Capital Markets

There is no indication that the Obama administration has even considered this eventuality. Indeed, I have not heard anyone on the left refer to Bernanke or the poison of his policies at any point in the last few months.

Remember when we said the Citi numbers were a miserable joke? Apparently at least two people (not Jim Cramer who absolutely loved Citi's "hairless" result) were aware of this:

• CITIGROUP NAMES MICHAEL CORBAT AS CEO VIKRAM PANDIT STEPS DOWN
• CITIGROUP PRESIDENT-COO JOHN P. HAVENS ALSO RESIGNS
• CITIGROUP NAMES MICHAEL CORBAT AS CEO VIKRAM PANDIT STEPS DOWN
• CITIGROUP BOARD UNANIMOUSLY ELECTED CORBAT TO CEO
• CITIGROUP SAYS HAVENS HAD BEEN PLANNING TO RETIRE AT YEAR END

And so the rat procession out of the titanic begins.

A new monetary era has began in the West. Its consequences will probably be very different in the United States and Europe. However, one way or the other, investors now operate under a regime of central bank asset price targeting. Everything we know about investors’ traditional reflexes and all historical points of reference are potentially invalid.

One of the most egregious aspects of the Great Moderation was the issuance (and thus demand for) of large amounts of grossly mispriced extremely 'junky' debt at the peak as investors stymied by the lack of spread (return) pushed further and further out the credit risk spectrum. The driver at the time was the liquidity flood triggered by large-scale securitizations (and that ended well eh?); this time it is central banks providing the fuel for investors to seek yield through leverage (either through fundamental leverage in riskier firms or technical leverage through riskier instruments). To wit, the last few weeks have seen a resurgence of issuance of PIK-Toggle bonds.

Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that -  to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'. The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.' But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming  years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present. One cannot possibly "print one's way to prosperity". The exact opposite is in fact true: the policy diminishes the economy's ability to generate true wealth. If anything, “we” are printing ourselves into the poorhouse.

The overnight session has been largely listless, with the market digesting a less than impressive start to earnings season by Alcoa, which reported declining cash flows, and various other negative earnings preannouncements out of major industrial companies. The IMF has not helped the somber mood with its analysis that by the end of 2013 European banks will need to dispose of up to $4.5 trillion in assets. Asian weakness (even the SHCOMP couldn't rally much on further easing rumors for the simple reason that the PBOC will simply not ease with QEternity out there and a food price hike over the horizon) has dominated the trading session so far. What little goods news there was came out ironically out of Italy and France, both of which reported better than expected August Industrial Production data. Italy IP rose 1.7% on expectations of a -0.5% drop, and up from -0.2% last, while the French Industrial Production posted a surprising surge, following weeks of poor data out of the country, with IP up 1.5% on expectations of a -0.3% print, and up from last month's 0.6%. However, even France warned not to read too much into a number driven by, well, cars and drinks.

Nothing materially new here from David Rosenberg's latest letter, but it is useful to keep being reminded over and over how central planning has totally destroyed the primary function of capital markets: discounting, and replaced it with a dumb terminal which only responds to red flashing headlines reporting of neverending liquidity. "If the Fed really had its way, the economy would be booming. But it is sputtering. For all the talk of one month's employment report — look at the entire quarter for crying out loud. Looking at total labour input, aggregate hours worked, it eked out a tepid 0.8% annualized gain in Q3....That the stock market is up 16% this year (on track for the best year since 2009) with earnings contracting underscores the major success of Fed policy in 2012 — managing to deflect investor attention away from negative profit trends and towards its pregnant balance sheet. So welcome to the new normal: the Fed has managed to negotiate a divorce between the economy and equity market behaviour.

Europe just can't catch a break these days. While French Fitch naturally came out earlier with a AAA rating and a stable outlook, it is Moody's, which has yet to follow through in S&P's footsteps 14 months later and tell the truth about America's AAA rating, that moments ago spoiled the ESM "inauguration" party by branding it AAA, but with a Negative outlook. So much for the most 'supersecure' CDO on earth: looks like we are not the only ones to assign comical value to the ESM's €80 billion first loss "Paid-in" tranche. Because that 12% in buffered protection can disappear very quick if and when the central planners lose control.

If interest income as a percentage  of total personal income had remained at its 2008 level, the total would now be over $1.5 trillion. It is this $550 billion annual delta that the Fed has directly, though its policies, taken away from US consumers in terms of purchasing power. So while the Fed has taken away the bond market as a venue in which to generate current income, it is the structural failures of equities in a post-HFT world (stories of mini, amd maxi, Flash Crashes are now a daily occurrence) that prevent investors from having the same confidence about current income in a market in which terminal and fatal capital loss are all too real fears. And there are those who still wonder why the US consumer is withering away, and absent such crutches as soaring Federal non-revolving debt, used for anything but its designated purposes, would have less purchasing power now than before the crisis as a result of the Fed's failed policies.  As George Magnus so peotically summarizes it "What the left hand giveth, the right hand taketh away."

Some correction of Friday’s Bull trap: European Risk Off, EGB credit torsion and weaker equities.

Doubtful whether any fireworks will come out of the ECOFIN meeting.

Seems to be more about maintaining the relative market quietness and status-quo.

There was a time when the world had (somewhat) free markets. Then Lehman failed as the inevitable culmination of a credit bubble that was second in size and severity only to the one being blown currently, and the central planners took over, converting equity, bond and FX markets into nothing but monetary policy tools dominated by central banks. Below is a great summary of how parallel to SkyNet's HFT takeover of stock trading, the central planners conducted their own not so stealthy take over of all capital markets. The chart is open-ended. Expect much more intervention by the Big 4 in the months and years ahead as the circular nature of increased central bank intervention leading to less faith in financial markets leading to increased private sector deleveraging leading to increased-er central bank intervention and so on, accelerates.

At least it is not the China bails out Europe one: thankfully that one is now finished. Instead it is something almost as stupid -i.e., something that was floated, then denied, then floated again, then redenied, from Reuters:

• EURO ZONE CONSIDERING FIRST LOSS INSURANCE FOR SPANISH BONDS UNDER ASISSTANCE PROGRAMME - EU SOURCES
• SCHEME COULD COST EU RESCUE FUND ABOUT 50 BLN EUROS FOR ONE YEAR, ENABLE SPAIN TO MEET FULL BORROWING NEEDS -SOURCES
• NO DECISION TAKEN YET ON BOND INSURANCE SCHEME, MAY BE SEVERAL WEEKS AWAY -SOURCES

Considering the source, Reuters, was pretty much 100% wrong on Monday when it said the Spanish bailout was imminent and Germany contingent, something Germany refuted shortly thereafter, we give this rumor about the same "likelihood" of being credible as every other one that Europe is fixed. But at least it managed to get the EURUSD higher by 20 pips.

For the third day in a row, there is little to write home about from the overnight action. The EURUSD has been choppy following an MNI report about comments from EU officials that suggested Germany wants to delay the Troika decision on a €31.5 billion payment to Greece until after the November 12 Eurozone finmin meeting, no doubt predicated by the already discussed willingness by Europe to not rock the boat before Obama is reelected, still leaving the question hanging: just why is an entire insolvent continent so hung up on a US presidential decision. The main FX market focus is on the European Central Bank rate decision, due at 1145GMT. The ECB is widely expected to leave rates on hold just as the BOE did moments ago (it needs to hurry up if it wants to win the race to debase) although in the New Normal one can't be sure of anything. In other news Spain auctioned off a much needed €3.99 billion in various short-term bonds, the bulk of which fell under the LTRO maturity umbrella, but which was successful nonetheless if with modestly weaker short-end results, and an overall bitter aftertaste as seen by the resumption in Spanish 10 year widening, as the entire market, not to mention Draghi, is starting to get very impatient with Rajoy, who is now even getting urged by Catalonia's Arturo Mas to finally bite the bullet and demand a bailout (and resign shortly thereafter): "A bailout is inevitable; therefore the best thing to do is to make the decision without delay,” Mas said. “Spain has the potential to overcome the situation, but it will need assistance for some time." Recall that Spain's cash needs in October surge so every single successful euro raised is more than critical.

Quiero un iPhone para salvar el Mundo! Looks like Spain actually enjoys the sovereign-regions-banks negative loop with no wish to cut the Gordian knot.

No European data tomorrow: Mario D, the floor is all yours, after Mariano D’s bond sales.

"The Fed will, “gradually sell securities or let them mature." Rubbish!