For several weeks now we have been warning that while the conventional wisdom is that Europe will never let Greece slide into default, Germany has been quietly preparing for just that. This culminated on Friday when the schism between Merkel, who is of the persuasion that Greece should remain in the Eurozone, and her Finmin, Wolfgang "Dr. Strangle Schauble" Schauble, who isn't, made Goldman Sachs itself observe that there is: "Growing dissent between Chancellor Merkel and finance minister Schäuble regarding Greece." We now learn, courtesy of the Telegraph's Bruno Waterfield, that Germany is far deeper in Greece insolvency preparations than conventional wisdom thought possible (if not Zero Hedge, where we have been actively warning for over two weeks that Germany is perfectly eager and ready to roll the dice on a Greek default). Yet it is not only Germany that is getting ready for the inevitable. So is Greece.
The ethics of debt, at least in the officially sanctioned media, boils down to: nobody made them borrow all those euros, and so their suffering is just desserts. What's lost in this subtext is the responsibility of the lender. Yes, nobody forced Greece to borrow 200 billion euros (or whatever the true total may be), but then nobody forced the lenders to extend the credit in the first place. Consider an individual who is a visibly poor credit risk. He would like to borrow money to blow on consumption and then stiff the lender, but since he cannot create credit, he has to live within his means. Now a lender comes along who can create credit out of thin air (via fractional reserve banking) and offers this poor credit risk $100,000 in collateral-free debt at low rates of interest. Who is responsible for the creation and extension of credit? The borrower or the lender? Answer: the lender. In other words, if the lender is foolish enough to extend huge quantities of credit to a poor credit risk, then it's the lender who should suffer the losses when the borrower defaults. This is the basis of bankruptcy laws--or used to be the basis. When an over-extended borrower defaults, the debt is cleared, the lender takes the loss/writedown, and the borrower loses whatever collateral was pledged. He is left with the basics to carry on: his auto, clothing, his job, and so on. His credit rating is impaired, and it is now his responsibility to earn back a credible credit rating....The potential for loss and actually bearing the consequences from irresponsible extensions of credit was unacceptable to the banking cartel, so they rewrote the laws. Now student loans in America cannot be discharged in bankruptcy court; they are permanent and must be carried and serviced until death. This is the acme of debt-serfdom.
What a difference a quarter makes: back in Q4 2011, in light of the imploding global economic reality, the only recourse equity bulls had to was to point out that corporate profitability was still at all time highs, and to ignore the macro. Fast forward a few months, when Europe's economic situation continues to deteriorate with the recession now in its second quarter, China's home prices have just slumped for a 4th consecutive month (forcing the PBOC to do only its second RRR cute since November), Japan is, well, Japan, yet where the US economic decoupling miracle is now taken at face value following an abnormally high seasonal adjustment in the NFP establishment survey leading to a big beat in payrolls and setting the economic mood for the entire month (with flows into confidence-driven regional Fed indices and the PMI and ISM, not to mention the Consumer Confidence data) as one of ongoing economic improvement. That this "improvement" has been predicated upon another record liquidity tsunami unleashed by the world's central banks has been ignored: decoupling is as decoupling does damn it, truth be damned. Yet the bullish sentiment anchor has flip flopped: from corporate profitability it is now the US "golden age." How long said "golden age" (which is nothing but an attempt to sugar coat the headline reality for millions of jobless Americans in an election year) lasts is unclear: America's self-delusion skills are legendary. But when it comes to corporate profit margin math, things are all too clear: the corporate profitability boom is over. As Goldman points out: with the bulk of companies reporting, in Q4 corporate profits have now declined by a significant 27 bps sequentially, and an even more significant 52 bps excluding Apple.
It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.
Open Europe has published a briefing note outlining the ten questions and issues that still need to be resolved in the coming weeks in order for Greece to avoid a full and disorderly default on March 20. The briefing argues that, realistically, only a few of these issues are likely to be fully resolved before the deadline meaning that Greece’s future in the euro will come down to one question: whether Germany and other Triple A countries will deem this to be enough political cover to approve the second Greek bailout package. In particular, the briefing argues that recent analyses of Greece’s woes have underplayed the importance of the problems posed by the large amount of funding which needs to be released to ensure the voluntary Greek restructuring can work – almost €94bn – as well as the massive time constraints presented by issues such as getting parliamentary approval for the bailout deal in Germany and Finland. While the eurozone also continues to ignore or side-line questions over the whether a 120% debt-to-GDP ratio in 2020 would be sustainable and if, given the recent riots, Greece has come close to the social and political level of austerity which it can credibly enforce.
History is replete with the carcasses of failed currencies destroyed through misguided intentional debasement by governments looking for an easy escape from piling up too much debt. James Rickards, author of the recent bestseller Currency Wars: The Making of the Next Global Crisis, sees history repeating itself today - and warns we are in the escalating stage of a global currency war of the grandest scale. Whether it ends in hyperinflation, in the return to some form of gold standard, or in chaos - history is telling us we can have confidence it will end painfully.
When gold was undergoing its latest (and certainly not greatest) near-parabolic move last year, there were those pundits consistently calling for comparisons to 1980, and the subsequent gold crash. Yet even a simplistic analysis indicates that while in the 1980s gold was a hedge to runaway inflation, in the current deflationary regime, it is a hedge to central planner stupidity that will result as a response to runaway deflation. In other words, it is a hedge to what happens when the trillions in central bank reserves (at last check approaching 30% of world GDP). There is much more, and we have explained the nuances extensively previously, but for those who are only now contemplating the topic of gold for the first time, the following brief summary from futuremoneytrends.com captures the salient points. Far more importantly, it also focuses on a topic that so far has not seen much media focus: the quiet and pervasive expansion in bilateral currency agreements which are nothing short of a precursor to dropping the dollar entirely once enough backup linkages are in place: a situation which will likely crescendo soon courtesy of upcoming developments in Iran, discussed here previously.
Although no one can be sure of Buffett's motives, it would be naïve to believe that someone as intelligent as Buffett has not considered the benefits of pushing through this tax structure. Higher taxes are always problems for entrepreneurs and regular people in the economy. However, they're often beneficial to the well-connected, who receive government bailouts and favors. And with Buffett even on the president's lips, he is becoming more connected to the power mechanism in D.C. every day. With many of Berkshire's companies, your loss as a taxpayer will be their gains.
Much has been said in the past about the world's largest university endowment fund - that of Harvard University, whose most famous overseer is the current Pimco CIO and part-time blogger Mohamed El-Erian. Yet relatively little light has been shed on the endowment fund of that "other" school - the one with the original business school, and whose alums have been largely credit with shaping the modern financial world as it stands: the University of Pennsylvania. Also, the one which for many years has oddly underperformed its peers, yet which during the financial crisis suffered the least of its peer Ivy League peers. Until now. In his latest letter, Oaktree's Howard Marks shares the lessons he learned as the Chairman of the Penn endowment in the period from 2001 to 2010. He also analyzes the various angles from which one should approach in evaluating investment performance and track records, in his traditionally meticulous and informative style - a lesson very much needed in today's market climate of bipolar euphoria.
It appears that while we were busy over the past month spreading the Greek pre- and post-bankruptcy balance sheet, and otherwise torturing Excel (something we urge other financial journalists to try once in a while - go ahead, it doesn't bite. In fact, it is almost as friendly as your favorite Powerpoint) our peer at such reputable financial publications as Forbes, and many others, were laying of carbon-based reporters and replacing them with... robots. As Mediabistro reports, "Forbes has joined a group of 30 publishers using Narrative Science software to write computer-generated stories. Here’s more about the program, used in one corner of Forbes‘ website: "“Narrative Science has developed a technology solution that creates rich narrative content from data. Narratives are seamlessly created from structured data sources and can be fully customized to fit a customer’s voice, style and tone. Stories are created in multiple formats, including long form stories, headlines, Tweets and industry reports with graphical visualizations.”" In other words, with well over 70% of stock trading now done by robots, we have gotten to a point where robots write headlines and stories read, reacted to and traded by robots. Surely, what can possibly go wrong. And here we were this morning, wondering why the market is not only broken but plain dumb.
It seems everyone has positioned for what is to come as today was blah. The volume on the NYSE was decent which is expected given the OPEX but trading in the e-mini S&P futures contract (ES) was dismal - lower even than the 2/6 and 2/13 low levels at what looks like the lowest non-holiday trading day since 2006. A very narrow range day (basically from last night's day session close) with a small pop this morning around the day session open saw the highs of the day but ES tried to inch back up there in the afternoon - as credit (IG, HY, and HYG) went sideways from after the European close. Financial and Discretionary stocks outperformed as XLF made new recent highs (while credit spreads remain near 5 week wides). VIX futures tracked stocks for the most part (with a slight push higher into the close) but implied correlation diverged (bearishly) higher. FX markets were relatively calm with in EURUSD with AUD and JPY (-2.5% on the week) weakness the main drivers of USD strength off European session lows - but USD ended the day practically unch (+0.5% on the week). The USD strength dragged Silver down over 1% on the week and Copper down 3.8% (biggest loser today) while Gold outperformed the USD and ended green on the week above $1720. Oil was the winner up almost 5% on the week - its biggest gain of the year - ending above $103.5 for WTI. Treasuries came back off their high yields of the day after Europe closed with a little more push into the close leaving 30Y unch for the week and the short-end +3-4bps.
We wish we had good news, but we are not going to lie: This is the worst possible news for any gold bull out there.
"All the options from here are bad, I am afraid" is how MEP Daniel Hannan describes the way forward in Europe in this FOX News interview. In one of the clearest and least status-quo-hugging explanations of what has occurred (gentile and bloodless coups in Italy and Greece), the 'cruel and irresponsible behavior' of European leaders stuns him and all in the name of the 'wretched single-currency'. When asked why they (the EU leaders) just don't get it (channeling Upton Sinclair's now infamous quote), Hannan replies "It is remarkably difficult to make a man understand something when his salary depends upon his not understanding it" as he makes it clear that the vested interests in keeping the Euro going (well paid and powerful government jobs for example) means they are prepared to inflict this shocking poverty on the Mediterranean countries. Summing it up nicely: until they leave the Euro, the Greeks have got no light at the end of the tunnel, making the point that Greece's least painful option is to Default, Decouple, and Devalue.