A Global Album Of Sovereign Insolvency

When it comes to providing analytical perspectives and empirical insights into the realm of sovereign deterioration, few come close to the work of Reinhart and Rogoff. Citi’s Willem Buiter is one such man. In his latest summary piece describing in excruciating detail just how bad things are at the sovereign level (and judging by tonight's opening print in the EURUSD more are starting to realize this), Buiter provides a terrific country by country guide of what is now an insolvent world, starting with the merely extremely risky, going through the backstop-baiters, and finishing with the time bombs that have already gone off and everybody pretends not to care. For those who do care, this is a definitive guide to what each individual European (and not only) country can look forward to in an age of global moral hazard. The only open question: with China's interest now to preserve the Euro's viability, how will Beijing act in the next few months as the eurozone finally starts unraveling.

Guest Post: The Reasonable Ineffectiveness Of Mathematics In Trading

Is mathematics a quantum leap forward compared to other methods of thinking? Sure. Its precision beats every other possible “system” and human intuition is limited by experience. One cannot “see” curves without tangents, nor intuit an n- dimensional space. But everyone lives and thinks with intuition in ordinary life. Successful trading is about buying cheap and selling dear: mathematical thinking is an indispensible means to that end. But it can also obscure intuition that necessarily deals with the inexact definitions of everyday life. Further, a mindset wholly engrossed in the mathematical development of an axiom base can take one far from practical relevance.

Are Inverted Chinese Corporate Curves A Harbinger Of A "Hard-Landing" Recession?

Following in the footsteps of the recent fireworks of the Chinese SHIBOR market courtesy of the evaporation of virtually all interbank liquidity, we now get more indications that all is fine... no inverted... no fine in China. Per Bloomberg, Chinese corporate spreads have now inverted to a level not seen since pre-Lehman days: "The average yield on yuan corporate debt maturing after 2025 was 4.67 percent in December, compared with 4.97 percent for three to five-year bonds, according to Bank of America Merrill Lynch’s China credit indexes. The last time the gap was wider was on Aug. 13, 2008, when the spread reached 31 basis points, or 0.31 percentage point." And while corporate bond issuance in China, especially on the longer end, is still very scarce (and a reason why China still does not have a representative CDS market, something that JPM will fix promptly), this should be an indication that either things are very good or starting to get rather bad, as more are "rushing" to the safety of near-term fixed income on concerns of what may happen to the long end in the next few months.

Spanish, Belgian CDS Hit Record Wides, Even As China Announces Plans To Buy €18 Billion In Spanish, Greek And Portuguese Bonds

Today, despite the announcement by Chinese Vice Premier Li Keqiangin in Madrid that China is willing to buy as much Spanish debt as that of Greece and Portugal (but not Ireland), or roughly €6 billion each, CDS in both the core and the semi-periphery, are back to record levels (El Pais and Reuters sources). Spain was last seen trying to catch up with Illinois, somewhere in the mid 300s, while Belgium also took out record wides at 225 bps. On one hand this is beneficial news for Spain, now that China is seemingly instituting its latest sphere of influence, but in reality is just doing all it can to precent the euro from collapsing (and thus killing Chinese exports to its second largest trading partner, the EU) and with net issuance in the country expected at just €47.2 billion, Spain may have well gone the distance to plugging as much as 13% of its net funding needs for the year. However, and what is spooking markets more, is that, as we reported yesterday, today European Commissioner Michael Bernier will publish a “consultation
paper” outlining ways to shield taxpayers from banking crises, chief among which is the renewed floating of the debt haircut idea.

As Irish ECB Borrowings Surge, The Country's Bank Run Picks Up Speed

Following the publication of the monthly Central Bank of Ireland flow statistics for November, that the country's bank ended up borrowing another massive amount of capital from both Europe and the central bank itself, should not be surprising. After all it was in November that Ireland followed Greece into the insolvency abyss, a place where none other than Olli Rehn guarded the gates to feudal hell. However, one much more troubling factor is that the depositor run from Irish banks, a development which many have cited as potentially being the catalyst for the next major step down in the European house of cards tumble, is accelerating. From the report: "Deposits from the Irish resident private sector were 6.7 per cent lower on a year-to-year basis in November 2010. The annual rate of change in deposits from Irish households was minus 4.5 per cent, whereas deposits from Irish NFCs fell by 14.9 per cent on an annual basis in November." What this means simply said, is that as more deposit capital is withdrawn from Irish banks, the more they will need to rely on ECB and ICB funding, the more distressed they will be perceived as, the more capital will be withdrawn and so on... But that is a 2011 story. And just in case anyone is wondering what the source of all the capital is that is pushing the EURCHF to fresh all time highs day after day, not to mention spreads of PIIGS CDS closing 2010 at near all time wides, please refer to the chart above.

2011 - The Year When Rare Earths Become The New Black

Since trading desks are dead, and to classify those manning them as bored would be an overstatement, here is what one such dejected individual who is neither able to ski with his/her boss over in Chamonix, nor pick 25 bps margins on CDS bid/ask spreads has come up with. Presenting the imaginary hedge fund letter describing: 2011: Year of the Rare Earth Mineral: "I have appropriated thirty-seven Chinese nationals from a Scandium Mine in Longba Town, Zhuxi Country, China, that have secured and transported my gadolinite, promethium, cerium and yttrium and other rare earth minerals holdings. As many of you are aware, I recently acquired these minerals, as well as the laborers, on a recent site visit to a rare earth mining facility in the P.B.O.C. My rare earth mineral holdings represent precisely half of my net worth."

Guest Post: Dude, Where's My Job

The storyline being sold to the American public by the White House and the corporate mainstream media is that the economy is growing, jobs are being created, corporations are generating record profits, consumers are spending and all will be well in 2011. The 2% payroll tax cut, stolen from future generations to be spent in 2011, will jumpstart a sound economic recovery. Joseph Goebbels would be proud. The economy is growing due to unprecedented deficit spending by the government, fraudulent accounting by the Wall Street banks, the Federal Reserve buying $1.5 trillion of toxic mortgage “assets” from their Wall Street owners, various home buyer and auto tax credits and gimmick programs, and Fannie, Freddie, and the FHA accumulating taxpayer loses so morons can continue to purchase houses.

One Minute Macro Update

Quick stop review of all the events shaping today's trading (and that's using the term loosely) action.

Must Read Introspective: A Look Back At 2010 Events, Key Market Themes And The Circular Nature Of Everything

Tonight's must read piece of introspection comes from the keyboard of Russ Certo over at Gleacher, who has compiled a fantastic look back at the key events that transpired and shaped 2010, and summarizes the key market themes that prevailed in the now past year. In summary: "the answer to the question of what were the main themes in the market
is ...............valuations in equities, credit spreads, sovereign
spreads, exchange rates, mortgage interest costs, bank earnings, net
interest margin, accounting schemes, tax code, debt ceiling and more are
all related.  Related to the ebb and flow of monetary and fiscal policy
aspiring to make adjustments to imbalances caused by earlier failed
fiscal and monetary policies.  How, circular indeed." In other words, not only does history not only rhyme, but chases its tail, and the more things change, the more absolutely nothing has changed. We are where we started, and in fact are in a far worse position, as increasingly fewer last resort levers to push and pull are available to the fiscal and monetary authorities. We jest when we suggest that a Martian bail out of plant Earth will soon be required, but pretty soon, in our Onion (or is that Douglas Adams?) reality, NASA may find itself with the prerogative to rapidly find semi-intelligent and very wealthy life on other located within a few parsecs. We can only hope that the restaurant at the edge of the universe is an In and Out Burger.

Scott Minerd's Detailed Pre-Mortem On What Europe's Bank Run Will Look Like, And Other Observations

We traditionally enjoy the periodic letters by Guggenheim's CIO Scott Minderd. His latest piece, "The Opening Act to the Broader Crisis" is no exception. In it, the strategist dissects the European crisis, compares it to the subprime debacle and sees it as the precursor to the eventual downfall of the euro, a surge in the dollar, the "federalization" of Europe and the adoption of QE by the ECB. The key must read item in the current report is Minerd thought experiment of what a  wholesale bank run, first in Ireland, and then everywhere else in Europe, would look like. This is especially important as one could, as Scott claims, start at any moment. What does this mean for investments? "If we are on the brink of crisis in Europe, which I believe we are, then there are several expectations we can draw about the investment landscape. First and foremost, the dollar will strengthen rapidly against the euro; U.S. Treasuries will rally; equity prices in Europe will fall; and credit spreads will widen, at least temporarily. In general, risk assets will experience choppier waters, especially as the crisis intensifies." Yet somehow this is a disconnect with the Guggenheimer's recent Barron's round table bullish statements on stocks and high yield bonds: "Let me be clear, I am not changing my mind on any of these investment theses, but a crisis in Europe will likely interrupt, but not derail, certain bullish trends at some point in 2011." It is ironic that Minerd brings up subprime as an analogy to Europe: after all his response is precisely the same that everyone else who appreciated the gravity of the subprime contagtion used at the time, starting with The Chairman. To wit "it is contained." All else equal, and it never is, we fail to see how a surge in the world's funding currency, the USD, will not generate an all our rout in every single risk asset, The Chairman's gushing liquidity notwithdtanding, due to trillions in short dollar funding positions.

Frontrunning: December 22

  • IMF announces it has concluded its gold sales (IMF)
  • Euro helped by report China will buy Portugal's debt (Reuters)
  • Huge South Korea Drill Likely to Infuriate North (Reuters)
  • And wristslaps for all: Deutsche Bank to Pay $554 Million in Tax Shelter Case (Bloomberg)
  • Another proposal to use a firehose to kill those pesky CDS speculators: Derivative Blitz Needed to Tame Anarchic Bonds (Bloomberg)
  • China Inflation Risk Leads to Asia's Worst Bond Returns (Bloomberg)
  • Does a Low VIX Signal Danger? (Barrons)

One Minute Macro Update

One stop summary for all the events that are making the markets in this snowy, volumeless day.

smartknowledgeu's picture

One of F. William Engdahl’s latest articles is titled “Wikileaks, a Big Dangerous US Government Con Job”. In this article, Engdahl implies that Wikileaks is a US government-run propaganda operation with an end goal of restricting freedoms on the internet. Here are some of the key excerpts from this article.

Guest Post: The Bennie Who Stole Christmas

Ben Bernanke is a highly educated PhD from Princeton who has never worked a day in the real world since he graduated from college in 1975. His entire life has been spent in the ivory tower of academia surrounded by models and theories that work perfectly in the comfort of his office. After building his reputation as an “expert” on the Great Depression by studying it and reaching the wrong conclusions, he came down from his ivory tower in 2002 to join an organization that has systematically destroyed the value of the US currency, thereby undermining the well being of the once vibrant middle class...If the Grinch had been pimping for a small pack of Grinchsters who impoverished the honest people of Whoville, then the Dr. Seuss poem would have perfectly described Ben Bernanke, the Federal Reserve and the banksters that run the show here in the USA. The actions taken by Ben Bernanke, Alan Greenspan and their brethren on the Federal Reserve over the last quarter century have destroyed the middle class and left senior citizens impoverished, while enriching its Wall Street masters. Now he is stealing Christmas from the hard working middle class of this country.

ECB Peripheral Bond Buying Plunges From €2.7 Billion To €600 Million In The Prior Week

In the past few days, European peripheral spreads have once again taken to widening both in absolute terms and relative to Bunds. The culprit: the ECB's permabid for insolvent debt has plunged from €2.7 billion to €603 million in the past week: this represents the lowest amount of bonds purchased by the ECB since the beginning of November. And without the backstop of wanton ECB buying sure enough the sellers emerge. Total debt holdings in the ECB's SMP program are now €72.5 billion. Incidentally one country which is certainly not benefiting from Jean Claude Trichet's largess with his bank's money is France, whose CDS earlier today hit an all time wide of over 100 bps on completely unfounded rumors that the country may be downgraded by one or more rating agencies. At this point expect to see the chart below yoyo in direct correlation to just how steep the sell off of European bonds may have been in the prior week.