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 Global Markets have reached the point of waht can be best labeled as "Elevated Risk". Analytics measurements including Fundamenal Analysis, Techncial Analysis and Risk Anlysis all are independently signalling this along with warnings. This months report lays out the Risk Assessment, Risk Levels as determined by our proprietary aggregated Global Financial Risk Index, changes in Tipping Points and the Macro Risk-On, Risk-Off Drivers.
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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>>
04/01/2012 5:36 AM
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"BEST OF THE WEEK "
TIPPING POINT or 2012 THESIS THEME
HOTTEST TIPPING POINTS
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - MAR 251h- MAR. 31st, 2012
FATAL FLAW: The bulk of the world's assets also happen to be its liabilities! At the end of the day, this may prove to be the fatal flaw in the chairman's attempt to dilute the global liabilities, he will be doing the same with the assets.
The European story remains one of major promises and no actual reforms. A low interest rate and an extreme sense of “security” created by the illusion of easy money and low interest rates won't last forever.
As I wrote in Interest rates: the market has it all wrong, we could be on route to an exit strategy from central banks which at a bare minimum will be a goodbye to “unconventional measures” and if so, the low in interest rate cycle is in place.
30 years of Japanisation?
The only way central banks can create a proper exit from unconventional is to hand over the torch to reforms from governments and politicians. Unlikely, yes, needed?
Absolutely, otherwise we are doomed to 30 years of Japanisation
2- Sovereign Debt Crisis
RISK - 1987 Comparisonsor the end of the “Portfolio Rebalancing Channel (PRC)
The last time the S&P 500 rallied in such a serene manner as the current trend was March 1987 - a few months before monetary imbalances came undone and crashed in October 1987. Further, JPMorgan's Michael Cembalest notes that prior to WWII, the previous rally as calm and uninterrupted as this was in November 1928 - a year before the crash. The JPM CIO points out how the Fed's ZIRP has created a 'Portfolio Rebalancing Channel' (PRC) transmission mechanism from cheap credit to wealth effect through spending and profits (that has worked as planned) but the last leg on this mechanism has not functioned so well. Payroll growth has been underwhelming and the housing market remains stunted - leaving the real economy remaining fragile despite the market's appearance. The Fed remains committed to driving this 'channel' but, as Cembalest points out this could easily be derailed by inflation, a bond market revolt towards funding our 'Ecuadorean' deficits, or the pending fiscal cliff legislated for 2013. "So the PRC keeps chugging along, until the Fed's job is done (and Goldilocks continues), or something breaks."
The S&P 500 has gone up in almost a straight line since November 25th, propelled by unlimited ECB lending and some positive US economic surprises. I looked for other periods when the S&P went up like this, with almost no volatility (defined as a rally whose stats match/beat those in the chart). In the post-war era, there were none. The last time this kind of rally happened: April 1943, after Germany was first defeated at Stalingrad. History does not rhyme; ninety years ago, money-printing led to calamity in Germany, and eventually, to disaster in Europe. Today, money-printing is designed to save it. Its impact led Mario Monti to declare this week that the European debt crisis was “almost over”.
3 - Risk Reversal
COMMODITIES - May be Sending a Signal of a Chinese Hard Landing
Earlier today we presented an extended case by Caixin's Andy Xie, who is now confident that a massive 40% devaluation of the Yen is imminent and inevitable
Either of these two bubbles popping - the JPY or the JGB - is fraught with danger.
It also would not be a surprise to anyone who sees the chart from John Lohman which shows the gradual failure of central planning since the second global depression started in 2007 (and offset to date by $7 trillion in central bank private-to-public risk offset), during which time the BOJ has been forced to load up its balance sheet with substantially more assets than its GDP has grown by.
This trend will accelerate which is why with time the exponential chart of central bank balance sheet expansion will only get more "exponential" until it finally pops, bringing with it an end to the truly last bubble.
Japan is the perfect case study of what happens when rates even dare to move higher.
Remember: an epic surge in average interest rates to a whopping 2% and Japan's interest expense would eclipse the country's tax revenues, at which point it is game over.
Any dot above the diagonal line represents an industry where job growth is faster now than it was pre-recession. Any dot below the line indicates slower job growth.
Manufacturing employment had been falling for roughly 15 years and then suddenly stopped falling in the wake of this recession and started growing. This may be (the) structural shift that folks are looking for but its important to note that this is basically a “reshoring” shift. Although, it's not so much reshoring as a rapid slowdown in offshoring combined with growing underlying demand
On the flip side of the chart it's pretty obvious that the big standouts are government and construction jobs, which means that recent signs of turnarounds in both could portend another big leg up in employment.
10 - Chronic Unemployment
DERIVATIVE HOLDINGS - Top 5 US Bank Positions Equals $230.8 Trillion (95.7%)
Banks now report to the OCC that a record high 92.2% of gross credit exposure is "bilaterally netted." While we won't spend much time on this issue now, it is safe to say that bilateral netting is the biggest lie in modern finance (read How US Banks Are Lying About Their European Exposure; Or How Bilateral Netting Ends With A Bang, Not A Whimper for an explanation of this fraud which was exposed completely in the AIG collapse). And just to put this in global perspective, according to the BIS in the first half of 2011, global derivative gross exposure increased by $107 trillion to a record $707 trillion. It will be quite interesting to get the full year report to see if this acceleration in gross exposure has increased. Because if it has, we will now know that in 2011 European banks were forced up to load up on several hundred trillion in mostly interest rate swap exposure. Which can only mean one thing: when and if central banks lose control of government bond curves, an rates start moving wider again, the global margin call will be unprecedented. Until then we can just delude ourselves that central planners have everything under control, have everything under control, have everything under control.
DIVIDENDS: "The cash here when it gets used is not going to help bonds, it's going to help equity holders. Year to date, dividends are up $20 billion."
BUYBACKS: "Buybacks are going to take a step up this year. It's a reason why the stock market is still going up despite resale inflows being negative and hedge funds not buying stocks and pension funds not owning equities. It's because corporates over the last 20 years have accounted for 87% of all inflows in the stock market."
India's October-December current account deficit nearly doubled to $19.6 billion from $10.1 billion a year earlier due to a sharp slowdown in merchandise and services exports even as imports grew at a rapid pace .
INDIAN CURRENT ACCOUNT DEFICIT
The Reserve Bank of India said that the country's balance of payments "experienced a significant stress as trade deficit widened and capital inflows fell far short of financing requirement, resulting in significant drawdown of foreign exchange reserves."
The trade deficit in the October-December period widened to $47.7 billion from $31.4 billion a year earlier. India's capital and financial account during the October-December period was at a net surplus of $8.2 billion. The central bank had to draw down its foreign exchange reserves by $12.8 billion during the quarter compared with an addition of $4 billion a year earlier to balance India's external account.
Much of the slowdown comes down to India’s recent foray into monetary tightening, to curb the country’s runaway inflation problem. While it might be working on that front, the move has also had the unintended consequence of dampening corporate investment in the country, as businesses find that it is unfavourable to invest at such levels of interest:
The Indian government has been ramping up its domestic borrowing. Borrowing spiked to an extremely high $17.6bn in January this year, with the government announcing further plans for substantial borrowing in the first half. Shipping analysts are naturally concerned because of India’s prominent influence in their market.
“A stronger India is better for commodity inflows into the country, but arguably also better for exports as well because government policy would be less focused on protectionism and following more popular moves politically in times of lower growth.”
An Indian slowdown, thus, could have far reaching implications.
24 - Shrinking Revenue Growth Rate
US FISCAL CLIFF - Reduced Rate is an Increasing percent of GDP
In a report set to convince borrowers that Student Loan ABS (Shadow Banking System) are still safe - of course they are - they are backed by all taxpayers after all in the form of the Family Federal Education Program
One bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month." As many as 27% of all student loan borrowers are more than 30 days past due." In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable.
readers were stunned to learn that unemployment among Europe's young adults has exploded as a result of the European financial crisis, and peaking anywhere between 46% in the case of Greece all they way to 51% for Spain. Which makes us wonder what the reaction will be to the discovery that when it comes to young adults 18-24) in the US, the employment rate is just barely above half, or 54%, which just happens to be the lowest in 64 years, and 7% worse than when Obama took office promising a whole lot of change 3 years ago.
This is $270 billion in debt that can not be discharged. Go ahead - file for bankruptcy - see what happens.
32- Government Backstop Insurance
CONSUMER CONFIDENCE -Drivers = Jobs & Gas Prices
Surprise! Jobs Drive Consumer Confidence 03/27/12 Lance Roberts - Conference Board's consumer confidence survey ticked down slightly in March to 70.2 from 71.6 in February. What was less widely discussed was the decline in future expectations about the economy, which fell from 88.4 to 83.
Consumer confidence still wanes at very depressed and recessionary levels. Even after reported increases in employment, a 30% rise in the stock market, and a perceived solving of the Eurozone crisis, confidence has only reached the same point that it was at this time last year just before the Japanese earthquake and tsunami.
The chart shows (gold bar) the confidence gap, which is the difference between the present situation index and the future expectations index. The red and blue lines are the number of individuals surveyed who feel that jobs are currently hard to get or plentiful.
If you want to know what will drive employment, just ask a business owner. A recent survey by the Dallas Fed found that the single most important item to creating jobs were "sales". This is the same issue that the NFIB has brought forth repeatedly in the small business survey: "poor sales" is the number one concern of small businesses today. The reality is that until consumers have deleveraged their balance sheets at home, consumption is likely to remain depressed far longer than most economists expect. While more rounds of liquidity injections by the Fed could certainly drive the stock market to historically high levels, it will be to the ire of Main Street as consumers suffer the fate of commensurate increases in energy and food costs that sap their ability to make ends meet.
Expectations for high inflation in the next six months has reached its highest level in six months jumping considerably from the previous month. Combine this with the overall drop in the expectations subindex of the consumer confidence index which fell for the first time in 5 months and all is not well in the 'stocks are going up so we are all doing great and the economy must be awesome'-transmission mechanism. On top of this wonderful news, the Richmond Fed missed expectations (with its biggest miss in 10 months) - taking us to 15 of 17 (removing the consumer confidence and S&P Case Shiller meets) missed economic data prints now. 7 of the 9 subindices of the Richmond Fed index dropped precipitously with only wages rising notably (more inflation?) even as 'number of employees' slumped by more than half and expectations for 'number of employees' in six months fell to its lowest since September. It would appear that higher gas prices are much more of a detrimental impact on the individual's confidence than a rising equity market is a boost - whocouldanode?
33 - Public Sentiment & Confidence
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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
FEDERAL RESERVE - Baiting Markets with Another Round of QE
Bernanke juices bulls once again 03/26/12 WSJ - Fed Chairman Ben Bernanke says the central bank needs to keep its accommodative policies in place to support the economic recovery. That’s about all the bulls need to hear to keep pushing stocks higher. The market is clearly interpreting today’s speech as evidence that a third round of quantative easing, or QE3, remains a serious option in the Fed’s arsenal.
The next time someone uses the phrase "...but the data is coming in strong..." please show this chart as US and European macro data prints have consistently missed expectations for well over a month now...
From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the continued surge in corporate earnings the PE ratio remains at a level not often seen since 1990 despite what has been a significant upward trend in stock prices so far this calendar year.
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