Balestra Capital: "If Government Programs Were Cancelled, The Economy Would Collapse Back Into Severe Recession"
While hardly an opinion that would be questioned around these parts, it is still good to see that even some of the smart money shares our views about the Schrodinger Economy ('alive' and 'dead' at the same time, depending if the BLS or anyone else is observing it) and we are not totally insane vis-a-vis one-time, non recurring government bailouts, which just incidentally have become perpetual and endless: "The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings. So the next question has to be: Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt? We think that if government programs were canceled, the economy would collapse back into severe recession." And here Balestra's Chris Gorgone explains quite astutely why anyone betting on a decoupling or perpetual USD reserve status may want to reconsider: "the U.S. is no longer in complete control of its own destiny. We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc. What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes. The world is changing rapidly. The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II." Alas, this too is spot on.JPM Expects Fed To Acknowledge Inflation Tomorrow As Hawks Continue Dissenting
While largely uneventful to most, the tomorrow's FOMC statement redline to the January one will be promptly scoured by algos everywhere for even the tiniest mention of the word inflation, as that will not only push back any hopes for a quick QE episode, but may temper expectations that ZIRP will last through 2014 (as the shaky 3 Year auction earlier indicated). And if JPMorgan's Michael Feroli is right, inflation is precisely what will be Bernanke's oh so observant mind tomorrow. In which case at 2:15pm watch out: the Chairsatan may just pull the punchbowl away as the Hawkish dissent mounts... if only until the market has a downtick of course, which will threaten to destroy the ever flimsier hollow house of ponzi cards, or something, and the chief fireman comes scrambling back with the firehose spraying trillion dollar bills.After Greece, Here Are The Four Things That Keep Bank Of America Up At Night
The Greek CDS auction has not yet taken place, nor has one quantified how many Greece-guaranteed orphan bonds with UK-law indentures have to be made whole (at a cost to Greece of course, no matter how much Venizelos protests), and somehow the world is already moving on to bigger and better risk strawmen. Because if one sticks their head in the sand deep enough, it will be easy to ignore that European banks have gradually over the past year or quite suddenly (as in the case of Austrian KA Finanz) taken about €100 billion in now definitive losses on their Greek bonds and CDS exposure. Luckily, just like in the US, there is now over $1.3 trillion in fungible cash sloshing in the system, allowing banks to 'fungibly' fund capital shortfalls and otherwise abuse every trace of proper accounting, when it comes to a post-Greek default world. The problem is that none of this actually solves the fundamental insolvency issues plaguing the 'old world', but what it does do, is force the accelerated depletion of an aging and amortizing asset base. That's fine - as Draghi said the ECB can "always loosen collateral requirements even more." So while we await to hear just who will sue Greece and Europe, and how much cash will have to be paid out to UK-law bondholders (before the Greek default is even remotely put to rest), here is a listing of what Bank of America (recall - BofA is the one bank most desperate to remove any lipstick from the pig due to its need for more QE) believes will be the biggest risks to its outlook going forward. In order of importance: 1) Oil prices (remember when a month ago we said this then ignored issue may soon hit the very top of investors worry lists?), 2) Europe; 3) US Economy; and 4) China. That about covers it. Oh and massive debt issuance supply too as well as the even more epic straw man that is this Thursday's stress test. Remember: stress tests will continue until confidence in the ponzi returns!
Additional 107 billion euros worth of Greek bonds hidden from view and tendered to ISDA
Good
evening Ladies and Gentlemen:
The USA government does not like to see gold rise for consecutive days
especially if we had an outside day reversal like the one we experienced
on Friday. Thus the bankers raided today. Gold fell by $ 11.70 to
$1699.20 whereas silver fell by 81 cents to $33.34 The big news of the
day actually arrived yesterday where Mark Grant noticed that a huge 107
billion
Market Complacency is on the Rise
The following chart is of the CBOE's Volatility Index, or the VIX as it is
generally referred to by traders and investors. It is used to gauge
investor sentiment in general. Sharp spikes are evidence of RISING FEAR
associated with global or domestic economic concerns while low readings
indicate a relative state of complacency among investors. In the past these
spikes higher have proved to have been good buying opportunities since they
have heralded the onset of Central Bank LIQUIDITY MEASURES to combat
deflationary headwinds.
While this indicator is generally not very good for pick... more »
A Ho-Hum Day
The gold market seems relatively quiet in comparison to some of what we
have been treated to over the last couple of weeks. Some traders are
probably welcoming the break to see if they locate their stomachs after
last week's wild ride.
Sellers surfaced near the $1720 resistance level noted on the chart
preventing gold from continuing to build on last Friday's rebound off the
$1680 level. It fell below psychological support at $1700 but has moved
back above that level here later in the session, although not by a lot.
The reaction to the late Friday ISDA news has been somewhat muted... more »
Employment Report And The Market
While
the recent employment report will most assuredly give the current
Administration plenty to boast about the underlying trends are far more
disturbing. The ongoing structural realities, the fact that many of
the jobs that have been destroyed will never return, combined with the
demographic shift make the headline number much less important compared
with the emerging trends. Take a look at a recent Gallup Organization
poll which polls weekly, rather than one week out of a month with BLS,
in regards to the emerging trends of employment. The most recent poll
update shows the trend of the percentage of unemployed rising. As you
can see the Gallup survey tends to lead movements in the BLS poll by
about 4 weeks or so. Therefore, it is highly likely that in the coming
month as the massive seasonal adjustments in January and February fade
out we will see the unemployment rate rise back towards 8.5%. Silver Slumps As Risk Broadly Recovers
Global
risk markets and US equity futures were drifting lower together (post
China trade deficit data) into this morning's confusion in Europe but
around 430ET, equities pushed higher, Treasuries rallied rapidly as we
approached the US day session open and broadly speaking risk was off
(in everything except stocks). Commodities dropped notably with Oil and Silver losing over 1.5% from Friday's close
before heading into the US open. The across-the-board weakness in
credit and our broad risk asset proxy (CONTEXT) reversed, as if by
magic, as the day-session open in the US dawned and led generally by
Treasuries, which staged a 4-5bps sell-off from overnight low yields
(with 2s10s30s notably rising on 30Y outperformance and 10Y
underperformance), we leaked back to unchanged in ES (the e-mini S&P
500 futures contract) having traded in a very narrow range all day on
low volumes (across MAR and JUN). VIX made headlines for its low levels
but the steepness of the term structure should be a much bigger
concern. AUD weakness spurred much of the early risk-off but accelerated stringer into the US close to maintain equities as close to green as possible. A very noisy day given very little news/event risk and the general confusion in European sovereign markets which all leaked wider. Credit and the vol term structure remain notable canaries as it appears EURJPY has become carry trade-of-the-day once again.Guest Post: The Audacity of Bonuses At MF Global
In the spirit of George Orwell’s Animal Farm
commandment: “all animals are equal, but some animals are more equal
then others” comes the galling news that bankruptcy trustee, Louis
Freeh, could approve the defunct, MF Global to pay bonuses to certain
senior executives. This, despite the fact that nearly $1.6 billion of
customer funds remains “missing” or otherwise partially accounted for,
yet beyond the reach of those customers, perhaps forever, since before
the firm declared bankruptcy on October 31, 2011... The Orwellian nature
of finance is spiraling out of control. It was acutely demonstrated
during the fall 2008, merge-and-be-bailed period, and subsequently,
through mainstream acceptance that “too big to fail” validates the
subsidization of reckless banking practices (bail first, ask questions
or consider tepid regulation later), and the European debacle. Three wrinkles of audacity underscore the potential MF Global bonus approvals.
Fed To Take Propaganda To The Schoolroom: Will Teach Grade 8-12 Students About Constitutionality Of... The Fed
Back in September we noted a peculiar RFP by the Fed which sought to become a secret 'big brother' to the social media world, and to "monitor billions of conversations and generate text analytics based on predefined criteria." The Fed's desired product should be able to "determine the sentiment of a speaker or writer with respect to some topic or document"... "The solution must be able to gather data from the primary social media platforms – Facebook, Twitter, Blogs, Forums and YouTube. It should also be able to aggregate data from various media outlets such as: CNN, WSJ, Factiva etc." Most importantly, the "Listening Platform" should be able to "Handle crisis situations, Continuously monitor conversations, and Identify and reach out to key bloggers and influencers." While it is unclear just how successful the Fed has been in eavesdropping on various critical blogs, and divining "sentiment", it now appears that the propaganda masters at the Office of Central Planning have decided to go for young American minds while they are still pliable. It appears that as part of its reenactment of Goebbels "economic education" curriculum, the Fed will now directly appeal to K 8-12 student, in which it will elucidate on the premise of "Constitutionality of a Central Bank." You know - just in case said young (and soon to be very unemployed) minds get ideas that heaven forbid, the master bank running the US is not exactly constitutional - you know, that whole thing between Andrew Jackson and the Second Bank of the United States...Equity Trading Volume Collapse Bodes Badly For Banks
With two minutes to go, aggregate volume on the NYSE was running almost 30% below its average run-rate for the year-to-date. We ended the day with the worst volume of the year so far, down 25% below its average
YTD. What should be more worrisome is banks' revenues which are being
hurt by lower risk-weighted inventories, decreasing net interest margins
thanks to the Fed, and now mind-numbingly low equity trading volumes (-19% QoQ sequential for the past two quarters)
- especially as we are granted access to the Fed's stress tests this
weeks (and the inevitable PR-driven requests for dividends and their
following hype). As US Rakes Largest Monthly Deficit In History, 2012 Tax Revenues Net Of Refunds Trail 2011
A few days ago we noted that based on preliminary data, the February budget deficit would hit $229 billion (yes, nearly one quarter of a trillion in one month,
about where real Greek GDP is these days) - the largest single monthly
deficit in history. Unfortunately, this number was low: the final
February deficit was just released and the actual print is $231.7 billion. It also means that in the first 5 months of the fiscal year, the US has raked up $580 billion in deficits, oddly matched by $727 billion in new debt issuance, 25% more new debt issued than needed to fund deficits...
And that in itself would not be horrible - February is traditionally
the worst month for deficits as the Treasury sees a surge in tax refund
issuance - if it wasn't for something even more troubling. As the
second chart below shows, through last Friday, and net of tax refunds,
total US tax revenues were actually lower in the fiscal 2012 year to
date period than compared to 2011, by just under $2 billion, at $625.5
billion. Which is the weakest link for any argument that the US is
actually growing: what is growing is America's debt
(now almost exponentially), while its revenues are at best unchanged.
And the scariest: annualizing net tax revenues brings the number to $1.5
trillion. Which is just 50% more where total US debt interest
will be in 2014 when debt is $20 trillion, assuming interest rates are
somehow allowed to go back up... to the astronomical level of 5%.Is The Laggards-To-Leaders Trade Rolling Over?
This
year has been characterised by a dash-for-trash as the flood of
central bank liquidity sent the marginal dollar into every down-beaten,
over-shorted, unprofitable, over-leveraged, illquid stock it could get
its hands on. As Goldman notes today, however, this laggards-to-leaders strategy is starting to underperform in the last few weeks.
Buying the trailing 12M laggards and selling the trailing 12M leaders
had returned an impressive 7% YTD but since mid-February (which notably
was when credit started to underperform equity markets more directly)
performance of this 'pair' has lost almost 3%. It seems the
liquidity-floats-all-boats mentality is indeed leaving the market and
with a refocus on growth (that this likely implies) we suspect correlation will pick up once again to the downside.What's Wrong With This Picture?
Central Planning is #winning because this time is different.Credit And Equity Continue To Be Bipolar Opposites
Since the Greek PSI deal was announced early on Friday morning, European credit markets have been underperforming European equity markets quite materially.
Friday in the US held up in a narrow range for a short-period but once
we discovered that the CAC was in fact a credit event thanks to ISDA,
the US credit market deteriorated rapidly and remains weak as US equity indices are holding stable.
We wonder, with CBs seemingly on the sidelines for now and fall-out
from the Greek deal remaining uncertain, whether credit is once again
reflecting market angst more efficiently than the marginal robot in
equity markets.Is Bond Market Whispering Inflation As 3 Year TSY Prices At Highest Yield Since October?
The jump in yield from 0.347% to 0.456% may not sound like much, but that is what just happened following the pricing of the latest $32 billion in 3 Year paper, which came at the highest rate since October's 0.544%. And considering that anything under 3 years is virtually risk free courtesy of ZIRP, this move is actually far more pronounced than it appears on the surface. Also, that the auction closed with a 0.1 bps tail is hardly too notable, although it does show that gradually interest for short-term paper may be decreasing as the Fed may be forced to not only not do QE if inflation courtesy of all the other central banks persists, but have to shorten its ZIRP through 2014 forecast. Auction internals were broadly in line, with a 3.436 Bid to Cover coming in slightly above the LTM average of 3.356. Dealers took down 56.5% of the auction, with Indirects holding 34.6% and Directs left with 8.9%. So the questions begin: is this the auction that heralds concerns of imminent inflation through the bond market (sending the 10 Year lower), and is this ultimately the market negative event, because while stocks may be pushing higher on the rotation out of bonds, all this means is that there will be no more easing for a long time.
The Greek PSI Lawsuits Begin
You didn't think investors would voluntarily give up on the potential to generate returns between 50% and 333% now did you following the 'coercively voluntary' (aka Schrodinger Spanish Inquisition) Greek debt exchange? Because here they come. Reuters reports that a Hamburg law firm representing 110 Greek bond holders have formed a class action group and intend to sue banks and the Greek state following the Greek swap. It is unclear yet if there are any hedge funds participating in the group, or if these are the entities represented by Bingham. Most likely not: those will almost certainly seek non-class action status so as not to dilute the legal effort, if not fees. However, now that the precedent is set, look for the onslaught of lawsuits to start in earnest. What is probably quite important is that European taxpayers will now be delighted to know they are paying the Troika lawyers' $1000/hour legal fees (and uncapped expenses).
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