May 16, 2012
“You never can quite get it right because in our particular free-enterprise system-a free flow of capital-stuff moves and it goes up and down. Even Jamie Dimon just blew $2 billion. That’s a big risk. We all have to live with the uncertainties of the business cycle, but we do our best.” –Jerry Brown
The rhetoric in Europe is picking up a bit as finance ministers have warned Greek officials that they could be ejected from the EU if the country fails to deliver as promised on the terms of its rescue and form a new government, and right on cue the newly elected officials failed to organize one. This means a follow up election will occur in early June to see if a new slate of legislators can form a new government. Polls are favoring the ant-EU left, and as a result yields in Italy and Spain jumped over 6% yesterday and German yields fell as investors moved capital into Germany.
Ally Financial’s mortgage subsidiary, Residential Capital, filed a much anticipated Chapter 11 earlier this week. Ally has been aggressively shopping the unit to potential suitors, and is also reportedly trying to sell its international operations as the company attempts to emerge from government ownership. The company has been one of the most aggressive lenders since its 2009 bailout. Ally is the former GMAC.
There’s always a silver lining, you just need to look for it. A slowdown in China could be a boost for strapped consumers in Europe and the US as commodity prices could decline (see chart from Monday). Frederic Neumann, the co-head of Asian economic research for HSBC, said “the US might not be in too bad a shape because it would benefit from cheaper commodity and oil prices.”
The metals have all broken or are about to break support as you can see in the chart below, courtesy Kimble Charting Solutions. Gold, which is 20% off its high, and silver have already broken technical support, and now copper is beginning to break down. Copper has been a very reliable indicator of global economic growth, so this is certainly concerning from a growth standpoint.
What happens if Greece leaves (or is kicked out of) the Euro? A few possibilities include massive asset outflows from Spain and Italy towards Germany as investors fear the possible next shoe. The ECB faces huge credit draws as banks see more liquidity concerns and the value of collateral is further compromised. Germany could be forced to step in and guarantee directly more debt for the PIIGS to keep their spreads from exploding. Assets, which have been fleeing from Greece, will explode out the door as investors fear being converted to Drachma.
If you think JP Morgan losing $2 billion on a trade is bad, wait until you look at California’s updated budget deficit. Originally estimated at $9.2 billion in January by Governor Brown, the deficit now appears on track to exceed $16 billion, a 74% increase. I guess that answers the riddle on Jeopardy the other night, when the answer was “California”, and the question was “Which US state most closely resembles Greece?”
I’ve been a proponent of restoring Glass-Steagall, the Depression era law that separated investment banking from commercial banking, since it was repealed in 1998, so when I rail against it I certainly can’t be accused of jumping on the bandwagon. Barry Ritholz posted this graphic yesterday showing an advertisement supporting the restoration of the act. After the very public JP Morgan trading loss announced earlier this week, the catcalls are beginning once again to restore this common sense piece of legislation. I’m sure once Jamie Dimon endures and FBI sponsored perp walk, he’ll change his tune about opposing restoration of the act.
Have a great day