Markets in positive territory in the early going as Friday’s mixed-message job data continues to be debated. We believe that it will be another month at least before the data is confirmed/denied, but the changes to the denominator do not give us a lot of faith despite the headline. The week’s light calendar will put focus on geopolitical issues including Egypt and Euro sovereigns. 10s and 30s are scheduled for issuance later in the week after long dated purchases on Tuesday. This should test the selloff observed last week. Implied Fed Funds point to an opportunity in the front end, though we are still a bit off of the hike expectations that were priced in mid December. Bernanke testimony to the House Budget Committee on Wednesday will generate sound bites ahead of the debt ceiling debate.
The garlic eaters don’t want to repay their debts, and the beer drinkers don’t want to lend them any more money. That pretty much sums up the financial tensions that exist within Europe right now. Time to Short the Euro.
The market was relatively quiet today as protesters in Egypt clashed with pro-government supporters (apparently one group wore plaid and another wore stripes, how gauche)...
What if a rating agency downgraded a country and no one listened?
With all of the news outlets focused on tensions in the Middle East, have we forgotten about the elephant(s) in the room? Ireland’s credit rating was downgraded one level to A- today by Standard & Poor’s - leaving it four levels above “junk” status. To add insult to injury, S&P said that the country remains on “credit watch with negative implications.” Nonetheless, the market barely shrugged. In fact, we remain within points of the post meltdown highs. The real kicker was the fact that Ireland’s 5-yr Credit Default Swaps FELL 4.6% today in the face of the downgrade. Perhaps the market has become numb to the rating agencies.
Not all debt is the same, so it would seem. Expect runs on Ireland, Greece and Portugal way before Japan despite the fact Japan has twice the debt as a proportion of GDP!
No matter how hard the ECB is trying to mask the fact that the only way to rescue Europe is through yet another ponzi scheme, which has a CDO in its foundation no less, depositors refuse to be fooled. According to the ECB, in December Irish banks lost deposits worth €40.3 billion, over 50% more than November, when €26.7 billion evacuated the banking system. The brings the total deposit flight from Ireland's 15 retail banks to a massive €110 billion, a number which if indexed to the US, would be well in the trillions. And as the Independent points out, "The most dramatic element of the latest data, however, is the sharp
acceleration in the fight of deposits from the so-called 'domestic
group' of banks." In other words, Irish banks are likely operating on liquidity fumes, and all of their operations continue to be funded on a day to day basis by the ECB and possible the IMF. And what is even worse, is that just like in the US, Irish consumer refuse to relever: "Yesterday's figures also show another contraction in banks' lending, as loans to households fell by 5.2pc and loans to non-financial companies fell 1.2pc in the year to December."
This is a warning to prepare for potential stealth bank runs cascading from North Africa and Ireland through to EU regional banking centers. Stealth bank runs are the unrecognized and perilous serpent lurking presently below the European financial surface. They prey on slower moving archaic bond vigilantes and anyone else swimming in these dangerous uncharted waters. Investors need to fully appreciate that a modern bank run looks and operates differently than what is depicted in the movies and what we most likely expect to occur! For starters, it isn't the individual depositor lining up, it's now Corporate CFOs or Treasurers at their terminal en masse! Secondly, it isn't driven by local depositors; it is now driven internationally by Corporate Finance committees! Thirdly, there are no telltale line-ups at bank doors. It is stealth, which will happen in an unexpected electronic 'flash crash' panic blur! Today, a triggering event will initiate global 'key strokes' that will move unprecedented amounts of money within hours.
Claims that total defaults in the municipal bond market could reach $100 billion are vastly exaggerated. Teachers will starve, police and firemen will go on strike, and there will be rioting in the streets before a single interest payment is missed to bond holders. Defaults will rise, but it will be from two to only 20, not the hundreds that Whitney is forecasting. Have I seen This movie before?
I am not an economist, but as a strategist I believe there is a case for a multi-year period of weak growth in the US, which could be magnified by an EM slowdown as the EM bloc diverges policy to deal with its own domestic positive output gaps, domestic inflation problems and domestic asset bubbles. The obvious problem is that the US has an excess debt problem and a central bank that seeks to solve asset bubbles that burst by creating new asset bubbles. This policy has been proved a failure. Remember that debt does not equal wealth, that asset bubbles do not equal wealth, that more liquidity does not equal money but instead equals more debt, and that liquidity does not equal capital.
The talk regarding the EFSF having the potential to buy bonds raises more questions than answers to us. For one, at what price will they be purchased? Banks that hold the sov debt are reticent to sell below par since that would make them realize a loss. The EFSF can ill afford to purchase bonds from banks at par when they are trading in the open market at prices well below that, and such a subsidy does not seem to make economic sense either. The aforementioned voters will soon recognize that this debt purchasing is a transfer and represents taxation on core country’s citizens to support periphery debt. Also, who might sell? The ECB’s program has a scant €76.5B to sell into such a scheme against an aggregate periphery debt load of over €3.2T. Direct issuance is a possibility, but then the EFSF becomes an even bigger CDO performing funding arb – at an unknown cost. With only €440B available, it seems that the funding for only a portion of the periphery would be achieved. Further, the AAA rating on the bond issuance out of the EFSF has a participant element to it. If a country needs funding, it is prohibited from contributing to the facility and whatever it draws comes out of the facility. Would a purchase of a particular country’s bonds by the facility constitute a drawdown per the facility’s rating requirements? It would seem so, though details are sketchy right now. Either way, this would seem to impact the ratings that were so important they took five months to obtain last year.
With all the hoopla over Egypt some have forgotten that this is merely a geopolitical event (one of those that absolutely nobody, with a few exceptions, was talking about less a month ago, so in many ways this is a mainstream media black swan which once again exposes the entire punditry for the pseudo-sophist hacks they are), and that the actual mines embedded within the financial system continue to float just below the surface. Below we present the five key fat tail concerns that keep SocGen strategist Dylan Grice up at night, which happen to be: i) long-term deflation, ii) a bond market blow-up, iii) a Chinese hard-landing, iv) an inflation pick-up, and v) an Emerging Markets bubble. Far more importantly, Grice provides the most comprehensive basket of trades to put on as a hedge against all five of these, while also pocketing a premium associated with simple market beta in a world in which the Central Banks continue to successfully defy gravity and economic cycles. For all those who continue to trade as brainless lemmings, seeking comfort in numbers, no matter how wrong the "numbers" of the groupthink herd are, we urge you to establish at least some of the recommended trades in advance of what will inevitably be a greater crash than anything the markets experienced during the depths of the 2008 near-cataclysm.
The effort in Washington State draws heavily on the success of the 92-year-old Bank of North Dakota (BND), currently the only state-wide publicly-owned U.S. bank.
And as Africa is burning, Europe is getting ever more insolvent. But don't let the charts posted earlier showing both Portugal and Spain spreads back at all time highs fool you: Europe is on top of it again. The latest development is the formerly taboo topic of extending bailout loans to Greece and Ireland to 30 years from the current 3. Obviously, this merely confirms just how ugly the demand picture for European sovereign debt must be if the block is considering essentially extended bail out guarantees in perpetuity. From Reuters: "The idea surfaced in intensive talks among euro zone ministers, central bankers and officials on the sidelines of the World Economic Forum in Davos this week, the sources said." Well, that half a million in (taxpayer funded) participation fees for the G-Paps sure is paying off.
One would think that judging by all the frequency of lies about Europe's latest CDO knight in shining armor, also known as the EFSF, that bond spreads would be rushing headlong to zero as yet another form of perpetual taxpayer backstop is implemented. One would be wrong. Spreads on the Portuguese and Spanish 10 Years are now back to their widest levels in history. It is fairly complicated to reconcile this stickiness with the daily barrage of mendacity from all ECB apparatchiks. Basically, the market, unlike Goldman (see below), is fairly unconvinced that any of the currently planned rescue plans have any chance of being successful.
Moody's is taking a closer look at states' unfunded pension liabilities..