recovery

Perhaps after today's budget miss in the Hellenic Republic it is time that the focus shift from the reality of a pending #fail for the voluntary PSI (for all the reasons we have at length discussed no matter how many headlines the markets tries to rally on) to a post-restructuring real economy reality in Greece. Whether self-imposed by devaluation or Teutonia-imposed by Troika, austerity is in the cards but there is a much more deep-seated problem at the heart of Greece - a total and utter lack of innovation and entrepreneurship. As Goldman's Hugo Scott-Gall focuses on in his fortnightly report this week "the competitive advantage of innovation is one that developed markets need to keep" and in the case of European nations that desperately need to find a way to grow somehow, it is critical. Unfortunately, Greece, center of the universe for a post-restructuring phoenix-like recovery expectation, scores 0 for 3 on the innovation front. Lowest overall patent grant rate, lowest corporate birth rate, and highest cost of starting a new business hardly endear them to direct investment or an entrepreneurial dynamism that could 'slow' capital flight. Perhaps it is this reality, one of a Greek people perpetually circling the drain of dis-innovation and un-growth, that Merkel is starting to feel comfortable 'letting go of'. Maybe some navel-gazing after seeing these three doom-ridden charts will force a political class to open the economy a little more, cut the red tape (after a drastic restructuring of course) and shift focus from Ouzo, Olive Oil, and The Olympics. We also suggest the rest of the PIIGS not be too quick to comment 'we are not Greece' when they see where they rank for innovation.

The other other John Taylor (not the FX trader, nor the guitar player, but the "Taylor Rule" discoverer, which is at the base of all Fed monetary decisions), spoke on Bloomberg TV, and his message was certainly a far less optimistic one than that conveyed by the man charged with putting his rule into practice. "We could get into a situation like Greece, quite frankly. People have to realize it is a precarious situation. The debt is going to explode if we don't make some changes." What changes does Taylor recommend? Why the same that Bill Gross warned about yesterday - that ZIRP4EVA means a liquidity trap pure and simple, and the Fed needs to start rising rates: "the Fed has bought so much of the debt that people don't know how they're going to undo that. They pledged to have interest rates at zero until 2014, but people are saying how can they possibly do that when the economy picks up. This uncertainty had lead people to sit on all this cash. I think if the Fed gets back to the policy that worked pretty well in the '80s and '90s, we would be in much better shape." Ah yes, but the one thing, and only one thing that matters, and that is not mentioned at all, is what happens to the stock market when the Fed officially sets off on a tightening path. Actually make that question even simpler - will the drop in the S&P will be 30%, 40%, or any other greater mulitple of 10% thereof, considering that as we noted previously, the Fed and the other two central banks alone have injected over $2 trillion in just over a year. And about $10 trillion in the past 5. Calculate what the removal of this liquifity would do to stocks...

Remember when back in September 2010, David Tepper moved the market by nearly 2% when he told a stunned world that he is "balls to the wall" stocks because no matter what happens, stocks can only go higher (a ludicrous proposition in any other universe except perhaps for this one where the "Greenspan Put" has since been replaced with the "Bernanke Guarantee"). He did out perform the market that year. The next year he lost over 3%. Why? Was it because the Fed did not go through with promises of LSAP (even though it did engage in QE3 curve shifting by ZIRPing the short end in perpetuity, and buying 91% of long-end issuance). Or because the master can only create alpha when the puppet is flooding the market with liquidity. Whatever the reason, the Pavlovian creature known as the market, has been salivating for LSAP version 2012 since the beginning of January, courtesy of bearish remarks by the Chairman. And yet Tepper has yet to make a guest appearance on CNBC to discuss why the "balls" may make a repeat appearance next to the "wall." Because, as Morgan Stanley's Mike Wilson explains, instead of focusing on the means, investors should consider the end: "I think QE3 will end just as badly as QE2" and "I would feel better if earnings and economic growth were accelerating like during QE2. But they aren’t." Sure enough, one glance at the chart below explains not only why this time QE will be different actually applies, but also why when it comes to comparisons to Japan, the US may be lucky if ends up in the same condition as Japan, when the probability is one of a far worse outcome...

In all the excitement over the December 21 LTRO, Europe forgot one small thing: since it is the functional equivalent of banks using the Discount Window (and at 3 years at that, not overnight), it implies that a recipient bank is in a near-death condition. As such, the incentive for good banks to dump on bad ones is huge, which means that everyone must agree to be stigmatized equally, or else a split occurs whereby the market praises the "good banks" and punishes the "bad ones" (think Lehman). As a reminder, this is what Hank Paulson did back in 2008 when he forced all recently converted Bank Holding Companies to accept bail outs, whether they needed them or not, something that Jamie Dimon takes every opportunity to remind us of nowadays saying he never needed the money but that it was shoved down his throat. Be that as it may, the reason why there has been no borrowings on the Fed's discount window in years, in addition to the $1.6 trillion in excess fungible reserves floating in the system, is that banks know that even the faintest hint they are resorting to Fed largesse is equivalent to signing one's death sentence, and in many ways is the reason why the Fed keeps pumping cash into the system via QE instead of overnight borrowings. Yet what happened in Europe, when a few hundred banks borrowed just shy of €500 billion is in no way different than a mass bailout via a discount window. Still, over the past month, Europe which was on the edge equally and ratably, and in which every bank was known to be insolvent, has managed to stage a modest recovery, and now we are back to that most precarious of states - where there is explicit stigma associated with bailout fund usage. And unfortunately, it could not have come at a worse time for the struggling continent: with a new "firewall" LTRO on deck in three weeks, one which may be trillions of euros in size, ostensibly merely to shore up bank capital ahead of a Greek default, suddenly the question of who is solvent and who is insolvent is back with a vengeance, as the precarious Nash equilibrium of the past month collapses, and suddenly a two-tier banking system forms - the banks which the market will not short, and those which it will go after with a vengeance.

• Please - we beg you, help us - IMF Urges Beijing to Prepare Stimulus (WSJ)
• Stalemate in talks on Greek austerity measures (Telegraph)
• U.S. Sets Money-Market Plan (WSJ)
• Forty States Sign On to Foreclosure ‘Robo’ Settlement (Diana Olick)
• Greece bail-out funds could be split (FT)
• Japan Adopts Stealth Intervention as Yen Gains Hurts Growth (Bloomberg)
• Papademos to Meet Greek Party Chiefs as ‘Great Sacrifices’ Loom (Bloomberg)
• Glencore-Xstrata deal meets shareholder opposition (Reuters)
• Romney campaign takes aim at rival Santorum (Reuters)

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.

While the EURUSD's recovery post Europe's close seemed to modestly support stocks, the USD is still up from Friday's close as ES (the e-mini S&P 500 futures contract) closes marginally in the green against the direction of FX carry, Treasuries, commodities broadly, and credit. The volumeless (and gravitationally unchallenged) push from post-Europe dip lows this afternoon were generally ignored by VIX, investment grade, and high-yield credit markets, after the morning was a relatively significant amount of selling pressure in HYG (the increasingly significant high-yield bond ETF) to pre-NFP levels only be bough all the way back and some more into the close. Average trade size and deltas had a decidedly negative feel on every algo-driven push higher from VWAP to unchanged but the divergence between Brent and WTI dragged the Energy sector over 1% higher (as every other sector lost ground with Financials and Materials underperforming. Treasuries rallied well from the Europe close and closed just off low yields of the day as commodities all ended lower from Friday's close with Copper and WTI underperforming and Silver just edging Gold as they hovered around USD's beta for the day. VIX dropped modestly after the cash close but ended higher on the day with a notably low volatility of vol from mid-morning onwards (and the late-day vol compression seemed index-driven as implied correlation also fell commensurately). A quiet day in European sovereign and financials along with the disastrously low volume day in ES and on the NYSE really don't feel like signs of broad participation as Greek events slowly but surely unfold along the path of known resistance.

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.

The last week has offered an amusing display of the difference between the cheerleading corporate mainstream media, lying Wall Street shills and the critical thinking analysts. What passes for journalism at CNBC and the rest of the mainstream print and TV media is beyond laughable. Their America is all about feelings. Are we confident? Are we bullish? Are we optimistic about the future? America has turned into a giant confidence game. The governing elite spend their time spinning stories about recovery and manipulating public opinion so people will feel good and spend money. Facts are inconvenient to their storyline. The truth is for suckers. They know what is best for us and will tell us what to do and when to do it....  The drones at this government propaganda agency relentlessly massage the data until they achieve a happy ending. They use a birth/death model to create jobs out of thin air, later adjusting those phantom jobs away in a press release on a Friday night. They create new categories of Americans to pretend they aren’t really unemployed. They use more models to make adjustments for seasonality. Then they make massive one-time adjustments for the Census. Essentially, you can conclude that anything the BLS reports on a monthly basis is a wild ass guess, massaged to present the most optimistic view of the world. The government preferred unemployment rate of 8.3% is a terrible joke and the MSM dutifully spouts this drivel to a zombie-like public. If the governing elite were to report the truth, the public would realize we are in the midst of a 2nd Great Depression.

Bernanke's recognition of his penalizing savers with low rates as an 'issue for people' sparked an interesting note from the WSJ on how sensible and stoic savers are being herded (unsafely) into risky investments. Bernanke's insistence that "our savers collectively have to hold all the assets of the economy and a strong economy produces much better returns in general" must be juxtaposed with comments from a money manager that "I don't think that's a fair-trade" for money intended to be invested safely. By removing the last shred of hope for a rise in savings rates anytime soon, the Fed is once again creating the potential for major unintended consequences as the 30% drop in interest income for US savers from the 2008 peak forces them to extend duration (TSYs), lower quality (corporate bonds), and/or increase leverage/risk (equities). One only has to look at Treasury yields, Muni yields, investment-grade bond yields, and now high-yield bond yields for how tempted investors (retail and professional 'insurance/pension' assets) have become to take their safest net worth asset (low risk liquidity) and expose it to the business/credit cycle and all its myriad event risks. While reducing the rate of savings might seem sensible for the short-term from the Fed perspective, it leaves a wholly unsustainable recovery (or bubble in who knows which asset class next) and as Nordea notes this week, based on their models, a considerably higher savings rate will be needed going forward (for any sustainability) even as 'saved money' is rotated into risk or spent on quality-of-life maintenance. Perhaps it is time for many to listen to the sensibilities of the WSJ's last (75 year-old) interviewee who notes "At my age, I can't be a risk-taker anymore" as maybe it is time to consider the reality of the recent good US data in relation to coinciding elements such as inventory build-up, plummeting household savings, and lower gas prices when adding to that risky investment.

Over the weekend, we commented on Dylan Grice's seminal analysis which excoriates the central planning "fools", who are perpetually caught in the "lost pilot" paradigm, whereby the world's central planners increasingly operate by the mantra of “I have no idea where we’re going, but we’re making good time!” and which confirms that in the absence of real resolutions to problems created by a century of flawed economic models, the only option is to continue doubling down until terminal failure. Basically, the take home message there is that once "economists" get lost in trying to correct the errata their own models output as a result of faulty assumptions (which they always are able to "explain away" as one time events), they drift ever further into unknown territory until finally we end up with such monetary aberrations as "liquidity traps", "zero bound yields" and, soon, NIRP (which comes after ZIRP), if indeed the Treasury proceeds with negative yields beginning in May under the tutelage of the Goldman-JPM chaired Treasury Borrowing Advisory Committee. Today, it is Bill Gross who takes the Grice perspective one step further, and looks at implications for liquidity, and the lack thereof, in a world where one of the three primary functions of modern financial intermediaries - maturity transformation (the other two being credit and liquidity transformation) is terminally broken. He then juxtaposes this in the context of Hyman Minsky's monetary theories, and concludes: "What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is two per cent of par and the downside substantially more?" In other words, Pimco is finally grasping just how ZIRP is punking it and its clients. It also means that very soon all the maturity, and soon, credit risk of the world will be on the shoulders of the Fed, which in turn labor under a false economic paradigm. And one wonders why nobody has any faith left in these here "capital markets"...

A lot of stuff in here this morning.

Instead of defaulting a long time ago (when we first suggested it should) when it could have pulled an Iceland, taken a bitter pill, hyperinflated the drachma and in the process delevered overnight, if at a big social cost of losing its welfare safety net (which it is about to lose anyway courtesy of the PSI and OSI), and not be held captive to bigger geopolitical interests, and hostage to the banker superclass, Greece very likely could have been on the road to recovery now, granted with a totally different political regime. Instead, the political regime is the same, Greece is more in debt than ever before, the economy is in shambles, the banks have seen two straight years of bank runs, and most importantly the people now are poorer and more disenchanted than ever, and as the following story indicates, about to get far angrier than any Syntagma square riot cam (which is about to come back with a PayPerView vengeance) has shown to date. According to Kathimerini, late on Saturday evening, "A group of between 30 and 50 youngsters attacked the house of President Karolos Papoulias."

Following up on our report from this morning that according to former Greek defense minister, German submarine chief procurer, and not to mention Jenny Twenty repeat offender, Evangelos "Xanax" Venizelos, we learn that the god of Deus Ex Machinae is about to abandon Greece, after an announcement by that most magic unicorn-infatuated of bureaucrats, Eurogroup head Jean-Claude Juncker made it clear that Greece is all but finished. As Reuters reports, "The possibility of a sovereign default by Greece cannot be ruled out, Jean-Claude Juncker, head of the Eurogroup of finance ministers from the single currency zone, said in a German magazine on Saturday." Translation: A Greek default on that €14.5 billion bond maturity D-day of March 20, is now inevitable. In an advance copy of comments to news weekly Der Spiegel, Jean-Claude Juncker was quoted as saying Greece could no longer expect solidarity from other euro zone members if it cannot implement reforms it has agreed. "If we were to establish that everything has gone wrong in Greece, there would be no new programme, and that would mean that in March they have to declare bankruptcy," he said. So after years of delaying the inevitable sovereign Lehman weekend, it is finally here. As a reminder, when Lehman filed, everyone, at least those in charge, thought the fall out could be contained. It couldn't, and the Fed had to step in with roughly $30 trillion in backstops, guarantees, and asset purchases. The same will happen this time.

A one-stop shop summary of bullish and bearish perspectives on this weeks news, data, and markets.