Goldman On Europe: "Risk Of 'Financial Fires' Is Spreading"

Germany's recent 'agreement' to expand Europe's fire department (as Goldman euphemestically describes the EFSF/ESM firewall) seems to confirm the prevailing policy view that bigger 'firewalls' would encourage investors to buy European sovereign debt - since the funding backstop will prevent credit shocks spreading contagiously. However, as Francesco Garzarelli notes today, given the Euro-area's closed nature (more than 85% of EU sovereign debt is held by its residents) and the increased 'interconnectedness' of sovereigns and financials (most debt is now held by the MFIs), the risk of 'financial fires' spreading remains high. Due to size limitations (EFSF/ESM totals would not be suggicient to cover the larger markets of Italy and Spain let alone any others), Seniority constraints (as with Greece, the EFSF/ESM will hugely subordinate existing bondholders should action be required, exacerbating rather than mitigating the crisis), and Governance limitations (the existing infrastructure cannot act pre-emptively and so timing - and admission of crisis - could become a limiting factor), it is unlikely that a more sustained realignment of rate differentials (with their macro underpinnings) can occur (especially at the longer-end of the curve). The re-appearance of the Redemption Fund idea (akin to Euro-bonds but without the paperwork) is likely the next step in countering reality.

Mark Grant Explains The Latest European Con

There is noise and fluff and soap bubbles floating in the wind but don’t be distracted. Like so many things connected to the European Union it is just hype. In the first place do you think that any nation in Europe is actually going to put up money for the firewall no matter what size that they claim it will be? Let me give you the answer; it is “NO.” The firewall is just one more contingent liability that is not counted for any country’s financials, one more public statement of guarantee that everyone on the Continent hopes and prays will never be taken too seriously and certainly never used. Any rational person knows that some promise to pay in the future will not solve anything and it certainly won’t create some kind of magic ring fence around any nation. Think it through; what will it do to stop Spain or Italy from knocking at the door of the Continental Bank if they get in trouble and the answer is clearly nothing, not one thing. The firewall is just a distraction to lull all of you back to sleep and all of the headlines and discussion about it makes zero difference to any outcome and so is nothing more than a ruse. “Look this way please, do not look that way, pay no attention to the man behind the curtain, put up your money to buy our sovereign debt like a good boy and everything will be just fine.”

As The ECB Crosses The Inflationary Rubicon Has Mario Draghi Lost All Control?

Having been heralded around the world for solving Europe's crisis, ECB head Mario Draghi confidently states (as does every other central banker in the world) that "should the inflation outlook worsen, we would immediately take preventive steps". However, a recent analysis by Tornell and Westermann at VOX suggests the ECB has hit its limit with regard to its anti-inflationary fighting measures. The ECB appears to have lost control over standard measures of tightening: short-term interest rates (since short-term lending to banks has dropped to practically zero), increase in minimum reserve requirements (practically impossible withouit crushing the banks that they have propped up due to the sharp asymmetries - the recent cut from 2% to 1% minimum reserves saw a remarkable EUR104bn drop), and finally asset sales (the quantity of 'sensitive' or encumbered assets on the ECB's books has reached such a scale - due to LTRO, SMP, and ELA programs - leaving the 'sellable' non-sensitive assets at a level below excess deposits for the first time in ECB history). As the authors note, while this does not immediately produce an inflation flare, the lack of maneuvering space will induce an inflationary bias to ECB monetary policy as Draghi will find it increasingly expensive  at the margin to hit the anti-inflationary brakes. "This bias puts the Eurozone at risk of de-anchoring long-run inflationary expectations. The danger is not inflation today, but the de-anchoring of expectations about future inflation." As we have noted many times before, the ECB (and for that matter most central banks in the world) need Goldilocks.

 

Summarizing The True Sad State Of The World In Two Charts

You can listen to CNBC, and the president, drone on about the recovery, about the wealth effect, about trickle-down economics, about why adding $150 billion in debt per month is perfectly acceptable, and about a brighter future for America and the world... or you can take a quick look at these two charts and immediately grasp the sad reality of where we stand, and even sadder, where we are headed.

Europe Drops Most In 3 Weeks As LTRO Stigma Hits New Highs

With Chinese and European data disappointing and Weidmann commenting on the futility of the 'firewalls' (as we discussed earlier) ahead of the discussions later this week, European equities dropped their most in almost three weeks over the last two days closing right at their 50DMA (the closest to a cross since 12/20). Credit markets (dominated by financial weakness) continue to slide as the LTRO euphoria wears off. The LTRO Stigma, the spread between LTRO-encumbered and non-LTRO-encumbered banks, has exploded to over 107bps (from under 50bps at its best in mid Feb) and is now up over 75% since the CDS roll as only non-LTRO banks have seen any improvement in the last week. Aside from Portugal, whose bonds seem to be improving dramatically on the back of significant Cash-CDS basis compression as opposed to real-money flows as the spread between Bonds and CDS has compressed from 500bps to 250bps on the back of renewed confidence in CDS triggering, sovereign bond spreads are leaking wider all week with Italy and Spain worst.

Guest Post: Welcome To The United States Of Orwell, Part 3: We Had To Destroy Democracy In Order To Save It

The dominant narrative of our so-called 'National Security State' seems to be: we were surprised by a treacherous, shadowy, sinister enemy and we have to set aside the niceties of democracy and civil liberties to combat this new and terrible foe. It's actually very simple: whatever the National Security State does anywhere on Earth is legal. Whatever action you take to protect your civil liberties is illegal. The State holds all the hammers, and you know what happens to raised nails.

 

Obama Imposes Martial Law With New EO

Jonathan W. Emord, Rense.com:
On March 16, President Obama without public notice unilaterally assumed dictatorial power over the entire country, issuing an Executive Order (“Executive Order—National Defense Resources Preparedness”) that would permit him in times of peace or war, in his sole discretion, to control all of the nation’s industry and resources for “purposes of national defense.”
Under Article I, Section 9, Clause 2, Congress has the exclusive power to suspend the writ of habeas corpus (the right of one to be released by a court from military or police custody) in “cases of rebellion or invasion” when “the public safety may require it.” Although not synonymous with martial law, which the Constitution never mentions by name, it is nevertheless clear that the Founding Fathers did not intend the President either to declare a state of war or to act independent of Congress to suspend the writ. Moreover, there is no executive power to impose blanket regulations over the economy independent of Congress, even in times of war. In this Executive Order, President Obama assumes that extraordinary power beyond the limits of the Constitution. Indeed, so sweeping are the areas of control, that there is no substantive difference between the powers he has assumed and those of a dictator.
Under the March 16 Executive Order, the President invokes a 1950 Act of Congress, the Defense Production Act, as a basis for asserting extraordinary control over the entire economy in service to the national defense needs of the United States. In effect, President Obama has unilaterally expanded the authority of Commander-in-Chief to include not only command of the military but also to command all private parties and resources in support of the military and objectives of his administration.
Read More @ Rense.com

 

 

Previewing Today's MF Global Hearing

Today at 2 PM, the House Financial Services Committee will hold its third hearing (and the fifth overall) on the ever more confounding topic of MF Global, its bankruptcy, and its vaporized client funds, which amount to about $1.6 billion at last check. And while Jon Corzine will not be there, virtually everyone else from the firm who can promise that said vaporitzation of funds was merely a softward glitch and not the fault of anyone in particular, will be present, from the General Counsel, to the CFO, to the Deputy General Counsel of JPMorgan, all the way to Edith O'Brien, assistant treasurer of MF Global, who is expected to plead the Fifth. One wonders why if there is nothing to hide, but that is the topic of another discussion. And as exposed last week by the WSJ, this hearing will be particularly interesting as now it has been made clear that Corzine specifically gave the order to transfer funds to JPM's account. As NJ.com summarizes: "Per JC’s direct instructions." This line, contained in an email that an MF Global finance official sent to explain a $200 million transfer to JPMorgan Chase from an MF Global account containing customer funds, will be a focal point of a congressional hearing today into the futures firm’s collapse. The email, disclosed in a congressional memo circulated Friday, has raised questions about whether the former governor and CEO of MF Global knew customer money was being used to plug holes in the firm’s finances as it plunged into bankruptcy during the last week of October. As much as $1.6 billion of client funds has gone missing, according to a trustee liquidating the futures firm."

One Chart Explaining Household Risk-Aversion

Household net worth has recovered (nominally) around $8.0tn of the $16.4tn lost during the crisis but there has been a regime-shift in terms of the volatility of household net worth since the late 90s. As Credit Suisse notes, this hugely increased and skewed volatility has fueled heightened risk aversion among consumers and retail investors. Just as non-financial corporations are hoarding cash (on the back of their memories of the credit crisis contraction in the money markets), the lesson corporate America will not soon forget is just as resonant with Households as they value liquidity and cash (and safety) much more highly now than ever before.

Mrs. Watanabe Prepares To Blow The JGB Bubble: Household Holdings Of Japanese Bonds Slide To Lowest In 7 Years

Two days ago we posted a very damning analysis of why Japan is finally facing the dilemma of either a major Yen devaluation, or, far worse, a long-overdue pop in the Japanese Government Bond (JGB) market. As expected, the conventional wisdom was that there is no danger of a JGB collapse as local households just can't get enough of JGBs following 30 years of straight deflation. As even more expected, conventional wisdom always ends up wrong, and this may be the case now. Bloomberg reports that "Finance Minister Jun Azumi’s efforts to get Japan’s households to increase investment in the nation’s debt are failing as holdings of government bonds fall to a seven-year low." Combing through the Japanese quarterly flow of funds report shows something very disturbing - the last bastion of JGB ownership, Japan's households, have started to shift out of bonds, which are now yielding 0.27% for the retail 5 Year bond, and about 1.00% for the 10 year, and are now putting their money straight into mattresses. "Japanese households owned 3.09 percent of domestic bonds in the final quarter of 2011, a decrease from 3.2 percent in the third quarter and the lowest since 2005, Bank of Japan data released March 23 show." And the worst news for any domestically funded ponzi regime: "Mrs. Watanabe” as many are housewives, have instead increased foreign-currency deposits and cash, according to the BOJ data.  "It’s a case of retail JGBs not having enough yield,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd."Households are accumulating cash and using financial investments to diversify into higher yields and JGBs don’t really provide this." ..."Individual investors are holding cash rather than bonds and other financial assets because they are wary of making risky investments, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo." Needless to say, when even Japanese households have given up, it's game over... for bubbles in both bonds and in "conventional wisdom."

 

 

A Few Thoughts On Deflation

Admin at Marc Faber Blog - 31 minutes ago

“Is deflation such a bad thing?” - in the CFA Institute Middle East Investment Conference (During deflationary periods in the nineteenth century, real per capita income apparently increased faster than it does now) *Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.* 

   more »

 

Video Interview: Follow Your Passion

Admin at Jim Rogers Blog - 35 minutes ago

Latest video interview. *Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.* 

  more »

 

Gold being held in check at $1680

Trader Dan at Trader Dan's Market Views - 1 hour ago

While Gold has been able to punch through this critical resistance level, it has not been able to HOLD ABOVE it. This is must do in order to kick it up and out of its current malaise. Once it does so, it should make a run at $1720 - $1725 in relatively short order. 

  more »

 

Moyers and Bacevich: Endless War

more »

 

SP 500 June Futures Daily Chart Close Up

more »

 

Banks Hold a Billion In Overseas Customer Money

more »

Little Known Rule Gives Wall Street Ability To Misuse Overseas Customer Money

more »

 

Liquidity Is Lifting The Equity Boat

Eric De Groot at Eric De Groot - 4 hours ago

It's not easy fading weakness (buying the dips), but veteran traders will buy fear as long as they see signs of accumulation. Positive divergences in trend energy and risk adjusted price suggests higher prices by the end of 2012. NYSE Composite A Stocks have come a long ways since the October 2011 lows. The red dot above the NYSE composite price stick reflects a statistically extended risk... [[ This is a content summary only. Visit my website for full links, other content, and more! ]] 

Spain, A Slightly Bigger Kick

Yesterday, we took a quick look at Italian bond issuance since October of last year.  Today it is Spain’s turn.  We think they have actually done a better job.  While the weighted average maturity of new Italian debt was only until August 2014, Spanish issuance has had an average weighted maturity of July 2015, almost a full year longer. The concern we have though, is that Spain has issued almost €100 billion of debt since November. Spain, with 'only' €711 billion debt, has issued 14% of that total since November.  Spain seems to have been issuing even more guarantees than Italy and to even worse institutions from a credit perspective (ie, ones that are more likely to rely on the guarantee for actual payment), so the trajectory of Spanish debt is concerning.

Durable Goods Miss, Inventory Stockpiles Soar To New All Time High

We have been keeping a close eye on economic reports in the month of March and as of this morning's just reported Durable Goods number we are now officially at miss 15 of 17. The headline print was +2.2% to a total of $211.8 billion, on expectations of +3.0%, up from a revised -3.6% decline in January. Ex-transportation, the number was +1.6% on expectations of a 1.7% increase, while Non-defense ex aircraft was up 1.2% on Exp. of 1.5%. The primary driver in the core slump was electrical equipment which slide 2.5% in February from $10.5 billion to $10.25 billion - are Americans getting all "gizmoed out?" And finally, for those who are saying the inventory restocking is over, we have two words: Dead Wrong. "Inventories of manufactured durable goods in February, up twenty-six consecutive months, increased $1.6 billion or 0.4 percent to $373.7 billion.  This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.6 percent January increase.  Machinery, up twenty-three consecutive months, had the largest increase, $0.6 billion or 0.9 percent to $62.2 billion.  This was also at the highest level since the series was first published on a NAICS basis." That's right - inventories just hit an all time high having increased 26 months in a row. And now you know where US economic "growth" has been hidden all these years. But yes, if you build it, they will come. Eventually. In the meantime, expect sell-side desks to again enact Q1 tracking GDP reductions.

Our sponsors were chosen to help you prepare for the coming global financial collapse...If you wait until TSHTF (the shi! hits the fan) it will be too late...  

Please consider making a small donation, to help cover some of the labor and costs to run this blog.

Thank You

 

 

I'm PayPal Verified