The European financial markets in the six weeks since the last EU Summit, have had a complete, unofficial and unreported implosion in the bond and credit markets . The current agenda of the upcoming EU Summit does nothing to fundamentally address the underlying causes. MORE>>
The World Economic Forum's 2012 Risks Report, the IMF's Global Financial Stability Report and our proprietary Aggregated Global Risk Level Index (AGRLI) all suggest global macroeconomic risks are increasing. The consensus findings are that the center of gravity of Global Macro issues are a combination of Chronic Fiscal Imbalances and a Global Governance Failure. MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
EURO EXPERIMENT : ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what 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". MORE>>
CURRENCY WARS: EU: A FLAWED FOUNDATION, BUT A BRILLIANT STRATEGY Released May 31st, 2011
It was the perception of getting something of value without any meaningful sacrifice that initially fostered the EU Monetary Union. Though the countries of Europe were fiercely nationalistic they were willing to surrender minor sovereign powers only if it was going to prove advantageous to them. They were certainly unwilling to relinquish sufficient sovereignty to create the requisite political union required for its success. After a decade long trial period it is now time to pay the price for Monetary Union. I suspect that the EU membership is unwilling to do so. Though they likely will see the price as too high to do so, the price to not do so has become even greater. They have unwittingly been trapped by a well crafted strategy. MORE>>
CURRENCY WARS: The Economic Death Spiral Has Been Triggered Released May 27th, 2011
For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended. It is now in the process of reversing and becoming a vicious downward economic spiral. One of the strategies is the Asian Mercantile Strategy. The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end. MORE>>
CURRENCY WARS: Debt Saturation & Money Illusion Released April 27th, 2011
Most of the clearly evident financial problems that surround us today stem from one cause - Debt Saturation. Most, intuitively, sense this to be a correct assessment but few can either prove it or articulate it to the less sophisticated. Let me arm you to be the "Nostradamus" amongst your friends and colleagues in explaining the problem and what the future therefore foretells. However, let me make it very clear, this will not make you popular. Smart maybe, but highly likely to make you unwanted at the social gatherings of the genteel. MORE>>
02/13/2012 9:12 AM
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The real tail risk of the 'Great Deleveraging' has only just begun. As MS notes, we may have avoided a credit crunch but European banks could delever between EUR1.5 and EUR2 Trillion over the next 18 months as the unwind is far from over. History suggests that over a longer time-frame, around five to six years - the deleveraging could reach EUR4.5 Trillion assuming zero deposit growth and the LTRO will slow but not stop the process. As we discussed last night, this deleveraging will inevitably lead to continued contraction in European lending to the real economy (no matter how much liquidity is force-fed to the banking system).
Morgan Stanley sees four broad buckets of bank deleveraging likely
Deleveraging has indeed a long way to go if history is any guide.
“This is reaching the danger point. It is already one and a half times the total budget of the German government. If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks.”
Banks set to double crisis loans from ECB Emergency funding take-up could reach €1tn European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze. Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29. “Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.” Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.
You Ain't Seen Nothin' Yet; Another Trillion (or Two) Euro LTRO Coming Next Month 01/30/12 Mish Last month, European banks tapped the ECB for €489bn in a long-term refinance operation dubbed LTRO. On February 29, another round of LTRO is coming up and expect banks to go for the gusto. Banks like cheap money to speculate and that is exactly what they will do. The money is supposed to go for bank lending but it won't. Why should banks lend? They have a guaranteed profit by speculating in Spanish or Italian bonds, assuming of course Spain and Italy do not need bailouts coupled with a writedown on government debt
Santander Profit Tumbles 98% Banco Santander said its fourth-quarter net profit plummeted 98% after it took a $2.38 billion charge on its Spanish real estate holdings, and as the bank set aside more funds to cover bad property loans.
Interesting calculations posted by Spiegel from the Kiel Institute on the sovereign haircuts which would make the debt of the listed countries sustainable.
European Bailout Infographic: Presenting The Truckloads Of Cash Needed To Rescue The Insolvent PIIGS 01/30/12 Zero Hedge one would need a 13 lane highway, filled with trucks bumper to bumper, stretching for about 3 kilometers to represent the €2.91 trillion in total amounts owed by the PIIGS and their citizens (whether voluntarily or not... actually make that involuntarily) to Europe's largest banks. What is most frightening is what is not shown: just how it is that the world's central banks are keeping all of these banks propped up. Because sooner or later all this money will be discovered to have been fatally misallocated. Then the real bailout cost will become all too evident, and just like in the US, it will be in the double digit trillions. Which means the metaphorical highway of trucks full of cash will stretch on for kilometers and kilometers and so on (or miles, for the naive US-based truckers). But since that day is in the future, there is no reason to worry about it.
2- Sovereign Debt Crisis
Europe Tightens Fiscal Ties European leaders agreed on a pact to move to closer fiscal union and signed off on details of a permanent bailout fund for the euro zone—yet Greece's debt restructuring threw a shadow over the summit
The European Union headed closer to fiscal unity when leaders of 25 member countries agreed to sign a treaty ('FISCAL COMPACT') designed to stop overspending and move forward with the establishment of a permanent E.U. rescue fund. The compact includes rules that limit debt allowances and makes it harder for countries to avoid sanctions if running debt above certain metrics. Britain and the Czech Republic said they were against the new ties.
Overall, 23 million people are jobless across the EU, 10 percent of the active population. In Spain, unemployment has soared to nearly 23 percent and closed in on 50 percent for those under age 25, leaving more than 5 million people out of work as the country slides toward recession.
2- Sovereign Debt Crisis
Crucial meeting of coalition partners 02/05/12 Athens News The crucial negotiation of the coalition political party leaders over the EC-ECB-IMF troika's ultimatums and shock measures has been set for 13:00 on Sunday. In this new meeting of the leaders of three parties backing the interim government led by Lucas Papademos which will take place on Sunday, the prime minister is expected to present them with a document detailing the rigid positions of the troika. ... [reports are] the prime minister is thinking of resigning if the three do not manage to come to an agreement.
Euro zone loses patience with Greece 02/04/12 Reuters Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.
Juncker Warns Of Greek Default As Europe's Patience With Greece Runs Out 02/04/12 Zero Hedge A Greek default on that €14.5 billion bond maturity D-day of March 20, is now inevitable. In an advance copy of comments to news weekly Der Spiegel, Jean-Claude Juncker was quoted as saying Greece could no longer expect solidarity from other euro zone members if it cannot implement reforms it has agreed. "If we were to establish that everything has gone wrong in Greece, there would be no new programme, and that would mean that in March they have to declare bankruptcy," he said. So after years of delaying the inevitable sovereign Lehman weekend, it is finally here. As a reminder, when Lehman filed, everyone, at least those in charge, thought the fall out could be contained. It couldn't, and the Fed had to step in with roughly $30 trillion in backstops, guarantees, and asset purchases. The same will happen this time.
Greece Draws The Line As Unity Government Leaders Refuse To Cede To Further Troika Austerity Demands "All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default. Representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs."
ECB's Cash Prescription Fails to Perk Up Portugal Yields are falling on Spanish and Italian government bonds as fears ease that the euro-zone's two-year debt crisis could spread to its larger economies. But Portugal, where yields hit euro-era highs, remains a worry.
Is China's Yield Curve Signaling A Harder Landing? The flattening RMB yield curve suggests the local bond market has become skeptical of Chinese growth prospects. Should the RMB curve flatten further from here, the anticipated decline of commodity currencies (AUD most specifically for US equity carry traders) could be sooner than expected.
Goldilocks Is Back - China PMI Rises To 50.5, Modest Beat Of Expectations, Shy Of Whisper Number 02/01/12 Zero Hedge China's goal-seeked economy performed admirably in January, and its Manufacturing PMI came absolutely golidlocks at 50.5, an increase from 50.3, previously, just modestly beating Wall Street expectations of a slight contraction of 40.6, yet a less than earlier whisper numbers which put it at 52. As such, thereis absolutely no indication if the PBoC will further tighten or ease in the next month, just as the PBoC likes it, because while many have been demanding easing in the last several weeks, and especially the housing market, the reality is that hot pockets of inflation still remain. Furthermore, the last thing China needs is to proceed with full on easing just as Bernanke goes ahead and launches QE x which will export more hot money, and thus inflation, to China than anywhere else, with the possible exception of gold.
And here are some observations from Bloomberg's Michael McDonough:
Headline PMI remained above 50 for two consecutive months; another 50-plus reading in Feb. would be very positive sign,
Underlying data still weak with new export orders falling to 46.9 from 48.6, while new orders rose to 50.4 Typically if this were true bottom, all forward-looking sub-components would rise above 50 in a month prior or the same month as headline index
Building domestic pressure coupled with foreign risks should continue to weigh on the Chinese economy, including the PMI going forward, forcing policy makers to cut RRR and eventually policy rates once they are convinced threat of inflation has been squelched
As Nomura notes, there seems to have been an unusual seasonal adjustment.
China’s official Purchasing Managers' Index (PMI) unexpectedly rebounded to 50.5 in January from 50.3 in December, much better than expected (Consensus: 49.6; Nomura: 49.0). The uptick may be partly due to an unusual seasonal adjustment. Since 2005 the PMI has shown a strong seasonal decline of 1.1 points on average in January (except for 2009). The accompanying press release indicates that the PMI this month was seasonally adjusted; an unusual move that may have contributed to the rebound.
What's also worrisome is that several key subcomponents showed strain.
...the export outlook appears to be under increasing strain, as the new export orders component fell sharply to 46.9 from 49.8 in December. Moreover, the overstock order component fell to 43.2 from 46.6 and the import component to 46.9 from 49.1, both now at their lowest levels since early 2009, when the economy was seriously affected by the global financial crisis. The employment component fell sharply to 47.1 from 48.7, the lowest in 35 months. Besides the impact from the new year, we believe the employment component reading may also reflect the strain facing the labour-intensive export sectors.
Occupy Protesters in Oakland Clash With Police Violence between authorities and Occupy protesters in Oakland flared over the weekend in a showdown demonstrators planned and police expected. Oakland police said they arrested more than 400 people
Obama Plans Refinance Aid to Lift Housing Obama is expected to announce a fresh bid to revive the housing market—despite likely congressional opposition—by letting millions of homeowners refinance their mortgages.
The unemployment rate has fallen to 8.3% from 8.5%.
Past reports were revised UPWARD
Hours worked is up to 34.5 per week
Manufacturing grew jobs by 50K vs. expectations of just 13K.
The public sector only shedded 14K vs expectations of a 20K decline.
The Labor Force Participation Rate declined to 63.7% in January
The Employment-Population ratio was unchanged at 58.5% in January
DAVID STOCKMAN: It's True, The BLS Data Is Made Up BI The reports are so massaged, estimated, deemed, revised, re-bench marked and seasonally adjusted that any month-to-month change has a decent chance of being noise. But the mainstream narrative never gets to the trend. In this case, the plain fact is that we are warehousing a larger and larger population of adults who are one way or another living off transfer payments, relatives, sub-prime credit, and the black market. My suspicion is that this negative trend and many others like it get buried by the monthly change chatter from mainstream economists and on bubble vision, and that these monthly deltas are so heavily manipulated as to be almost a made-up reality. Call it the economists’ Truman Show.
Explaining Yesterday's Seasonally Adjusted Nonfarm Payroll "Beat" 02/04/12 Zero Hedge - In January, those "not in the labor force" did in fact rise by 1.2 million (whether compared to December or to 2011), and the labor force participation rate dropped to a new 30 year low of 63.7%, a number which incidentally only has to drop by 5% more percent for the BLS to report zero, or even a negative, unemployment rate.
TrimTabs Explains Why Today's "Very, Very Suspicious" NFP Number Is Really Down 2.9 Million In Past 2 Months 02/04/12 Zero Hedge "Either there is something massively changed in the income tax collection world, or there is something very, very suspicious about today’s BLS hugely positive number," adding, "Actual jobs, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists – that 2.9 million fewer jobs gets translated into 446,000 new seasonally adjusted jobs." A 3.3 million "adjustment" solely at the discretion of the BLS? And this from the agency that just admitted it was underestimating the so very critical labor participation rate over the past year?
Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per Year: The President’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates, cutting through the red tape that prevents these borrowers from saving hundreds of dollars a month and thousands of dollars a year. This plan, which is paid for by a financial fee so that it does not add a dime to the deficit, will:
Provide access to refinancing for all non-GSE borrowers who are current on their payments and meet a set of simple criteria.
Streamline the refinancing process for all GSE borrowers who are current on their loans.
Give borrowers the chance to rebuild equity through refinancing.
Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules
Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work: Following the Administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.
Weaning Off 'Alternative' Investments Just five years ago, it was illegal for South Carolina's public pension plan to invest in hedge funds and other complicated bets. Now, nearly half its assets are in such investments. That is way too much for the state treasurer. 01/30/12WSJ
Fed May Sell More AIG Bonds as Risk Hunger Picks Up 02/04/12 WSJ The New York Fed is asking for bids on some $6 billion in residential mortgage-backed securities from its Maiden Lane II portfolio it took on as part of the 2008 bailout of American International Group.
Fed's Evans Would Back 'Very Aggressive' Debt Purchases 02/04/12 WSJ A high-profile defender of Fed policies to stimulate the U.S. economy would back "very aggressive" debt purchases by the Fed, and said he believes the central bank should more explicitly state the conditions necessary for a federal-funds rate increase.
Fed Likely to Retain Low-Rate Stance 02/04/12 WSJ A few more months of strong jobs reports like the one released Friday, and the Fed might need to draw up a new game plan. For now, though, Bernanke seems unlikely to rewrite his script for the central bank.
'While we expect central banks globally to continue to provide liquidity, it is the ECB’s position that has changed the most dramatically. The relative expansion of the ECB’s balance sheet is EUR bearish in our view....the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained. We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR"
ZERO HEDGE RATIONAL
"Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a proportional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion."
Japan Hardens Currency Rhetoric 02/02/12 WSJ The dollar fell to ¥76.02 Wednesday, the lowest since Oct. 31, when Japan carried out a widely publicized currency-market intervention that sold an estimated daily record of around ¥7.5 trillion. There is speculation that without official actions to bolster the dollar, it may soon drop below a record low of ¥75.31, also marked on Oct. 31, on expectations that the U.S. Federal Reserve will continue its loose monetary policy for longer and keep the U.S. currency weak.
Amazon Slides After Missing Revenues Expectations, Guides Much Lower 02/01/12 Zero Hedge Amazon slides 10% after hours as it reports much weaker revenues of $17.43 billion on expectations of $18.26 billion. EPS are not really comparable but seems to beat EPS of $0.16 on Exp. of $0.38. This may not be apples to apples. More importantly, the company guides Q1 to Operating Loss of $200MM to Income of income of $100MM, on Wall Street Consensus of $268MM, and guides to Q1 revenue of just $120-$13.4 billion on Estimates of $13.4 billion: pretty wide range there
Amazon's Spending Hurts Profit 02/01/12 WSJ Amazon is struggling to make money as quickly as it spends it, putting the squeeze on the online retailer's latest financial results and crimping its outlook
HONDA: 01/31/12 Honda announced net profitfell 41 percent to ¥47.66 billion, or $624.3 million, as a strong yen eroded international margins and Thai suppliers only started coming back on line. The company forecast full year net profit of ¥215 billion, well below analyst expectations for ¥250.5 billion.
Yields Plunge Most In 3 Months As Equity-Debt Divergence Remains The Treasury complex is seeing yields (and curves) compress dramatically today. With 5Y at all-time low yields and 30Y rallying the most in three months, the divergence between stocks and bonds appears ever more glaring. 30Y (which just went positive YTD in price) has traded around the 3% yield mark for much of the last 4 months (around 120bps lower than its average in Q2 2011 - pre-US downgrade) and most notably curve movements (as the short-end becomes more and more anchored to zero) have been dramatic. 2s10s30s is now at almost four-year lows and the last four times we saw equities diverge (up) from bonds' sense of reality, it has been stocks that have awoken. Back of the envelope, 2s10s30s suggests that the S&P should trade around 1100 (as we test 1300 in cash today).
SOCIETE GENERALE: The spread between high and low beta equities has also been very wide. When measured using deciles, we find a spread of around 15% in the US, and a remarkable 20% gap in Europe. Over the last 22 years we have only recorded such a wide spread in Europe on two other occasions – in October 2002 and in March/April 2009. This isn't necessarily bullish, however. While the strong performance of high beta names may indicate a potential bottoming out of equity markets, we have seen numerous occasions in the US where the spread has been wider than the current 15% and where the equity market continued to trend lower. Notably almost all these bear market beta rallies coincided with an interest rate cut from the Fed.
NOMURA: The decline in implied volatility (red line) vs. the a basket of "high-risk" stocks (grey line, inverted). As you can see, the grey line hasn't caught up to the red line, suggesting more strong performance for the risk basket.
Dead Market Exhibit A: January Volume Presented with little comment except to say that the total lack of volume (and massive concentration of what volume there is at the close) is hardly reflective of a market that is anything other than broken and dying. Last January (2011) the average number of stocks traded on the NYSE per day was 891mm shares vs 661mm for this January (a 26% drop YoY!) and this is down an incredible 59% from January 2008.
Life – and Death Proposition 02/02/12 PIMCO Bill Gross zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis
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