Reality

The reality is that the Fed is stuck in ZIRP and will never be able to leave it. In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%. Things are only going to get worse. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year (assuming of course that the current GDP growth projections are accurate...)

Okun's rule-of-thumb relates the long-term empirical finding that a country's unemployment rate is closely related to a country's output (or GDP) - perfectly sensible and comprehensible. In fact to be a little more explicit, it is the change in unemployment that is more notable in its relationship to the potential GDP (the output gap). His original work noted that a 3% increase in output corresponds to a 1% decline in unemployment rates (and/or rise in labor force participation, rise in hours worked, and rise in labor productivity) but as Goldman Sachs notes this week, Okun's Law has broken. As they point out, even though US real GDP growth has averaged a meager 2.5% pace since the end of the recession, the unemployment rate has fallen almost two percentage points from its peak. There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth). It seems to us that none of these are good for growth as the reality of a higher unemployment rate (BLS adjustments aside) is negative, lower potential for growth impacts earnings expectations (as we are already seeing in company and analyst outlooks which has perplexed those market watchers pinning their hopes on the jobless rate), and the balance sheet recessionary impacts of the 'employed' minimizing debt rather than maximizing potential gain is a further drag. Either way, as Goldman notes the potential growth rate going forward (2012 and 2013) is likely to remain quite weak, in the neighborhood of 2% in line with the CBO's dismal views and this could be further exacerbated by the drop in labor force participation we have noted vociferously.

Explain to me again, how often is EVERYBODY ALWAYS RIGHT? Finding value in not following the name brand following crowd...

Greece is the epicenter of a drama that threatens to unwind with all the intrigue and subterfuge of ancient Greek myths and tragedies. As with the legend of Icarus, big, and now bigger, transnational banks provoked the gods with their wax-and-feather financial fabrications to create the appearance of soaring wealth. Now that they have flown too close to the sun and their wings have melted, these banks are being brought to earth by the obligations and consequences imposed by their fabrications. Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves. They clothe themselves in their indispensability and shield themselves from accountability with tales about how many innocent citizens will be hurt if they don’t get their next bailout. It is as if they say, “We are above the law… We are the law.” Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris. In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart.

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.

Earlier in the week we began discussing the stigma that would likely be attached to the banks that decide to borrow from the ECB via the LTRO. Many talking heads including Mario Draghi himself, arbiter in chief of all risky collateral in Europe, dismissed this - reflecting back at the compression in credit spreads in the market-place as evidence that all was well and confidence was returning. In the last week our (senior unsecured debt) index of LTRO-ridden banks has underperformed non-LTRO-ridden banks by 23bps to a 75bps differential. This is the largest divergence since the LTRO began and corrects off mid-Summer tight levels of difference as the critical flaw that we also pointed out earlier in the week (that of the implicit subordination of bank assets via ECB's LTRO collateralization). Credit Suisse agrees with us and expounds on 'the flaw' in the LTRO scheme noting that the market is fickle and self-sustaining at times (as we have seen) but over time (and that time appears to be up this week), the market will weigh the liability side of the balance sheet versus the asset side, less haircuts (which implies haircuts will become the de facto capital requirements) and inevitably (given bank earnings potential) reflect this huge differential - most specifically in the senior unsecured debt market. With few shorts left to squeeze, spreads back at pre-crisis levels and financials having dramatically outperformed even large gains on sovereigns, the weakness in senior financial debt in Europe this week is more than just a canary in the coal-mine, it should become the pivot security for risk appetite perception.

The situation in Greece has taken a more sinister turn. The outrage in Greece is growing. More and more of the people on my distribution list with ties to Greece are pointing out how bad things are there. Daily life is getting more difficult by the day for most people, yet the EU has told the Greeks that their current offer isn’t enough and that they have doubts about its implementation. At least they got that right, the austerity measures, will not remain implemented. It seems obvious to anyone who hasn’t become locked into a negotiating stance that the whole austerity idea isn’t working. It is possible over the weekend that the Greek parliament will defer to EU demands and vote in a plan that is “acceptable” but I don’t see it lasting. The people are fed up and more and more realize that defaulting and costing the foreign bankers money is worth a shot. Default is NOT the end of the world or of Greece. For all the politicians who keep saying default is the end, they are just wrong. It will cause problems, but Greece will survive, and for the first time can start focusing on a plan to move forward rather than dealing just with problems of the past.

A scandal before construction has even started.

The Greek daily http://www.dimokratianews.gr/ (price 1 Euro, not 2000 Drachma) may have summarized best what at least a prominent subsegment of Greece feels toward Die Frau, who quite adeptly managed to dodge the Greek "pledge"  gambit, so thoroughly discussed earlier, and put the ball back in the Lucas Papademos' court, who now must be tearing his hair out: not only did Europe put him in his current position, but now it is the same Europe who no longer wants him in... What's a former ECB apparatchik and Trilateral Commission member to do...

FX Concepts' John Taylor is out with today's slam dunk de-noisification of all that is irrelevant with the following summary of what is really going on as the world's central banks embark on the latest and hopefully final attempt to reliquify everything. All we can add to Taylor's analysis, especially in light of today's incremental easing in ECB collateral requirements, is that the biggest beneficiary by far of what in a few months will be another multi-trillion balance sheet expansion, is and continues to be hard, non-dilutable, i.e., real, money. Because as fiat currency loses all relevance in a world in which it is printed on a daily basis by the central banks, whether or not we end up with a Weimar scenario, the cash thrown out by the even profitable companies will be increasingly more meaningless. Yet the take home message is that banks will never, ever stop diluting existing money. They simply can't as the past few months have so vividly demonstrated.

After an almost incessant rally off Thanksgiving Day lows, European financials are seeing a quite notable divergence in their performance over the last two days. Dispersion has risen across all of credit with financial credit spreads widening significantly as both broad stocks and specifically the European financial stocks trade sideways to higher. This is the most significant divergence between credit and equity for the financials in Europe since that rally began and was then extended via LTRO hopes. Perhaps the reality of implicit LTRO subordination as increasing amounts of collateral (backing the entire capital structure of the banks) is being priced into the much more sensitive and quick to react credit markets as stocks just can't shake the momentum extravaganza.

As rumors of the imminent iPad3 (and FoxConn hacking) spread across the web and a general sense of cult-like euphoria washes away the reality of a considerably weaker earnings picture (and outlook) than even downgraded expectations had prepared for, we present two charts, via JPMorgan, of just how grossly distorted the picture of US economic health (implicitly via US corporate earnings) has become, thanks to Apple. While ignoring Apple as a provider of 'wealth' is akin to Monty Python's "What Have The Romans Ever Done For Us?" comment, we worry that so much 'expectations' burden should fall on the shoulders of a company that relies on constant 'successful' innovation and constant low cost wages (no growth) to merely maintain current growth and earnings while facing constant and massive competitive threats from every side of its business (especially with austerity/recession/credit-constrained Europe as the largest sequential growth driver in the last surprising quarter). While 'Let Them Eat PSI' is the clear message for the Greeks, it would appear the US investor is truly satisfied by its extra large helping of iPad meals, even as 'explicit' job creation in the US via this main driver of US earnings remains de minimus (recognizing of course the peripheral impact of developers into this infrastructure that however do not amount to too much in terms of earnings or GDP as is painfully obvious from these charts). As goes AAPL, so goes the US?

Iran has the capability of creating a world of hurt for the U.S. Navy’s 5th Fleet.

Remember robosigning and the whole fraudclosure scandal? In a few days you can forget it. Because in America, the cost of contractual rights was just announced, and it is $25 billion: this is the amount of money that banks will pay to settle the fact that for years mortgages were issued and re-issued without proper title and liens on the underlying paper, courtesy of Linda Green et al. Why is this happening? Because staunch hold outs for equitable justice (at least until this point), the AGs of NY and California folded like cheap lawn chairs (we can't wait to find what corner office of Bank of America they end up in), but not before the one and only intervened. From the WSJ: "The Obama administration made a full-court press over the past four days to secure the support of key state attorneys general, including those from Florida, California and New York." Nothing like a little presidential persuasion to help one with overcoming one's conscience. Because in America the push to abrogate the very foundation of contractual agreements comes from the very top. But wait, there's more - just to wash its hands of the guilt associated with this settlement which shows once and for all that the Democratic administration panders as much if not more to the banking syndicate as any republican administration, as it announces one settlement with one hand, with the other the US will sue banks over the mortgage reps and warranties issue covered extensively here, in the most glaringly obtuse way to distract that it is gifting trillions worth of contingent liabilities right back to the banks, not to mention discarding the whole concept of justice. From the WSJ: "Federal securities regulators plan to warn several major banks that they intend to sue them over mortgage-related actions linked to the financial crisis, according to people familiar with the matter. The move would mark a stepped-up regulatory effort to hold Wall Street accountable for its sale of bonds linked to subprime mortgages in 2007 and 2008. At issue is whether the banks misrepresented the poor quality of loan pools they bundled and sold to investors, the people said." Wait, let us guess -that particular lawsuit will end up in a... settlement? Ding ding ding. We have a winner. All today's news succeed in doing is finally wrapping up any and all legal loose ends, so that banks can finally wrap all outstanding litigation overhangs at pennies on the dollar. And if at the end of the day, they find themselves cash strapped, why the US will simply loan them more cash of course.

Another day, another delay, and still nothing is done.

• GREEK PREMIER SAYS OUTSTANDING ISSUE NEEDS FURTHER WORK
• GREEK PREMIER SAYS DISCUSSION TO CONTINUE ON OUTSTANDING ISSUE
• PAPDEMOS SAYS AIMS TO CONCLUDE LOAN TALKS AHEAD OF THURSDAY'S EUROGROUP MEETING

And on the off chance that Greece, gasp, does not actually get something done by the deadline, it means that at tomorrow's meeting the only topic of discussion will be the calorie content in the taxpayer funded pastries. In the meantime, some semblance of reality is creeping back into the EURUSD.