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>>
03/04/2012 4:58 AM
Postings begin at 5:30am EST
and updated throughout the day
What Carry Trade? Euro Banks Deposit Entire LTRO 2 At ECB, Bring Total To Over $1 Trillion 03/02/12 Zero Hedge - Europe's banks are not only not deleveraging but increasing leverage while paying an incremental 75 bps on up to €700 billion in deposits. Not only is it not earning a carry spread, but it is losing 75 basis points as it is paid a meager 0.25% for a deposit that cost it 1.00%. instead of building a cash position and retaining earnings to fund €3 trillion in debt rollovers over the next three years (by the time the LTRO matures incidentally - good luck paying down that additional €1 trillion, which makes it a total of €4 trillion in maturing debt), roughly 800 European banks will bleed by €6 billion in the next year just to store their cash with the ECB.
Who in their right mind would buy an insurance policy on their sovereign bond exposure, knowing that the outcome is rigged and no payout can ever be expected?
In less than one year, the bankers and political leaders in Europe will come to hate the ISDA decision. By destroying the private market for sovereign risk insurance, they have made it certain that Spain, Portugal and Italy will be locked out of the global bond market.
How Greece’s default could kill the sovereign CDS market 03/02/12 Salmon (Reuters) - Market participants have already been spooked by the possibility that Greece might be able to default without triggering its CDS at all. Now they can add to that another worry: that Greece might be able to default in such a manner as to leave the ultimate value of the CDS largely a matter of luck.
In the best-case scenario for Greece and Europe and bondholders, every €1,000 of old Greek bonds will get converted to new bonds with a face value of just €315. Those bonds will probably trade at about 30% of face value, which means the new-Greek-bond component of the exchange will be worth about 10 cents for every dollar in face value of old Greek bonds that you might currently hold. Add in another 15 cents of EFSF bonds, and the total value of the exchange will be about 25 cents on the dollar, which is why people are talking about a 75% “present value haircut”.
the key number in the auction is the nominal value of the cheapest-to-deliver Greek bond — that’s the price at which the auction clears. And here’s the rub: this auction is going to take place after March 20, after the old Greek bonds have been exchanged into new securities. Because Greece intends to use collective action clauses to change the terms of all its outstanding bonds, even if they’re not tendered into the exchange, there effectively won’t be any old bonds in existence by the time the CDS auction happens. The only outstanding reference securities will be new bonds.
What this means is that the CDS architecture is broken, and can’t cope with collective action clauses. And as a result, according to the hedge fund manager who tipped me off to the whole problem, “this Greece CDS imbroglio might be the final blow for sovereign CDS as a product.”
ECRI: Since our recession call five months ago, the definitive, hard data used to determine official recession dates have gotten worse, not better, despite the consensus view that things have been improving since we made that call in late September.
GDP growth, year-over-year, peaked in the third quarter of 2010 at 3.5%. By the second quarter of 2011, it had fallen to 1.5% and it’s basically flat-lined from there. It has not reaccelerated.
It’s a similar pattern for personal income growth and
It’s a similar pattern for the broad measures of sales growth.
As of January, when you look at industrial production growth, year-over-year, it has now declined to a 22-month low.
Taking all of these key aggregate measures of output, jobs, income, and sales, putting it into our Coincident Index, the growth rate has now dropped to a 21-month low. The economy is weaker today than it has been in 21 months.
The European Central Bank handed out€529.5 billion ($712.81 billion) in cheap, three-year loans to 800 lenders, the central bank's latest effort to arrest a financial crisis now entering its third year. Wednesday's loans were on top of the €489.2 billion of similar loans the ECB dispensed to 523 banks in late December. The ECB's goal is to help struggling banks pay off maturing debts and to coax them to lend to strained governments and customers. About two-thirds of the loans went to banks in three euro-zone countries—two in the so-called "periphery," likely Spain and Italy, and one in the "core," likely France or Germany.
"It's giving us an insurance policy against having any liquidity shock"
Before it was announced late last year, ECB loans generally had to be repaid within about a year at most. Now banks can borrow virtually unlimited amounts for three years at a 1% interest rate, well below what they would pay to borrow elsewhere. The ECB money comes with no strings attached, so banks can invest or lend it as they please. A similar "carry trade" phenomenon helped U.S. banks emerge from the 2007-2008 crisis.
The first installment of ECB liquidity in December largely eliminated the risk that a bank would suddenly keel over because it ran out of money.
It also reduced the odds that banks would have to dump huge quantities of loans and other assets to reduce their funding needs.
Some banks, particularly in Spain and Italy, used portions of those funds to buy higher-yielding bonds issued by their governments at a time when most investors remained skittish, and it helped reduce government borrowing costs.
But many banks primarily used the funds to pay down maturing debts or simply deposited the money at other banks or with the ECB itself, even though they yield less.
The infusion fell short of some politicians' hope that it would stimulate bank lending to customers in struggling European economies.
ECB's Mario Draghi raises the stakes with trillion euro gamble 03/01/12 Ambrose Evans-Pritchard, Telegraph "There is no such thing as a free lunch: liquidity today comes at the price of subordination tomorrow," - "We have monetary anarchy running riot where the elastic band between the real economy and the current liquidity-fuelled markets is stretched further and further beyond credulity," - "The LTROs make things massively more dangerous. The banks borrow cash from the ECB to acquire sovereign bonds. The more the banks accumulate these bonds, the riskier the situation is becoming. The ECB seems to be making a trillion euro bet,"
It should come as no surprise to readers as it has been long pointed out that the need (and expectation) for all "transitory" measures to become permanent and exponentially larger to maintain this mirage of sustainability, but comments from ECB's Nowotny just took the shine off the day as Gold, Oil, Financials, ES, and AAPL all dropped notably (pulling back to TSY's outperformance) as he strongly suggested this is it (via Bloomberg)...
NOWOTNY SAYS SMP IS MORE OR LESS ON HOLD
NOWOTNY SAYS 3-YEAR LOANS WILL NOT BECOME A REGULAR FEATURE
NOWOTNY SAYS NOT `CONVINCED' ABOUT CASE FOR HIGHER FIREWALL
Greek Bank Deposit Outflows Soar In January, Third Largest Ever 03/01/12 Zero Hedge total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.
S&P Declares Greece in Default 02/28/12 WSJ Standard & Poor's cut Greece's long-term credit rating to selective default from double-C. The move was expected, as S&P said this month that " it would consider Greece in default if it added "collective-action" clauses to its sovereign debt, effectively forcing all bondholders to accept a bond-swap offering. ..."
S&P Downgrades Greece to "Selective Default" 02/28/12 BI - Greece is now in selective default according to S&P, which just amended its rating from CC (junk) to SD (selective default). This comes after Greece instituted retroactive collective action clauses to force bondholders to participate in an upcoming debt restructuring and submitted a formal offer for its creditors to participate in a bond swap last week. The "selective default" designation differentiates what's happening right now from disorderly default (or "D" rating), since the current debt restructuring is being managed and guaranteed by other EU countries. The move is primarily a technical one; private Greek bondholders are being asked to voluntarily trade in their holdings of Greek bonds for ones with longer maturities, but are now being forced to do so through a collective action clause (CAC) that could make this restructuring obligatory.
2- Sovereign Debt Crisis
G-20 FINANCE MINISTERS - Mexico City
G-20 Defers Move On Aid for Europe 02/27/12 WSJ - Officials from the world's leading economies deferred for months key decisions on international aid for Europe as they awaited more euro-zone action to fight the Continent's debt crisis. They anticipate an agreement to expand Europe's rescue fund next month. That move "will provide an essential input in our ongoing consideration to mobilize resources" to the International Monetary Fund.
European leaders this week plan to discuss combining money left in a temporary bailout fund with a permanent facility launching this summer, to create a combined €750 billion ($1 trillion) fund that could support struggling economies such as Italy and Spain. But Germany's reluctance is likely to push that decision later into March, or further into the spring. At the same time, the IMF wants to expand its lending capacity by $500 billion to almost $1 trillion by raising money from its member nations. Together, the European and IMF funds could provide $2 trillion in rescue capacity to guard against further global turmoil.
EU Demographic Problem - 02/28/12 Reuters Graphic Behind the ugly economic news coming out of Europe – as the eurozone seems to be heading into its second recession in less than three years – lies a still more ominous set of data that is likely to have repercussions for Europe’s economy and the choices available to its policymakers for many years to come. The consequences of an aging citizenry are numerous. First, and most dramatically, in any society, retirees consume a disproportionate percentage of a government’s social spending, ranging from pensions to healthcare. Secondly, they tend to consume fewer consumer goods, meaning that they aren’t contributing to the economy’s growth in that way, either. Finally, when they retire from the workforce – which happens at a relatively early age in many European nations – they contribute far less to government tax revenues. Economies already battling to balance budgets and tackle lofty public debt levels will face additional challenges as a result.
More burden on the EU "Social Entitlement Program" and significantly less people to pay
How Exactly Does that work?
2- Sovereign Debt Crisis
GLOBAL GOVERNANCE FAILURE
HOUSING - Triple Dip?
The Relentless Household Deleveraging 03/01/12 Zero Hedge the slow pace of deleveraging will continue to weigh on growth over the next few years - even as they have drawn down debt as a percentage of personal income from its peak in June 2009 at 114.76% to 101.1% at the end of 2012. There is a long way to go to the apparent Maginot line of supposedly sustainable 90% and with wage growth stagnant, the bulk will come from debt reduction in true balance-sheet-recession style - putting still more pressure on a perniciously polarized government to do anything about it. While progress has been made, there is still a long way to go for the US Household to get to supposedly sustainable levels of debt to personal income...
There's Been A Major Swing In What People Are Scared Of In Just The Last 8 Days 02/27/12 BI
19 - Oil Price Pressures
Countdown to Market Peak Has Begun 02/28/12 Puplava the annual rate of change in oil prices (red line, shown inverted and advanced), the S&P 500 (black), and the ISM Manufacturing PMI (blue line). The rate of change in oil prices leads the rate of change in both the ISM and the S&P 500 and the recent advance in oil is pointing to economic and market weakness by the summer. Note the two peaks in the red line for oil (again, shown inverted) which indicates we may see a small sell off in late spring followed by a subsequent sell off in early summer.
Don't Lose Sleep over China's Fewer Treasury Holdings Credit Writedowns 03/02/12 Credit Writedown - Less demand for Treasuries coincides with a smaller Chinese current account surplus. China’ current account surplus is about a third of what it was prior to the global financial crisis. Holdings peaked at $1.315 trillion in July and finished the year near $1.152 trillion. China may have shifted some funds from Treasuries to Agencies, especially given the persistent speculation of a new round of Fed asset purchases to be focused on mortgage-backed securities.
Chicago PMI Soars To 64, Beats Estimate Of 61, Employment Index Highest Since 1984 02/29/12 Zero Hedge "At this point it is no longer worth commenting on economic data, as between this, the NAR, the consumer confidence, it was all become farce of a blur. We now expect February unemployment to print negative as the labor participation rate slides to 50%, and seasonal adjustments and birth/date fixtures account for 5 million "additions" to jobs."
US ECONOMIC NEWS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
In the U.S. we now have the perfection of cloaked crony capitalism: corporate cartels use their vast concentrations of capital and revenue to buy the political leverage needed to write regulations specifically designed to eliminate competition. Recall that the most profitable business model is a monopoly or cartel protected from competition by the coercive Central State. Imposing complex regulations on small business competitors effectively cripples an entire class competitors, but does so in "stealth mode"--after all, more regulations are a "good thing" (especially to credulous Liberals) which "protect the public" (and every politico loves claiming his/her new raft of regulations will "protect the public.") This masks the key dynamic of crony capitalism: gaming the government is the most profitable business model. Where else can you "invest" a few hundred thousand dollars (to buy political "access" and lobbying) and "earn" a return in the millions of dollars, and eliminate potential competitors, too? No other "investment" even comes close.
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