Switzerland

 Every summer, my colleagues and I invite young people from all over the world for an intensive 4-day workshop about freedom and entrepreneurship. This year’s workshop just concluded yesterday afternoon, and it was, without doubt, the best one ever. For the past several years, we have been conducting this event at a lovely resort in the Lithuanian countryside. It’s a pretty place– a nice, comfortable, relaxing environment away from all the noise and distraction of daily life.  Now, I pay for the whole thing myself. I rent out the entire resort and pick up the total cost of food, lodging, entertainment, etc. For this year’s event, my staff was able to negotiate the same price as last year, and I was happy about this. But after the first two days, we began to notice something different: the resort was actually skimping out on our food portions! In other words, they kept the price the same as last year… but they were delivering less value than before. In this case, it was in the form of food portions that were at least 10% smaller!

While expectations of a Draghi rescuing us all from our bad selves remain extreme - well he did promise! - it seems the market that one would expect to be the most likely to benefit from his 'Aid' is increasingly not Kool. The last two days have seen Italian and Spanish sovereign bond spreads turn back down - even as stocks in those countries keep up the good wealth-building work (with the front-end wider by around 30bps today alone). At the same time, financials have seen their credit risk widen back out (especially seniors) and XOver (the European high-yield credit market) did not exude the kind of equity ebullience that we are used to in a pure risk-on, central-bankers-have-our-back period.

Want to buy stocks on anything than a greater fool theory, or hope and prayer that someone with "other people's money" will bail you out of a losing position when the market goes bidless? That may change after reading the latest monthly letter from Pimco's Bill Gross whose crusade against risk hits a crescendo. Yes, he is talking his book (and talking down his equity asset allocation), but his reasons are all too valid: "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.”.... So what is a cult chasing figure supposed to do? Well, the cult of equities may be over. But the cult of reflating inflation is just beginning: "The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process!... Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun."

It's all about the central banks this week.

How can such a small country blow through so much money?

Did you know that Chinese government officials are all corrupt? Did you know that many of Chinese statistics look either weird or totally unreliable to a point that even the Vice Premier can’t help admitting it? People outside of China have never really trusted the Chinese Communist Party as far as politics are concerned, and probably never will. However, the seemingly unstoppable growth engine of China has produced a remarkable level of complacency among investors that China is going to do well. While recent economic data from China are mixed at best, the market consensus is unanimously biased towards believing that the second quarter is the bottom. We do not understand the reasons behind the faith in the Chinese leadership as far as running the economy is concerned.  Here are a few reasons why you should just stop believing in the Chinese leadership when it comes to running the economy.

A tax collector rant.

Spain's IBEX equity index closed at Euro-era lows today having dropped over 10% in the last 3 days (crushing the hopes of the afternoon post-short-sale-ban squeeze yesterday). This leaves IBEX down over 30% for the year (and Italy down over 18% YTD). Add to that; inverted long-end curves in Spain (and almost Italy), all-time record high short- and long-term spreads for Spanish debt and euro-era record high yields, record wide CDS-Cash basis, dramatic short-end weakness in Italy, new low negative rates in Switzerland (-46bps) and Germany (-7bps), and EURUSD at its lowest since June 2010 at 1.2059. But apart from that, the EU Summit seems to have done the trick nicely. Financials have been crushed in credit-land as subs notably underperform seniors and HY and IG credit continues to lead the equity markets lower in reality. Meanwhile, remember Greece? 30Y GGBs have dropped almost 20% in price in the last few days and have closed at all-time record low closing price at just EUR11.55!! S'all good though - where's Whitney?

Because Everyone from the Ultra-Rich to Illegal Immigrants Pay Nothing

While it seemed somewhat inevitable given the trend, the dismal reality from Europe has sent investors scurrying for the 'safety' of the US Treasuries overnight. The entire yield curve has fallen to all-time record lows with 10Y trading below 1.40% and 30Y below 2.48%. 7Y - the seeming cusp of Twist - is below 90bps now and 2Y below 20bps. The shortest-dated T-Bills still trade around 4-6bps (as opposed to the deeply negative rates in Switzerland and Germany this morning with FX risk premia expectations, and Twist+, affecting this differential). Not a good sign at all - and definitely not yield curve movements on the basis of renewed QE as we see stock futures plunging to the old new reality (as those pushing dividend yields as the 'obvious move here may note that since Friday's highs, you've lost half a year's dividend as equity capital has depreciated 2%). Perhaps the sub-1% 10Y we noted yesterday is not such a crazy idea after all...

• Greece should pay wages in drachmas - German MP (Reuters)
• Greece Seeks More Cuts as Deadlines Loom (WSJ)
• Greece Back at Center of Euro Crisis as Exit Talk Resurfaces (Bloomberg)
• Berlusconi seeks return to liberal roots (FT)
• For brokers like Peregrine, from bad times to worse (Reuters)
• Japan Sees More ‘Widespread’ Global Slowdown With China Cooling (Bloomberg)
• China Central Bank Adviser Forecasts Growth Slowdown to 7.4% (Bloomberg)
• London Out to Prove It's Still in the Game (WSJ)
• Stockton Reveals Bondholder Offers From Mediation (Bloomberg)
• US lawmakers propose greater SEC powers (FT)

The week ahead brings a batch of Q2 GDP prints, which will provide guidance on the strength of activity in that quarter, as well as a bunch of business survey data which will offer insights into the strength of momentum at the start of Q3. Starting with the GDP data, the main attraction is likely to be the print from the US. Goldman expects a below trend print of 1.1%qoq, vs the consensus at 1.5%qoq. The Q2 print from the UK is expected to be negative. While only a few Q2 prints have been published so far, only China has recorded a recovery on Q1. The consensus expects soft prints for the business surveys out this week. The Euroland flash PMIs are expected to be unchanged, leaving them at levels consistent with a continued contraction in activity. The German IFO is expected to fall slightly, as is the Swiss KoF. There are no consensus expectations for the China flash PMI, however if it does not pick up from current levels around 48, questions over the extent/effectiveness of stimulus in China will remain.

Two days ago we made the "missing link" connection between traders in Libor manipulating banks (all of which curiously had a hub in Singapore: something else for the media that has been about 4 years too late on this topic to focus on) and hedge funds (most of which curiously centering on the otherwise sleepy bastion of banking: Geneva, Switzerland). The immediate aftermath was the loss of trading privileges of one Michael Zrihen. We are fairly certain this is just the beginning of the hedge fund bust: when all is said and done, many more funds will have terminated traders they hired for reasons (and kickbacks) unknown over the past 2 years as Lie-bor manipulators sought to put a clean firewalled break between their old employer and current one. Because apparently sometimes the regulators are that stupid and can be confused by a simple job change. And while many have assumed (and even calculated based on completely groundless assumptions) that only BBA member banks have benefited from Libor manipulation, the reality is that hedge funds were just as complicit and benefited just as much if not more. What is worse, they took advantage of their whale client status with manipulating banks, and courtesy of Total Return Swap and other leveraged gimmicks, made far more money when they co-opted two or more banks to do their bidding. Impossible you say: hedge funds would never be so stupid. Oh very possible: we present exhibit A - Brevan Howard, a "fund, with assets of $20.8 billion as of Dec. 31, has never had a losing year and returned 14.4 percent annualized from its April 2003 inception through the end of 2008" as Bloomberg said in a made to order profile of the funds recently. Perhaps there is a very simple reason for this trading perfection: "Brevan Howard telephoned on 20 Aug 2007 to ask the defendant to change the Libor rate," according to a paper filed with the Singapore High Court cited by Bloomberg."

Spain's broad equity index suffered its second largest single-day drop in almost 4 years and Italy also tumbled almost 5% as everything European was sold hard. EuroStoxx (the broad Dow equivalent) is down almost 3% as EURUSD dropped to two year lows, EURJPY to 12 year lows. AAA safe havens were massively bid with Germany, Denmark, and Switzerland all to new low (negative) rate closes. Core equity markets did suffer though with Germany down 2% but it was the periphery that saw the damage in credit-land with Spain 10Y closing at 7.27%, 610bps over Bunds (and 5Y CDS over 605bps). Spanish spreads are +130bps from post-Summit (and pre-Summit) and Italy +78bps, but it is the front-end of the curve that is most worrisome - Spain's 2Y is 132bps wider in the last week. Europe's VIX exploded by over 4 vols to 24% today and once again looks decidedly high relative to US VIX.

What's Ben gonna do?