Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps
First it was Zero Hedge. Then Ron Paul joined in. Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again. Incidentally, O'Driscoll says, "America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here." One thing we can say proudly - it has been noticed loud and clear here...Update On The "Non-Printing" ECB's Parabolically Rising Balance Sheet
While
the surge in the ECB's balance sheet has been discussed to death on
these pages, with a particular emphasis on what we believe the key correlation driver-cum-pissing contest of 2012 will be -
namely the relative size of the ECB vs Fed balance sheets - it is
often best to see things for oneself. Such as the fact that the balance
sheet of the European Central Bank, which has been accused of not printing,
has grown at the fastest non-pre apocalypse pace in history for a
modern central bank (the only exception is the Fed, whose balance sheet
grew from under $1 trillion to over $2.2 trillion in the aftermath of
the money market collapse), increasing by EUR800 billion, or over $1 trillion, in six months,
to E2.73 trillion (obviously an all time record). Annualized this is
an increase of over $2 trillion or more than the Fed did in all of QE1.
So, just what happens next year when the banks box Draghi in a
corner and the Goldmanite decides to actually... print. Perhaps this
is a question, as before, left best to our German readers, who unlike
their detached from reality peers in the US, know that hyperinflation
is and can be all too real.Why ECB's LTRO Won't Stop Collateral Contagion
The details of the European liquidity crisis are generally reported, but for some reason no media source wants to pull the pieces together so everyone can see the magnitude and futility of the crisis. A growing Collateral Contagion is being shrouded in the apparent belief that the solution to the European Financial and Banking crisis is a grand change in Treaty governance. Obviously the European Central Bank (ECB) was well aware of the reality, when it was forced to deploy a historic and unprecedented LTRO (Long Term Purchase Operations) on Wednesday December 21, 2011. 560 banks desperately and immediately grabbed what they could, to the tune of €489B. The LTRO bought the EU private banks some time. It did nothing to solve the EU Sovereign Debt Crisis. Gordon T Long describes 13 symptoms of the stark reality that forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". He argues correctly that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king.
Rosenberg, Ryding, Zandi, Arbess, Zuckermann And Rickards All Chime In On The Future Of The Eurozone
When
six out of five economists (thanks to the magic of Keynesianism... and
self promotion from general counsel to general expert) all agree on the
same topic, and the very definition of groupthink is that the Eurozone
will survive, the glaringly obvious call is precisely the opposite. If
there was ever an argument to say that 2012 is the year the Eurozone
finally dies, the below video is it.Guest Post: A Run On The Global Banking System - How Close Are We?
Nine weeks after its bankruptcy, the general public still hasn’t quite realized the implications of the MF Global scandal.
Our own sense is, this is the first tremor of the earthquake that’s
coming to the global financial system. And how the central banks and
financial regulators treated the “Systemically Important Financial
Institutions” that had exposure to MF Global—to the detriment of the
ordinary, blameless customer who got royally ripped off in its
bankruptcy—is both the template of how the next financial crisis
will be handled, and an accelerator that will make the next crisis
happen that much sooner. We critics of the current, corrupt
state of affairs also sometimes confuse the SIFI’s with the system
itself, whenever we say, “The whole system is corrupt!” But the system
is not corrupt—it’s the regulators and SIFI’s who are corrupt. If
nothing else, the handling of the MF Global bankruptcy has proven that,
once and for all. That’s why we’re pulling out our money now—while we
still can. Because once the general public catches on to what we already know . . . oh boy.Greece Should Have Defaulted: It Would Have Sent A Message
"Greece should have defaulted; it would have sent a message that not all
derivatives are equal because it depends on the counterparty." - *in Lew
Rockwell*
*Marc Faber is an international investor known for his uncanny predictions
of the stock market and futures markets around the world.*
These Days Everybody Thinks There's A Free Lunch
We did have more discipline and more understanding in the past few decades,
but that's partly because of the history of those decades. We remembered
the First and Second World War. We remembered the Great Depression. We
remembered what happened when you got too leveraged and couldn't pay your
bills. We knew what happened when you debased your currency.
But now of course, since the Second World War, we have had two or three
generations grow up who don't remember all of that, haven't read their
history, politicians who didn't know anything about history at all and
don't know anything ... more »
A Strategic Alpha Preview Of 2012: Hope And Expectations
The EU is still a massive risk to the global economy but so is political inaction, over- regulated or manipulated markets, high unemployment and geo-political shifts. QE is a concern as central banks abandon inflation targeting and indeed growth to maintain ratings. The EU is still throwing liquidity at a solvency crisis at both sovereign and banking level. EU banks not only have a cash problem, more specifically, as ECB President Mario Draghi says : "hoarding at the ECB signals that the problem afflicting the Euro-zone is not so much about the amount of liquidity but that this liquidity is not circulating around the region's banks". I am not surprised as they all know that each has a similar or worse problem sitting in the vaults.... In the first throes of the new deflationary cycle the Dollar will do well, as the fight intensifies and the US uses the Dollar as a monetary tool and prints more Dollars, it will fall precipitously. Correlations will break this year and many of the “relative value” trades will implode. Gold will break away from being pressured by a strong Dollar as the hunt for alternatives to Fiat currency explode. The likes of the AUD will fall steeply as the global growth story rolls over as we have suggested for a long time. But it is China that holds the key. Hard or soft landing is the question. Can they really have a soft landing if the developed world implodes? No chance.Currency Wars Update
Yesterday, the fine folks of Tradition Analytics were kind enough to explain (once again) just how it is that the Fed has boxed itself into a corner, where in order to maintain the already outlierish growth rate of monetary supply, the Fed will have no choice but to print (same with the ECB), or else risk a massive economic collapse (thank you Austrian theory). Today, the same group provides an update on what everyone knows has been the status quo's only way of dealing with the deleveraging tsunami since March 18, 2009: currency warfare. In the note below, they provide a recap of the recent history of FX warfare, as well as an update of where we stand currently. Keep in mind, currency warfare only works to a point. Then it escalates into other, more violent forms, first trade wars, then real ones.
US Navy Says Any Disruption To Straits Of Hormuz "Will Not Be Tolerated"
Just out from Reuters:- U.S. FIFTH FLEET SAYS ANY DISRUPTION OF NAVIGATION IN HORMUZ STRAIT "WILL NOT BE TOLERATED"
EUR Plunges In Thin Market, Below 1.3000
While
it is unclear what just spooked the EURUSD, sending it lower by 70
pips in minutes, perhaps a better question is why the EURUSD is not
thousands of pips lower to begin with. As a reminder every single large bank
is pushing for a lower EURUSD on hopes that a EUR collapse will kill
the market and send the ECB scurrying into printing money. The problem
there is that the ECB just announced its balance sheet expanded to EUR
2.73 trillion, an expected increase of over EUR 200 billion in one week
(since the LTRO), and a whopping EUR 800 billion in 6 months (that's
$1.1 trillion... in six months)! As such, good luck selling to the
Germans on the ECB board that EUR 1.6 trillion annualized is
insufficient. Lastly, and as a reminder, here is the only correlation that matters in 2012.Art Cashin Exposes The Behind The Scenes Panic In Europe
Think "all is fine" in Europe after today's largely irrelevant Italian bill auction (the auction was for 6 month debt - even Greece can raise that kind of money)? Think again. Here is the Fermentation Committee Chairman explaining why Europe is so hard pressed to create a fake sense of calm, allowing those who know the real story to take advantage of the situation while they still can, and sharing the behind the scenes truth you won't get anywhere else. Certainly not SWIFT.The Italian Yield Curve Vs The Euro Basis Swap
Throughout this entire crisis (going back to 2007), the governments and central banks have made efforts to “fix” certain things. If LIBOR gets too high, then they take action, that at least temporarily improves LIBOR. Those who look at the “improved” data and think the problem has been fixed have been proven wrong, as the market exposes other holes and eventually even the government and central bank money can’t keep the prices artificial for too long without forever increasing the amount of public money at risk. There may be no better example of that phenomena than the Euro Basis Swaps. To some degree, this rate measures the difficulty that European companies (banks) have when trying to get dollars. The First “globally coordinated” action in September brought the rate back from-110 to -80. That faded until it hit an almost scary -160. The Second “globally coordinated” swap line action got us all the way back to -110 (about the same level that had sparked the first action). We retraced some of those gains, saw fresh gains on the back of LTRO, but again have stabilized at rates that are worse than what the policy makers have targeted. Where would these rates be without intervention? Should we be happy about the improvement, or should we be concerned that in spite of all the intervention, this is the best they could do?
Goldman Lowers Sears Price Target From $43.00 To $30.00, Reiterates SELL
As we said yesterday when Sears decided to very unprudently (if very conveniently) post an update of its revolver in its horrendous preannouncement, the company is about to experience some MF Global style "death shorting" having invited every short from miles around to sniff at just how (un)stable its liquidity is. Judging by the action in the pre-market session, where the stock is another 4% lower, we may have been correct. And just to make the lives of key shareholders Eddie Lampert and Bruce Berkowitz even worse, here is Goldman cutting its price target from $43 to $30, while still maintaining a Sell. Alas, this name is going far lower.Themis Trading Flops Its 2011 Market Structure "Predictions"
Our friends at Themis Trading, who continue the good, if seemingly futile fight, for a fair and untiered market, refresh on their late 2010 market structure forecast, only to find that with a 1 out of 10 "success" track record, they have the same predictive hit rate as Byron Wien and Joe LaVorgna. Which, incidentally, is not a good thing: it simply means the US stock market is now more broken and corrupt than ever, a development that is not lost on US investors, who later today we will find have redeemed a near record amount of cash from US equity mutual funds in 2011, and have pulled cash for 34 out of 35 weeks in a row, leaving mutual funds with virtually zero cash buffer, massive leverage and dreading that day when the Santa rally coupled with low volume levitation is no longer sufficient to mask the massive capital hole in the heart of the S&P 500.5 Reasons Why 2012 Will Not Be A Replica Of 2011... At Least Not For Europe
With many expecting 2012 to be a replica of 2011, at least for US stocks which the non-permabull consensus sees closing the year largely unchanged for the second year in a row, one open question is whether this will also be applicable to Europe. As a reminder, the EURUSD opened this year near the 52 week lows, only to rise by several thousand pips as concerns about European contagion were brushed away on hopes Europe's politicians had it "under control." They didn't, and the EURUSD returned to its year's lows recently. But is the same pattern in store for early 2012, where as we already noted, the bulk of gross debt issuance is due to take place, especially in January? Below are UBS' 5 other key reasons why the European resurgence (however brief) that was experienced early this year will not be recreated in the new year that is now just around the corner.Frontrunning: December 28
- BRIC Decade Ends With Record Fund Outflows as Growth Slows (Bloomberg)
- U.S. says China not currency manipulator; chides Japan (Reuters)
- Japan Deflation Returns as Production Slides (Bloomberg)
- Record use made of ECB deposit facility (FT)
- Irish May Pay Greek Price for T-Bill Market Return: Euro Credit (Bloomberg)
- Italian 10-Year Bonds Rise, Stocks Advance After Debt Auction (Bloomberg)
- Obama to nominate economist, banker, as Fed governors (Reuters)
- Japan relaxes weapons export ban (FT)
Italy Successfully Sells Ultra-Short Maturity Debt
Despite European banks hoarding cash at the ECB at record levels as observed previously, Italy succeeded in selling ultra short maturity debt earlier today at interest rates that confirm Europe has managed to stabilize near-term expectations. Specifically, as Reuters reports, Italy sold 1.7 billion euros of 24-month zero-coupon bonds on Wednesday at an average 4.85 percent rate, sharply down from an auction yield of 7.8 percent a month ago. The Bid to Cover was 2.24 compared to 1.59 previously. Nonetheless, this amount was less than the maximum 2.5 billion euros targeted at the auction. Italy also sold 9 billion euros of six-month bills at an average yield of 3.25 percent on Wednesday, half of what it paid a month ago to sell six-month paper at a bid to cover of 1.69 compared to 1.47 previously. Lastly, the fact that Italy can place debt in under 2 years when the LTRO itself has a 3 year maturity means that the real issuance test will come tomorrow when Italy is on deck to sell 3 Year bonds. As for 10 year BTP, which were trading at over 7% as recently as overnight, that is a different story completely.Abysmal Spanish Housing Market Gets Even Worse In October
If there is anything that the European banks' negative response to the LTRO's invitation to use "free money" and relever even as Europe faces a perfect storm of deleveraging in 2012 (a topic beaten to death by us here previously) is that the problem at the root of the European financial crisis is not a liquidity one - it is, and has always been one of solvency, or, said otherwise, a problem when bank assets do not generate enough cash flow to satisfy cash outflows from bank liabilities, period, the end. Everything else is irrelevant. And while the market is fascinated in complete noise such as at what price will Italian bonds price in minutes, what the real focus should be on is the state of the primary driver that led Europe into (and eventually will take it out of) the credit bubble- housing. Today, Bloomberg provides a quick update of the Spanish housing situation which can be summarized as follows: horrible and getting much worse, because as October data shows, lending has imploded, down nearly by half just from a year earlier, while the average price is down over 7%.
ECB Deposits Jump 10% More To Record EUR452BN
While
sovereign spreads are leaking modestly tighter this morning as
European credit markets emerge from the holiday hibernation, the ECB
Deposit Facility surged 10% further to a LTRO-busting EUR452bn. While we
assume there is some year-end 'management' involved here (and some
will argue that putting the LTRO-carry-trade to work takes time), the
sheer velocity and scale of the ramp in deposits suggests this is not a
game-theoretically optimal use of this new-found cash
(neg-carry-trade) but instead a clear message that banks will delever
and remain risk averse no matter what the central banks 'suggest' is
appropriate. Didn't we learn this lesson already in Japan (for two
decades of debt minimization as opposed to profit maximization) and the
US (Fed reserves skyrocketed as dealer bond inventories drop
precipitously?). Also, those saying that banks are just waiting for the
new year to start putting LTRO cash to use, there is no reason to wait
- Italian BTPs are already at 7% - all banks are doing by delaying is giving up on days of free carry trade,
thus this argument is pure rubbish. We are also seeing EUR-USD basis
swaps starting to decompress (worsen) once again. In summary: since LTRO day, EUR187 billion of the 210 billion free money has been redeposited at the ECB. Equities Unch As Financials Lag
Given
the low volume day, it is hardly surprising that markets had some
unusual actions today but the consistency with which financials lagged
on the day, combined with the selling pressure we saw in HYG
(which has increasingly seemed to dominate credit markets recently)
offers little to 'buy into' from today. ES (the e-mini S&P 500
futures contract) oscillated up and back to VWAP all day long in a very
narrow range as risk assets rose modestly (helped by the seemingly
Iran-driven surge in Oil more than any other). FX carry did little, TSYs
rallied (and 2s10s30s dropped) modestly, as Gold dropped on the day
but credit (based on the IG and HY credit indices) outperformed
equities by a little (more end of day liquidity than risk appetite) as the
anchor of BofA (-2.5%) and MS (-2.9%) dragged financial stocks (-0.6%)
to close at their lows of the day and seemed the most important factor
of the day (even as corp bonds - as thinly traded as they were) saw net buying. Combine this move with the metals sell-off that stabilized only after Europe closed (collateral/liquidation needs?) and there is some food for thought even on a quiet day.
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