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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>>

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

SPAIN & ITALY - Ponzi Patriotism

Visualizing Europe's "Ponzi Patriotism" 05/11/12 Zero Hedge

"The day when the eligible ECB collateral (which in the last iteration included banana peels and condom wrappers, so even that is fast running out) is completely gone, and the ECB has no more pretext to fund various regional ponzies is coming. Of course, by that time the youth unemployment will have hit 120% (based on BLS seasonal adjustments), and there will be other problems"

EU - There is No Austerity, Only tax Increases

On Europe's Phantom Austerity Spending Cuts 05/08/12 Zero Hedge

TRUTH ON AUSTERITY

• The 'savage' spending cuts in Europe have yet to show up anywhere.
• All the rhetoric of how Europe's austerity has failed, all the hand-wringing and election-winning, and yet all the major nations are spending more than pre-recession levels.
• France and the UK did not cut spending at all, and even in Greece and Spain cuts have been small (and any meaningful reforms failed to be implemented).
• In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts?

TAX INCREASES

• The trouble, of course, is that while the threat of austerity has struck fear in the hearts of every European voter, the action of raising taxes has hurt just as much and perhaps the "trumpeting the failure of austerity as a reason to go full-Keynesian again" chatter will recede as facts overtake fallacies.
• As Mark Grant recently noted, there's a big divide between austerity pledged and austerity implemented, as it appears its more about raising taxes than cutting spending.

Fiscal Austerity in Europe Doesn't Mean Large Spending Cuts

SPAIN BANK BAILOUT - Completely Out of Control

Spain Appears Unsure What A "Bank Bailout" Means 05/08/12 Zero Hedge

• Spain to Spend €7bn-€10bn (It Doesn't Have), Bailing Out Bankia, the Nation's 3rd Largest Bank; Liar, Liar Pants on Fire 05/07/12 Mish
• New eurozone crisis looms as Spain prepares bail-out 05/07/12 Telegraph

Spain's banking system bailout is quickly becoming farcical. According to the WSJ this evening, Spain is to require its banks to set aside more provisions (between EUR20 billion and EUR40 billion) in an effort to overhaul the country's financial sector. This additional need for reserves (or provisioning) puts yet more pressure on the banks' balance sheets as it comes on top of the already EUR54 billion that has been set aside from February. Interestingly the EUR20-40 billion still falls dramatically short of Goldman Sachs' estimate of an additional EUR58 billion that is needed to cover reasonable loss assumptions. We can only assume that the game is to create as large a hole as is possible without tipping the world over the brink and then fill it with the state funds a la TARP (as Rajoy has indicated will be the case). It is fascinating to see us drift from the 'denial' phase to the 'recognition' phase slowly but surely (though still miserably under-capitalized) with the amazing arrogance that given the state is the only entity capable of issuance it will fund these shortfalls. So, in a nutshell: the Spanish banks got EUR352 billion (via LTRO and loan repayment) and are left with only EUR80 billion (after deposit outflows and sovereign reach-arounds); did not use this low risk-premium period to raise capital on the public markets; are now seeing the holes in their balance sheets exposed as being bigger by the week; but will be 'fulfilled' by a sovereign's issuance of debt to inject into an ever-increasing black hole of residential and developer loan delinquencies in Spanish banks. Way to go Rajoy - ECB's LTRO carry trade tied the banks more closely with their sovereigns and now the sovereign is directly involved with the banks - this will all end well, we are sure.

From UBS - Where the money goes in Spain - In Chart 21 we update the chart of the sources and uses of incremental funding in Spain in recent months.

The rise in ECB use of €270 billion since June 2011 has been met with a fall in loans outstanding of €82 billion, by our estimates (€64 billion reported to February then the same rate of decline in March and April). Uses of funds have included:

• The €52 billion excess of maturities over debt issuance;
• A reduction in private market repos of €74 billion to February
• An outflow of deposits of €55 billion to February, assumed to have continued at the same pace to April
• And the €60 billion rise in government bond holdings over June-January, with an assumed increase in March and April in line with the prior monthly run rate

This leaves the system with €80 billion yet to be used. We believe this significant sum could be a support for the government bond market in the near term. However, we also see the elevated ECB use overall making it less likely the system (and, by extension, the sovereign) will be able to return to the public markets in sufficient size to meet maturities and incremental issuance from non-domestic, non-official sources in coming months.

DERIVATIVES - $3.9T Counterparty Risk the Highest Since 2008

Decoding the latest OTC Derivatives BIS Estimates 05/10/12 FT-Alphaville

JP MORGAN - There is NEVER only one Cockroach!

Is JPM Staring At Another $3 Billion Loss? 05/10/12 Zero Hedge

As is evident, IG9 credit index and the S&P 500 have moved in a very correlated manner - and IG9 net notionals (the amount outstanding in IG9 CDS) has risen alongside these moves as JPM built a bigger and bigger longer and longer credit position. The red vertical arrow shows the current dislocation if one assumes the cessation of Iksil's unwind efforts stalled IG9's selloff - which is the $3bn loss that remains to be seen and the black dotted line is an indication of the kind of notional unwind that would occur - which with a market moving as it is - would be highly disjointing.

Of course, the situation is far worse because 1) any efforts to unwind such a huge position will lead to the market yawning wide and swallowing him in illiquid bid-ask spreads; and 2) the rest of the world knows their position - so why would the hedge funds not push their position. Perhaps this explains why JPMorgan's CDS has remained relatively wide while its exuberant stock price shot up on stress-test ebullience - only to plummet back to CDS reality this evening. Critically, JPM will need to use whatever method they can to hedge this now over-hedged and over-long position - which likely means credit instruments such as JNK, HYG, HY18, and IG18 will all get their share of strange attraction as the trader mispriced not just the basis risk (the volatility between the hedge and its underlying) but the attraction of running with a trend when you have a bottomless pit of money to cover it - until now.

and perhaps there was already concern in the market with regard JPM's counterparty risk or exposure from hedgies' trades as CDS has been far less exuberant than stocks...

Of course noone knows for sure what exact positions Iksil had on - though it is clear what hedging he needed to do to manage his hedges. As Peter Tchir ( @TFMkts ) noted this evening - perhaps this mark-to-model irregularity is what the Fed discovered and gathered all the banks last week to ascertain just who has what exposure to whom? As we tweeted earlier, perhaps Iksil just got carried away - and please understand that while CDS do indeed provide leverage, so do many other financial instruments - it is not the instrument that caused this - it is the trader as "you don't hedge risk when you bet on momentum continuing you idiot!"

GREEK ELECTIONS - No Firm "Pro-Baliout" Government Can Emerge

Goldman's Bearish Take 05/06/12 Zero Hedge

SITUATION

1. It is unclear whether the first party New Democracy and (what appears to be the third party) PASOK occupy enough seats in the parliament to form a majority (jointly accounting for roughly 35.5% of the vote).
2. Even if they do, they will do so with a marginal vote share and they may need more parties to join in, in order to form a broader coalition government.
3. The "radical left" (SYRIZA), with its clear anti-austerity agenda (but not an anti Europe agenda), is the second party in terms of votes and becomes a key “power-broker” among the anti-austerity powers of the left and the right (radical left accounts for 16.5% of the vote roughly).
4. Parties of the far right (Independent Greeks and Golden Dawn) appear to occupy a large portion of the next parliament jointly (counting for more than 15% of the vote).

The foggy political situation in Greece stands in stark contrast to the immediate decisions that need to be taken in the next two months. As we mentioned in our Friday note (European Views: A Preview of Greece Elections), for the next government, we believe:

1. A decision will need to be made for the Greek international-law bond maturing on the 15th of May the owners of which have held out from the PSI process. The outstanding notional is not large (about EUR430mn) but the broader implications of a no-payment decision are unknown.
2. Second, by June, budget cuts worth about 11.5bn EUR for the rest of the program period will need to be specified. There is little room left in the budget to promote such an adjustment without affecting public sector wages and pensions. Beyond the funds for PSI and for a partial recapitalization of the banking system, the rest of the funds from the second package remain undisbursed. Undisbursed funds for 7bn EUR worth of arrears (roughly speaking) and for the primary position of Greece will be important for the domestic economy.
3. Third, pressure from international lenders will likely shift on product market reforms going forward. This implies a focus on privatizations, opening up closed professions, reducing barriers to entry for new enterprises, reducing assured profit margins for various sectors etc. This is a crucial part of the recovery process for Greece and stalling those would likely deepen the recession.
4. Fourth and final, the recapitalization of the banking system in a format that makes it easy for banks to attract private capital in the future needs to move forward in a short time-span to safeguard financial stability.

SUMMARY

• A resounding lack of a pro-bailout coalition government. The two big pro-austerity parties got a stunningly low 32% of the vote, meaning that the overwhelming intention of voters was "anti-programme" (against the existing austerity deal). That makes it extremely unlikely that the current cuts-for-bailouts deal can go ahead easily. Read more: http://www.businessinsider.com/duetsche-bank-on-greek-elections-2012-5#ixzz1uAlHsjbo
• When the people have lost everything they are free to do anything - as they did,
• ND + Pasok have 149 as of 300. Two SHORT of a WEAK majority
• The anti-bailout parties will have among them nearly 60% of the finaly vote which means they could form an anti-bailout coalition if they buried their diferences.
• A more likely outcome is that a broader coalition government is built, but with an explicit mandate to renegotiate the bailout, instantly creating Euro-wide uncertainty
  

• The Banks' Nightmare Is Coming True- Greek Left Calls For Anti-Bailout Coalition 05/07/12 Zero Hedge
• 16% of the new Greek parliament is Nazis and communists 05/06/12 BI
• Neo-Nazis Winning Seats In The Greek Parliament, And This Famous Chart Is Proving Apt Once Again 05/06/12 BI
• Deutsche Bank Explains What Just Happened In Greece, And Why Markets Are Getting Hammered Tonight 05/06/12 BI
• Nouriel Roubini Has A LOT To Say About The Greek Election 05/06/12 BI

FRENCH ELECTIONS - Goes Left on Record Unemployment

IT'S OFFICIAL: Hollande Defeats Sarkozy 05/06/12 BI

• Polls showed Hollande with 52 to 53 percent of the vote in an election that turned on solutions for Europe's economic crisis amid record unemployment in France.
• Hollande, has said he's opposed to the Eurozone's existing (but unsigned) fiscal compact, which effectively bans fiscal stimulus. He also favors more ECB involvement, higher taxes domestically, and generally a stance towards growth.
• More significantly, perhaps, is that Merkozy is no more.
• Meet President Hollande 05/06/12 Zero Hedge
• Sarkophagus: Hollande Wins French Presidency 05/06/12 Zero Hedge

CHRONIC UNEMPLOYMENT - Migrates To "Disability" (Welcome To Socialism!)

TrimTabs on Debt and Disability Claims Disability Fraud vs. Expiring Unemployment Benefits 05/11/12 Mish

In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000. In the last month, actual employment fell by 169,000, but the unemployment rate dropped by .1%. That is an amazing "achievement" to say the least.

CONSUMER CREDIT - Hugh Shift in Credit from Revolving to Non-Revolving?

Consumer Credit Chart Is BACK 05/07/12 BI

TOTAL CREDIT IS GROWING SIGNIFICANTLY & ORDERLY

Consumer Credit Soars As US Government Encourages Student, Car Loan Bubbles 05/07/12 Zero Hedge

BUT THE MIX IS CHANGING DRAMATICALLY

CORPORATE BORROWING - $46T Needed Between in Next 4 Years

The Credit Overhang: Is A $46 Trillion Perfect Storm Brewing? 05/09/12 S&P

In the first of a series of reports on corporate credit markets, S&P highlights a truly unsettling downside scenario that could derail the "fragile equilibrium" in credit markets.

The title of the report: The Credit Overhang: Is A $46 Trillion Perfect Storm Brewing?

S&P estimates up to $46 trillion in refinancing and new financing needs by companies over the next four years.  The worry is whether or not the credit markets will be able to handle it.

From the report:

The global "wall" of nonfinancial corporate debt maturities coming due from 2012 to 2016 is not new to market observers. Less discussed is the incremental financing that corporate debt issuers will need over this period to fund capital expenditure and working capital growth. Standard & Poor's Ratings Services estimates the total amount of refinancing and new money requirements over the next five years at between $43 trillion and $46 trillion. This demand for funds will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds. These factors, amid the current eurozone crisis, a soft U.S. economic recovery following the Great Recession, and the prospect of slowing Chinese growth, raise the downside risk of a perfect storm for credit markets, in our view.

It's important to note that this is a downside scenario. S&P's baseline scenario is that the credit markets will indeed be able to handle the new financing needs.  But after the fiscal and monetary efforts of the last several years, governments have little left in the tank to combat a new crisis. 

An S&P chart on the size of credit needs in relation to GDP:

S&P Opens The Pandora's Box: The Wall Of Refi Worry Is $46,000,000,000,000 Tall 05/10/12 Zero Hedge

In what S&P calls a 'Perfect Storm', the next four years will see a minimum of $30 trillion in companies' refinancing needs related to maturing bonds and loans and further they expect $13-$16 trillion more debt will be required to finance growth. With bond portfolios over-stuffed with corporate debt (since angst over sovereign risk has skewed asset allocation away from that cohort) the rating agency is concerned that ongoing bank deleveraging, these huge debt re-funding requirements, and the diminishment of central banks and governments to do anything about it leave serious problems with a credit overhang so large. Critically, especially as we hear calls for 'growth' plans from Europe, is the increasing likelihood that, as Reuters reports, this will potentially influence corporate credit quality and "alter the fragile equilibrium that currently exists in the global corporate credit landscape". While S&P expect the refinancing needs may well be met "This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds" which "raises the downside risk in global markets" as an inability to finance growth may well be the catalyst for another risk flare. "Governments and central banks have less fiscal and monetary flexibility to prevent serious problems emanating from future market disturbances. A perfect storm scenario would likely cause financing disruptions even for borrowers that are not highly leveraged." Of course the size of this massive refinancing wall dwarfs the recent discussion of how much of Europe's financial system's equity market cap is nothing but vaporware - since we note that 30% of this $30 trillion is for European financials and corporations.

CONSUMER CREDIT - It's All Government Sponsored and Guaranteed

Consumer Credit Soars As US Government Encourages Student, Car Loan Bubbles 05/07/12 Zero Hedge

The total non-revolving debt is now $1.739 trillion: an all time record. As for the source of such debt? why the US government of course, in what is the supreme ponzi scheme, whereby the US government allows US consumers to purchase Government Motors products and to keep the Higher Learning status quo in power. In other words, the US government has become the final enabler of the consumer spending bubble with proceeds used to keep the US auto unions happy (as channel stuffing is already at record high levels), and of course, to fund such ancillary student purchases as iPads. As for whether any of this debt will ever be paid off? Don't be silly.

Click to Enlarge (To See PURPLE!)

That US consumer credit soared by $21.4 billion in March on expectations of $9.8 billion rise, or the fastest monthly expansion since March 2001 would have been commendable and memorable if one did not dig through the actual components. Which sadly are atrocious: of the entire surge, a modest $5.1 billion was from real credit, or revolving, credit-card type debt. This brought the total revolving debt to $804 billion or to a level first crossed in January 2005.

GDP DISTORTIONS - Government Credit & Channel Stuffing

The dramatic increase in Consumer Credit and the Shift has had a "mysterious" impact on GDP this quarter.

GDP Real Growth was = 2.2% on $15.5T = ~ $341B in change in the QUARTER on an ANNUALIZED basis. This equates to ~$341 / 4 = 85.3 per quarter.

Total Credit mysteriously surged to $21.4B versus expectations of $9.8B in the single quarter ending MONTH of March.

That may not sound like much but it is about small percentages. $21.4B on $85.3B is 25.0%. But it is WORSE than that because this compares a single month to the quarter.

The quarterly change by month (annualized) was 8.4% + 4.4 + 10.2 which = 23%. The Y-o-Y change was 2542 -2421 = $121B

OR $21.4 + 9.0 + 9.0 ~ $39.4B of the% 85.3B of the reported GDP Growth

$39.4B /$85.3B = 46% of this quarters GDP number

CONSUMER STRENGTH - Government Transfer Payments in Disguise

Consumer Strength Isn't All It's Cracked Up To Be 05/08/12 MoneyGame

According to research from Morgan Stanley global strategist Gerard Minack, the U.S. government is actually "paying out as much in benefits as it receives in taxes from households." And analysts already concerned about a fiscal cliff ahead around the start of 2013 when the government dramatically cuts back expenditures, the power of the consumer might be much weaker than the numbers would suggest.

US ECONOMY - Indicators of recession Ahead without more "G" in the GDP (QE)

US Real Personal Income Growth 05/09/12 Credit Writedowns

The takeaway here is that personal income growth is seriously flagging going into the fiscal cliff which promises to turn income growth decidedly to income contraction. The ECRI take: For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession. Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.

BERNANKE - The 100 DMA QE Maginot Line

Visualizing The Saturation Of Hopium 05/10/12 Zero Hedge

As the S&P 500 oscillates in a 20pt range this week between its 50DMA (Mislabeled on this chart) and the 4/23-4 Bernanke Hope lows, it is becoming increasingly clear that the breadth of the hopium-infused float-all-boats new-normal reality is seriously fading.

NYSE net new highs is fading fast as the S&P clings to hope... in a tight band between 50DMA and Bernanke's Hope Low...

ANALYTICS - Fed Market Manipulation

How The Fed Quietly Bought 1,150 S&P Points 05/10/12 Zero Hedge

With the need for exponentially larger expansions of the central bank balance sheets - and most importantly, the rate of expansion (flow) not just the size (stock) - we thought it useful to see just how the Fed's actions had impacted the S&P 500. From the lows in March 2009, 1150 S&P points have been 'created-or-saved' thanks to central bank largesse. That is a cost of $2 billion (not million!) for every S&P 500 point since the Fed started to expands its balance sheet by $2.3 trillion. Money-well-spent, we are sure you'll agree. In the meantime, it is the printing-endgames that we care about and the horrible sense of deja vu that the following chart inspires should at minimum see investors scaling back (which it appears the sensible retail investor is) - despite the imploring of every long-only asset manager.

The S&P 500 overlaid with the various Fed experiments...

And it seems like the balance sheets of the central banks need to expand at an ever-increasing rate just to stand still in terms of asset prices...

Does make one wonder what the 'real' value of the S&P 500 would have been without all that assistance?

But we are heading towards the end of Operation Twist and given the previous examples we have seen, it seems we are echoing once again...

Charts: Bloomberg

ANALYTICS - Plunging G10 Global Economic Surprise Index

One Of The Best Predictors Of The Stock Market Is In Freefall 05/09/12 BI

FINANCIAL REPRESSION - The Fed owns the stock market & have repressed all investors into risky assets

Jim Grant: "The Fed Owns The Stock Market" 05/09/12 Zero Hedge

The dulcet tones of Jim Grant provided much food for thought on Tom Keene's Bloomberg Radio show this morning. While the interest rate observer did not change his tack on the extreme experimentation of world's central banks, he did have some new perspective on the incredible moral hazard (or unintended consequence) that is being created. One of his main criticisms is the incredible arrogance and conceit of a central banking system that believes it can see the future and thwart things before they come to pass, as he notes "I blame the central bankers for confusing the black art of central planning with the traditional art of central banking". He fully expects more easing by the Fed and its friends as he awaits their response to this latest stumble in the markets but what is most evident to him is that "The Fed owns the stock market" since they have financially repressed all investors into risky assets they now have been forced to have a moral responsibility to keep us safe in those assets - incredibly! The Fed is more likely than not to intervene with still more money-printing in any effort to keep this bubble afloat. What Jim focuses on is the morality in economics and the current immoral policies that have very bad consequences.

Jim's discussion of the Fed begins around 6:05 and he dives into financial repression at the 9:44 mark

Keene And Grant by user5452365