The MF Global playbook is playing out step by step:
- JEFFERIES HAS BEGAN AN ORDERLY LIQUIDATION OF PFG’S POSITIONS
- JEFFERIES DOESN'T EXPECT TO INCUR ANY LOSS IN RESPECT OF PFG
- JEFFERIES ALREADY LIQUIDATED SUBSTANTIAL PORTION OF POSITIONS
- JEFFERIES SAYS PFG POSITIONS SECURED BY CASH HELD IN MARGIN ACC
- JEFERIES TO KEEP PFG LIQUIDATION PROCEEDS IN SEGREGATED ACCOUNTS
Just out from Bloomberg, where we find that our own corrupt politicians have just discovered that gambling went on for years and years, and nobody had the faintest clue!
- SENATE BANKING COMMITTEE TO ASK GEITHNER, BERNANKE ABOUT LIBOR
Surely the wristslapping will be so profound, Geithner is already soaking his arm elbowdeep in vaseline. In other news, go long AMZN as Senate (and soon Congress) just bought out Amazon's entire inventory of "Libor for corrupt morons"
If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage. As a result, the State/finance cartel has only one choice: increase leverage by whatever means are left. There are only two:
- Allow banks to claim phantom assets as capital/reserves
- Lower interest rates so stagnant income can leverage ever greater quantities of debt
The State/finance Empire and its army of academic toadies (economists) must cloak this reliance on leverage from the citizenry, lest they grasp the precariousness of the entire financial system. As the economic Establishment is discredited by reality (that their sputtering reflation policies have come at an unbearable cost is now undeniable), their attempts to discredit their critics become increasingly comic: only PhD economists in the employ of the Empire are qualified to comment on the Empire's policies, etc.
The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it here last week. As Barclays notes, the county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money. There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price" and then refi the borrower into a new private or more likely into an FHA mortgage. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms. Barclays does note though that there are many challenges to such a program including the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds and the fact that new mortgage origination is likely to suffer with new mortgagees bearing the costs of such a program in the form of higher mortgage rates/less credit availability.
Forget Ali - Frazier; ignore Santelli - Liesman; dismiss Yankees - Red Sox; never mind Silva - Sonnen; the new undisputed standard by which all showdowns will be judged happened in Spain over the weekend. During a debate on Europe's crisis, Pedro Schwartz (a mild-mannered Spanish 'Austrian' economics professor) took on the heavyweight Paul 'I coulda been a Fed Chair contender' Krugman, and - in our humble opinion - wiped the floor with his Keynesian philosophy. From the medicinal use of more debt to fix too much debt, to the Japanization of world economies and the demand-side bias of every- and any-thing - interested only in the short-term economic growth; the gentlemanly Spaniard notes, with regard to the European crisis, the fact that "Keynesians got us into this mess and now we have to sacrifice our principals so that they can get us out of this mess". Humble and generous in his praise - though definitively serious with his criticism - Schwartz opines: "Often Nobel prize winners are tempted to pontificate on matters that are outside the specialty in which they have excelled," noting "the mantle of authority whereby what ever they say - whether sensible or not - is accepted with resignation from some and enthusiasm by others." Krugman's red-faced anger is evident at the conclusion as he even refused to shake Schwartz's hand after the debate. Absolute must watch!
Following months of ever higher Chinese imports, no doubt predicated by stockpiling and hoarding reserves, in June Chinese crude oil imports plunged from over 25 million metric tons to 21.72 MMTs, the lowest since December, or about 5.3 million barrels a day, down over 10% from the previous month's record import. While the number was still quite higher than the 19.7 million tons, the sudden drop is concerning, especially since the price of Brent slid materially in June, and if anything should have resulted in even more imports if indeed China was merely stockpiling crude for its new strategic reserve facilities. Which begs the question: was the demand actually driven by the economy, and just how bad is the economic slowdown over the past month if not even stockpiling at preferential prices can offset the drop in end demand?
June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.
The global economy is an entangled affair, make no mistake in your calculation here, and the numbers from around the globe are telling and will affect both the U.S. bond and equity markets. Much of the financing for the Emerging Markets was provided by the European banks and as they pull back and reorganize based not just on Basel III but based upon problems of the sovereign where they are domiciled the situation exacerbates. Two of the world’s financial axises are slowing and troubled and to not think that this will not affect America will lead you to conclusions causing you to play the Great Game badly. What did the meeting of the European Finance Ministers accomplish; not much. They nodded to the Spanish banks and agreed to inject $30 billion by the way of the sovereign, increasing the debt of Spain, with veiled promises of a new ESM fund which would lend money directly to the banks at some point in the future and this point is highly subjective depending upon to whom you listen. The Spanish claim within days or weeks while the Germans indicate it may be sometime next year. There is now a “maybe-maybe” timeline in Europe for almost anything as the weaker nations prod the stronger nations for more money.
Engine of growth?; job creators?; Obamacare sufferers?; the sad reality is that small business in the US has just rolled over. From a slow leak higher in confidence this year, Small Business Confidence has just plunged by its largest in 24 months to its lowest level since October 2011. Seems like perfectly timed for a fall election.
European equities are seen firmly in the green at the North-American crossover, with outperformance noted in the peripheral bourses. Overnight news from the Eurogroup has confirmed that the EFSF/ESM rescue funds will be given the powers to intervene in the secondary bond markets, easing sentiment towards the European laggard economies. Gains are being led by a particularly strong technology sector, with the riskier financials and basic materials also making solid progress. Asset classes across the board in Europe are benefiting from risk appetite, with the Bund seen lower and both the Spanish and Italian 10-yr yields coming below their key levels of 7% and 6% respectively. The moves follow a spurt of activity in Europe with a number of factors assisting the way higher.
SSDD. Europe has a late night conference, regurgitates stuff, gives no details, makes lots of promises, peripheral bonds tighten only to blow out, etc, etc, etc. Seen it all before. Unlike a week ago, Spanish bonds, when Spanish bonds ripped by 1%, this time we can barely muster a 25 bps move tighter, with the 10 year "down" to 6.82%. It was 6.25% a week ago. Expect the blow out as has been empirically proven time and again. Hint: there is no magic money tree nor is there a magic collateral tree.
- EU talks up Spanish banks package, markets skeptical (Reuters)
- China’s Import Growth Misses Estimates For June (Bloomberg)
- The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
- Draghi pledges further action if needed (FT)
- JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
- Norway's Statoil to restart production after govt stops strike (Reuters)
- Top Fed officials set table for more easing (Reuters)
- Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
- Obama Intensifies Tax Fight (WSJ)
- Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
- Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
- Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)
While early news are still abuzz with last night's largely irrelevant FinMin meeting, which came up with nothing new, but merely regurgitated the June 28 summit decisions in a way to send Peripheral bonds modestly higher, however briefly, the real news this morning will be out of Karlruhe, where the German Constitutional Court - which holds the fate of the European bailout mechanism - has already said there will be no final decision on the constitutionality issue. The question now is whether the Court will issue a temporary injunction, which however, the court itself admits "will be interpreted by the foreign press as ‘euro-rescue is halted." Instead, what will likely take place is a two step process. As Market News reports, "Judges during the hearing suggested a two-part decision was likely, first on the injunction in about three weeks, and then in early 2013 on the broader constitutional question." Obviously, the court is not in any rush to come up with a definitive judgment. The problem is that Spain is. As is Italy: unless the ESM is able to promptly roll out its rescue functionality, the entire bailout mechanism will be halted and all the "progress" achieved so far will be for nothing. Sure enough, "a delay could have “serious economic consequences” for the Eurozone as well as Germany, and in turn would risk placing the entire euro project “in question,” Schaeuble warned." Yet not even the German FinMin will dare to tell German's constitutional arbiters to hurry up. Which is why keep a close eye on those Red flashing headlines out of Germany: they can make or break both the Euro, the PIIGS bonds, and broadly risk, if there is indeed a major delay, and certainly, if the court does order an injunction.