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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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>>
03/16/2012 4:05 AM
Postings begin at 5:30am EST
and updated throughout the day
The strength of trend of key US data over the past three months has been disappointing in aggregate. Tthe next time you hear some long-only asset manager or octogenarian wealth adviser say the 'data has been very strong' so buy-and-hold big-tech or dividend-payers, do them a favor and remind them of this chart and what happened last year.
4 - Risk Reversal
SHADOW BANKING SYSTEM COLLAPSE - Still a $3.5 Trillion Hole
Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing 03/15/12 Zero Hedge - While equities may have returned to 2008 valuations, the credit shortfall across combined US liabilities - traditional and shadow - still has a $3.6 trillion hole to plug to get to the level from March 2008. It is this hole that is giving equities, which have already surpassed 2008 levels, nightmares. Because while the Fed is pumping traditional commercial banks balance sheets via reserve expansion (read: fungible money that manifests itself most directly in $5 gas at the pump) resulting in a $2.3 trillion rise in traditional liabilities from Q3 2008 through Q4 2011, what it is not accounting for is the now 15 consecutive quarters of shadow banking system contraction, which peaked at $21 trillion in Q1 2008, and in Q4 2011 declined to $15.1 trillion... and dropping. It is this differential that will be the source of the needed "Outside" money. It is this collapse that the Fed has yet to tackle, and it is the offset of this collapse which the equity market has somehow already priced in!
Consider: Who will step in to buy (not China) considering there is about $6 trillion in net new US debt issuance over the next 4 years?
10 - US Banking Crisis II
US TREASURIES - US Bond Yields Make Major Move > UP
An Alternative View On Recent Treasury Weakness 03/14/12 Zero Hedge - Its supply-and-demand stupid. The last few weeks have seen massive, record-breaking amounts of investment grade USD-based corporate bond issuance, at the same time dealer inventories for corporate bonds are at multi-year lows and Treasury holdings at all-time-highs. In general to underwrite the massive corporate bond issuance, dealers will place rate-locks (or short Treasuries/Swaps in various ways) to control the yield and sell the idea of the 'spread' to clients (which is where most real-money buyers will be focused on value. We suggest that the almost unprecedented corporate issuance and therefore need for rate-locks has provided a significant offer for Treasuries that the dealers (who are loaded) and the Fed (who is only minimally involved) was unable to suppress. The key question, going forward, is whether the expectations of a much lower issuance calendar will relieve this marginal offer in Treasuries and allow rates to revert back down?
11- Bond Bubble
CURRENCIES - Yen Shows Major Weakness > DOWN
Will JPY Devaluation Disrupt Global Growth? 03/14/12 Zero Hedge - Seemingly hidden from the mainstream media's attention, the last six weeks has seen the second largest devaluation in the JPY since Sakakibara's days in the mid-90s. This has to be putting pressure on Japan's Asian neighbors - not least the engine of the world China. Furthermore, JPY on a trade-weighted basis has cracked through all the major moving averages and sits critically at its post-crisis up-trendline. JPY weakness and the carry trade may not be quite as hand in hand if rates start to reflect any behavioral biases, inflation (or more critically hyperinflation) concerns any time soon. The six-week devaluation in JPY (spike up) is the second largest since the mid 1990s...
Global Prospects (sell Yen to buy foreign opportunities),
BOJ's unorthodox easing measures,
Losing "Safe-Haven' status,
Non-Japanese Hedge Funds (=9.3% US$ v Yen)
A broad yen-bearish view that the BOJ, under continuing political pressure, will take additional easing measures ahead,
Japan's trade picture is now expected to remain deeply in the red after years of surpluses fed by the country's exporters,
A dollar-bullish sentiment is growing fast as recently rosy U.S. economic indicators have prompted investors to bet that the Fed may terminate its accommodative policy stance earlier than the promised 2014,
Japanese institutional investors are expected to join the party after the start of the new fiscal year on April 1. Domestic life insurance firms and other institutions are expected to start buying overseas assets without the heavy currency hedging they have previously undertaken on the back of widening interest-rate gaps between Japan and the U.S. A wider interest rate gap means higher hedging costs,
Mrs. Watanabe—as Japanese retail margin investors are known— shouldn't be discounted. "We've been buying the yen until recently, but now it's the dollar we are stocking up on," said Yukio Nakamura, a veteran retail investor.
"What we are seeing is a big change where every underlying flow is reversing course," said Koji Fukaya, chief currency strategist at Credit Suisse in Tokyo. "In this type of market, a discussion on whether the speed is too fast or not is really of no use."
DYLAN Grice of Societe Generale recently highlighted an intriguing quote from Sir Mervyn King, governor of the Bank of England, about the central bank's accumulated pile of gilts. Last month, Sir Mervyn said that
I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we'll find that a whole lot easier than we did when expanding it.
The nature of this cunning plan was not revealed. But there was an intriguing suggestion in yesterday's FT from Jo Owen, a former partner of Accenture. the Bank of England should simply retire (i.e. cancel) the debt. As the author writes
After buying £325 billion of debt from the market, the public sector (the Treasury) is paying interest to itself (the BofE) on debt that it owes to itself. It makes no sense for the public sector to owe itself money.
One can understand the author's reasoning, although wait until he gets started on America's social security trust fund. But what might be the flaws with this plan?
The main obstacle to retiring the debt lies with the markets and the credit rating agencies. They may see this as a slide towards Weimar Republic economics; monetary financing of government debt by printing money.
Indeed they might, for that is what it would be. It would also be an effective default, even if the buyer was conniving in the write-off. Those who were suspicious of QE have feared that this might be the end game all along.
However the author also suggests that the money created to buy the gilts could be "cancelled". I am not sure what this would mean in practice. When the bonds were bought, the money was added to the bank accounts of the sellers; in practice it is an asset of the banks. What would happen if banks suddenly took a £325 billion hit to their assets? One reason central banks went down the QE road was to stabilise the financial system; the overnight reversal of this policy would undo much of the good work.
It seems unlikely that this is really the Bank's plan. Instead, the Bank probably expects to sell the gilts to the commercial banks, which will need to own more government bonds as part of Basle process for beefing up their capital and liquidity ratios. Of course, this is still an oddity, on a par with a government owing money to itself. The government will be standing behind the banks as lender of last resort, and the banks will be standing behind the government as lender of first resort.
Having a captive buyer in the form of the banking sector is a form of financial repression. On that note, Carmen Reinhart has another excellent comment piece on Bloomberg. As she points out
Critical factors explaining the high incidence of negative real interest rates after the crisis are the aggressively expansive stance of monetary policy and heavy central bank intervention in many advanced and emerging economies.
This raises the broad question of whether current interest rates are more likely to reflect market conditions or whether they are determined by the actions of official large players in financial markets. A large role for non-market forces in interest-rate determination is a central feature of financial repression.
Official bodies (including foreign central banks) own around half the Treasury bond market; the share of private sector (and thus profit-maximising) is probably the lowest since the early 1970s. As Ms Reinhart warns
That, too, was a period of rising oil, gold and commodity prices, negative real interest rates, currency turmoil and, eventually, higher inflation.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - MAR 11h- MAR. 17th, 2012
EU BANKING CRISIS
ECB - LTRO Masks Spanish & Italian (SPIT) Capital Flight
Is The ECB Masking Accelerating Deposit Flight In Italy And Spain? 03/12/12 Zero Hedge - While LTRO may have slowed the need for immediate asset sales and larger deleveraging in European banks, the two most significantly worrying trend concerns remain front-and-center - those of deposit flight and lending cuts. The latter remains a concern for the BIS, who note in their recent report, that lending curtailment by European banks focused primarily on risky (non-sovereign) and USD-denominated (EM mostly) debt as banks sought to reduce risk-weighted assets (RWA) to meet Basel III capital rules. It would appear though that banks remain in deleveraging (asset sale) mode, in anticipation of the end of ECB facilities down the road, which will become increasingly troublesome given the encumbrance of so many of their assets already by the ECB itself. What is most concerning though is the dramatic and accelerating deposit outflows from not just Greece but Italy and Spain (which just happen to be by far the largest 'takers' of LTRO loans).
Spanish and Italian (SPIT) banks dominated the use of the ECB's LTRO facilities, while Finland/Germany/Luxembourg (FINGEL) banks took only modest amounts...
As most importantly - Deposits are flooding out of SPIT banks...
1- EU Banking Crisis
COLLATERAL CONTAGION - Balance Sheet Encumberance
Why Europe Is Running Out Of Assets - Encumberance 03/12/12 Zero Hedge By demanding collateral for their bottomless pit of low-interest loans, the ECB has not only reduced banks' necessary deleveraging needs (and/or capital raising) but has increased risk for all bond-holders (and implicitly equity holders, who are the lowest of the low in the capital structure remember) as the assets underlying the value of bank balance sheets are now increasingly encumbered to the ECB. Post LTRO, Barclays notes that several banking-systems (PIIGS) now have encumbered over 15% of their balance sheets but LTRO merely extends a broader trend among European banks (pledging collateral in return for funding) and on average (even excluding LTRO) 21% of European bank assets are now encumbered, and therefore unavailable for unsecured bond holders, ranging from over 50% at Danske (more a business model choice with covered bonds) to around 1% for Standard Chartered. As the liquidity-fueled euphoria starts to be unwound, perhaps this list of likely stigmatized banks is the place to look for higher beta exposure to the downside (especially as we see EC B margin calls start to pick up).
Whether it be their direct actions with Greece (specifically subordinating the world) or their indirect actions with LTRO collateral needs, the systemic risk of Europe's banking/sovereign credit system is far higher now than it was before (and credit markets have already begun to adjust to this new reality - senior spread decompression, recent sovereign underperformance, and LTRO-Stigma - even if equities remain dumbstruck with the implicit print-fest - though very recently European financial equities have joined the credit drop more closely).
China Trade Deficit Spurs Concern 03/12/12 WSJ The weekend report of a $31.5 billion trade deficit in China for February was substantially larger than most analysts expected and followed a string of other disappointing economic data, including weak growth in car sales, industrial production and retail sales, and the continuation of a steep fall in property sales. The only bright economic star was that inflation slackened more rapidly than expected.
The Fed said 18 of the 19 financial firms it tested retained a large enough capital buffer to continue lending in a steep downturn, defined in part as one in which housing prices and stock markets tumble sharply, and unemployment climbs to 13%. (Current unemployment is around 8.3%.) However, the Fed said at least four of the 19—Citigroup, Ally Financial Inc., MetLife Inc. and SunTrust Banks Inc.—would have to resubmit their capital plans to the Fed, amounting to a de facto rejection of their dividend or stock-buyback plans. Ally Financial was the sole institution to fall short of the test's capital requirements even without any proposed dividend payments or other capital distributions.
Demonstrates it is More Powerful than the FEDERAL RESERVE & US TREASURY
How J.P. Morgan Chase Scooped The Fed 03/13/12 WSJ - The Fed told many of the nation's largest banks around midday Tuesday that it would announce stress-test results at 4:30 p.m. EDT, after the close of the New York Stock Exchange, and that banks could issue news releases about increasing their dividends or share buybacks after the Fed's release. But J.P. Morgan, the nation's largest bank, issued a news release at 3:04 p.m. outlining its results and plans. Its shares jumped 7% after the release and pulled up other bank stocks. The next bank to disclose that it had passed the test was U.S. Bancorp at 3:58 p.m., just before the market close. Several rival banks said they received instructions from the Fed to stay quiet until the central bank put out its own results for all 19 banks covered by the latest stress test. An executive at one rival bank said the bank was instructed by the Fed "not to tell anyone" the results. The banks said they were frustrated by J.P. Morgan's release because they felt they were playing by the Fed's rules.
Economic Surprise Indices are all rolling over - Reality is not meeting Analyst/Market Expectations...
Energy Demand is dropping rapidly - suggesting that 1) global economic recovery is stalling (or magically growth has become energy independent), and 2) central bank intervention (and geopolitical tensions in their somewhat circular fashion) has led to demand destruction quicker than many would have hoped.
Kostin said there were three main reasons for his call:
The U.S. economy is stagnating, growing below trend.
In a weak economic growth environment, markets historically have a flat multiple
2012 is expected to see earnings growth of only 3 percent.
Elaborating on these three key points Kostin said at sub-2 percent, income growth is weak. Also, earnings and revenue forecasts have been cut across all sectors in the last 30, 60 and 90 days. He also blamed rising oil prices and the lack of money flow into the market.
26 - US Stock Market Valuations
Gold & Silver Backed, Absolute-Return
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MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Fed Is 'Playing a Game With Us:' Pimco's Gross 03/13/12 CNBC - The Federal Reserve "is playing a game with us to some extent" by maintaining low interest rates, Pimco founder Bill Gross told CNBC, who also expects another round of quantitative easing. - "I think the Fed will continue to do this for a long time and subordinate investors in the bond market," said Gross, who runs the world's largest bond fund.
Financial Repression Back to Stay: Carmen M. Reinhart 03/12/12 BL Unlike income, consumption or sales taxes, the “repression” tax rate is determined by factors such as financial regulations and inflation performance, which are opaque -- if not invisible -- to the highly politicized realm of fiscal policy.
According to Dunning-Kruger, no matter how much information is provided, the unsophisticated would:
be incapable of recognizing the wisdom of such a plan;
assume they know better; and
have no idea of the extent of their inadequacy.
What’s worse is that with incompetence comes the illusion of superiority. In other words, stupid people are too stupid to know how stupid they are. It would appear then that democracy dooms us to mediocrity and misinformed choices.
San Francisco Chronicle
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