The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. 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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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>>
02/20/2012 4:01 AM
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The ECB won’t book any profits or losses on its bond swap, but that might be enough to be considered default. If, for example, the ECB purchased the bonds at 50 cents on the dollar and the new bonds are now worth what the ECB paid that would mean the new bonds are worth less than the face value of the original bonds. While the ECB would come out without making or losing money, to ratings firms that would be considered a reduction in the value of the bonds and should theoretically trigger a default.
If the ECB debt swap doesn’t trigger a default by Fitch, S&P and Moody’s, the expected private sector bond exchange could easily clinch that distinction for Greece.
The private sector bond swap aims to cut the value of the bonds currently outstanding by half, which would be a clear loss for bond holders and meet ratings firms criteria for default.
A second avenue for a downgrade to default could come if Greece’s parliament passes legislation introducing a so-called collective-action clause and retroactively applying it to outstanding debt. The clauses say that if a certain portion of bond holders agree to a debt restructuring every single bond outstanding is subject to the same restructuring.
S&P said earlier this month that even retroactively adding that clause whether it is used or not could be enough to consider Greece in default because it is materially changing the terms of the debt.
The European Central Bank has completed an exchange of Greek bonds it bought starting in 2010 for new bonds from the Greek government that shield the central bank from incurring losses, paving the way for a massive debt-relief operation Monday.
The swap applied only to the roughly €50 billion in Greek bonds purchased via the ECB's nearly two-year-old bond-purchase program.
The operation doesn't include the estimated €12 billion in other Greek bonds held by individual central banks as investments.
National central banks that hold Greek bonds separately from the ECB's Securities Market Program, or SMP, will have to negotiate individually with the Greek government to protect those bonds against losses.
The ECB's bond swap aims to draw a clear legal distinction between those bonds bought by the central bank as part of its monetary policy, and €200 billion in bonds held by private creditors, which are due to be restructured, slashing their value.
Germany, Bank Ease Tensions on Bailout 02/17/12 WSJ A debt restructuring and second bailout for Greece appeared likely to go ahead, as German officials scrapped an idea to pressure Greece by withholding part of the bailout and the ECB developed a plan to protect its holdings of Greek bonds from the restructuring.
Completed ECB Bond Exchange Is "Biggest Screwing Of Our Lives" 02/17/12 Zero Hegde DOW JONES REPORTS THE ECB GREEK BOND SWAP IS NOW DONE. THIS MEANS THAT EACH AND EVERY EUROPEAN BOND THAT YOU OWN IS NOW SUBORDINATED TO THE ECB AND THE EUROPEAN UNION. IF THEY CAN SWAP THEIR BONDS FOR NEW BONDS WITH DIFFERENT TERMS, NO CAC CLAUSE IN THIS CASE, THEN THEY CAN SWAP THEIR BONDS FOR ANY TERMS AND CONDITIONS THEY LIKE WHILE THE BONDS OF PRIVATE HOLDERS ARE HELD TO THE ORIGINAL INDENTURE. THE EQUITY MARKETS MAY RALLY ON THIS NEWS BECAUSE THEY ARE FOCUSED ON A DEAL GETTING DONE BUT ANYONE IN FIXED INCOME SHOULD NOW CONSIDER RETCHING UNDER THEIR DESKS AS WE ALL JUST TOOK ONE OF THE BIGGEST SCREWINGS OF OUR LIVES THAT MAY WELL NOT BE A SINGULAR EVENT.
Moody’s Warns Big Banks of Possible Credit Rating Cuts 02/16/12 NY Times The ratings agency is reviewing 17 global banks, including Morgan Stanley, Citigroup, Goldman Sachs, Bank of America and Credit Suisse, for possible downgrades to their long-term credit ratings, dulling optimism caused by a monthlong rally in which major banks have recovered some of last year’s losses. Moody’s said it was weighing the risks to the institutions’ investment banking models and exposures to its capital markets business, which include trading securities and underwriting stocks and bonds.
China Bolsters Rhetorical Support for Europe 02/15/12 WSJ China's central bank pledged to increase its holdings of euro-denominated assets, bolstering Beijing's rhetorical support but stopping short of a specific investment plan.
Gallup also finds 10.0% of U.S. employees in mid-February are working part time but want full-time work, essentially the same as in January. The mid-February reading means the percentage of Americans who can only find part-time work remains close to its high since Gallup began measuring employment status in January 2010.
Bank of Japan Sprays World With Surprising ¥10 Trillion ($130B) Gift In Valentine's Day Liquidity 02/14/12 Zero Hedge - The Janapese central bank expanded their existing plan by ¥10 trillion, or about $130 billion. The facility, which includes low-cost loans, is now worth about ¥65 trillion, or $844 billion." The rub however lies in the total Japanese GDP, which at last check was $6 trillion (give or take), and declining. Which means this announcement was the functional equivalent to a surprise $325 billion QE announced by the Fed. What is ironic is the market reaction: the BOJ expands its LSAP by 18% and the USDJPY moves by 30 pips.
Rising gasoline prices are threatening to stall the U.S. economic recovery just as it appears to be gaining momentum. Oil prices have climbed sharply in recent weeks as mounting tension with Iran has raised the threat of a disruption in global supplies. On Wednesday, oil futures on the New York Mercantile Exchange rose $1.06 to $101.80 a barrel on reports that Iran had cut off sales to six European countries in response to the European Union's newly stepped-up sanctions. Iran's oil ministry later denied the report.
Yamaha's Rough Road Ahead 02/17/12 WSJ Yamaha Motor has taken many of the right turns to lessen its dependence on the stagnant Japanese market and reduce currency exposure, but the motorcycle maker is forecasting a profit decline of 37% in 2012.
26 - US Stock Market Valuations
Housing Agency's Reserves at Risk The Federal Housing Administration could exhaust its reserves over the coming year, which would require a Treasury infusion for the first time in its 78-year history.
27- Government Backstop Insurance
Russia Dumps Treasurys For 14 Consecutive Months; China Slashes Holdings To Lowest In Over A Year 02/16/12 Zero Hedge - Two things bear pointing out: the very demonstrative selling of US paper by Russia continues, and is now in its 14th consecutive month (as has been reported here consistently), as total USTs in Putin's possession declined to a fresh multi-year low of $88.4 billion, half of the $176 billion in October 2010. Also confirming that the Asian anti-USD axis is now one which consists of at least Russia and China (and certainly Iran), was the stepwise dump of US paper by Beijing which sold $32 billion in US bonds in December, bringing its total to a new post 2010 low of $1100.7 billion. And lastly, this was not isolated to just these two: in December the grand total of US Treasury holding by foreigners declined from $4.75 trillion to $4.732 trillion. The question then is: just what are China and Russia buying (ahem stockpiling) with all the dollars that are not recycled back into Treasurys?
31 - US Reserve Currency
Unadjusted January Retail Sales Post Biggest Sequential Plunge In History 02/15/12 Zero Hedge - The plunge from $459.8 billion in December to $361.4 billion in January, or -$98.5 billion in one month, was the biggest one month drop in retail sales in history. Now we won't say much on this topic, suffice to say that it would be far more useful if the BLS and Census Bureaus were to open up their models and explain in nuanced detail just what "old normal" adjustments they still incorporate into data sets. Because as many have already noted, seasonal adjustments used for data from 1980 to 2008 when "up" was the only allowed direction for everything, are completely irrelevant and misleading in the New Deleveraging Normal.
Nominal "discretionary" retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.47% from December and increased 4.86% above the level seen in January 2011 while, adjusting for inflation, “real” discretionary retail sales increased 2.23% over the same period.
SF Fed President John Williams spells it out nicely: What does this tell us about where monetary policy should be now? Inflation in 2012 and 2013 is likely to come in around 1½ percent, below the FOMC’s 2 percent target. And clearly, with unemployment at 8.3 percent, we are very far from maximum employment. At the San Francisco Fed, our forecast is that the unemployment rate will remain well over 7 percent for several more years. This is a situation in which there’s no conflict between maximum employment and price stability. With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open. This will help lower unemployment and raise inflation back toward levels consistent with our mandates. And we want to do so quickly to minimize total economic damage. The longer we miss our objectives, the larger the cumulative loss to the economy.
This Is STILL The Most Glaring Anomaly In The Market 02/18/12 BI - The S&P and the 10-year yield moved closely up until about last December, when the stock market started taking off, and the yield stayed low. It's not some iron law that they have to move together, but it is weird that there's a divergence, because as growth expectations and risk appetites rise, you'd expect a decreasing bid for Treasuries, and thus higher yields. And the fact that that hasn't happened remains strange. Everyone seems to think that yields must be too low, but it's pretty impressive how long this divergence has remained.
Market Volume Hits Fresh Non-Holiday Decade Lows 02/14/12 Zero Hedge - Today's NYSE volume (16% below the year's average volume) is the lowest on Bloomberg data for a non-Holiday day in over a decade. ES (the e-mini S&P futures contract) also had a dismal day with the day's total just beating February 6th previous multi-year low (non-holiday) volume and 30% below the 50-day average volume.
Shifting Landscape in Presidential Race Subtly but significantly, two forces—an improving economy and the emergence of social issues as a prime topic—are converging to shift the ground beneath the 2012 campaign.
Interest Rate Swaps- The REAL Purpose of Gold & Silver Price Suppression IR swaps artificially support the bond market by creating massive demand for bond trades that are embedded into these swaps. Thus, this massive trading of OTC IR swap derivatives creates massive artificial demand (no end user is purchasing the bond...this is merely trading for trading's sake), which results in an artificially high price for said bonds, which means interest rates are suppressed and kept at severely and artificially low rates. This is how you can see 3.5% 30 year rates when actual inflation is running 8-10% annually- massive artificial demand for bonds due to unimaginable volume of IR swap OTC's trading back and forth among the treasury's proxies JPM, Citi, HSBC, etc.
The Farce-Hole Gets Deeper: Obama's "Robo-Settlement For Votes" Cost To Taxpayers: $40 Billion 02/17/12 Zero Hedge Plunging deeper into the farce-hole, the FT reports tonight that Obama's foreclosure settlement with the banks over their improper seizure of tax-paying US citizens' homes will in fact be subsidized by those very same US taxpayers. It is a hidden clause (that has not been made public yet) that allows the banks to count future loan modifications under the $30bn (taxpayer funded) HAMP initiative towards their $35bn agreement to restructure obligations under the new settlement. As the FT goes on to note, BofA will be able to use future mods made under HAMP towards the $7.6bn in borrower assistance it is committed to provide - which means, in a (as TARP inspector general Neil Barofsky describes) 'scandalous' turn of events the bank will receive payments for averting a borrower default and be reimbursed by the taxpayer for the principal write-down. We have much stronger words for how we are feeling about this but Barofsky sums it up calmly "It turns the notion that this is about justice and accountability on its head". Are the Big Five banks truly beyond the law?
Insider-Trading Bill Clouds Legality of Tips 02/16/12 WSJ The legislation could severely curtail the political-intelligence industry, in which hedge funds and other investors benefit from information gathered on Capitol Hill.
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