The Global Markets have reached the point of what 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. - The "Peek Inside" shows the detailed coverage available this month.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
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 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. - The "Peek Inside" shows the detailed coverage available this month.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
The HSBC Flash PMI posted a decline from 49.3 in April to 48.7. This is the 7th consecutive month in which the economy is in a contraction according to HSBC, and 10th of the last 11.
“Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption"
Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets. The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices. A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore. China’s economy grew 8.1 per cent in the first quarter from the same period of 2011, the weakest rise in nearly three years but still pointing to a so-called soft landing
This Flash PMI print infers zero growth in China's Electricity Production YoY which we crudely assume means zero growth in coal demand...
the EURUSD cross-currency basis-swap - or European bank's most desperate way to fund itself in the absence of any further ECB aid, a lack of collateral, and no interbank-lending (trust #fail) - is flashing a warning light. Today that light went ultraviolet. For maturities beyond the LTRO (greater than 3Y or so) the current level of stress is greater than at the end of November last year which was the trigger for the globally coordinated central bank response. 3Y basis swaps are now back above 70bps (below -70bps) and near record lows - signaling a real desperation for term funding among European banks - as we explained here. Translated: central bankers are now calling each other and planning; the only question is what they can do this time: last time the FX swap margin was cut from OIS+100 to OIS+50 bps. Now what: interbank lending at no cost? - Thank you Uncle Ben.
3Y EURUSD basis swap rates are crisis-like...
and normalized to the 11/30/11 levels of last year's critical global intervention, we are worse now..
In the middle of the European crisis last fall, EUR-USD cross-currency basis swap spreads were on the tip of every trader and media-personality's tongue as the critical means for providing banks with access to short-term USD liquidity was ratcheting lower and lower. This means the European banks were willing to pay a higher and higher premium to be able to offload their EUR funding into USD funding. With LTRO funding now faded and perception of the sustainability of European banks becoming dismal, US banks are charging ever higher rates for Eurozone banks to borrow. What is more worrisome is that with the relative liquidity of USD assets, it would appear that the widening in the basis swap spread means the European banks have run dry of money-good USD collateral to unwind. This repricing of USD liquidity costs (now at 4 month highs and increasing rapidly) suggests that the Fed-provided swap lines could get a fresh calling to save the day and/or just as we have noted so many times in the past, the collateral squeeze continues to be the critical part of Europe's demise (and thus negates anything but absolute monetization by the ECB as a solution for the banking system).
1- EU Banking Crisis
BANK RUNS JUST BEGINNING: Expect Another 429B from Italy & Spain
EU: The Problem is Not Thay Difficult to Understand, If you Actually WANT to Understand it!
SEE A CORRELATION HERE?
2- Sovereign Debt Crisis
EURO - Why Does the Euro not Fall?
Four Reasons Why The Euro Is Not Crashing 05/21/12 Zero Hedge
First, the European Central Bank so far has not engaged in outright quantitative easing during the financial crisis. Moreover, while the Federal Reserve, the Bank of Japan and the Bank of England all have cut interest rates to between zero and 0.5%, the ECB's benchmark interest rate remains at 1.0%. In contrast, investors are concerned the Federal Reserve will engage in a third round of quantitative easing. Similarly, the Bank of Japan and the Bank of England have also been printing money and buying government bonds.
Second, the Eurozone as a whole runs a balanced current account. Thus it is not dependent on foreign capital inflows to support the value of the euro.
Third, high oil prices have increased the petro-dollars accumulated by central banks and sovereign wealth funds in the Middle East, North Africa, Commonwealth of Independent States and Norway. These official investors diversify a portion of their new foreign reserves into Eurozone markets.
And, last, Eurozone banks under pressure to shrink their balance sheets and rebuild capital have been selling foreign assets.
As Chart 1 shows the ratio of loans-to-deposits peaked in the Eurozone close to 125% in 2007 when the credit crunch began. Since then the ratio has declined to 115% but largely because of an increase in deposits. As Eurozone banks further reduce the size of their balance sheets, they are likely to cut loans now including those from abroad. That leads to repatriation flows supporting the euro. How long can such deleveraging go on?
Chart 2 shows how the ratio of loans-to-deposit has fallen from its peak in Japan in 1992, the US in 2008 and the UK in 2007. For the last two decades Japanese banks have steadily reduced their loans-to-deposits ratio from 130% in the early 1990s to below 80% now.
American and British banks have also been deleveraging sharply over the last few years. But Eurozone banks have been much slower, suggesting they will spend many more years slimming down their balance sheets now. That should lead to more repatriation flows to the benefit of the euro.
Thus while the euro is set to keep sliding owing to the debt crisis in the Eurozone - our end year target is 1.15 against the dollar - in the absence of a break up of the single currency area, the euro's decline should be cushioned by the Eurozone's banks.
So where does the chaos from a Greek bank run and exit lead us.
The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play.
The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth.
We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!
3 - Risk Reversal
JAPAN - DEBT DEFLATION
US TREASURY'S: Special Exclusive Treatment for China Since June 2011 - Why?
China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters.
China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary.
The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.
The change was not announced publicly or in any message to primary dealers.
"If it wants to sell, however, it still has to go through the market." < Reuters Quote ??? The privilege may help China obtain U.S. debt for a better price by keeping Wall Street's knowledge of its orders to a minimum.
Although the Japanese, for example, own about $1.1 trillion of Treasuries, their purchasing has been less centralized. Buying by Japan is scattered among institutions, including pension funds, large Japanese banks and the Bank of Japan, without a single entity dominating.
Documents dealing with China's new status as a direct bidder again demonstrate the Treasury's desire for secrecy -- in terms of Wall Street and its new direct bidding customer. To safeguard against hackers, Treasury officials upgraded the system that allows China to access the bidding process. Then they discussed ways to deflect questions from Wall Street traders that would arise once the auction results began revealing the undeniable presence of a foreign direct bidder.
The news that China has become the first sovereign to establish a direct sales relationship with the U.S. Treasury (therefore cutting out the middleman and bypassing Wall Street ) raises a few interesting questions.
1- The biggest Chinese outflows in U.S. Treasuries occurred in the months following the establishment of this relationship:
2- PBOC has felt pressured to keep buying, and as various PBOC officials have hinted in recent months, China is actively seeking to convert out of treasuries and into gold. And that makes sense — treasuries are yielding ever deeper negative real rates. People holding treasuries are losing their purchasing power.
3- N ow that the PBOC has effectively been upgraded to primary dealer status, would the Fed start buying treasuries directly from the PBOC in order to manage rates downward and prevent a spike in Treasury borrowing costs should China choose to quicken the pace of a future liquidation, potentially bursting the treasury bubble?
CLEARLY THERE IS A LOT MORE GOING ON THAN WILL EVER BE MADE PUBLIC
It may not be quite the 0% coupon which Germany got yesterday for its 2 year bonds (soon realistically going negative if the demand is there), but lending $35 billion to Uncle Sam at a cash interest of 0.625% and a record low yield of 0.748% is still quite remarkable. Because with this auction, total US debt/GDP is now almost 103% (rounded up). But who cares: when one needs to parks cash in a hurry, one will do just what the herd is doing, consequences of groupthink be damned. The internals: 2.99 Bid To Cover, higher than the TTM average of 2.924%, but of note was the slide in Indirect Bidders which bought "only" 42.6% of the auction, and Directs, who only purchased 6.5% of the total. This means that for the first since June 2011, Primary Dealers, who promptly take the proceeds and flip it for cash into the limbo that is the custodial repo market, amounted to over half of the total takedown, or 50.9%: hardly a ringing endorsement when one strips away the ponzi apparatus that is the PD bid. That said: Uncle Sam will take it, and will certainly take another $29 billion in 7 year bonds tomorrow, which will also likely price at an all time low yield.
8- Bond Bubble
HIGHER EDUCATION - Supply and Demand Mismatch - Insufficient Return
For the first time in history, the number of jobless workers age 25 and up who have attended some college now exceeds the ranks of those who settled for a high school diploma or less.
Out of 9 million unemployed in April, 4.7 million had gone to college or graduated and 4.3 million had not, seasonally adjusted Labor Department data show
In 2011, 57% of those 25 and up had attended some college vs. 43% in 1992.
Those without a high school diploma fell from 21% to 12% over that span.
But along with the increasing prevalence of college attendance has come a growing number of dropouts, who have left school burdened by student loan debt but without much to kick-start their careers.
Among everyone up to age 24 who has left college or earned a two-year degree — including those not actively searching — the full-time employment-to-population ratio has plummeted from 69% in 2000 to 62% in 2003 to 54%.
This has occurred even as student lending and enrollment at community colleges has soared, elevating the student loan crisis to the center of political debate and a rallying cry for the Occupy Wall Street movement.
Those who graduated with a four-year degree fared better employment-wise but many of those still struggle with student loans.
Many other end up underemployed in retail sector jobs as opposed to the curriculum they studied. Student loans are a trillion dollar problem, and growing every quarter.
10 - Chronic Unemployment
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
SENTIMENT SHIFITNG: As the Central Bankers Had Hoped (and Required)
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