What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.
Chris Martenson
Macro Overview
The First Thing I Noticed When I Got Back
Apologies to readers for the “radio silence”, I’ve been away for 3 weeks in Hong Kong. As usual, there are, of course, a few things to report from my observations in the East. Some of them may surprise you, but let’s leave that for another day.
The thing I noticed as soon as I logged in to check my blog statistics was that the articles I had written a long time ago on Greece (in an attempt to simplify the explanation of how Greeks had gotten themselves into a debt trap) had generated a lot of renewed attention. It’s surprising because I wrote these two articles a year ago and yet readers clearly think it has relevance today… the sad truth is that it does. Here we are 3 years into Greece’s woes and the same old problem persists with the Eurozone now bracing itself for “GREXIT” – the exit of one of its members, Greece, from the Monetary Union.
I turns out the word “solidarity” may have a different meaning when it’s vented from a European politicians mouth. If the Greeks exit they take not just themselves but also the credibility of allEurozone politicians. Who’s gonna believe Van Rompuy or Merkel or Rajoy when they say that “Portugual/Ireland/Spain [insert your favorite peripheral nation here] will definitely not exit the Eurozone”?
For those of you that care, here are the two articles, apologies for the gross simplifications, the articles are intended to be soft humor, not condescending in any way.
In the first article I quoted Chris Martenson’s piece Death by Debt. This is a great article, I suggest you read it – it too was written a year ago but still has relevance today.
Death By A Million Debts
You see, I have old fashioned principles. I believe that if one is in debt to someone else, one only has two options: repayment or default. It’s really that simple.
There are those who believe that government debts (in particular Treasuries) do not need to be repaid, the laws of logic are corrupted, bent and therefore rendered mute, in these special cases. They believe that debts can be magically printed out of existence. If this is the case then, by definition, they are not debts, they are something else … and the market will eventually treat them accordingly; assigning the relevant risk premium to both the debt instruments and/or the paper currency in which they are denominated.
For now, though, let us go along with the charade and simply understand the risks the Feds around the globe are undertaking on our behalf… the markets are down, even inflation is a little softer, even oil has come off the highs… so what are the headlines du jour? More QE of course! QE in the UK, QE in the US, QE in Europe, QE in Japan… QE forever! If we all print those suckers fast enough nobody will owe anybody anything and everything will be better…
But look around you; everything is not better is it? Although suffering may be drawn out over a longer time to reduce the visible impact, the tragic reality is that everything will not be better, most of us will suffer terribly under this monetary overkill. A small proportion of the victims will suffer and understand the root of this suffering … and a smaller proportion still will know root causes and have the fortitude to do something about it.
I leave you once again with Chris Martenson’s quote:
What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.
Market Overview
The Only Two Things I Saw Going Up In May
I had been loosely following the markets while on my trip but not in any great depth. When I got back to my desk and set up all my monitors I was simply amazed at how many of my alerts were flashing on the screen. I’ll go through this another time but I was also quite pleased with myself. The only two asset classes I was actively keen on were Natural Gas and Volatility. Both have done extremely well since I’ve been away – as other asset classes have simply capitulated.
Loyal readers know I always write about buying volatility on the dips, this time was no different and, if you did do this, good for you, you would have made some money from this tumultuous market.
But readers may also have followed the piece I wrote on Natural Gas in the market section of my “squeaky bum time” comment just before I went away. Since then Nat Gas has risen by over 30% in just a few trading days to such an extent that I’m actually a little disappointed. I didn’t want it to react so quickly, it may be short-term overbought now … and I may have to look for another idea to focus on for a while.
I could easily put up a rather smug chart of the VIX or Nat Gas today but I’m not going to … instead I want to focus on something a little alarming. The US bond market is arguably the most manipulated in the World, I know, so I should take yield curve shape with a pinch of salt. But have you seen the 2s-10s recently? I was taught that a negative yield curve was a sign of a dysfunctional economy (recession, usually). It’s certainly been an accurate indicator of recession over the last few decades – looking awfully close to that now as the 2s-10s (two year yield minus 10 year yield) reaches a low not seen since the 2008/9 recession.
So my Chart of the Day is a 4 year chart of the 2s-10s.
Chart of the Day
US Yield Curve Steepness – 2s-10s (Source: Bloomberg)
France’s elections have thrown open the entire Eurozone debate with Far Right, Le Pen winning an astonishing 20% of the vote and whose views on Europe are blatantly anti-EU. It’ll be interesting to see how Sarkozy and Hollande dissect this popularity and implement the amendments into their campaign? Was their support entirely anti-immigration or was a large portion of it a middle finger at Merkel?
Well it appears, already that this is being played out, without either candidate wasting much time over it.
Sarkozy’s interpretation of Le Pen’s popularity is directed firmly at the Far Right’s attitude to immigration calling for a Europe which seeks to “defend its borders” and voicing respect for the Nationalist voters who are concerned over immigration – which seems to be directed largely at the Muslim community in the press, from what I can tell.
By contrast, Hollande appears to be directing his rhetoric firmly at Le Pen’s stance on the European Union (i.e. against it). By reiterating his stance to re-jig (re-neg?) the “Merkozy” fiscal compact and making stronger noises about a “French Flake” on the austerity measures. This has not been missed by Europe’s Iron Lady, who has, begun her defense (of her European policy and perhaps of Sarkozy too?), ironically, before Hollande has even come close to getting his feet under the desk. One thing for sure, Hollande is already feeling the cold calculated strength of Merkel’s iron fist around his neck – hey, at least he knows what he’s letting himself in for, should he ever have to sit across the table from her. But, this is a pivotal point in gauging real French opinion on the cozy Merkozy relationship – opening up a new battle front against the mighty German could either work for Hollande or against him in a big way.
I think this was in many ways an inevitable route for the candidates to take. Sarkozy daren’t even hint at betraying the German titan and it is hard to see a French socialist embracing anti-immigration issues. Needless to say, this divergence in the dissection of the Far Right vote will prove to be the decisive factor in the French elections of 2012.
Market Overview
Is Bank Of England The First To Get Truly Trapped?
I’m not going to wait for Apple’s results to hit the tape before sending them out, but it may be the event of the day. As I write this AAPL stock is down over 2%.
Also, I find the trend of the British Pound interesting as it appears to be bucking its normal characteristic. Normally, Cable gets sold off as global economic conditions deteriorate. This time it appears to be trending up into the bad news. One British Pound now buys you 1.61 US Dollars and we are in danger of breaking a new high for the Pound.
Currency traders are aware that there is nowhere for the BoE to go with even some of the most dovish of Monetary Policy Committee members refraining from voting for more QE “stimulus” as persistent inflation data puts a spanner in the works. Financial News writes in an article today:
The Monetary Policy Committee voted 8-1 this month against increasing purchases of those bonds, known as gilts. Adam Posen, who spent 12 months voting alone for more QE until the MPC swung to his view in October, rowed back from voting for an increase. Even for David Miles, who favoured a £25bn increase, the decision was finely balanced.
The interest rate differential is a mouth-watering prospect for money traders in a seemingly zero-interest rate world. No noticeable recourse to mortgage rates in the UK… … yet… …
Tomorrow is a crucial day for the British economy, GDP was down last quarter and is forecast to be a frighteningly low +0.1%. Miss that and confidence will plummet and Cameron will feel the heat of the opposing Labour Party Leader, Ed Miliband … as well as the rating agencies.
No prizes for guessing Chart of the Day – Cable (Dollar-Sterling) year-to-date.
Chart of the Day
GBP-USD (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
UK GDP
Corporate Events:
Results:
Boeing [BA], Canon [7751], Caterpillar [CAT], China Life [2628 HK], China Unicom [762 HK], Credit Suisse [CSGN VX], Eli Lilly [LLY], Ericsson [ERICB SS], Fiat [FI IM], GlaxoSmithKline [GSK LN], KDDI [9433 JT], Las Vegas Sands [LVS], Rolls Royce [RR/ LN],SAP [SAP GR], Siemens [SIE GR],
Dividends:
Hong Kong Exchanges [388 HK], Procter & Gamble [PG], Tesco [TSCO LN], Tyco [TYC],
Today there’s speculation the ECB will jump in. You know what? That will be one of the worst possible things to happen to medium term confidence for the markets. As soon as the ECB steps in, resumes the SMP buying program it’s a clear signal that nothing is fixed…
Bill Blain – Newedge Group
Macro Overview
Super Mario To The Rescue
The Spanish are in a funk. They may have the best soccer team in the world but they can’t even afford to watch them play. Meanwhile unemployment among young people is a cool 50% and they having trouble hitting their already woefully depressing deficit targets.
This is a pretty large economy in Europe in many senses, but not in terms of market capitalization any more… the Spanish stock market has been pummeled to a humiliating level where Apple’s market cap alone is larger than “the combined market cap of companies in Spain, Portugal and Greece”, says an article in ZeroHedge.
This is a pretty big deal for a country regarded as one of the major economies in Europewith a population close to 50 million. Now, it emerges that the country may have difficulty borrowing money from rational investors. That does not surprise us does it dear reader? So in steps the World’s most irrational investor group, the Central Bankers. Super Mario is eyeing up Spanish bonds and backing up the truck… or, rather the trash lorry. That does not really surprise us either, does it dear reader? The ECB balance sheet looks like landfill anyway, what difference does a ton of toilet paper make?
What is a little interesting is just how Super Mario has a taste, a blood lust, even, for non-conventional measures at a time when Super Ben appears to be hesitant. True Mario has more fires to fight, but his mandate is only half that of Ben’s – inflation is not only his priority objective, it’s his only objective!
Market Overview
Nokia Collapses To New Lows
I almost feel sorry for Nokia stock, even though it’s insanity to have feelings for a chart. But they’ve just missed the boat, they’re product will soon be as defunct as the Xerox electronic type-writer if they don’t take care.
Today the stock got pummeled and managed to trade up a little into the close but still closed down 15% on the day a calamitous new low.
Chart of the day is Nokia and also Palm Oil futures… hmmm… that chart looks interesting!
Sorry I’ve been off writing for a couple of weeks, I’ve been sick. You see, I had just a common cold/flu virus but because I’d had a few consecutively my immune system was vulnerable. This is when tonsillitis strikes, usually on the back of a virus when the body is weak. By the time I’d got to the doctors the tonsils were reducing so it was treated with just painkillers.
This was my first mistake: while the tonsils were improving a larger, much more aggressive throat infection was building steam constricting my airways to dangerous levels. Before I knew it I was coughing up blood and accompanying the paramedics to my local hospital. I ended up on a drip for 3 days which did give me some time to think about the economy but, if I’m being honest, I was not thinking that deeply, nor was I looking at the markets – just the ceiling, mainly! It is only now, after a serious set-back and a significant amount of pain, that I can say I am truly on a road to recovery.
There are so many parallels with economic malaise and subsequent recoveries here that I don’t know where to begin. But perhaps the most glaring moral regards the treatment of the cause rather than the symptoms. However, painful or uncomfortable it may be, it is often better to strike at the heart of the problem than to tinker around the periphery… and of course, prevention (I should not have over-run myself over the last few weeks) is the best cure.
Anyway, I’m good now… so let’s get back into the groove.
Market Overview
Wall Of Wonder
What’s all this? It appears that as we reach new highs on the S&P the market appears to be doubting itself again. They say the market climbs a wall of worry… not lately. These days the market hurtles down a runway of uncertainty and deleveraging only to takeoff on the aerodynamics of QE.
Now we are increasing altitude and flying high only one question remains…how much fuel do we have? And will there be an airstrip when we need to land?
Speaking of which, I notice Brent Crude did not dip below $120 once while I was sick. Bernanke may not have the ammunition we think he does with Oil up here… he can wave the bazooka all he wants, but, ultimately, he may only be able to fire oil-friendly pellets.
Chart of the Day is Brent Crude… oh, and the Spanish 5 yr CDS over the last 2 months – just to get the grey cells working.
… the doctrine of Central Bank independence – which is truly a religious matter – doesn’t hold at all times…
Paul McCulley – A Hairy Man who used to run PIMCO with Bill Gross.
Macro Overview
McCulley Breaks Taboo Over Fed-Treasury Collusion
Do people still listen to hairy men? I kinda like Paul’s new look… in many ways I can take him more seriously than I could with that neat quiff and absurd moustache.
The American Central Bank is not independent, there are times when the Fed colludes with Treasury and gets its sticky little fingers into smelly old politics… c’mon Paul… tell us something we didn’t know!
Market Overview
Shanghai Swoon
Markets gave back some today after the reality of the QE hype set in (QE with oil at $120…. Hmmm…) I wonder how that will work out…
But if you feel bad about a few points on the S&P spare a thought for those long Chinese domestic shares…
Chart of the Day is Shanghai Composite. Probably the worst performing index this month I’d say – can you find a market that underperformed this?
These are rallies that you rent not rallies you necessarily own.
David Rosenberg
Macro Overview
Rosenberg On The Liquidity Rally
Good little interview with David Rosenberg “The Bear” and Tom Lee “The Bull”.
Rosenberg makes a good point, the liquidity-driven rallies are hollow and prone to sharp reversals… they are rallies to “rent” not rallies to “own”. That plays straight into the momentum philosophy. But the ripple effects from massive liquidity injections can propagate for quite some time (let’s face it we are still riding aftermath of LTRO)… the question in my mind is not whether Rosenberg is right, but whether his timing is on cue… One thing I’ve learnt is that the Fed can pump and print, extend and pretend much longer than we can remain solvent… or sane, for that matter!
Hussman On The Mean Reversion Of Profit Margins
Speaking of the perils of mean reversion, I could not help noticing Cullen Roche’s article in Seeking Alpha which drew attention to this Hussman report on the cyclicality (and consequential mean-reversion) of profit margins – here is a small excerpt but it’s better to read the article in full.
What’s going on here is that profit margins have never been wider in history. But profit margins are also highly cyclical over time. The wide margins at present are partly the result of deficit spending amounting to more than 8% of GDP – where government transfer payments are still holding up nearly 20% of total consumer spending, and partly the result of foreign labor outsourcing (directly, and also indirectly through imported intermediate goods) which has held down wage and salary payouts. Indeed, the ratio of corporate profits to GDP is now close to 70% above its long-term norm.
But these are not normal times, dear reader, something tells me, with this amount of liquidity in the system and the strange reflexivity of the markets (rally when economic news is bad because it implies explosive central bank printing) historical precedents may not matter all that much.
Market Overview
Risk Aversion Is Simply Absent In Hong Kong
Pretty dull day in the markets today, I have to say.
My Chart of the Day is the VHSI. Remember this is a kinda new thing I’ve been looking at. It’s like the VIX but for the top volatility names listed in Hong Kong. Interesting that the markets are so nonchalant about implied volatilities in Asia– remember volatility can go up even if equities go up!
Chart of the Day
VHSI - Hong Kong Listed Volatility Index (Source: Bloomberg)
What has The Fed got against the pricing mechanism? It’s gotten this country a long way over 200 years…
James Grant
Macro Overview
Jim Grant’s Alternative
I’m away on business in Hong Kong over the next few days so, continuing on the Maverick Austrian theme I just want to leave you with a couple of video clips of Jim Grant. First one is on CNBC (from which the quote above is derived… here). I like the bit where Maria Bartiromo asks Jim: “what is the alternative?”… so which he immediately retorts: “Capitalism is an alternative to what we have now! I highly recommend it…”
Here is the second clip of Jim Grant on Bloomberg.
Market Overview
Darlings Of Europe
I’m not going to say much, I’m just going to show you the chart. ASML is a European maker of semiconductor manufacturing equipment. Companies like this have products where a large part of the value is in the intellectual capital which is contributed by a highly educated European work force – they are relatively pretty well insulated from the Euro crisis.
I’m not going to say much, I’m just going to show you the chart. SAP is a European software giant. Companies like this have products where a large part of the value is in the intellectual capital which is contributed by a highly educated European work force – they are relatively insulated from the Euro crisis.
… this kind of giving be but to give with one hand, and take away with the other, which is deluding, not a giving.
John Milton (1608 – 1674)
Macro Overview
What The ECB Giveth With One Hand, It Doth Take Away With The Other
We ought to have a word for John Milton. He might be a poet and he might have died nearly half a millennium ago but the old boy knew what he was talking about. Beware the charitable man bearing gifts with one hand, while the other hand remains tucked behind his back.
Wall Street should know this. I don’t know how many times I’ve heard a banker or broker say: “there’s not such thing as a free lunch”.
So when the ECB comes bearing gifts of freshly minted Euros and demands only “trash” in return, the banks ought to be wary of this “cash for trash” scheme – as Bill Gross calls it. All you can eat buffet? Perhaps, but there’s no such thing as an entirely free lunch.
Central Banks Oversight Expands In Lockstep With Their Respective Balance Sheets
I’m drawn to a comment Ben Bernanke made at a dinner in 2008 during the height of the Sub Prime crisis. When asked what he would most like to have knowledge of he basically said that he’d love to know who the hell owned all this crap. It was at a time when banks were keeping their cards very close to their chests on liabilities related to Sub Prime mortgages – nobody wanted to suffer the same fate as Bear Stearns, or later Lehman.
The Fed found an ingenious way of acquiring such knowledge, killing two birds with one stone, in my opinion. Bernanke was able to draw the most offending banks out of the wood work by allowing them to put trash for collateral in return for cash. This eased up the banking sector while also putting the newly defined banking sector firmly under the regulatory scope.
The ECB’s LTRO may be performing a similar trick.
ECB Margin Calls Show Increasing Oversight From ECB
An article in ZeroHedge caught my attention. Let’s start with this table on the official ECB website which summarizes the state of the ECB balance sheet. You see item 2.5 on the liabilities side of the balance sheet – that shows the amount of deposits which effectively represent margin calls by the ECB on the banks. It is at €17.143 billion – which is not very much in the grand scheme of things (remember the size of LTRO is well over 500 billion).
But to help you put this in context Bloomberg, rather conveniently, have been plotting the size of this margin call allotment over time. It is my Chart of the Day. Looks a little more dramatic doesn’t it?
We should keep perspective on this of course, having done so much to protect Europe from a financial sector crisis it is unlikely that the ECB will push a major bank over the brink with intense margin squeezes. But generally speaking, it’s a fairly simple concept, dear reader, if you post collateral on a loan it is generally accepted that the collateral will need to be paid good, otherwise it’s fairly typical for the lender to request more collateral or “margin” as reassurance.
But, if anything these margin calls on the banks go to show that, if they want some nice, freshly minted Euros to boost their capital ratios, they’d better be prepared for much, much more oversight and interference from the central bank and, as a result, the profit margins and indeed share prices of some banks may enter some resistance as a result.
My mind operates on a simple system, dear reader. I believe for every action there is a reaction and this even includes creative QE monetary policies, like the LTRO – and we have not even touched upon moral hazard or inflationary expectations or the stigmas associated with drawing down on it. The LTRO is no free lunch – what the ECB giveth the banks with one hand, it doth take away with the other.
Market Overview
A Blip, A Wobble or A Correction?
So far it looks like just a blip. The equity markets are recovering well from the little set-back it had this week. In fact the economic data out of the US has been pretty sanguine – indicating an economy on the front-foot not the back-foot.
ISM data was high (if anything a little too high), jobs numbers and payrolls were pretty good too. The two main thorns in the side of the market are the Greek workout and Oil prices. But these two issues are at least known-unknowns and in Greece’s case soon to be a known-known.
Chart of the Day – as mentioned above – Margin Deposits on the ECB Balance Sheet.
Chart of the Day
ECB Margin Deposits (Source: Bloomberg)
Events
Macro Events:
Update:
Australia GDP +0.4% QoQ a long way below expectations
Alerts:
Japan GDP
Corporate Events:
Results:
Carrefour [CA FP], Deutsche Post [DPW GR], MTR CorpHong Kong[66 HK]
A uniting or cementing force or influence by which a union of any kind is maintained.
Oxford English Dictionary – definition of the noun “bond”.
Macro Overview
Capital Structure Explained
Equity holders demand higher returns for their investment than bond holders. The reason is intuitive and simple: equity holders are subordinated to bond holders. Meaning; when a company goes bankrupt the assets are divvied up between the investors, but the bondholders are paid out first – before the equity holders even see a dime. This is why stocks tend to go to zero pretty quickly when a bankruptcy is imminent!
Even within the bond markets there are tiers of capital structure. For example, senior bond holders rank higher than subordinated bond holders. Now, because subordinated bond holders take higher risk, they demand higher returns. That is, their credit spreads are wider, which is the same as saying that the bonds trade lower than their senior equivalents. I apologize if I insult your intelligence, dear reader, but there are people even at the upper echelons of finance who appear to think that this simple relationship can be glossed over. Where am I going with this?
Let’s start at the beginning. When we read the dictionary definition for the noun “bond” we see some remarkably strong language in addition to the succinct definition I wrote above. Words like “pledge”, ”obligation”, “duty”, “covenant”, “an agreement or engage binding on him who makes it”. In finance, a bond is a clear obligation a borrower has to a lender, cemented in a contractual agreement (notice I’m simply using the same words the Oxford English Dictionary uses).
Not so in Europe apparently, well, not any more anyway. If you buy this “bond”, this contractual obligation between a European sovereign state borrower, as an investor, the conventional rules of risk and return do not apply. The Feds in Europe dictate that they reserve the right to change the terms of that bond retrospectively. Remember, this is the same institutional framework which Europeans rely on to preserve the value of their fiat currency. A currency which, unlike Gold, Oil or Silver has intrinsic worth of ZERO, its worth is determined only by the credibility of the promises upon which it is founded.
Capital Structure Arbitrage – ECB style
But I digress; we’ll come back to the credibility implications another day… back to European sovereign “bonds”. The ECB has subordinated all “bondholders” by entering into a debt swap where the central bank exchanges old “bad bonds” for new “good bonds”. The good bonds are designed so as not to be susceptible to any collective action clause (CAC) on Greek debt. Nobody else is allowed this privilege. But this naturally means that all the other holders of the “bonds” have suddenly become structurally subordinated to the ECB and are powerless to even dispute this.
This throws a massive spanner into the works. Previously “bond” holders have had the comfort of a pretty simple risk-return dynamic, but now there are a multitude of qualitative factors to consider – and bond holders generally do not like unquantifiable, qualitative factors.
How much of an issue does the ECB hold or intend to hold in the future in any European sovereign – not just Greece?
Where is the limit beyond which the ECB will retroactively subordinate ordinary “bond” holders of any given debt without warning?
And, as ZeroHedge cheekily imply: why stop act CACs? Why not retrospectively change other terms, like the coupon, or maturity, or add any other clause to the so-called “bonds” according to who holds them?
Why not make pension funds subordinate to municipalities, and hedge funds subordinated to pension funds?
The European CDO Market
There are political meddlers crawling all over the European markets infecting the zone. Like putrid, disease-ridden vermin, they leave only the pungent discharge political recklessness over anything their slimy manipulative paws finger. Only Friday I commented on the politicization of ISDA terminology:
Note, if politicians throw enough real and political capital and succeed cheating CDS holders out of a default trigger, then there is a good chance the credibility of the entire credit insurance market inEuropewill suffer. Would you invest in European credit risk, knowing that one of your main investment exits was now effectively a rigged market? Perhaps you would, but you’d be a fool not to demand a higher premium for this additional risk. Borrowing costs in Europe could surge.
It is impossible to calculate just how much wealth has been thrown at this imbecilic objective and indeed how much will be lost if indeed the EU-Feds succeed in destroying the credibility of the market place in credit insurance. But I’d rather that wealth was in my pocket and I’d rather the Merkozy meddlers and political peddlers kept their dirty fingers out of the specialized nuances of the credit derivative markets.
The ECB “is exempting themselves from collective-action clauses, and not giving any other bondholder the same rights,” Grant argues. That could complicate Greece’s current negotiations with bondholders, and also means that a potential Portuguese, Irish or Italian debt restructuring could yield similar results.
The ultimate euro-bear said he spoke with two “of the biggest names in the bond world” this morning, which he declined to name. Sufficeth to say, neither of them were happy with the ECB’s Greek debt exchange. With a push underway in Europe to curtail the influence of ratings agencies, Grant added that the ECB’s swap “is a real shot across the bow. They’ve abrogated the rule of law and replaced it with the rule of politics.”
Whether it likes it or not, with the debt swap deal the ECB is setting a precedent of making the rules of the “bond” market up as it goes along. In this respect the ECB is playing with fire – a potentially huge fire.
You will notice I facetiously put the word “bond” in quotation marks because, of course, we do not have a European bond market any more – certainly not in peripheral sovereign debt.
What we now have in Europe is a retrospectively mutated Sovereign CDO market. A CDO market where the tranches are determined not by the construct of the instrument, but by the character of the holders. Welcome to European politics dear bond investors!
The Senior tranche is of course the ECB holdings
The Mezzanine tranche is the bank holdings (as they are subordinated to the ECB but also simultaneously supported by the ECB – e.g. LTRO)
The Equity tranche is subordinated to everyone. It is the bottom of the cesspit in terms of capital arbitrage. Who holds this? Why the private investors, of course.
European Sovereign Bonds have mutated into CDOs
The ECB May Be Spawning The Perfect Sucker-Rally
So, just like subordinated bond holders demand higher return than senior bond holders – in a normal, unrigged market. Holders of peripheral debt, indeed all European sovereign debt, may demand higher returns for their investments in future. This means that the credit spreads will widen and bond yields will rise – i.e. the bond prices will fall.
In doing this debt swap the ECB has not only damaged its credibility and the credibility of the entire European bond market, it has potentially painted itself into an expansionary corner. As less and less private investors show up to bond auctions, the ECB and its zombie banks will be “coerced” into filling the funding gap and buying more themselves. This effective monetization will be inflationary and may be good for risk assets like commodities or even stocks.
But we know that rising costs are recession-makers. Especially rising oil prices. If you’re a clever momentum trader by all means ride the wave, equities may go up 30% from here for all I know – it certainly would not surprise me. But be careful, the mother of all sucker rallies could be in play here… and I have no idea when this sucka is gonna finally blow.
Market Overview
Silver
I’m not going to comment on the markets really today. I’m only going to show a Chart of the Day – Silver. This is not so much a rise in popularity of the metal per se, it is a representation of the lack of faith in paper promises.
Some of you will note, that comment above was exactly the same as yesterday’s and the day before – it’s just I substituted the word “Gold” and “Oil” for “Silver”.
Chart of the Day
Silver (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
India GDP
Sweden GDP
US GDP
Corporate Events:
Results:
Holcim [HOLN VX], HK Exchanges [388 HK],TaiwanSemiconductor [2330 TT],
Dividends:
Bank of America [BAC], BHP Billiton [BLT LN], Pepsico [PEP], RioTinto [RIO LN],
The Fed is embarking on something new and, I think, highly questionable.
Which is: to enforce the symptoms of prosperity, rather than sound money.
Jim Grant [emphasis mine]
Macro Overview
The New Interest Rate
Forget Central Bank Base Rates, they are rendered impotent in a balance sheet recession, Oil prices are the new economic accelerant and right now Mr. Oil seems hell-bent on tightening and decelerating economic activity.
In a piece last week, I casually commented on oil… perhaps too casually.
I read yesterday somewhere that “Oil was the new interest rates”… rates are irrelevant now and oil plays a bigger part in dictating economic activity. I don’t know why but it was an interesting comment and I thought I should share it with you. Any of you that peek at Google Trends will know that “gas prices” is one of the fastest growing searches at the moment.
Ironically, by trying to boost consumption with monetary easing, the Fed must be careful that it does not stifle consumption by boosting the cost of energy.
Now Oil is a big red flashing beacon on everyone’s radar. Indeed, the FT today frets: Oil price rise sparks profit concerns in Asia. Ahhh… you see? The Chinese weren’t so crazy to stockpile oil in the midst of a slow down when the price was $50-$70 – nearly half what it is now.
Bloomberg quoted a Tom Keene interview with legendary bear David Rosenberg in an article which came out on Friday:
The price of oil rose above $109 for the first time in nine months today and is in the midst of its longest streak of advances in more than two years. Rosenberg said that for each additional penny at the gas pump, $1.5 billion is strained out of household cash flow.
“By May we’re going to be talking about gasoline prices breaking a new high, between $4 and $5,” he said.
The Strait of Hormuz is only half the story, dear reader, the reality is we are in a brave new world where ALL the major central banks are simultaneously debasing their currencies. All business need a form of money to live, it is to the economy what blood is to the human body.
But, by definition a money-form must not only be an exchange medium but a store of wealth and capital… it must be something for which the supply can be understood, even predicted. This is why investors (and China) seek oil… and gold. All the major paper promises (aka fiat currencies) are wearing thin – so much so that even the Swiss Franc is beginning to rise again.
Here is what I wrote in a piece last summer and the attached video of a Bloomberg interview with the legendary Jim Grant:
I leave you, once again, with something I put in my piece (The Feral Reserve), Jim Grant’s wonderfully eloquent quote in this Bloomberg interview, after 11min 30 seconds:
“… the clarifying insight into Quantitative Easing came in the form of a letter to the editor of the financial times about a year ago. The writer says:
‘Ah! Finally I think I get it. I get what Quantitative Easing means. I understand now… what I no longer understand is the meaning of the word money.’
That is the definitive insight into what the enterprise of QE is all about…. Debasement.”
I’m not going to comment on the markets really today. I’m only going to show a Chart of the Day – Brent Crude Oil (of course). This is not so much a rise in popularity of the metal per se, it is a representation of the lack of faith in paper promises.
Some of you will note, that comment above was exactly the same as yesterday’s – it’s just I substituted the word “Gold” for “Oil”.
Chart of the Day
Brent Crude Priced In Dollars (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
Germany CPI
Japan Industrial Production
South Korea Industrial Production
Corporate Events:
Results:
Nothing Significant
Dividends:
Nothing Significant
Reading, Links:
For article on the history of monetary debasement read:
