a few weeks ago ahead of the presidential election, gold will be far, far higher. Yet for some truly high humor, here is the justification for why the Fed will need to do more QE, even though Goldman itself has been expounding on the improving economy: "The improvement might not last." In other words, unless the "economic improvement" is guaranteed in perpetuity, the Fed will always ease. Thank you central planning - because of you we no longer have to worry about either mean reversion or a business cycle.
We are not picking on Greece today but in the shadow of Lagarde's (and Thomsen's) comments on how shiny everything is in Greece but risks remain, we thought this anecdote-and-analysis discussion between RGE's Megan Greene and CMC's Michael Hewson was so timely as a follow-up to our previous discussion in December. From her experience in a coffee-less and book-less cafe/bookstore in Athens to a succinct perspective on debt sustainability, competitive issues, elections, and implementing structural reforms, the discussion is a quick-and-dirty way to grasp that it's all about the politics and less about the economics. Critically Green points out the much more important 'change that the Greeks can believe in' is the structural reforms - and unfortunately there really has been very little progress. Simply put, until Greece sees a whole new political class capable of implementing the kind of structural reforms necessary to improve Greek competitiveness, Greece will never reach sustainability. This leads to her conclusion (spoiler alert) that what it will take is for Greece to exit the Euro. Quite unapologetically, Megan notes the political 'spring' in the youth that is building in sound and fury and feels that this new political class will not succeed until Greece has hit rock-bottom - though this could take a while as mindsets shift from Euro-friendly to Austerity-unfriendly with perhaps post German elections in 2013 as a catalyst with an amicable divorce. As a bonus, Greene also discusses LTRO, the Spanish elephant in the room, and the new fiscal compact's procyclical and toothless structure. Everything you wanted to know about Europe but were afraid to read...
Here is where the parasitic 1% have their problem. What they have “sold” the American public as the spirit of the nation is now in direct opposition to reality. In fact, it has become so obviously untrue that the population is waking in drove to the truth and the truth is that we have a utterly corrupt, sociopathic minority running the nation like a giant criminal syndicate for their own power and money. Therein lies their weakness however. They have no philosophy. These guys are actually so twisted that all they think about is how can they keep growing their money and power. Furthermore, they are operating under an exposed playbook of control. Just take a look at Obama’s approval ratings. They are plunging. They are plunging despite fabricated economic numbers and biblical stock market rigging to make things look good. They are plunging because people are waking up and seeing all of this for what it is. A gigantic scam. All the signs I see point to increasing desperation on their part and exponential awakening on the part of the meat of the bell curve. These guys are toast and what we should now be focusing most of our attention on is what kind of society we want when this one collapses. Hopefully the other side of the bell curve can influence the debate for the first times in five thousand years. That is my hope and my vision of the future.
With Greece seemingly well-and-truly in the mainstream media's rear-view mirror, we thought it useful to go over a few details that are 'evolving' as we approach the CDS auction and foreign-law bondholder participation deadline. In a nutshell, there are now seven (count them seven) classes of debt in the Greece capital structure ranging from Old GGB holdouts to Troika- and EFSF-subordinated 'loans'. Critically though, just as we have written extensively, it is the size of the holdouts that will become a growing headache for the European Greek government. As BNP notes today, there are at a minimum EUR2.5bn but potentially up to EUR11bn of holdouts that leaves the Hellenic Republic with the chance of achieving 100% participation practically impossible and some very difficult choices between a disorderly failure-to-pay default on these holdouts (with all the ugly ramifications of out-of-control bankruptcy and litigation) or 'unfairly' pay this 'small' group of desperadoes out as normal (i.e. pay interest and principal to Par at maturity - no haircuts). This is exactly the 'blocking-stake-Foreign-Law-bond' strategy we suggested that hedge funds would undertake and it appears successful given the record price differential that now exists between Greek- and Foreign-Law bonds.
From Deutsche Bank: "We removed Apple from SOLAR following a ~50% gain since adding it to Solar on October 19th (adding ~$175Bln in market value). Over the same time period, the S&P is +15%."
Why do families persist in taking on $100,000 student loans for mostly mediocre educations with mostly mediocre "benefits" in the job market? Because they feel they have no other choice. Why do people persist in mortgaging their future and accepting the yoke of debt-serfdom to own a house? Because they feel they have no other choice, and owning a house has become integral to the "American dream." Why do local state, county and city politicos continue playing absurd budget games, shuffling funds, borrowing from their employees' pension plans to make this year's pension plan contribution and similar threadbare tricks? You guessed it: they have no other choice, lest someone somewhere feel some pain. Why do our Federal "leaders" borrow $1.5 trillion each and every year now, fully 10% of the nation's total output, knowing full well that this level of borrowing will bankrupt the nation? (Don't forget to add in the "supplemental" off-budget borrowing.) You know: they have no other choice, lest someone somewhere feel some pain. So instead they keep the accelerating vehicle pointed straight for the cliff. There are only two end-states to this level of borrowing: hyper-inflation or default. Any other "choice" is mere fantasy.
The crash in home prices in Spain is re-accelerating. Bloomberg data shows the drop in Q4 as the third worst drop YoY ever and the fastest rate since September 2009 taking prices back to March 2005 levels. As WSJ reports, Spanish banks hold more than EUR400 billion worth of loans to the construction and real-estate sector, back by collateral that is now losing value at almost record paces. Is it any wonder that the banks are seeking state-guaranteed debt issuance (as no-one will touch them directly) as "the outlook remains bleak, with the demand for housing expected to shrink throughout 2012 with debt-laden households struggling to cope with a devastated labor market and limited access to credit." Perhaps today's disappointing Spanish auction (weak demand) is the first reality-seeking canary in the LTRO-enthused coalmine of Spanish and Italian self-dealing as the real-money vigilantes start to bet actively against Spain in favor of Italy (which trades tight of Spain for the first time this week since August). Spanish banks need more cowbell LTRO (but what collateral is there left) to fund more support for their local govvies.
It seems like it was only yesterday that Goldman initiatied a long in the Russell 2000, only to prematurely close the trade a few days later. Sure enough, here it is again. So, dear muppets, you are to buy all the 'elephants' that Goldman has to sell. As for the three letter acronym: just use RUT.