With less than 48 hours left until Europe's latest and greatest summit on Wednesday (no point in keeping count: it is certain that yet more extensions wil be demanded and granted, letting the EURUSD have just that much more space from where to fall) Europe has, as it usually does in the 12th hour after it whips out the abacus, realized that the EFSF in its latest incarnation is Dead on Arrival (as expected). So what does Europe do? Why come crawling to Uncle Sam of course, only in this case it manages to save face as the uncle is really Aunt Lagarde, one of Europe's own, and ironically up until 4 months ago, the Finance Minister of what has emerged as the most distressed core European country. From the WSJ: "Europe may ask the International Monetary Fund to create and run a special new fund to help solve its debt crisis, according to a person familiar with the matter. The idea is one of several options still in the formative stage that European officials are considering as a way to prevent the crisis from engulfing its largest economies. The IMF and world financial leaders fear that if Europe doesn't act forcefully now, it could push the global economy into a recession and spark another global financial meltdown." And yes, there is a reason why three weeks ago we made big news out of the IMF scrambling to "Double Bail Out Capacity To $1.3 Trillion, May Issue Bonds." Because when in doubt always follow the money, or in this case the US taxpayer bailout, because this is what the IMF's turbo intervention will be: it will always give the right answer.
Ray Dalio On Whether The Current "Hopeless, Mob-Rule Deleveraging " Can Lead To The Ascent Of Another "Hitler"Yesterday we presented the complete must watch Ray Dalio interview and transcript from his Charlie Rose appearance in which he explained how, in his increasingly skeptical view, we are now "out of ammunition" as there are "no more tools in the toolkit." Today, he layers on top of this rather bleak macroeconomic perspective some very disturbing observations, specifically, what the realization of the dead end situation facing monetary and discal authorities means when confronted with a violent (metaphorically) deleveraging, and a violent (quite literal) social mood. In an FT op-ed he writes; "We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem." Needless to say this won't be the first time we have found ourselves in such a predicament: one very vivid example from history beckons: "Frustrations increase, the established ways of doing things come under attack and frustrations over the ineffectiveness of government creates the perceived need for someone to gain control of the mess. Plato spoke of this dynamic. It was the reason Hitler was elected in 1933."
IceCap Asset Management: The Tip Of The Iceberg... Is Straight Ahead; Here Is What Lurks Below The Surface
We have to say, the continuous unbridled enthusiastic cheerleading for the stock market to go higher has us puzzled. Yet, many of investment leaders from the big box banks and mainstream media continue to shout about buying the dip, proclaiming stocks are cheap as well as touting the merits of the one-size-fits-all balanced fund for every investor for every occasion. While we genuinely believe that today this view will lead many to financial despair, it’s important to recognise why this view is shared by the hands that hold the savings for many people in the World. For starters, many of the industry’s largest players simply do not have the product available nor the expertise available to properly guide the average person during these dramatic economic times. Either the cognizance to understand the realities of 0% interest rates, money printing, and a risk free investing game for banks is missing, or they firmly believe actions by central banks and governments will save us all.
UPDATE: HYG's premium to Net Asset Value (NAV) is its highest since May09!!
We often discuss how credit markets have provided useful insights (and potential pre-emptive indications) with regard to risk appetite and whether ES should rip and today's incredible rally in HYG (the high yield credit bond ETF) is one to be aware (beware) of. The rumble of liquidity-driven hedging being unwound was very loud indeed and as spreads reach significant levels on a medium-term basis and HYG recovers its major drop in price, we wonder if the market is now less prepared to handle any downside shock especially as risk-appetite is clearly dragging even in high-concession primary issue land. Much of today's action in the high yield credit market seemed as much about catch up to each segment's relative-value as any real aggressive buying as hedges were clearly unwound. We would warn traders who use index aggregates to judge relative asset allocations between credit and equity to be very careful with this shift, as bottom-up, it does not exist yet.
Today's adjustment to the government's HARP program to get anything with a pulse as close to the discount window as possible was not the only proposal to revive the moribund US housing market. According to a new proposal by HUD, beginning this month and continuing for a year, anyone with a just $100 will be allowed to buy a HUD-owned REO home. In essence: the new buyer is merely taking over the mortgage payments in a repeat of what happened in 1970s New York along the Central Park West corridor. Granted for now it is stricly limited to only... 28 states! But it gets better: "HUD’s $100 down payment incentive program can also be applied to an FHA 203k loan, which can be used to fund repairs and renovations on the home. The 203k program allows buyers to finance both the mortgage and additional money for rehabilitation needs with a single government-insured loan." Said otherwise, a $100 downpayment gives one unlimited degrees of freedom how to spend non-recourse, massively levered capital, and courtesy of money's fungibility, to even fund, shhh, the occasional iPhone. "Matt Martin, CEO of Matt Martin Real Estate Management (MMREM), says this is one of the most exciting features of the new incentive program and should drive a lot of exposure to FHA’s 203k offering." Why of course it is: it will only take enterprising Americans a few weeks to realize that the latest HUD program is basically an EFSF in sheep's clothing, which provides US consumers with a Benjamin in their pocket, the ability to lever up by a factor of about two thousand (or more) and use the proceeds for pretty much anything (but make sure to call it "home repairs"). And when the HUD is stuck with hundreds of billions of non-performing, delinquent loans, what then? Why the same that will happen to the EFSF: another wholesale taxpayer funded bailout... of those who were tricky enough to figure out this latest subsidy of the global retailer base.
As we present Morgan Stanley in the role of the biggest Netflix bull (or is that loser? We are not sure we can use that word without preclearing it with the Wall Street directorate of truth), we eagerly await the barrage from the media that has a "gag order" on the investment bank with massive French bank exposure, that will shoot the messenger for suggesting that in addition to being a European bank risk derivative, Gorman's bank is also one of the biggest finders and keepers of momo darlings. As for the UBS Global Asset Management and Lone Pine analysts who loaded up to the gills on NFLX stock in Q2, we are confident you will have more than enough time to sample the company's streaming product in your extended search for the next job.
Just Say No, Germany ... and Don't Listen to Geithner
Graham Summers’ Weekly Market Forecast (Stocks Are Last to Get It Edition)