fixed

Is a bonus culture beneficial to the economy?

The rhetoric coming out of Greece has reached a fever pitch. Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants. If he isn’t the most conflicted politician of all time, he is right up there. Samaras may believe it, or may have decided this is his best route to power when the vote is passed and the Greek people decide to kick Papademos out (remember, he was never voted in). Either of them would be more credible if they made any attempt to explain why it would be so disastrous. So far, not one basic fact to support the chaos theory has been given. I will admit that if Greece defaults without any preparation, it would be extremely ugly, but there is no reason not to be prepared. So, if I was the Greek Finance Minister (I would probably have a longer last name, with more vowels) here is an outline of how I would prepare for default.

It is only appropriate, and so ironic, that a politically motivated settlement whose purpose is to squash any claims of pervasive defective document fraud (and contract law but just ask GM bondholders about that - it's hardly news) is itself found to be... defective. American Banker reports that the reason why the terms of the so-called historic (just ask the Teleprompter in Chief) foreclosure settlement deal are not public yet, is "because a fully authorized, legally binding deal has not been inked yet." Wait, so America's cohort of AGs just all, pardon the pun, robosigned a piece of paper that does not exist? What next: there is a different Linda Green signature on every page of this yet to be produced document making a complete mockery of the rule of law?

Just over three years ago, Zero Hedge first pointed out some dramatically meaningless inconsistencies in one of the world's most important numbers (which also happens to be "self-reported" and without any checks and balances) - the London Interbank Offered Rate, better known as LIBOR, which is the reference rate of a rather large market. Following that, we made a stronger case that the Libor, should really be abbreviated to LiEbor in "On the Uselessness of Libor" from June 2009, which alleged that this number is essentially manipulated, potentially with malicious intent. That alone got us a very unhappy retort from the British Banker Association (BBA) which is the banker-owned entity set to "determine" what the daily Libor fixing is based on how banks themselves tell us their liquidity conditions are. Well, as has been getting more and more obvious over the past two years, our allegations were 100% correct, and have now manifested in a series of articles digging through the dirt, manipulation and outright crime behind this completely fabricated number. And yet this should be the most aggravated offence in the capital markets, because LIBOR just so happens is the primary driver in determining implicit risk as a reference rate for $350 trillion worth of financial products. That's right - that one little number, now thoroughly discredited, has downtstream effects on $350,000,000,000,000.00 worth of notional assets. That's a lot. And while we are confident that nobody will ever go to prison for LIBOR fraud, which has explicitly been leading investors and speculators alike to believe that risk is far lower than where it truly is, what one should ask if the LIBOR rate is manipulated, and with is the entire floating and interest rate derivative market, not to mention CDS which are also driven off a Libor benchmark, what is there to say about the minuscule in comparison global equity market? In other words, does anyone honestly think that with the entire fixed income market pushed around by individuals with ulterior motives, that stocks are ... safe for manipulation?

Just over a week ago we highlighted the desperate plight of cash-strapped California. With a $3.3bn short-term 'hole', they were looking for cash-management solutions under every rock and hard place they could find. Today we hear that California joins the Obama bank foreclosure settlement enabling $18bn of bank-funded cash (implicitly via Federal Reserve/Government coffers) can flow to the left coast. Los Angeles alone will receive $4bn which while eventually wending its way down to the consumer (to be spent and implicitly spurring further economic activity or perhaps more likely to pay down other debt in this balance sheet recessionary environment), as Bloomberg asks, "Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?" To add to California's 'aid', BofA has become the first bank to sign up for the 'Keep your Home' program where Federal dollars are given to banks to encourage them to reduce mortgage balances on struggling (over-levered and perhaps once greedy) California homeowners. Certainly it is a happy coincidence that perhaps a short-term cash crisis could be band-aided in the Golden State by this well-timed joining of California to the settlement.

Irish Finance Minister saying that whatever the ECB does with Greece would be of interest to Ireland. So if ECB forgives Greek debt (directly or through EFSF), Ireland is going to want the same deal. Portugal won't be far behind. And why stop at ECB and not go for PSI as well?

The last time the Fed tried to dump Maiden Lane 2 assets via a public auction in a BWIC manner, it nearly crashed the credit market. This time, the FRBNY, headed by one ex-Goldman Sachs alum Bill Dudley, has decided to go back to its shady, opaque ways, and transact in private, with no clear indication of the actual bidding process or transaction terms, and sell $6.2 billion in Maiden Lane 2 "assets" to, wait for it, Goldman Sachs, the same firm that would benefit in the first place if AIG's assets imploded (remember all those CDS it held on AIG which supposedly prevented it from losing money if AIG went bankrupt?). One wonders: does Goldman have a put option on the ML2 portfolio if the market experiences a sudden and totally impossible downtick some day? But all is well - we have assurance from the Fed that the sale happened in a "competitive process." Luckily, that takes care of any appearance of impropriety.

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.  New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.  The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.

European stocks advanced today following reports that the ECB is said to be willing to exchange Greek bonds with EFSF. In addition to that, although a vast majority of officials remain adamant that no haircuts will be applied, WSJ report indicated that the concession by the ECB will contribute to the Greek debt reduction, and the concession depends on the overall debt agreement being set. However it remains to be seen what effect using the EFSF for such spurious purposes will have on the demand for EFSF issued bonds in the future. Still, the renewed sense of optimism that debt swap talks are nearing an end depressed investor appetite for fixed income securities, which in turn resulted in further tightening of peripheral bond yield spreads. The stand out was the 10-year Spanish bond, amid a syndicated issuance from the Treasury. Going forward, Greek PM is scheduled to meet party leaders on a loan deal at 1300GMT, while other reports have suggested that the Troika is keen on meeting Greek parties individually. There is little in terms of macro-economic data releases today, however the US Treasury is due to sell USD 24bln in 10y notes.

While hardly new to anyone who actually has been reading between the lines, and/or Zero Hedge, in the past few months, the Greek endspiel is here, and as a note by Goldman's Themistoklis Fiotakis overnight, the Greek timeline, or what little is left of it, "allows little room for error." Furthermore, "Due to the low NPV of the restructuring offer it is likely that part of this investor segment may be tempted to hold out (particularly owners of front-end bonds). How the holdouts are treated will be key. Paying them out in full would probably send a bullish signal to markets, yet it would be contradictory to prior policy statements about the desirability of high participation both in practical terms as well as in terms of signalling. On the other hand, forcing holdouts into the Greek PSI in an involuntary way would likely cause broad market volatility in the near term, but could be digested in the long run as long as it happens in a non-disruptive way (as we have written in the past, avoiding triggering CDS or giving the ECB’s holdings preferential treatment following an involuntary credit event could cause much deeper and longer-lived market damage)." Once again - nothing new, and merely proof that despite headlines from the IIF, the true news will come in 2-3 weeks when the exchange offer is formally closed, only for the world to find that 20-40% of bondholders have declined the deal and killed the transaction! But of course, by then the idiot market, which apparently has never opened a Restructuring 101 textbook will take the EURUSD to 1.5000, only for it to plunge to sub-parity after. More importantly, with Greek bonds set to define a 15 cent real cash recovery, one can see why absent the ECB's buying, Portugese bonds would be trading in their 30s: "Portugal will be crucial in determining the market’s view on the probability of default outside Greece... Given the significance of such a decision, markets will likely reflect concerns about the relevant risks ahead of time." Don't for a second assume Europe is fixed. The fun is only just beginning...

If the people in this country had any balls (or actual leaders and not just the Corporate puppets we're allowed to vote for), we'd have a mortgage strike.

The mainstream view uniting the entire political spectrum is that all our financial problems can be fixed by what amounts to top-down, centralized policy tweaks and regulation: for example, tweaking policies to "tax the rich," limit the size of "too big to fail" financial institutions, regulate credit default swaps, lower the cost of healthcare (a.k.a. sickcare), limit the abuses of student loans to pay for online diploma mills, and on and on and on. But what if the rot is already beyond the reach of more top-down policy tweaks? Consider the recent healthcare legislation: thousands of pages of obtuse regulations that require a veritable army of regulators staffing a sprawling fiefdom with the net result of uncertain savings based on a board somewhere in the labyrinth establishing "best practices" that will magically cut costs in a system that expands by 9% a year, each and every year, a system so bloated with fraud, embezzlement and waste that the total sum squandered is incalculable, but estimated at around 40%, minimum....The painful truth is that we are far beyond the point where policy/legalist regulatory tweaks will actually fix what's wrong with America. The rot isn't just financial or political; those are real enough, but they are mere reflections of a profound social, cultural, yes, spiritual rot. This is the great illusion: that our financial and political crises can be resolved with top-down, centralized financial reforms of one ideological flavor or another. It is abundantly clear that our crises extend far beyond a lack of regulation or policy tweaks. We cling to this illusion because it is easy and comforting; the problems can all be solved without any work or sacrifice on our part.

Our bullish premise rests on Greece being fixed.

It has only been a week since we discussed the San Francisco Fed's research group admitted that water was wet Fed policy will be unable to impact unemployment since the cyclical changes are more structural leading to jobless recoveries as fat is removed from the system. The powerless Fed now has another well-researched problem. As Daniel Wilson of the FRBSF sheepishly admits (having spent several thousands in taxpayer cash to fund the latest Fed 'white paper') with regard to the impact of fiscal stimulus: It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to +3. Critically he notes that the benefits of fiscal stimulus vary with the business cycle and are strongest during recessions. So, given that the US is decoupling and that we are not in a recession, we assume the multiplier effect of the Fed's much-desired fiscal stimulus requests will be at the lower end of the range - either negative or inconsequential?

In other words, for the Fed to get its desired fiscal stimulus from the government they had better engineer, using only the monetary policies up their sleeves, a recession.

Weekend talks between Greek government officials failed to reach a definitive conclusion and as such market sentiment has been risk averse across the asset classes. The equity market has been chiefly weighed upon by the banking sector and as such underpinned the rise in fixed income futures. However, recent trade has seen a slight pullback led by tightening of the French spreads on reports of good domestic buying noted in the belly of the French curve. Today marks the deadline for Greece to provide feedback as to the proposed bailout terms put forth by the Troika, but with continued disagreement on the fine print in the additional austerity proposals, market participants remain disappointed in the lack of progress. Of note a PASOK spokesman has said that Greece should not hold a general election after clinching an agreement on a second bailout package, suggesting instead an extension of Lucas Papademos' tenure. However, the two main unions of Greece have called for a 24hr strike on Tuesday. Looking ahead there is little in the way of major US economic data today so Greece will likely remain the dominant theme for the rest of the session.