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>>
03/22/2012 5:03 AM
Postings begin at 5:30am EST
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Ultra-high corporate profits in the midst of a mediocre recovery 03/20/12 James Mortimer, GMO - no matter how much the economy is recovering, or how cheap stocks seem to be, margins are just ridiculously high now, and have to come down. You can read his letter here. We summarize it here, though the basic gist is that corporate profits are being fueled by unusually large deficits.
So what's the source of these incredibly high margins, and can they really persist? Here Montier gets into the basics of the flow of funds and the national accounts, and he bases his work on the economist Michael Kalecki, who identified this simple equation:
And with that equation we can finally start figuring out the source of those monster profits. This is how things looked like in 2011
See the big source of profits? Yep, it was the government's monster negative savings. Or to put it another way, it was the huge deficit equalling 7.6% of GDP that really boosted corporate profits.
Now what you have here is the justification for huge government deficits. Following the crisis, the private sector balance sheets were badly damaged, and government deficits have done wonders towards boosting GDP and corporations.
Portugal's five-year bond yields are stuck around 16%, where Greek bonds traded in April 2011 when euro-zone politicians started to insist private creditors should take losses. The flash point is a €9.7 billion ($12.84 billion) bond maturing in September 2013 that isn't covered by Portugal's €78 billion bailout. Until Lisbon explains where it will find the money, investors will fear a repeat of Greece's debt restructuring.
2- Sovereign Debt Crisis
CHINA - More Signs of Broadening Slowdown: To Single Digits Mind You!
At the AJM Global Iron Ore & Steel Forecast conference, BHP Billiton's Ian Ashby warned attendees that China's demand for iron ore was flattening. Rio Tinto also shared that sentiment. The China bears were only emboldened when Chinese policymakers announced they would raise the country's gasoline and diesel prices.
China’s imports have far outpaced exports in the past 4 years, and trade surplus has shrunk from 9% of GDP in 2007 to 3.3% in 2011.
China imports a lot from East and Southeast Asian economies and is the largest market for almost all major economies in the region.
China imports a huge amount of energy and resources (metals and minerals) mainly for its domestic use, which has benefited commodity exporters such as Australia and Brazil significantly.
Exports to China have become increasingly important for some large developed economies such as Japan, Germany and the EU in general.
Some large emerging market economies may find it increasingly difficult to “decouple” from China.
4 - China Hard Landing
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - MAR 181h- MAR. 24th, 2012
EU BANKING CRISIS
PORTUGAL-SPAIN - On Deck
Pimco chief Mohamed El-Erian expects 'second Greece’ in Portugal 03/18/12 Ambrose Evans-Pritchard - Mohamed El-Erian, Pimco’s chief executive, said Portugal will need a second rescue as the original package of €78bn (£65bn) falls short, setting off a political storm over EU rescue costs. “Unfortunately, that is how it will be. It will make the financial markets nervous because they are worried about a participation of the private sector,” he told Der Spiegel over the weekend
ADDITIONALLY, the ratio of HY bond prices to VIX has soared to record 'risky' highs strongly suggesting that either VIX is set to rise notably, high-yield bond prices are set to fall notably or both and these extremes have tended to occur in the lead ups to notable risk flares (around Fed implicit easing periods).
3 - Risk Reversal
RISK - SKEW
SKEWered 03/19/12 Zero Hedge - While stocks are surging in nominal terms, the options markets are increasingly pricing in greater and greater downside risk concerns. Currently, we are at record levels for this so-called Skew (meaning the price of downside protection outweighs the cost of upside protection by the most ever). Trade accordingly.
... here is Goldman's ranking of global across asset class hedge relative costs.
Macro Data Weakening On Seasonal Unwinds 03/19/12 Morgan Stanley - Much has been made of the positive impact that seasonal adjustments have made to the crop of supposedly better than expected macro prints that remain anecdotal evidence of why the S&P 500 is trading above 1400 again. Unfortunately the pleasant after-glow of a time-series-based adjustment that has become increasingly unstable and hard to justify post-crisis is starting to fade. Morgan Stanley's Business Condition Index dropped a very significant 5 points in March to 51%. Just as pointed out here (in Bernanke's scariest chart) the seasonal factors are almost entirely responsible as the trend of recent data is just not meeting expectations (both in analyst and market perceptions). Under the surface, things are a little gloomier also as their Hiring Plans Index dropped for the first time in six months and the business conditions expectations plummeted 11 points to 57% in March. Given this (leading) data, is it any wonder MS believes QE3 is inevitable and imminent?
SWIFT Cuts Iran Off: The international institution responsible for around 80 percent of the world’s financial transactions announced that it will cut off Iranian financial institutions from its system from Saturday. This unprecedented move is a big blow to Iran, and follows up on EU sanctions.
Majority in Israeli cabinet for strike: Israeli newspaper Maariv (Hebrew link, quote in English) by Ben Caspit saying that 8 out of 14 Israeli cabinet members now support a strike on Iran’s nuclear facilities. The cabinet can give Prime Minister Netanyahu the green light for a strike, at the time he sees fit.
Netanyahu preparing Israeli public: The Israeli Prime Minister continues the tough rhetoric against Iran also after coming back from his long visit in the US. Analysts see this as a preparation of the Israeli public for a war.
Using Oil Reserves: There was a report, later denied, that the US and the U.K. decided on releasing oil from the emergency reserves in order to lower prices. This could be another preparation.
“Last Chance” Warning: According to Russian sources, U.S. Secretary of State Hillary Clinton asked the Russians to send a message to Iran that the upcoming six-nation talks with Iran are the last chance before military action.
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GLOBAL MACRO REPORTS & ANALYSIS
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FEDERAL RESERVE - What's After Operation Twist?
Operation Twist Is Coming To An End: A Preview Of The Market Response 03/19/12 Zero Hedge - As macro data trends deteriorate and Dudley demurs, it is becoming increasingly clear that the risks for the US equity market are skewed to the downside as we head towards the end of Operation Twist (and seasonal factors subside). The Fed's 'upgrade' from modest to moderate growth certainly spooked Gold and Treasuries and saw small caps notably underperform but given historical precedence, if Operation Twist ends without a new program beginning, investors will likely expect a drop in equities (broadly) of 8-10% (which coincides with the QE1 and QE2 ends as well as the 1983, 1994, and 2003 normalizations in policy). Reiterating our recent theme, in order to avoid the end of Operation Twist, the Fed's economic outlook would need to deteriorate - which itself is a scenario likely to result in falling stock prices and just as the cause of a 'crash' in PCE towards the end of QE1 and QE2 was a function of higher inflation, we have the current spike in energy prices to ensure this time is no different.
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