fixed

Now that the Greek exit is back to being topic #1 of discussion, just as it was back in the fall of 2011, and the media has been flooded by groundless speculation posited by journalists who have never used excel in their lives and are merely paid mouthpieces of bigger bank interests (long live access journalism and the book sales it facilitates), it is time to rewind to a step by step analysis of precisely what will happen in the moment before Greece announces the EMU exit, how the transition from pre to post occurs, and the aftermath of what said transition would entail, courtesy of one of the smarter minds out there, Citi's Willem Buiter, who pontificated precisely on this topic last year, and whose thoughts he has graciously provided for all to read on his own website. Of course, take all of this with a huge grain of salt - these are observations by the chief economist of a bank which will likely be swept aside the second the EMU starts the post-Grexit rumble.

Curious how the world's most important trading desk saw the action today? Here it is.

When it comes to question of "who is right" in the market, the debate usually ends with credit (investment grade) or equity (and its high beta equivalents in the fixed income arena: high yield bonds). And since the question is rhetorical we will kill the suspense and cut straight to the answer: always, and without fail, credit. The chart below shows that once the manipulated ramp up in high beta risk equivalents such as the ES and HY is over (especially since IG is now losing its artificial JPM-induced bid, or technically offer, which is unwinding positions across all vintages and buying protection to close short positions), the way down to a credit-implied fair value of 1335 on the S&P will be fast and furious.

The California housing market sits in an odd stage of limbo.

All you need to read and some more.

Yes, believe it or not, there is a world outside of JPM in the past 12 hours, and it was very ugly: weak Chinese CPI, big miss in Chinese industrial output (+9.3%, Est. +12.2%), even bigger miss, actually make it a decline, in Indian factory Outupt (down -3.5%, est. +1.7%), a collapse in China’s new local-currency loans plunging by 32% m/m in April, making a new money infusion paramount (yet inflation still abounds, and the threat of NEW QE keeping the PBOC mum - oh what to do?) and of course... Greece, where things are heading for a second election at breakneck speed, and where Syriza is gaining about a percent in new support each day, guaranteeing life for Europe will be a living hell in one month. What else happened overnight to send futures down 0.5% (and JPM down 8%). Below is a full recap from Bank of America.

Remember the "no brainer", "trade of the year"? Looks like all hell may be about to break loose as the trade of the year, becomes the mistrade of the decade...

The ECB seems to be quite happy to comment on Greece, and most of the comments seem to say that Greece isn’t doing their part.  Well, what about the ECB?  What have they been doing for Greece?  So far, not very much and I think they need to start to play nicely with their holdings.  If the ECB just plays nicely, at no cost to the ECB, the situation in Greece would improve quickly and dramatically.  The ECB must go from being a lender of last retort to a bona fide contributor to Greece and a true lender of last resort. Maybe the ECB should “Ask not what Greece can do for you, but what you can do for Greece”?

I think this going to get very messy, soon.

Back in the middle of March, when all was sunshine and unicorns in the post-LTRO world of recovery and another sustainable recovery, we were vociferous in our noting that nothing has been fixed and LTRO3 is not coming. Sure enough, here we are a few weeks later and the encumbering stigma that we were the first to point out (and call Draghi out on) is now wider than at any time since the LTRO program began with the banks that took LTRO loans now trading wide of pre-LTRO levels (fully stigmatized despite all that extra liquidity). Today saw the Stigma spread between LTRO and non-LTRO banks jump its most in 2 months to over 160bps (its highest in almost six months). There is however a troubling conundrum facing the ECB. The banks that need another LTRO (or liquidity) no longer have performing collateral to pledge and other banks that would like liquidity will not take it since they now understand the encumbrance and stigma that is attached to that decision. The ECB is snookered (and so is it any wonder that Draghi is playing for time) and perhaps this is why we are seeing the EUR leak lower against the USD as markets anticipate some more direct monetization mandate-busting action by the ECB (shifting the Fed/ECB balance and implicitly the flow between the two that we have also pointed out as critical). Either way, there is no LTRO3 coming anytime soon and together with this morning's jumps in liquidity funding costs, the vicious circles are ramping up again in Europe.

Preaching from the pulpit of the fiscally most undisciplined country in the world

We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble. Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon. The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. Capital markets are at the heart of capitalism and they are not working.

The entire bogus recovery is again being driven by subprime auto loans being doled out by Ally Financial (85% owned by the U.S. government) and the other criminal Wall Street banks. The Federal Reserve and our government leaders will continue to steer the country on the same course of encouraging rampant speculation, deterring savings and investment, rewarding outrageous criminal behavior, purposefully generating inflation, and lying to the average American. It will work until we reach a tipping point. Dr. Krugman thinks another $4 trillion of debt and a debt to GDP ratio of 130% should get our economy back on track. When this charade is revealed to be the greatest fraud and theft in the history of mankind, Ben and Paul better have a backup plan, because there are going to be a few angry men looking for them.

About two years ago the Norwegian sovereign wealth fund did something truly remarkable: it invested for infinity: "Norway, which has amassed the world’s second-biggest sovereign wealth fund, says Greece won’t default on its debts. The Nordic nation’s $450 billion Government Pension Fund Global has stocked up on Greek debt, as well as bonds of Spain, Italy and Portugal. Finance Minister Sigbjoern Johnsen says he backs the strategy, which contributed to a 3.4 percent loss on European fixed income in the second quarter, compared with gains on bonds in Asia and the Americas. Norway says its long-term perspective will protect it from losses. “One could say we are investing for infinity,” Johnsen said." Well, we all know how the experiment ended: "Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings." So much for infinity. But that has not stopped others to boldly catch falling knives where so many other have tried to catch falling knives before, and failed. Enter Greylock Capital and various other hedge funds who are positive they have rediscovered the wheel.

Just like Rome wasn’t built in a day, the Eurozone won’t be destroyed in a day, but it is on a path that leads to eventual dismantling. This week we will see everyone play nice. Conciliatory words will be spoken.  Growth will become the topic de jour.  The markets will fall all over themselves once again on news of bank bailouts.  The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets.  Europe will have a new spirit of co-operation and will welcome fresh insights into the process.  Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about.  There will be talk, and maybe even action on the bank recapitalization efforts.  Good banks and bad banks will abound.  Governments will promise money to banks at rates so low no sane investor would even consider. Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest as justifying further bailouts for the core will be nigh on impossible, growth is not easy to achieve, and the good-bank-bad-bank model is a loser from the start.