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Money Surges To Europe; Growth To Follow

If you ignore the ongoing Greek sideshow, rarely has European money growth been as accommodative as it is today. Europe has enormous structural problems of too much debt, an inflexible currency and an ageing population, but cyclical factors are very positive. Leading indicators are also positive, and the problems in Greece practically guarantee that the ECB will remain extremely accommodative even though Germany will require some tapering of QE.  Barring major contagion from Greece, any equity weakness in Europe will represent a buying opportunity.  Real M1 in Europe is growing at 11%, and the collapse in the price of oil means that excess liquidity is surging now and is as high as it was in 2009 and higher than it was in 2004-05.

While investors are worried about the fallout from Greece on the European banking system, we offer the next chart to show that excess liquidity is still extremely positive for European banking stocks.

- See more at: Variant

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Gold Shrugs Off 'Armageddon'

This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor's 500 Index lost 2.09 percent and the Dow Jones Industrial Average fell 1.95 percent. Volatility exploded, as the Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, to 18.85. 

One would imagine that such a scenario might be constructive for gold. It has been called the best measure of fear, the only real currency, a refuge for those who plan for panic. So how is it doing these days? Spot prices were soft on Monday, despite the wild volatility in equities, drifting down a few bucks from about $1,180 an ounce to about $1,176. They fell a few dollars more yesterday, and are soft Wednesday.

I thought gold was an investor’s best friend during Armageddon.

The Rise and Fall of Gold

I have kidded the goldbugs over the years, but the muted response to the latest crisis is surprising, even to a precious metal skeptic. Gold simply can’t find a bid.

This isn't the sort of response we have come to expect from the “catastrophe metal.” Earlier this month, gold spiked to $1,202, from $1,172, raising hopes of a turnaround. The gold mavens began to dream of a new technical setup, perhaps even a resurrection of the currently deceased trend. There were renewed whispers about $5,000 price targets.

And then … nothing.

I have been writing critically about gold since it peaked in 2011. Its story has become an object lesson in how to manage your positions without letting emotion get the better of you.

Why is gold no longer responding to global catastrophes? Nobody knows for sure, but a few different theories might help to explain its behavior in the most recent crisis:

1) The old narrative has failed. Without a new and improved rationale, buyers aren't motivated to accumulate more gold.

2) The U.S. economy has slowly improved, and much of the rest of the world is healing, too.

3) Other asset classes have been far more productive and rewarding investments in the last five years.

The failure of the classic gold narrative, recounted in great detail last year, is one explanation. The storyline was essentially a clever sales pitch filled with specific frightening details -- the Fed was going to cause hyperinflation, the dollar would collapse, and so on. All of this proved to be false.

Further reducing enthusiasm for gold is the gradual improvement of the U.S. economy. Despite forecasts of imminent collapse, the major economic data -- including employment, wages, spending, housing, autos and consumer sentiment -- have all trended higher over the last five years. Tales of an impending depression were greatly exaggerated.

Then there are other asset classes. U.S stocks are up 167 percent over the last 5 years. China’s stock market, despite the recent 20 percent drop, is still up almost 10 percent for the year, and it has been on fire the last 2 years.

Each of these is a possible explanation for the lack of response to the Greek crisis. Perhaps a default to the International Monetary Fund is no big deal, and gold has no reason to rally.

Regardless, gold seems to going nowhere fast. Feel free to send me an e-mail explaining how wrong and stupid I am. I have an archive of all the messages warning me that gold would teach me a lesson in humility. “You’ll see” these e-mails smugly assure me, “your comeuppance will be here any day now.” My plan was to respond to each on its fifth-year anniversary with a chart showing the performance of gold versus all other asset classes and the details of how much money has been lost.

What once seemed like a snarky and amusing idea just looks cruel today. 

Gold teaches the careful observer many lessons -- about narratives, emotion, managing positions, leverage, one-way, can’t miss trades, the efficiency of markets, and story-tellers with product for sale. This is why you should never ever drink the Kool-Aid.

Astute traders ignore these lessons at their own risk.

Courtesy of Ritholtz @ BloombergView

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Market Pause. Would You Buy Here?

With all of America's 401k's flowing into equities and with CNBC continually saying bonds are the worst trade around, one has to determine if continuing to buy here is the smartest way to go or take partials, roll up your stops and raise cash rather than buying this top.

Technically the monthly chart shows MACD posed to bear cross although the month is far from over.  The bollinger band is flattening out which does not say to "buy" here but remain cautious and sit on hands.

Here TLT for a quick glance at the monthly and yeah, it's still selling.  Could see a temporary bounce (here or there) but overall, the trend is still down so equities (or cash) it is.

I believe traders are taking profits at this fibonacci extension ahead of the June FOMC meeting and why not.  The 10 year Treasury has been on a move and if the Fed doesn't raise (which most don't think it will) it can return to oversold and ramp up again before September.

QE is over.  I repeat; QE is over.  The market must find a way to stand on it's own ahead of Fed tightening.  Are we growing enough to sustain a rate hike w/o QE assistance?  This makes you wonder...........idc what Jim Cramer says. (he is noise - not news)

We have not seen any 'failures' or widespread fear to make one believe a top is truly in.  Yes Greece is a concern but on a scale of size, this represents a tiny blip on the world map.  The largest overall effect would (imo) be confidence in the Euro but one must wonder, is it baked in at this point?  Some fear that if Greece fails, is Italy next with their debt?  Is the Euro ultimately set to fail?  I personally have no concern over Italy's ability to meet it's debts however just this morning ECB's Ben Moyer said it would not pose a problem if Greece leaves the Euro, so go ahead and go.  Exports in Italy simply are nowhere what (little) they are in Greece.  Greece itself simply should not have been allowed in the Euro to begin with.  It doesn't belong.  I make jokes that Putin and friends should just go ahead and buy Greece but a great part of me truly believes that would be for the best.  Don't tell the U.N.  Just let it happen and look the other way.  All is well and move on with your business.

The market, in the meantime, is looking for reasons to head higher amongst the obvious profit taking which is taking place. 

I think the market is at a profit taking level and seeking a growth story to head higher.  Will we find one now or have to wait until September?  Banks are one solid play but a pullback in the 10yr will cut that off at the neck.  In the meantime, your 401k is busy pumping in and buying "here" but you have to ask yourself if it's the right thing to do. 

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Cyprus, Stress Tests And That VIX

For those who found themselves busy fertilizing their lawns and Spring cleaning this weekend, you missed a market-moving decision as Cyprus announced (quite conveniently after Fridays close) an unprecedented levy on all bank deposits of 6.75% for accounts below $100,000 euros, and 9.9% for $100,00 euros and above.  OUCH

Adding insult to injury, if you lived in Cyprus and needed cash from an ATM machine, you were out of luck as  Cypriots awoke to find bank transfers already frozen as the government prepares to seize the assets when their banks re-open on the 19th although the glimmer of hope exists the final vote tomorrow could fail (there must be a joke there somewhere about PIIGS and flying).

All the talk from EU politicians.  All the promises that the Euro would be fine.  All of the money printing.  All of the haircuts already taken.  Blah blah blah blah.......and here we go again.

My hats off to whomever bought the enormous volume in VXX end of Feburary.  (click on chart to enlarge)  That hedge should payoff nicely on this news.  Don't you find it quite coincidental that these Greek news came out AFTER the U.S. released their bank stress tests results?  (hehehe)

One would also assume that the reigning Corporate elite and their buddy banksters overseas are having an ever more difficult time squeezing money out of the little guy going forward because simply put, there ain't none left.

Given what the "trickle down" effect did to U.S. assets over the last 30 years, I wouldn't be at all surprised to see the U.S. encounter further resistance from their citizens as well **if** fear isn't contained, and quickly.  Needless to say every dog-n-pony show will be out this week to reassure capital markets.   After all, OUR U.S. banks passed their stress tests....don't panic..........all is well. (*cough cough* what about their exposure to overseas banks????)  Well we've all been waiting for a correction - maybe this'll be the catalyst.


Now I would think the topics of taxing the wealthy, income distribution and wealth inequality have already been to death but thanks to Cyprus, here we go again.  *sigh*  Oh the pain........

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*Lehman Moment* [a/k/a Extend & Pretend]

Originally posted by Doug Noland @ http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10543 on how *extend and pretend* are the new normal and why Greece could very well be the tip of yet another Lehman Moment.


Isn’t it incredible that the failure of one firm, Lehman Brothers, almost brought down the global financial system?  It is equally incredible that, less than three years later, a small country of 11 million has the world teetering on the edge of another systemic crisis.  Today’s circumstance is a sad testament both to the instability of the international Credit “system” and to the lessons left unlearned from the previous crisis.

For about 15 months now my analysis has attempted to draw parallels between the initial subprime eruption and last year’s Greek debt crisis.  Both were the initial cracks in major Bubbles (“Mortgage/Wall Street Finance” and “Global Government Finance”).  These two weakest links – due to their role as the marginal borrower exploiting a period of system market excess – were extremely poor Credits.  On the one hand, the systemic vulnerabilities associated with a potential bursting of major Bubbles elicited aggressive policy responses to the initial subprime and Greek tumults.  On the other hand, policy had no constructive impact on the underlying quality of the debt – while significantly inciting market excesses (market price distortions, Credit and speculative excess, etc.) that exacerbated systemic fragilities.

There was heightened fear this week that the “Greek” crisis was evolving into Europe’s “Lehman Moment.”  Recalling back to 2008, the Lehman collapse was the catalyst for a crisis of confidence throughout the expansive universe of “Wall Street” risk intermediation.  Importantly, market confidence in the willingness and capacity for policymakers to backstop this multifarious system held steady virtually until the moment the Lehman bankruptcy was announced.  The marketplace had appreciated the enormous risks associated with a potential crisis of confidence throughout the securitization and derivative marketplaces, yet assumed that policymakers would simply not tolerate a failure by one of the major players in this financial daisy chain.  The global financial system almost imploded when this precarious “too big to fail” assumption was debunked.   

I have posited that the global policy response to the 2008 crisis only expanded and solidified the market’s notion of “too big to fail.”  Most in the marketplace believe that policymakers now recognize that allowing Lehman’s failure was a major policy blunder.  The expectation today is that the EU, ECB, IMF, Germany, China and the Fed will not tolerate a Greek debt default.  This faith had better not be misplaced.

While the Lehman failure proved the catalyst for the 2008 crisis, it was definitely not the root cause.  The problem was instead the Trillions of unsound debt underpinning Trillions of leverage, Credit insurance, and sophisticated risk intermediation that, through “Wall Street alchemy”, had transformed really bad loans into seemingly appealing (“money-like”) debt instruments.  As soon as the market began to back away from these structures (commencing with subprime concerns), the downside of a (Hyman Minsky) “Ponzi Finance” scheme was set in motion.  And as the Bubble began to falter, the market increasingly valued huge amounts of debt based on the perception of a system backstop rather than on the fundamentals of the underlying debt instruments (largely, increasingly vulnerable mortgages). 

If authorities had moved to save Lehman back in September of 2008, it would have bought some extra time – and would have changed little.  Trillions of unsound debt, distorted asset and securities markets, and a severely maladjusted economic structure ensured a major crisis.  It was only a matter of the timing and circumstances as to how the widening gulf between distorted market prices and the true underlying value of the debt was resolved.  As we are witnessing with Greek, Portuguese and Irish debt (and CDS) prices, market troubles often manifest when unanticipated policy uncertainties force the marketplace to take a clearer look at the fundamentals underpinning a debt structure – only to grimace.

The problem today is not really Greece.  A dysfunctional global Credit “system” has created tens of Trillions of unsound debt – and rapidly counting.  Aggressive “activist” policymaking has been at the heart of this unprecedented Credit inflation, and the markets today fully expect policymakers to ensure this Bubble’s perpetuation.  And, importantly, for better than two years now global fiscal and monetary policies have incited another huge round of global speculation and leveraging.  This latest Bubble gained considerable momentum with last year’s European Greek bailout and implementation of the Fed’s QE2 program.

Policymaking gave a new – and egregiously profitable – lease on life to the “global leveraged speculating community.”  Given up for dead in late-2008, hedge funds, proprietary trading desks and others have been able to exploit government-induced market distortions like never before.  With confidence that massive fiscal and monetary stimulus would ensure economic expansion, abundant marketplace liquidity, and strong inflationary biases for global securities and commodities markets, the global “risk on” trade proliferated near and far.  Re-risking and re-leveraging – through the creation of new market-based debt and attendant liquidity – fueled a self-reinforcing speculative boom.  QE2 (and other central bank liquidity operations) coupled with re-leveraging dynamics bolstered the perception that the markets had commenced a cycle that would prosper in liquidity abundance for an extended period.  Fragile underpinnings, especially in the U.S., seemed to ensure years of policy largess.

There is a big problem any time the leveraged speculating community begins to question core assumptions – certainly including the capacities of policymakers to sustain Credit booms, ensure liquid and continuous markets, and to contain Credit stress.  Think of it this way:  Enterprising market operators are incentivized into leveraged (“risk-on") trades when they discern that policymaking is providing both a trading edge (generally an inflationary bias or predictable spread) in the marketplace and a favorable liquidity backstop availing an easy exit when necessary.  I would argue that huge speculative positions have accumulated over the past two years on assumptions that are increasingly in doubt.  This has quickly become a major market issue, and largely explains recent market action.

The markets must now face the reality that policymakers don’t, by any stretch, have the Greek crisis contained.  Last year’s big “fix” is now appreciated as a mere little band-aid.  What appeared an incredible sum for the one-time bailout of an inconsequential economy is increasingly recognized as the tip of the iceberg for huge structural problems at Europe’s periphery and beyond.  The markets are beginning the process of recalibrating the potential costs – including financial, economic and social, along with myriad unknowable attendant risks - associated with festering Credit and market crises.  The results are frightening.     

My basic premise is that the sophisticated leveraged speculators have been operating as the marginal source of liquidity - fueling a highly speculative run throughout global risk markets.  These players now appreciate that assumptions underlying their bullish positioning in various markets are now in jeopardy.  No longer do the policymaking, liquidity and economic backdrops support their aggressive risk-taking posture.  This essentially ends the latest cycle of speculative excess, as prospects would appear to dictate more self-reinforcing pressure to de-risk and de-leverage. 

A speculative marketplace cannot easily accommodate a move by the marginal liquidity provider to unwind leveraged positions.  This challenge becomes only more formidable when a meaningful segment of the speculating community would prefer to reverse long exposure and go short various risk markets.  Others will move aggressively to hedge long exposures in the derivatives markets.  It is exactly these types of dynamics that transforms what seemed to be highly liquid markets quite abruptly into illiquid problems. 

It has been part of my bear thesis that the “moon and stars” have been lining up for a bout of de-risking and de-leveraging right as QE2 was wrapping up.  Market cracks have been forming for months now – emerging market equities, commodities and gold stocks, the banks and the depleting energy sector come to mind.  Hedge fund returns have been unimpressive, which equates to a lot of positions and leverage in potentially weak hands.  And, importantly, the U.S. economy has performed dismally in the face of massive stimulus.  Much of the marketplace has been caught poorly positioned.  Still, many of the bullish persuasion are comparing the current soft-patch to last year’s, missing the critical difference that recent weakness commenced in the midst of strong equities markets, booming debt issuance and $20bn or so of weekly quantitative easing. 

It is certainly not a clear line from Athens to the U.S. markets and economy.  And it’s not an easy task to explain how financial conditions in our system have come to a large degree to be dictated by global market forces.  But to appreciate the gravity of the situation one must first recognize the underlying fragility of our financial and economic systems. 

If this were a sound recovery – fueled by balanced growth, strong capital investment and financed largely by relatively stable bank finance - I’d be a lot less worried.  But we’re instead in a quite shaky recovery incited by massive fiscal and monetary stimulus – which spurred excessive risk-taking, speculation and general financial excess.  Real economic adjustment was put on hold; the system has been set up for disappointment.  And with bank lending stagnant, the vast majority of system credit creation is coming these days from the issuance of marketable debt.  The markets had already moved to impose austerity on the municipal bond arena, and it appears the booming corporate debt marketplace is now facing an abrupt shift in the liquidity backdrop. 

“Extend and pretend” and “kicking the can down the road” are now bandied about when discussing the policy approach to the Greek crisis.  Virtually everyone believes that policymakers will –heroically in the final hour – come together, end the brinksmanship and craft a policy response that avoids even a technical default.  German Chancellor Merkel peaked into the abyss and saw the light – just as the markets presume politicians and central bankers will do.  There will be no “significant” contribution (aka losses) to bondholders, with Ms. Merkel agreeing instead to a voluntary participation from private creditors. 

The problem is the market has no appetite for Greek debt – and it doesn’t want the debt of Ireland or Portugal either.  And it wouldn’t take all that much for the marketplace to take a cautious approach to debt altogether.  At this point, there’s little that can be done to make this problematic periphery debt appealing to the marketplace.  Meanwhile, the Greek populace has taken a lot of pain – and will be told to endure worse – without seeing any positive results.  The whole process has lost important credibility, which could mark an important inflection point for the markets.

Global markets have enjoyed a bountiful year of policy-induced gains.  Policymakers, once again, emboldened those believing that governments can solve debt problems and easily intervene to bolster financial markets.  This backdrop has, at the same time, provided quite an opportunity for market participants to hedge risk in Credit default swap (CDS) and myriad other derivatives markets.  At the end of the day, the flurry of hedging and speculating that arose when subprime heated up in ’07 embedded risk exposures that came back to haunt the system with Lehman’s collapse.  And, I’ll wager, many of the institutions at the heart of today’s booming global risk-intermediation and derivatives markets (including CDS) are heavily exposed to Greek and periphery debt. 

Expanding debt impairment is becoming a major problem; there’s no apparent default mechanism that wouldn’t imperil many of the world’s major financial institutions; and the tentacles of this potential crisis reach far out across the global system.  “Extend and pretend” is the new normal, as global markets become a politicians and policymaking confidence game.  Europe – and the world’s – new “Lehman Moment” commences when the markets question the soundness of the global derivatives marketplace


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