I make a distinct reference to the CASH HIGH S&Ps versus the S&P FUTURES has made an all-time high. According to the CQG charts, the all-time high in the S&P futures front month is 1586.75 and the high daily close is 1576.25. The CASH high is 1576.09 and the previous high CASH daily close was 1565.15, which was surpassed on Friday’s close. Here is a significant chart that shows the important difference between Friday’s close and the last record high close of October 9, 2007.
For the last three years, this blog has made the point that a moral drama playing out on the global financial stage. The U.S. Tea Party was based on a concept of liquidating the assets of large debtors and letting the pain be absorbed by the financial system and those who have saved and played by the rules of capitalism will be rewarded. The moral precepts of the “original” Tea Party supporters may have been correct but the timing of favoring system-wide asset liquidation had long passed and the fallout would have led to economic collapse and possible political upheaval. The U.S. could not handle the massive unemployment from a forced deleveraging. While I am opposed to moral hazard in principle, the enforcement of punishing debtors at the expense of the entire system is absurd.
It made little sense to blog about Cyprus last night because the initial news release was so vapid it was of little use. Those who perceived a risk-on based “settlement ” proved to be disappointed this morning. Long before Dutch Finance Minister Dijsselbloem opened his mouth, the euro and its various correlated trades were in a turnaround from last night’s movement. Mr. Dijsselbloem also serves as the head of the ECOFIN (European Finance Ministers) so his voice carried more weight than the usually opining of a podium-addicted eurocrat. It seems that the ECOFIN honcho made it known that the severe punishment of investors and depositors in Cyprus was to serve as the TEMPLATE for all future European banking insolvencies. The stern tone of the message sent global equities lower and the DOLLAR and any currency not in Europe, rallying.
Okay, you must have some fun amongst the idiocy of the Eurocrats. It seems that the best intentions of last Friday night’s decision to sacrifice the pawns in the game have done exactly what I thought the ill-conceived plans would accomplish. For 10 billion euros of bailout capital the fallout has been large drops in equity values. The capital losses are small compared to embarrassment facing the European policy makers. In a Bloomberg article by James Neuger, “Europe Plays I-Didn’t-Do-It Blame Game on Cypriot Deposit Levy,” it seems that German FM Schaeuble, France’s FM Moscovici, Spain’s FM Guidnos and even Finland’s FM Urpilainen all claim that they were opposed to taxing the guaranteed deposits of under a 100,000 euros. They all seem to point to the ECB and IMF as wanting the “bail-in.” This is a classic example of what my friend Andy Schreiber used to say: “Success Has Many Fathers, Failure Is But An Orphan.” The Cypriot situation is a situation that punches way above its weight. Carmen Reinhart, an economist I cite regularly on financial repression, silenced the talking heads on CNBC when she claimed that, “Do not take size as an indicator of importance.”
Yes, another day and the markets had to try to understand the significance of Cyprus. The newswires were filled with analysts claiming this was a “tempest in a teapot” and that the doomsayers were blowing the Cypriot problem into a pseudo crisis. Again, a world that is highly leveraged is subject to a “single spark starting a prairie fire” and the fear of contagion and an electronic bank run are very real if the major policy makers don’t invoke the trust of the electorate and investors. The perceived actions by IMF Director Lagarde (the joker) and the liquidationist mentality being thrust from Berlin and Chancellor Merkel (the thief) have created a situation where European bank depositors are nervous, especially so in the peripheral banks. THE MAIN COMPONENT OF THIS UNCERTAINTY WAS THE MOVE IN THE FRONT MONTH EURIBOR CONTRACTS,AS THE JUNE 2013 FELL 10 TICKS ON A DAY WHEN OTHER INTEREST RATES WERE LOWER. NOTHING SAYS BANK FEARS THEN A COUNTER MOVE IN THE EURIBOR AND LIBOR MARKETS. An increase in bank yields with equity markets falling is a sign about the fear in the bank deposits market. It seems that the policy makers that are leading the previously “revered” TROIKA (IMF,European Commission and ECB) have initiated fear for a mere pittance.
It was a very muddled and confusing day in the markets as the news wires carried numerous rumors. The Cypriots were going to approve the lunacy and then they weren’t as the government couldn’t get the needed votes in parliament. Later in the day there was noise about a new compromise with the depositors with more than 100,000 euros bearing the brunt of the “TAX PLAN” and small depositors paying just 3 percent. The markets did not follow through with last night’s initial selloff and the U.S. equities tried to make a move higher late in the day but late selling pushed the markets down on the day by the close. The U.S. is fulfilling its role as a haven, but instead of bonds being the main recipient of global angst, it appears that frightened money is comfortable buying the asset base of U.S. corporations. Gold did perform as a haven but for all the turbulence in the market its rally was tepid. It seems that investors want an asset with some return rather than the mere store of value.