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 Obama Budget is A Campaign Budget. Nothing changes until after the fall election and precisely on december 31st, 2012. Suspect budget assumptions and and the outcome on this date will make a $5T difference over 10 years. The markets will not wait and be hedl hostage to the outcome. 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 that like the US, 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. We submit the US Budget as evidence of the later.
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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>>
02/25/2012 3:49 AM
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TIPPING POINT or 2012 THESIS THEME
HOTTEST TIPPING POINTS
US GDP Growth versus Sovereign Debt
Remember: Rogoff & Reinhart Found above 90% GDP Shrinks by 1% & bad things begin to happen. Few survive it.
Europe's Cash-For-Trash LTRO-'Scam' And The Indentured Servitude Of The Citizenry 02/24/12 Zero Hedge - Insolvent banks lending to insolvent governments and we are calling it success? The banks can turn a tidy profit, but the straight-talking Irishmen asks the question every Greek citizen should be asking: "where does the profit come from?" The answer: the average tax-paying European citizen, and it is this that provides the comfort for the Germans to allow the Greeks to default without bringing down every bank in Europe in a contagious cascade of margin calls, un-hypothecation and deleveraging. The balance is out of skew due to 30 years of runaway full-Keynesianism, which leads indeed to the problems that McWilliams so well espouses.
ECB's Mario Draghi magic corrupts bond markets 02/24/12 Telegraph - The European Central Bank's blitz of measures to stave off a credit crunch and shore up EMU states are profoundly distorting debt markets and may ultimately do more harm than good.
LTRO has badly eroded the capital structure of banks, pushing many over the edge towards junk status. Spanish and Italian banks are using the ECB money to buy more of their own governments' debt than is covered by equity, becoming a "levered option on sovereign risk".
ECB has set off bond market tremors by exerting 'droit de seigneur' to shield itself from losses on its €40bn holding of Greek bonds. This has automatically reduced other creditors to junior status.
European banks to delevearge by up to €2.5 trillion over the next 18 months, and €4.5 trillion over the next five years, matching the pattern seen in Japan.
Simon Ward from Henderson Global Investors said the bazooka is better than nothing but a bad way to inject liquidity. The ECB would have got more bang per buck and avoided a host of problems if it had launched quantitative easing (QE) for the whole eurozone. "Their back door method is a form of disguised QE but it's a less efficient way to inject cash into the economy, it subordinates bondholders, and concentrates the ECB's credit risk in the periphery," he said. By forswearing QE as an Anglo-Saxon vice, the ECB has inadvertently resorted to a more insidious vice.
EVENT HORIZON: as central banks of the world have printed $7tn into existence in the last few years, we thought an examination of the marginal utility of central bank printing would be useful. The depressing truth is that, using Gold as a proxy for central bank ebullience, the impact of implicit devaluation (or explicit printing) by central banks is having a smaller and smaller impact on stock market (asset) prices. Since the lows in March 2009, the impact of central bank intervention on the Dow has rapidly diminished from over 20 Dow points per $1 Gold move to only 2 Dow points per $1 Gold move in the last few months. What is dramatically clear is that investors are losing 'value' even as they see their brokerage statements rise and while Gas prices will inevitably slap reality into their faces, perhaps just as the Debt/GDP multiplier signaled the Keynesian Endgame, then the Gold/Dow multiplier signals the Currency-Wars Endgame - or alternatively, Central Banks will have to go exponential in their extreme experimentation to fulfill equity-holder's hopes and dreams as they approach their event horizon.
Greek CDS to Trigger in March 02/19/12 Mish Greek CDS contracts are set to trigger next month after Greek parliament retroactively inserts collective action clauses (CACs) forcing all debt-holders to participate in the next deal. Bear in mind that forced restructuring is the trigger, not the insertion of the CAC language itself
How does Greece's debt swap work? 02/19/12 Guardian Bailout to include private bondholders exchanging €200bn of sovereign debt for mix of new bonds of lower value and cash. will happen between 8 and 11 March, not long before Athens has to pay back a €14.5bn bond maturing on 20 March.
The deal hammered out with private creditors will offer them new 30-year bonds with a coupon, or interest rate, of around 3.75%, which would rise if Greece achieved stronger-than-expected economic growth.
The European Financial Stability Facility (EFSF), is expected to make €30bn available as a cash sweetener for bondholders, which would translate into 10-15% of their holdings. Without that cash banks and hedge funds would probably walk away, as they will be made to suffer losses, or a "haircut" of up to 70% on their bond holdings. The size of the sweetener and the final interest rate are expected to be set by eurozone officials before the finance ministers' meeting on Monday.
The Greek parliament is expected to vote through legislation this week on so-called collective action clauses which would force some investors to take losses of 70% on their holdings.
The Greek parliament is expected to vote through legislation this week on so-called collective action clauses which would force some investors to take losses of 70% on their holdings.The ECB's profits will be recycled back to eurozone governments. Exempting the ECB could trigger debt insurance contracts, known as credit default swaps, some analysts say. This could weaken the euro.
The austerity measures being foisted on Greece as a quid pro quo for a second, €130bn bailout, are quite likely to prove self-defeating, in that the austerity, by further weakening the economy, may well cause the debt to GDP ratio to rise further.
Furthermore, the debt "haircut" being required of private investors may prevent Greece from ever returning to private markets for borrowing, making the country indefinitely reliant on official support. After the bailouts, so much of Greek's debt will be held by official repositories, all of who will have preferential treatment as creditors, that no private sector investor would go anywhere near it, knowing he'd be last in the queue of creditors.
Greece is going to need a third bailout of €50bn by the end of the decade on top of the €136bn agreed in principle last night. By the way, this favourable scenario makes the heroic assumption that the Greek economy stops shrinking next year and returns to 2.3pc growth in 2014. Few believe that's remotely possible.
As part of the deal, the Greek government has committed to enshrine into its legal framework a provision to give priority to debt service payments above all other public expenditure, including its inclusion in the Greek Constitution as soon as possible. This is the sort of thing that prompts revolutions.
Greek Debt Nightmare Laid Bare02/20/12 FT A “strictly confidential” report on Greece’s debt projections prepared for eurozone finance ministers reveals Athens’ rescue programme is way off track and suggests the Greek government may need another bail-out once a second rescue – set to be agreed on Monday night – runs out. The 10-page debt sustainability analysis, distributed to eurozone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, €170bn bail-out.
It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.
A “tailored downside scenario” in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 – well below the target of 120 per cent set by the International Monetary Fund.
Under such a scenario, Greece would need about €245bn in bail-out aid, far more than the €170bn under the “baseline” projections eurozone ministers were using in all-night negotiations in Brussels on Monday.
The report made clear why the fight over the new Greek bail-out has been so intense.
A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance to go through with the deal since they received the report
IMF Draft Sees Greek Debt Reaching 129% of GDP in 2020 02/19/12 WSJ The International Monetary Fund now expects Greece's debt to reach 129% of the country's gross domestic product in 2020. That is even further above the level most economists consider sustainable than previously thought, making it more difficult than ever to argue that the country can ever repay its debts.
The options envisaged by the IMF include:
Allowing Greece to capitalize accrued interest on the bonds now held by private creditors. These bonds are set to revert to the Greek government under a massive debt swap under which investors will receive new bonds worth only half as much.
The second option is to cut the interest rate on an existing €110 billion bailout loan.
The third option is ask euro-zone central banks to tender the Greek bonds they hold as investments—estimated at around €12 billion—in the debt restructuring.
Under the fourth option, the European Central Bank would forgo the profit it would otherwise make on around €45 billion to €50 billion Greek in bonds it bought in the open market in 2010-2011.
The draft analysis says the first and second options would trim the country's debt by 1.5 percentage points of GDP each, the third by 3.5 percentage points and the fourth by 5.5 percentage points. It also says that Greece's debt-to-GDP ratio for 2011 is now estimated at 164% from 162% earlier. "The IMF is looking for a combination of the options that would lead towards the 120% debt-to-GDP target by 2020. But it's not known how many of those options will be adopted by the finance ministers on Monday"
On The Greek "Glitch", Systemic Instability And Skating On Water 02/19/20 Bill Buckler When the prospect of a nation being unable to roll over a paltry few Euros of maturing debt is enough to galvanise the entire financial world into monetary excess exceeding anything imaginable as recently as late 2007, one must conclude that the markets are skating on the thinnest ice in their entire existence. But skate they are.
The Asian crisis was not allowed to derail the global financial system. It was "fixed" by throwing a huge amount of money at it. The result was the "tech wreck" of 2000-2002.
The sub prime mess in the US was not allowed to derail the global financial system. It was "fixed" by so much money that it made the Asian crisis bailouts look like a shower of loose change. The result was the global stock market swoon of late 2008 - early 2009.
The global stock market swoon was "fixed" by trotting out the financial "nuclear option", the direct monetisation of sovereign debt by central banks which came to be known as "Quantitative Easing" (QE).
Japan Posts Largest Trade Deficit on Record 02/20/12 WSJ Japan's economy got off to a bad start this year, posting a record ¥1.475 trillion (US$18.5 billion) merchandise trade deficit in January as a global economic slowdown and the strong yen hurt exports and fuel imports continued to increase. The data released Monday from the Ministry of Finance underline the persistent head winds facing a resource-poor, export-reliant economy. The yen's strength and Europe's debt crisis hurt demand for Japanese products, particularly in Asia, while Japan needs more foreign fuel to generate power as many domestic nuclear power plants have remained idle since last March's earthquake and tsunami.
Deja Vu 2011...Or 1997 02/23/12 Zero Hedge - The S&P 500 has had the best start to the year since 1997, and Gas Prices are accelerating rapidly. Two interesting analogs may be useful to think about the next moves in these markets and whether we see divergence.
S&P 500 2012 performance (green) compared to 2011 (orange) and 1997 (blue) signals perhaps a roll-over is due?
.. and while gas prices have risen rapidly, they are on the same pace (in percentage terms) as they were last year (incredibly). The difference obviously is the much higher base price. What triggered last year's rollover? High energy prices acting as a drag? European dysphoria re-emerging? US growth hope fading?
US & Euro Zone Industrial Production 02/22/12 Reuters - The recent crop of crises among countries on the periphery of the eurozone – most dramatically Greece, but also Ireland, Portugal, Spain and Italy – has caused industrial production to plunge in the eurozone as a whole. the modest gains reported by France and a small slide in growth announced by Germany have been more than offset by the economic slump on the part of the eurozone’s laggards. The German economy may look strong relative to its eurozone counterparts, but it’s not going to be able to do much to yank Greece et. al. out of the doldrums because much of its growth is driven by exports. And it’s going to take a while for the economic reforms – such as they are – to pay off in the form of higher growth on the part of countries like Spain and Italy. While the question of whether Europe can stop its downward slide is likely to be met with a regretful grimace, the biggest question of all is the extent to which those eurozone woes will begin to weigh on the still-tenuous economic growth in the United States as well. Can the U.S. keep growing, if the European economic picture keeps deteriorating?
30 - Global Output Gap
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past performance is no guarantee of future results.
The Empire Manufacturing Index that we saw earlier this week, while up over all, displayed weakness in six out of the nine underlying components. Of particular note was the weakness in new orders and backlogs which doesn't bode well for future economic strength. In today's Philly Fed report we witnessed employment drop by over 10 points from 11.6 to 1.1 which is definitely a sign of concern and prices paid rise which points to profit margin compression ahead.
With profit margins already pushing peaks for this cycle, and the financial markets pricing in extended economic growth, the weakening of margins due to pricing pressures puts investors at risk. Expectations for Q4 earnings were reduced by roughly 50% going into the earnings season and the beat rate of those reduced expectations has still been extremely weak. The markets are currently advancing on hopes of a resolution in Greece but even if that is done it is likely that the repricing of risk in the face of weakening margins will be just as damaging.
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
The idea among some "Dow Theorists" is that when the Transports get very weak (relatively) it's a sign that the market as a whole is doomed to fall. It is pretty stark the gap that's opened up this year. At a minimum it at least shows that some parts of the market are getting roughed up by the rise in oil prices.
The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system, a stark contrast with its push for transparency in its interest-rate policies and emergency-lending programs.
The Fed's recent approach to writing financial regulations is very different from its practice in the 1980s and 1990s, when it held as many as 31 public meetings a year.
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