There was a time in late 2011 and early 2012 when people kept track of cash deposited with the ECB with great interest as it showed just where the latent money in the Eurosystem is going, or rather wasn't (and receiving 0.25% from the ECB in exchange for the 1.00% funding cost to borrow LTRO repos from the ECB, an inverse carry trade if you will). Subsequently it was shown that there is at least one liquidity rotation before the money reenters the ECB, as Spanish and Italian banks were busy buying up sovereign paper (now at a P&L loss since the onset of LTRO 1, never mind 2, and as noted earlier, with haircuts on Spanish paper about to go up by another 5%, the toxic liquidity spiral is about to resume), and that the bulk of the cash actually came in from "Northern" Europe where maturing risk paper was not rolled and instead was dumped with Mario Draghi. One thing is certain: this money was not re-entering the broader economy, but who cares about the people any longer. Well, it may be time to start caring about the ECB daily deposit update, because as of Friday, €793.6 billion was deposited with the ECB - an increase of €2.2 billion overnight, €18 billion compared to a week ago, and the highest since the €816 billion deposited on March 13.
The good news: Spanish Q1 GDP printed -0.3% on expectations of a -0.4% Q/Q decline. Unfortunately this is hardly encouraging for the nearly 25% of the labor force which is unemployed, and for consumers whose purchasing habits imploded following record plunges in retail sales as observed last week. The bad news: Spain now joins at least 10 other Western countries which have (re) entered a recession. Per DB: "Spain will today likely join a growing list of Western Developed world countries in recession. Last week the UK was added to a recession roll call that includes Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia. Debt ladened countries with interest rates close to zero have limited flexibility to fight the business cycle and this impotency will continue for many years." Alas, the abovementioned good news won't last: from Evelyn Hermman, economist at BNP - "The Pace of Spain’s economic contraction may increase in coming quarters as austerity measures bite more sharply." Of course, it is the "good news" that sets the pace each and every day, as the bad news is merely a further catalyst to buy, buy, buy as the ECB will allegedly have no choice but to do just that when the time comes. And something quite surprising from DB's morning comment: "If it were us in charge we would allow more defaults which would speed up the cleansing out of the system thus encouraging a more efficient resource allocation in the economy at an earlier stage." Wait, this is Deustche Bank, with assets which are nearly on par with German GDP, saying this? Wow...
Hugh Hendry is back with a bang after a two year hiatus with what so many have been clamoring for, for so long - another must read letter from one of the true (if completely unsung) visionary investors of our time: "I have not written to you at any great length since the winter of 2010. This is largely because not much has happened to change our views. We still see the global economy as grotesquely distorted by the presence of fixed exchange rates, the unraveling of which is creating financial anarchy, just as it did in the 1920s and 1930s. Back then the relevant fixes were around the gold standard. Today it is the dual fixed pricing regimes of the euro countries and of the dollar/renminbi peg."
Three weeks ago we discussed the ultimate-doomsday presentation of the state of Spain which best summarized the macro-concerns facing the nation and its banks. Since then the market, and now the ratings agencies, have fully digested that meal of dysphoric data and pushed Spanish sovereign and bank bond spreads back to levels seen before the LTRO's short-lived (though self-defeating) munificence transfixed global investors. However, the world moves on and while most are focused directly on yields, spreads, unemployment rates, and loan-delinquency levels, there are two critical new numbers to pay attention to immediately - that we are sure the market will soon learn to appreciate. The first is 5%. This is the haircut increase that ECB collateral will require once all ratings agencies shift to BBB+ or below (meaning massive margin calls and cash needs for the exact banks that are the most exposed and least capable of achieving said liquidity). The second is 10%. This is the level of funded (bank) assets that are financed by the Central Bank and as UBS notes, this is the tipping point beyond which banks are treated differently by the market and have historically required significant equity issuance to return to regular private market funding. With S&P having made the move to BBB+ this week (and Italy already there), and Spain's banking system having reached 11% as of the last ECB announcement (and Italy 7.7%), it would appear we are set for more heat in the European kitchen - especially since Nomura adds that they do not expect any meaningful response from the ECB until things get a lot worse. The world is waking up to the realization that de-linking sovereigns and banks (as opposed to concentrating that systemic risk) is key to stabilizing markets.
"A majority of doctors support measures to deny treatment to smokers and the obese, according to a survey that has sparked a row over the NHS‘s growing use of 'lifestyle rationing'", The Guardian notes, and that’s the trouble with services and institutions run from the taxpayer’s purse, administered by centralists and bureaucrats. It becomes a carrot or a stick for interventionists to intervene in your life. Its delivery depends on your compliance with the diktats and whims of the democracy, or of bureaucrats. It is easier to promote behaviour desired by the state when a population lives on state handouts; and increasingly throughout the Western world, citizens are becoming dependent on the state for their standard of living. With the wide expansion of welfare comes a lot of power, and the potential for the abuse of power. Citizens looking for a free lunch or an easier world should be careful what they wish for. Welfare recipients take note: you depend on government for your standard of living, you open yourself up to losing your liberty.
Once upon a time when Nigel Farage got up to speak you often wondered whether he was the full ticket, but today when he gives the European parliament the benefit of his opinion he is the only one making any sense and that includes most of our other politicos back home. Instead of planning to get out of the EU madhouse we have confirmed that £10 billion of our money, yours and mine, has been re-pledged to the IMF “pour encourager les autres” as I am sure was the phrase Christine Lagarde used as she sidled up alongside an impressionable young chancellor, who is totally out of his depth in such company – Lagarde’s youthful pastime of synchronised swimming for the French national team is now paying dividends. It is only a promise at this stage, but it already has parliamentary approval – slid through in a dark period rather like TARP in the States – without any proper scrutiny and an absence of opprobrium from the main stream media the supposed guardians of free speech. If only…
A rather curious phenomenon that has been observed in the popular press lately is that on those rare occasions when total global public debt is demonstrated correctly on a country by country basis, i.e., including contingent liabilities, as well as various trans-national, public-sector backed guarantees (such as EFSF backstops), and most importantly the Net Present Value of pensions and healthcare, or the cost of the welfare state expressed in current dollars, there is one country that is systematically excluded. That would be the United States. Today we set the record straight by adding the US to the list where it rightfully belongs, and also answer the rhetorical question of why the US just so happens to be consistently omitted from such column-chart based, hair-raising classifications. Simply said, it is quite clear why the now defaulted Hellenic Republic could and should be forgiven in saying that “at least Greece is not America…”
In yet another 2011 déjà vu moment, Europe’s bank funding window is slamming shut again (the catalyst that brought the 2011 Euro crisis vintage to its heights). Nowhere is this more evident than when comparing monthly debt issuance in the first 4 months of 2012 to the previous two years. Sadly, even despite taking place while the LTRO effect was front and center, Europe still was unable to match prior year debt. Fine, the skeptics will say, this simply means that there is less debt maturing and thus less need for new issuance… And the skeptics would be wrong. As charts two and three demonstrate, this is broadly correct for only 4 countries, of which 3 still have their own currencies (coincidence). The balance is a sorry sight, with Germany, Spain and Italy seeing nearly EUR100 billion in net unrolled redemptions just Year to Date alone! As UBS very poignantly points out, “It is difficult to see this as anything other than contagion from the latest variant of the euro crisis.”
With all eyes firmly planted on Spain, the little-Escudo-that-could has quietly slipped off the heading-into-the-abyss list of the mainstream media. Little was made this week of the fact that 10Y Portuguese bond yields dropped to seven-month lows - except by us of course where we explained that this is almost entirely due to the CDS-Bond basis trade 'arb-du-jour' that has placed a technical bid under Portuguese bonds. Between the help from LTRO and the fact that ISDA is under-pressure to improve/amend CDS rules to 'honor the spirit of the CDS contract to the fullest extent' which implicitly reduces the massive 'event' premium uncertainty between CDS and Bond risks for distressed-names (thanks to the ECB's actions in Greece), every bond in the short- to mid-term maturity of Portugal appears notably rich - with only the longest-dated bonds reflecting the crisis that remains. As we described in detail here, the real Debt/GDP of Portugal is around 140% (notably higher than the EC estimates of 111% once contingent liabilities are take account of) and the issues that face this small nation are entirely unresolved with bank recapitalization needs of at least EUR12bn and a highly indebted private sector. The bottom-line is that optically-pleasing bond improvements recently have been entirely due to synthetic credit arbitrage and, as Morgan Stanley notes, the nation remains mired in the three risks of contingent liabilities, bank recap needs, and a grossly indebted private sector; leaving a second bailout very likely by September 2012 and the challenging debt dynamics likely to mean a restructuring.
The US is now about to enter fully-fledged "election mode". With only two candidates left in the "race" for the Republican nomination - only one according to the mainstream media, but more on that below - the "issues" at stake in the upcoming election are now being very carefully tailored for an increasingly unruly domestic US political audience. A less polite way of phrasing this is that the spin is becoming dizzying. The foremost task of preparing for the November vote is to maintain the illusion that any and all economic or financial "hiccups" which might affect the US in the next six months are not home gown. The US establishment has never fooled all of the people all of the time -just enough of them to keep their power. The problem is that this keeps getting harder to do.
Two weeks ago we reported the somewhat surprising news that according to the FT, current Bank of Canada head, and former co-head of sovereign risk at Goldman Sachs had been "informally" approached by the Bank of England to be Mervyn King's replacement when the latter's contract runs out in June 2013. Once the news broke, the tenuous arrangement to have a former-Goldmanite at virtually every single developed world central bank seemed to have hit a snag as both the Bank of Canada and Carney himself were forced to deny that any interest by the BOE had been expressed. Of course, what was missing from the public discourse is that this was likely one of those "reverse inquiry" type of career moves, whereby the candidate himself, or rather the employing firm - in this case Goldman Sachs, makes the decision whether or not the candidate would be suitable to head the Goldman subsidiary known as the Bank of England. Which is why it is with even less surprise that we now learn that it is none other than the firm's most permabullish strategist Jim O'Neill, who after coining the globalist wet-dream term "BRIC" was sent in exile to chair the firm's worst performing division, GS Asset Management, that is rumored to be the latest replacement for Mervyn King.
iTax Avoidance - Why In America There Is No Representation Without "Double Irish With A Dutch Sandwich" TaxationSubmitted by Tyler Durden on 04/29/2012 06:44 -0400
Back in October 2010 we presented an analysis by Bloomberg which showed not only that courtesy of not paying taxes at its statutory rate of 35% Google was adding about $100/share to its then stock price of $607/share, but just how this was executed. Now, it is the turn of Apple, with its $110 billion in cash, to fall under the spotlight, with an extended expose in the NYT titled "How Apple Sidesteps Billions in Taxes" in which we learn that, shockingly, if you are at a table with only corporations sitting to your left and right, then you are the only person in the room paying taxes. Why - because global corporate tax "avoidance" schemes are not only perfectly legal, but they are actively encouraged, and in some cases form the backbone of a sovereign's (ahem Ireland) economic and even domestic policy, which just happens to be front and center in virtually every global corporate org chart permitting virtually the entire elimination of cash taxation at the corporate level.
Way back in 2009, we remember fielding all manner of questions from people wanting to invest in gold, having seen it spike from its turn-of-the-millennium slump, and worried about the state of the wider financial economy. A whole swathe of those were from people wanting to invest in exchange traded funds (ETFs). John Aziz always and without exception slammed the notion of a gold ETF as being outstandingly awful, and solely for investors who didn’t really understand the modern case for gold — those who believed that gold was a 'commodity' with the potential to 'do well' in the coming years. People who wanted to push dollars in, and get more dollars out some years later. 2009 was the year when gold ETFs really broke into the mass consciousness. Yet by 2011 the market had collapsed: people were buying much, much larger quantities of physical bullion and coins, but the popularity of ETFs had greatly slumped. This is even clearer when the ETF market is expressed as a percentage of the physical market. So what does this say about gold now? Especially as Zhang Jianhua of the PBoC noted "No asset is safe now. The only choice to hedge risks is to hold hard currency — gold."
While Greece has had its fair-share of EURs funneled to it and through it over the course of the last year or two, it appears they have now created their first 'internal' bailout as things go from bad to worse. As Athens News reports, Greece will provide EUR250mm in emergency funds to its ailing electricity providers to prevent a California-style energy crisis. This liquidity injection to the country's power utlities was yet another unintended consequence of government intervention action. An increasing number of consumers stopped paying their electricity bills following the TROIKA's Greek government's infliction of EUR1.7bn property taxation via the electricity providers. The main power utility PPC had a liquidity hole blown through it as non-payments mounted and while regulators claimed the system needed at least EUR350mm to stay afloat, the government has agreed to allow PPC to hold EUR250mm of the property tax it has collected on behalf of the state until June 30 - by which time, it is hoped the utility will have managed to secure other lending facilities. Quite an incredible move - to force the electricity provider to gather the property taxes - and while this attempt clearly failed we suspect the next move will be food-and-water-rationing without proof of tax payment.