Goldman Sachs

By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct.  And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs. David Stockman, former director of the OMB under President Reagan, lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few.

With aggressive monetary easing policies now being pursued in almost every major Developed Market economy, the world has clearly been pushed into a "currency war" and while this term was 'coined' by Brazil's Guido Mantega in 2010, the last 200 years or so are rife with different exchange rate regimes, all of which ended in currency crises shaping the next regime. The following chart shows these crises and regimes and given the current 'non-cooperative way forward', global preferences for a weaker currency will do nothing but generate more instability in FX markets as the fight against deflation flares everywhere.

It has been a recurrent joke that in addition to Germany (see chart), the only winners out of the slow-motion trainwreck that is the Eurozone, are the Belgian caterers who in 2010, 2011 and 2012 had an absolute record profit year following what was a weekly summit after summit in which we learned, without fail, that Europe is fine, couldn't be finer, and to "believe" Draghi that he would crush and mangle anyone who dared to short the EURUSD (ironic when every other central bank is literally paying FX traders to short their currency). But while caterers were literally swimming in money in the past three years, charging European taxpayers hundreds of thousands of euros per hour for either sturgeon eggs and pâté, or boxed lunches depending on the amount of austerity imposed, so far 2013 has been rather dry. All that of course is about to change, following the epic fiasco with the Cyprus "bail-in", which courtesy of Diesel-BOOM's subsequent clarification, is a unique template that will never be repeated... until the next PIIG finds itself in the same trough, which now that the dominoes are dropping once more, shouldn't be too long. Which is why the best levered derivative trade on the European "positive contagion" mutating back into its "negative" wilde-type is to go long European caterers. However, to offset as much non-catering risk as possible, it would be ideal to have a pair trade opportunity, whereby to go short an offsetting catering exposure. Luckily, we have found just that. Luckily we have just the trade.

• What bread... What circuses... JPMorgan Chase Faces Full-Court Press of Federal Investigations (NYT)
• European Regulators to Charge Banks Over Derivatives (WSJ) ... but forgive us if we don't hold our breath
• Cyprus readies capital controls to avert bank run (Reuters)
• Damage ripples through Cypriot economy (FT)
• G4S readies guards as Cypriot banks prepare to open (Reuters)
• Global pool of triple A status shrinks 60% (FT)
• Customers Flee Wal-Mart Empty Shelves for Target, Costco (BBG)
• BOE Says U.K. Banks Have Capital Shortfall of $38 Billion (BBG)
• U.K. Banks Facing Capital Shortfall (WSJ)
• Cyprus Details Bank Revamp (WSJ)
• Kazumasa Iwata Joins Kuroda Naysayers as BOJ to Meet (BBG)
• BRICS Nations Need More Time for New Bank, Russia Says (BBG)

Events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.  

Through the centuries – in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today's United States, whose Dollar fiat currency exists primarily in digital form – "money" is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange). But what happens when a society starts doubting the value of its money?  Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face. Unlikely. The reality is, the Federal Reserve is like any other organization. Human. And fallible. For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; we humbly ask you to watch the following...

Goldman Sachs and Morgan Stanley are down 6.5% on the week (and even BofA has turned red on the week) as US equities have started to show 'slight' strains on European fears (as well as global PMIs and US earnings - what else is there?). Homebuilders gave up all their week's outperformance in the first hour of the day. Dow Transports are down 2.5% on the week now - notably underperforming and reverting their outperformance. VIX surged 1.25 vols to 14.00% - with protection remaining bid relative to stock's modest drop so far. While Treasury yields pushed lower all day (-6bps on the week) as did WTI (-1.5% on the week now), gold and silver flatlined after the spike higher this morning (both up 1.4% on the week). JPY strength was a key factor today as carry-trades were unwound. Risk-assets in general were once again highly correlated as credit tracked lower closing at its lows of the day like stocks. Equity trading volume was above average but average trade size is still falling and S&P 500 futures inability to hold VWAP into the close suggests institutional selling pressure is picking up.

• Euro zone call notes reveal extent of alarm over Cyprus (Reuters)
• Stagnant Japan Rolls Dice on New Era of Easy Money (WSJ)
• Cyprus, European data batters shares and euro (Reuters)
• UK cuts taxes to revive stagnant economy (FT)
• "Quality Control" Rat Body Linked to Blackout at Fukushima (NYT)
• North Korea issues fresh threat to U.S., South probes hacking (Reuters)
• South Korea Says Chinese Code Used in Computer Attack (BBG)
• Osborne paves way for Carney to retool Bank of England (Reuters)
• Carney Gets ‘Escape Velocity’ Mandate With Limiter (BBG)
• Osborne Pledges Five More Years of U.K. Austerity (BBG)
• Bernanke Saying He’s Dispensable Suggests Tenure Ending (BBG)
• Senate Passes Bill to Fund Operations (WSJ)

The shorter FOMC preview: the green smoke rising from the Marriner Eccles building is not because a new Fed pope was picked. For the longer FOMC preview: here is Goldman Sachs...

Most investors are nervous now and need to hold things together to include the Fed meeting announcement Wednesday. If bulls are lucky they’ll get their Turnaround Tuesday.  

Still in WallStreetPro withdrawal? We may have just the methadone fix for you... "You will lose your f##king money in your bank," is how this English gentleman cabbie begins his caustic diatribe against all that is wrong with European (and in fact) the world of bankers and elites. The so-called 'artist taxi driver' has a spit-flying hand-smashing epic rant while sitting in his taxi. "They did a stress test on the banks in Cyprus 18 months ago and said it's f##king great" and now this; "this is some f##king crooked shit." "They're off their f##king nuts mate," he explains as he asks rhetorically of the bankers getting the bailouts, "how many f##king ponies do their daughters' need?" Insightfully he remarks that, "Cyprus could be the beginning of a bigger and f##king worse financial crisis," and exclaims "[Goldman Sachs and the Bankers] are looking after their own interest - who are they f##king borrowing money to in Cyprus?" His exasperation is one many can empathize with we are sure as he concludes, "We need to shut down the f##king markets... What kind of society allows the rich people to be gambling while the poor people f##king die," ending with a warning, "Wake the f##k up!"

• JPMorgan Report Piles Pressure on Dimon in Too-Big Debate (BBG)
• Employers Blast Fees From New Health Law (WSJ)
• Obama unveils US energy blueprint (FT)
• Obama to Push Advanced-Vehicle Research (WSJ) - here come Solar-powered cars?
• BRICs Abandoned by Locals as Fund Outflows Reach 1996 High (BBG)
• Obama won't trip over Netanyahu's Iran "red line" (Reuters)
• Samsung puts firepower behind Galaxy (FT)
• Boeing sees 787 airborne in weeks with fortified battery (Reuters)
• Greece Counts on Gas, Gambling to Revive Asset Sales Tied to Aid (BBG)
• Goldman’s O’Neill Says S&P 500 Beyond 1,600 Needs Growth (BBG)
• China’s new president in corruption battle (FT)
• Post-Chavez Venezuela as Chilly for Companies From P&G to Coke (BBG)

"Equity prices in the US and Europe have been hovering at multi-year highs. To the extent that this reflects powerful policy easing, equity markets may have lost some of its ability to reflect economic trends in exchange for an important role in the policy fight to support spending." This is a statement from a Bank of America report overnight in which the bailed out bank confirms what has been said here since the launch of QE1 - there is no "market", there is no economic growth discounting mechanism, there is merely a monetary policy vehicle. To those, therefore, who can "forecast" what this vehicle does based on the whims of a few good central planners, we congratulate them. Because, explicitly, there is no actual forecasting involved. The only question is how long does the "career trade", in which everyone must be herded into the same trades or else risk loss of a bonus or job, go on for before mean reversion finally strikes. One thing that is clear is that since news is market positive, irrelevant of whether it is good or bad, virtually everything that has happened overnight, or will happen today, does not matter, and all stock watchers have to look forward to is another low volume grind higher, as has been the case for the past two weeks.

The Biggest Welfare Queens of All ...