LIBOR

The final quarter of 2012 is going to prove increasingly challenging. All the issues the EU Elites were able to bury, smooth and bluster through the summer are coming back to the fore. The immediate challenges are Spain, contagion, and banks, and who knows how many sucker punches wait in the wings? It’s no wonder banks are de-leveraging by cutting lending (and accelaterating recession) instead of raising new capital. Well at least the Euro Elites understand it.. This morning we have Bank of Italy chief Visco saying “Italian Banks lowering Leverage Reduces Risk…”

• China carrier a show of force as Japan tension festers (Reuters)
• Draghi Rally Lets Skeptics Dump Spain for Bunds (Bloomberg)
• China’s Central Bank Injects Record Funds to Ease Cash Crunch (Bloomberg)
• Obama warns Iran on nuclear bid, containment 'no option' (Reuters)
• When Would Bernanke’s Successor Raise Rates? (WSJ) that's easy - never
• Italy's Monti Downplays Sovereignty Risk (WSJ)
• Portugal swaps pay cuts for tax rises (FT)
• Madrid faces regional funding backlash (FT)
• Berlin Seeks to Push Back New Euro-Crisis Aid Requests (WSJ)
• Race Focuses on Foreign Policy (WSJ)
• China Speeds Up Approvals of Foreigners’ Stock Investment (Bloomberg)

The August housing starts number was a disappointment, printing at 750K on expectations of a rise to 767K from last month's 746K, now revised lower to 733K. This would have been a boost to a market trained to expect more QE on any economic weakness, if only all QE in perpetuity, and certainly at leat $85 billion in monthly flow, was not already priced in. As a result, we are slowly getting to the dreaded point where bad news is once again bad news, at which all faith in the Fed as a monetary policy vehicle is lost (since Fiscal policy is now perpetually deadlocked). If there was any good news, it was in the single family starts which printed at 535K in August, a rise of 28K from July, and the highest since April 2010 (when housing had again "bottomed") driven by a surge in new building in the Midwest to 134K, from 111K. Finally housing permits which are nothing but noise, declined but beat expectations modestly. Since permits are a completely meaningless category and are purely used by hedge funds to game the market (they cost a token amount of money to procure, involve no actual work, and are there merely to frame the "housing has bottomed" trope time after time, until disproven), just like Libor, there is no point to observe them.

Nothing has changed, it has only gotten worse...

Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.

• Germany says U.S. debt levels "much too high" (Reuters)
• Netanyahu ramps up Iran attack threat (Reuters)
• Burberry plummets by most ever, slashes guidance, rattles Luxury-Goods Industry as Revenue Growth (Bloomberg)
• FoxConn Again Faces Labor Issue on iPhones (NYT)
• Southern whites troubled by Romney's wealth, religion (Reuters)
• China's Xi not seen in public because of ailment (Reuters)
• Another California muni default: Oakdale, Calif., Restructuring Debt, Planning Rate Raise After Default (Bond Buyer)
• Spain's PM expects "reasonable" terms for any new aid (Reuters)
• Bernanke Proves Like No Other Fed Chairman on Joblessness (Bloomberg) - Ineffective like no other?
• John Lennon’s Island Goes on Sale as Irish Unpick Property Boom (Bloomberg)

We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. This can only be extremely bullish of precious metals and commodities in the long run. In the short-run, we will have to face the usual manipulations in the precious metals markets and everyone will seek to front run the European Central Bank, playing the sovereign yield curve and being long banks’ stocks. If in the short-run, the ECB is the lender of last resort, in the long run, it may become the borrower of first resort!

While last week's surprise announcement that GM was desperately seeking up to $5 billion in additional cash through a new revolver (meaning the administration's pride and bailed out joy, Government Motors, is once again burning far too much cash and that channel stuffing only pays in porn movies) took precisely nobody by surprise (at least not anyone who has been following our 2 year long series tracking AOL GM's dealer inventory warehousing habits), a far more sinister cash need has developed a very short time ago in a continent far, far away. Because while we have also noted the collapse in steel inventories and iron ore prices , which have recently imploded to 3 years lows as the Chinese hard landing, no longer maskable or avoidable, is finally sending shock waves around the world, as well as what these mean for a world that is sliding into a deep recession, promises by various impotent central bankers notwithstanding (see here, here and here), so far this wholesale collapse in the iron market had not translated into discrete events at the corporate level. Until now that is, because that second derivative of the "Chinese economic miracle", Australian hyper-levered iron ore miner, Fortescue, which is the fourth largest in the world, and is also the kangaroo in the iron ore mine for not only China, but Australia as well (and with a cornucopia of junk bonds in its balance sheet, a massively levered one at that) just telegraphed to the world that it is in desperate need of cash. According to Bloomberg, Fortescue Metals Group has approached about 20 banks as it markets a $1.5 billion loan in syndication, according to three people familiar with the matter.

Forget the few hundred million dollars in wrist-slap fines the banks face from regulatory discipline over the Libor rate manipulation 'conspiracy fact'. As the WSJ reports this morning, the number of suits and potential liabilities are rising rapidly as cities, insurers, investors, and lenders all jump on the cabal-beating band-wagon. From individual investors claiming lost returns due to low rates to hedge funds squeezed in derivatives trades, liabilities could exceed $176bn as the blood-suckers lawyers note "this is just the beginning" as "scores of interested potential clients" have called. While, obviously, it won't be easy to win in court, the ongoing costs of litigation and potential liability (which will be largely ignored by Messrs. Bove et al. we are sure) range from Macquarie's $176bn estimate to Morgan Stanley's $7.8bn (quite a range) and it will likely take years for the lawsuits to see resolution. Notably though, floating-rate bond-holders are likely to have the most success (and easiest claim) as Darrell Duffie notes "assuming they can convince a jury Libor was too low, it's pretty easy to then show they were paid too little interest" but in the meantime, as CalPERS adds, "we await the regulatory investigations, which will drive the outcome" of litigation.

The empirical data is in. And it turns out that as we have been suggesting for a very long time — yes, shock horror — helicopter dropping cash onto the financial sector does disproportionately favour the rich. Here are four simple questions to the venerable Bank of England (just as applicable to any and every Central Banker); and sadly, we expect to see the announcement of more quantitative easing to the financial sector long before we expect to see answers to any of these questions.

When first the speculation and subsequently the confirmation that in addition to suffering massive losses on its IG-9 position, JPM had engaged in massive, reckless and criminal CDS mismarking with the intent to defraud and to boost the appearance of profit for selfish reasons, we promptly concluded that "Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm." So far, the regulators which are currently on page two of "CDS for Absolutely Corrupt Criminal Morons", are only slowly catching up. And while the stench will eventually lead to Jamie, as what happened in the over the counter, unregulated CDS market has most certainly happened at the tens of trillions in other OTC products traded by JPM, most of which are IR swaps, tying it all back nicely to the Libor scandal of which JPM is also a part, the first person who will certainly experience some major pain as the JPM scapegoating plays out, is none other than the London Whale himself Bruno Iksil, who was loved by all at JPM when he was making money, and is now being hung out to dry, once the bank is in the prosecution's cross hairs.

This morning's update on the ECB's FX swap usage confirmed what those who care about this kind of stuff already know: the USD shortage in Europe, all Libor and other manipulated and fraudulent signs to the contrary, is getting worse: in the week starting August 23, the number of banks demanding a 7 day USD swap with the NY Fed, and intermediated by the ECB, rose to 12, or the highest since February, while the amount requested was $8.5 billion, or the second highest in 2012 so far. In other words, while everyone knows the EUR interbank market in Europe is slammed shut, most likely in perpetuity, courtesy of the trillions in EURs raining from the ECB, it is now once again time for the USD market to implode, something it last did in the beginning of 2012 when the advent of the short-term benefit from LTRO 1 and 2 fixed the funding situation, albeit briefly.

• German central bank warns country’s financial health not a given (WaPo)
• Secret Libor Committee Clings to Anonymity After Rigging Scandal (Bloomberg)
• Peru Declares State of Emergency to Quell Violent Mining Protests (Dow Jones)
• Euro-Area Economic Adjustment Only Half Complete, Moody’s Says (Bloomberg)
• Wall Street Leaderless in Rules Fight as Dimon Diminished (Bloomberg)
• China Swaps Drop From Three-Month High as PBOC Adds Record Cash (Bloomberg)
• China invest $1 billion in U.S. Cheniere's LNG plant, Blackstone to act as intermediary buffer (FT, Reuters)
• Romney Offers Lukewarm Support for Fed Audit - Hilsenrath (WSJ)
• U.K. Unexpectedly Posts Deficit as Corporation Taxes Plunge (Bloomberg)
• Obama issues military threat to Syria (FT)
• Merkel Allies Signal Concessions on Greece Before Samaras Visit (Bloomberg)
• Chinese banks warned of foreign exchange risks (China Daily)

While Europe is once again experiencing one of its brief, manic episodes of inexplicable euphoria sending all risk assets in the continent higher while everyone is still on vacation (and ahead of a surge in Spanish bond issuance in September, which only spikes even more in 2013 - more shortly), its banks have quietly run out of dollars again. Certainly, looking at the now irrelevant metric known as Libor which indicates precisely nothing of significance, and merely allows banks to feel good about themselves, and which has been declining, one could imagine that banks have zero problems finding unsecured follar funding. One would also be absolutely wrong because as the most recent ECB and Fed data confirm, 7-day dollar swaps between the ECB and New York Fed - the only real sign of dollar funding scarcity - has risen to $9.3 billion in the current week, the highest since December 9, 2009. And with 10 banks bidding at the last USD operation, one can be sure that at least 10 European banks are suddenly hoping that the bout of euphoria continues for at least 2 more weeks so that the executives of these 10 dollar impaired banks can continues their vacation in peace, until the eye of the European hurricane passes starting September 1.

Tyranny, true tyranny, thrives on our selective awareness, and our ability to bend our minds and our vision to avoid seeing that which is really there.  In the end, victory over tyranny is less about guns, bombs, mass dissent, and civil fury; it instead requires an acceptance of the dark side of the world, and the unwavering will of honorable men ready to face it.  That is to say, the defeat of tyranny begins and ends in the mind.  In America today, many minds are not ready to handle the trials ahead.  Maybe it’s the ease of several generations of uninterrupted prosperity.  Maybe it’s the Babyboomers.  Maybe it’s Generation X.  Maybe it’s the public education system.  Maybe it’s the water.  Maybe it’s all of the above and more.  At this point, we have little time to debate symptomatic culprits.  It is time to go to the root of the problem, and cut it out. What we need is a foundation, a set of “personal rules for combat” when engaging a tyrannical establishment.  This “code” should above all else provide a way of mentally and spiritually confronting one’s own weaknesses and presumptions.  Dictators and oligarchs are not our primary concern.  Our inner state is.