Market Turbulence As Global Economies Falter: The European debt-crisis, the derailing of Chinese economic growth and an underemployed United States all point toward a “global crunch”.
From Whitney Tilson's just released letter: "It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history." Is that so? May one inquire, in the aftermath of the JPM CIO scandal, does T2 mark the bulk of their positions, which as Zero Hedge disclosed recently are call options, based on market, or based on magical bid/asks, to be made up on the go (as in JPM'scase)? That's right - a hedge fund which "invests" in theta. Is there any wonder why the "hedge fund" with about $200 million in actual stock-based AUM (the balance being calls and warrants), may be the first one with a negative Sharpe ratio? For a visual summary of why LPs (aside from friends and family of course) in T2 are singlehandedly propping up the bottom line of Dramamine, see the chart below.
- Wisconsin's Walker makes history surviving recall election (Reuters)
- China Labor Shortages in Guangdong Show Stimulus Limits (Bloomberg)
- Oil rises toward $100 ahead of ECB (Reuters)
- China's Property Controls to Stay (China Daily)
- Spain Makes Explicit Plea for Bank Aid (FT)
- Fed Considers More Action Amid New Recovery Doubts (WSJ)
- Noda Sales-Tax Push Confronts Rising Japan Majority Opposition (Bloomberg)
- National Interests Threaten EU Bank Reforms (FT)
Three months ago, just when things looked like they were about to turn south, the Fed's trusty mouthpiece, Jon Hilsenrath, made it clear that the market can stop falling as the Fed was "considering" sterilized QE, or more Twist, something we explained later would be impossible in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: "Fed Considers More Action Amid New Recovery Doubts." And as it has been leaked (now that people have actually done the appropriate math), so it shall be.
What would a day be without recycling of tired and expired rumors out of Europe. Sure enough:
- EFSF PROVISIONAL CREDIT LINE COMPROMISE BETWEEN MADRID AND BERLIN
- EFSF is to prepare a credit line for Spain in the case of need - Dow Jones
- EFSF provisional credit line for Spain is one option according to a German newspaper
Ah, the good old EFSF, which was last summer's magical bailout mechanism which with 3-4 turns of leverage, would bring the total to €1 trillion... until the realization that there is nothing to lever, as nobody (except for Japan occasionally) wanted to put any money in it. Oh well: the rumor is good to get stocks into the green for at least a few minutes.
Just as expected an hour ago...
- JAPANESE FINANCE MINISTER AZUMI SAYS G7 WILL NOT ISSUE A JOINT STATEMENT
- AZUMI: G7 DID NOT DISCUSS GREECE LEAVING THE EURO
- AZUMI: G7 AGREED WILL WORK TOGETHER TO DEAL WITH PROBLEMS IN SPAIN, GREECE - RTRS
- AZUMI URGED EUROPE TO EASE CONCERNS OF FINANCIAL MARKETS
- AZUMI: G7 AGREES TO COOPERATE TO RESOLVE SPAIN, GREECE PROBLEMS
Luckily, they did discuss the.... Yen?
- Spain says markets are closing to it as G7 confers (Reuters)
- Germany Pushes EU Bank Oversight (WSJ)
- Falling Oil Prices Are No Mystery (Bloomberg)
- Aussie Rises After RBA Cuts Rate Less Than Swaps Suggest (Bloomberg)
- Euro falls on Spain worries as market awaits G7 (Reuters)
- Bad News Piles Up for China's Economy (Bloomberg)
- Japan Lawmakers Push to Curb Central Bank (WSJ)
- Lawyer Kluger Gets 12 Years, Bauer 9 for Insider Trades (Bloomberg)
- All eyes on Wisconsin governor's recall election (Reuters)
- The Global Obesity Bomb (BusinessWeek)
And so those lining up at the bailout trough are now 4: remember all those lies Spain spoon-fed the gullible press that it didn't need a European bailout as recently as yesterday? You can now forget them. From Reuters: "Spain said on Tuesday that credit markets were closing to the euro zone's fourth biggest economy as finance chiefs of the Group of Seven major economies were to hold emergency talks on the currency bloc's worsening debt crisis. Treasury Minister Cristobal Montoro sent out the dramatic distress signal in a radio interview about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain. Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and and prompting the Madrid stock market to rise. But his comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on expectations that a conference call of G7 finance ministers and central bankers may hasten bold action." Well, Germany got its wish: it got Spain to admit it is broke. Just as it wanted - because remember: all Germany is, is a true lender of last resort unlike the ECB: after all they are the decision makers. And Germany knows very well that it needs Europe desperate when it is forced to accept any conditions to the German DIP loan that Schrodinger Schauble proposes. Which means forget anything positive will come out of the G7, and certainly forget anything actionable will come out of the ECB's June 7 meeting. If anything, things will first get much worse, before things get better. And finally, don't forget just who benefits the most from EURUSD at parity or lower... That's right: Germany.
Thus we have the world’s three most important Central banks as well as the global economy’s “economic miracle” retreating from aggressive monetary intervention.
All you need to read and some more.
To the bloody end.
We will get a test once again as to the effectiveness of the central bank/MoT confidence game.
- Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
- Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
- Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
- Merrill Losses Were Withheld Before Bank of America Deal (NYT)
- Investors Brace for Slowdown (WSJ)
- China's lenders ordered to check bad loans (China Daily)
- Obama Seeks Way Out of Jobs Gloom (WSJ)
- Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
- China to open the market further (China Daily)
- Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
- Tax-funded projects to be more transparent (China Daily)
Deflation has effectively been abolished by central banking. But is it sustainable? The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects. Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — we think they will soon be smashed again.