What happens when a central bank becomes insolvent? We might get an answer to that question quicker than we expected. At current exchange rates, it will be one of the most expensive lessons in history. Usually, when excessive leverage is involved, it is never a good thing (for the institution) when the amount of assets flat lines, or even slows down. The People’s Bank of China’s balance sheet has definitely shown a noticeable slowdown. In the past, its balance sheet had the amazing ability to increase by a trillion renminbi every few months. The current balance seems to be stuck at around ¥28 trillion, which it passed in July, 2011. If its assets decrease by ¥22 billion (or -0.07%), it is insolvent. Since peaking out in January, 2012, the PBoC’s balance sheet has lost ¥895 billion, so maybe it already is. Maybe nothing bad will happen. After all, who needs shareholders equity when you can print money?
Back in March we wrote "Mario Draghi Is Becoming Germany's Most Hated Man" for one reason: a few months after the former Goldman appartchik was sworn in to replace Trichet with promises he would not "print" Draghi did just that in a covert way via $1.3 trillion in LTROs, that immediately hit the economy and sent inflation across Europe soaring. It now appears that the simmering hatred between the two is about to upshift to a whole new level, with the threat of open escalation finally arriving. Because if Sueddeutsche Zeitung is correct, via Reuters, in precisely 12 hours, Draghi will proceed with a plan that has neither Germany's nor Buba's blessing, in the process effectively isolating the only remaining solvent country in Europe, and its de facto paymaster, and forcing Germany to take a long, hard look at the exit sign (which, however, as reported earlier, with each passing day that drags Germany's economy is becoming less of an unthinkable outcome). To wit: "Draghi is planning concerted action using both the ECB and the future euro European Stability Mechanism (ESM) to purchase sovereign debt from Spain or Italy in order to help push down borrowing rates for those two countries." There is one problem: "highly doubtful that the German government would agree to Draghi's approach. The Bundesbank also is likely to reject the idea, the paper added."
Back in September, before the transition from then ECB head J.C. Trichet to current Goldman plant and uber printer Mario Draghi we asked whether "Trichet will disgrace his already discredited central banker career by pushing a rate cut before he is swept out of the corner office by Mario Draghi, or will the former Goldmanite Italian become the most hated man in Germany soon, after he proceeds to ease, even as Germany still experiences Chinese inflationary re-exports. The answer will be all too clear in just a few months." Sure enough, following a whopping €1 trillion in incremental liquidity released by the ECB in the three shorts months since Draghi's ascension on November 1, all under the guise that the ECB is not printing when it most certainly is, albeit "hidden" by the idiotic claim that it accepts collateral for said printing (what collateral - Italian and Spanish bonds, which will become worthless the second even more printing is required in a few short months? This is run time collateral that can be issued "just in time" to convert it to even more cash as UniCredit did again today), the answer is becoming clear. Slowly but surely the realization is dawning on Germany that while it was sleeping, perfectly confused by lies spoken in a soothing Italian accent that the ECB will not print, not only did Draghi reflate the ECB's balance sheet by an unprecedented amount in a very short time, in the process not only sending Brent in Euros to all time highs (wink, wink, inflation, as today's European CPI confirmed coming in at 2.7% or higher than estimated) but also putting the BUBA in jeopardy with nearly half a trillion in Eurosystem"receivables" which it will most likely never collect.
A few lines from Hilsenrath and three little words from Draghi last week were enough to offset the reality of 300 corporate results which are indicating a pending US recession (at least empirically as James Bianco points out) given that negative YoY revenues are expected. This fascinating interview between the B-Boys, shifts from the crazy reality above to the incredible correlation between Obama's probability of being re-elected and the S&P 500 - making the teleprompter-in-chief a clear risk-on trade (which is the exact opposite to the relationship before he was elected) though things are changing. They address Draghi's heavy-handed approach and ask he if can do whatever it takes, just do it - don't keep telling us about it (obviously dismissing his capability of fixing anything); and conclude with a discussion of the fiscal cliff (which will be pushed off til after the election) and the reality of spending cuts versus higher taxes (noting that taxes are low since there are no capital gains tax). Seeing Biderman's Batman to Bianco's Robin is well worth the nine minutes.
A slow leak higher in risk assets (assisted by Knight Capital's exposing the 'tickle-algo') into the FOMC in general was abruptly extinguished by a lack of anything new to report at all. The knee-jerk derisking was then caught as BTFD'ers could not resist and while FX markets in general were not buying the rebound, Treasuries sold off as stocks reverted back up into the green, above VWAP and above pre-FOMC levels. But as the real trading of the last 90 seconds of the day began, stocks smashed back down towards their lows with JPY crosses also dragging lower. Financials appeared to be the signal that 'all bets were off' as they went all humpty-dumpty and couldn't get back to pre-FOMC levels. Treasuries ended up 4-5bps with the belly underperforming (though off their worst levels), Gold and stocks recoupled lower, the USD closed at its highs of the day, VIX staged a come-back and closed unch at 18.9% (as stocks caught down to it too and it ended at its flattest in 10 weeks), and while HYG staged what appeared to be a miraculous effort to save the day to close unchanged (but was HYG-SPY arb), equities ended at their lows - underperforming credit notably. Of course KCG was the talk of the day, dumping over 32% of its market cap to end with a $6 handle as all those market-making algos start to look each other in the eye and fight over that last 100-lot 'real' transaction.
While markets await details on the next round of quantitative easing (QE) -- whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) -- it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies? The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression. QE is a poor transmission mechanism for creating jobs. It wasn’t supposed to be this way.
NYSE To Cancel Trades Beyond 30% Band From Opening Price In Various Stocks, Knight To Foot Bill For Balance?Submitted by Tyler Durden on 08/01/2012 15:43 -0400
Update: NYSE has completed its review of the impaired stocks. Those are the only 6 stocks which will see trade cancellations:
Just as the only response by the SEC and various exchanges to the May 2010 flash crash was to cancel all trades beyond a 20% band of the prevailing NBBO before the Flash Crash (in the process destroying any confidence that market crash perpetrators would be truly punished by forcing them to incur the full damage resulting from the consequences of their stupidity), so the NYSE has determined to unilaterally cancel all trades, initially in six stocks, but probably in all of the attached 140 symbols, in a move that will teach the offenders absolutely nothing, and will punish only those who took advantage of a broken market to incur one-time profits courtesy of a broken market structure. However, what it will also do, is likely make Knight directly liable for any losses incurred by traders from the opening price through the 30% breakage threshold. In other words, with Knight losing about $300 million in market cap today, investors are speculating that the net loss to the firm will be just that as it has to foot the bill. Considering the volume and breadth of the impaired universe, this will likely be very big underestimation of just what the final bill will be to Knight. And isn't it ironic that Knight itself was until recently complaining about how much money it itself lost on the FaceBook IPO as a market maker...
When we discussed the next steps from the Lieborgate fallout, we made it explicitly clear that one after another experts will come to the fore with their predictions on the monetary fallout of Lieborgate, and how much various banks will be on the hook for: basically an exercise in futility as there is no way to even remotely extrapolate what the liability is to manipulating $500 trillion worth of IR-derivative notional. The bulk of these analyses have been of the lowballing variety, designed to create a "framing" limit for the Libor liability within a given mental range, when in reality the number could and likely will be orders of magnitude greater, but what bank wants ambulance chasing to go off the charts and be sued by anyone who was exposed to debt instruments in the past decade - read mortgage or credit card? One firm which dares to break away from the framing mold is Australian bank Macquarie which has thrown out the simply stunning number of $176 billion. If true: prepare for the banks' Tobacco moment as well over half of the market cap of global financial institutions who just so happens have exactly $0.00 in litigation reserves for just this contingency, is slashed.
Citi Sounds A Warning: "The Misread Of The Fed May Also Worry Investors That They Have Misread Draghi"Submitted by Tyler Durden on 08/01/2012 15:33 -0400
The FX market remains the most anxious post-FOMC with USD strength across the board but we note that JPY crosses (e.g. EURJPY) are largely in line with equity's movements for now. Citi's FX Strategist, Steven Englander, is a little more concerned in his post-FOMC view that while "it is possible that there will be a revisionist view of the statement that puts a more positive interpretation on it", he adds that "investors may also be pulling back a bit from ECB expectations on the view that coordinated easing is out of the picture (keeping in mind that such coordinated easing is far from common). The misread of the fed may also worry investors that they have misread Draghi" which we explicitly said NOT to expect without Germany's buy-in - which remains absent for now.
And not only did the Fed disappoint, but it didn't even extend ZIRP through 2015. Sorry Hilsenrath, better luck next time
- FED SAYS IT `WILL PROVIDE ADDITIONAL ACCOMMODATION AS NEEDED'
- FED REPEATS EXCEPTIONALLY LOW RATES AT LEAST THROUGH LATE 2014
- FED SEES INFLATION OVER MEDIUM AT OR BELOW MANDATE LEVEL
- FED TO KEEP REINVESTING HOUSING DEBT TO MORTGAGE SECURITIES
- FED SAYS HOUSING SECTOR REMAINS DEPRESSED
- LACKER DISSENTS FROM FOMC DECISION
And if markets are surprised by this goose-egg according to which the September FOMC will at best be the ZIRP extension that was supposed to take place today just so Congress can sort its own mess out with the Fed, wait until Draghi confirms what we said last week: that he was merely posturing and is totally impotent without the Buba's blessing. Then you will see pain in a market which is 5% higher than where it would be absent his headfaked posturing.
Our interpretation of the forward-looking language in today’s statement – especially the phrase “will provide additional accommodation as needed” – is that some form of monetary easing at the September 12-13 FOMC meeting is the current baseline. Although easing is by no means a foregone conclusion, we suspect that the incoming information needs to improve materially in order to forestall it. Most plausibly, Goldman reiterates expectations of a lengthening of the forward rate guidance as the most likely outcome for September 13, with asset purchases financed by renewed balance sheet expansion following in late 2012/early 2013.
UPDATE: Energy, Tech, and Staples have reverted BUT Financials and Utilities remain near lows...
The knee-jerk reaction was very clear - selling pressure on both US equities and gold as no mention of NEW QE disappointed and no language change per se to indicate its imminent arrival. No rate extension droive the front-end of the Treasury curve higher in yield and the curve is flattening as 30s and 10s outperform and 2s underperform. EURUSD dropped 70 pips to 1.2235 as USD strength was across the board. Commodities are broadly lower as USD strengthens BUT gold and stocks are rebounding back towards unchanged from pre-FOMC now. As we post, only the USD seems to be holding its change as Gold, Stocks, and TSYs have retraced the immediate reaction - though stocks looked like a trickle up to VWAP so be careful. FX markets remain the most 'skeptical' as the rest revert from kneejerk for now...
- Pre: 10Y 1.4950, ES 1376, DXY 82.7, gold 1603, IG 105.75, HY 97.25, HYG 91.39, WTI 88.81
- Post: 10Y 1.51, ES 1374, DXY 83.1, gold 1600, IG 105.4, HY 97.28, HYG 91.42, WTI 88.85
Just when you thought it was safe to hope that saved-or-created jobs were at least not plunging anymore, the truth is out with online job postings. As opposed to de minimus surveys, or BLShit small pool analysis, the 'fact-based' number of 'New Help Wanted' Online Ads plunged in July by its most since January 2009! The total number of Online Help Wanted Ads also fell by its most in a year and as Credit Suisse points out, in 7 of the last 8 times when we see an outlier of this magnitude it is followed by outright declines in non-farm payrolls and private payrolls.
The following chart from today's TBAC presentation slidedeck should put to bed all debate of not only what the US government spends its money on (of which about half is generated through tax collection and half is borrowed), but also what the trends in current year spending are compared to 2011. In summary: of the 4 biggest categories HHS (Medicare & Madicaid), Social Security or together Welfare, Treasury and Defense, Welfare is higher, Treasury is higher, and Defense is not only lower, but has lost to Treasury as the third biggest expense category year to date.