The Swiss National Bank may have pegged the EURCHF (and as noted earlier, is progressively accumulating losses defending the barrier - even as EURCHF options are leaning further and further towards the peg breaking), but what about its bonds? At the current rate, Swiss debt, which is quite negative, with 2 year bonds now trading at record NEGATIVE rates, will repay itself quietly in a few short decades: ahhh the benefits of compounding. And for an example of how this is done, hours ago, the government issued debt at a rate of 0.62%. Oh sorry, we forgot the negative sign.
There’s a rather peculiar tribe of people in northern Uganda known as the Ik that has completely mystified anthropologists for decades. You see, the Ik are unlike just about any other people on the planet in that they shun cooperation, community, and even family. Due to the constant disruption of national boundaries in Africa coupled with terminal drought and famine conditions, the Ik have a very limited means of survival. As such, their culture epitomizes the ‘every man for himself’ mentality. Family means nothing. One brother could be starving to death, and the other brother with a belly full of food, and neither would have the slightest thought of sharing. It simply does not register with them. Each member of the tribe typically spends long periods in isolation searching for food and water. Their only reason for marriage is simply that it’s more convenient to build homes in pairs. Nothing else is shared… and most of the time, an Ik husband and wife will seldom be home at the same time. Children are occasionally produced from conjugal relationships, generally because they scare off birds and pests from the agricultural fields. By the age of 3, Ik children are kicked out of the home and left to fend for themselves. And they’re not weaned off, either, it’s sink or swim. All of this sounds shocking to westerners.
It is becoming clearer and clearer that some new policy option is required in Europe - but as JPMorgan's Michael Cembalest excellent cartoon description of the never-ending circular arguments among European leaders would put it - you would have to be a wide-eyed optimist to believe it will be a decisive one. Comparing the progress of the European Monetary Union with structural changes in the US around the end of the 19th century, it is arguable that more time is needed before judgment is passed but they may not get the chance. The resolution of a staggering EUR10 trillion in peripheral sovereign, household, and corporate debt may not wait. Durable unions are signaled by signs of wage convergence and unilateral transfers of wealth to smooth regional income difference - while a lender of last resort appears to be most people's solution, it likely will not be enough given the competitive divergences.
Back in February, as part of the latest Greek bailout of European banks, we noted that the most subversive part of the German-led proposal was nothing short of a gold confiscation scheme. Today, courtesy of The Telegraph, we learn that Germany is quietly reminding the world that the stealthy, but voluntary, accumulation of gold is what it is all about. As part of a newed push for quasi-Federalism, whereby Germany would fund a "European Redemption Pact", in which Berlin would, in the form of Germany-backed joint bonds, be responsible for any sovereign debt over the 60% Maastrtich limit, but with a big catch. The catch is that "a key motive is to relieve the European Central Bank of its duties as chief fire-fighter. "We have got to get the ECB out of the game of distributing money, and separate fiscal and monetary policy. Germany has only two votes on the ECB Council and has no way to control consolidation," he said. Germany would have a lockhold over the fund, able to enforce discipline. Each state would have to pledge 20pc of their debt as collateral. "The assets could be taken from the country’s currency and gold reserves. The collateral nominated would only be used in the event that a country does not meet its payment obligations," said the proposal. In other words: a perfectly legitimate, and fully voluntary scheme in which sovereign gold is pledged to a German "pawn broker" until such time as the joint bonds are extinguished, and if for some "unpredictable" reason, a country fails to meet its obligations, read defaults, all the pledged gold goes to Germany!
But why Gold? Why not spam. After all gold is selling off, spam is stable, and the dollar is soaring. Couldn't Germany merely demand that broke countries simply pledge all their USD reserves, and keep their worthless, stinking yellow metal? Apparently not.
While InTrade has the odds of Grexit by year-end at 40% (off from its 60% highs), when it comes to the professional money, it seems the odds are higher. In Citigroup's client survey of credit professionals, they find 62% of investors sure that Greece would not survive in the Eurozone until the end of next year. With 45% expecting Grexit this year and a further 17% expecting it by the end of next, that leaves a still remarkably hopeful 38% of managers who believe Greece will never leave. Are you a Grexican or a Grexican't?
Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.
Presented with little comment - aside to note that we have seen this again and again and again, but perhaps this time is different...
Pretty much any commentary here is pointless
First it was the CEO of Bankia whose departure via Golden parachute seems incredible in its absolute lack of shame; and now, as Bloomberg reports, Miguel "Mafo" Ordonez - the Governor of the Bank Of Spain - has resigned - with 2 weeks notice.
BANK OF SPAIN GOVERNOR TO LEAVE ROLE ONE MONTH EARLY
ORDONEZ TO LEAVE ON JUNE 10
Did he maybe find some unmissable Costa Del Sol real estate opportunities forcing him to get out of dodge just that much earlier? If so, could he maybe spread the love and give everyone else the hot tip (aside from Spanish taxpayers of course)?
With the EUR imploding following the recent note out of witchhunt target extraordinaire Egan-Jones, and the apparent inability of the ECB to handle the sandtrap on the 18th (they were supposed to announce the magical mystical bailout announcement 20 minutes ago), it makes sense to check up on the most recent InTrade odds for a [Insert first two letters of a peripheral European country]-xit, or, technically, the odds"Any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012." As of minutes ago, this number was 40%. This, however, appears to be a simple Fibonacci retracement to the all time high of 60% seen last November. And while we don't have an opinion one way or another, this level certainly provides pair trade opportunities: recall that according to Buiter, Greece is out by January 1, 2013, so technically a 100% probability, while the ECB gives 0% odds of a Grexit, ever. In other words, two pair trades of Buying ECB while Shorting InTrade, and Buying InTrade while Shorting Citi, virtually guarantees profits.
A $29 handle and elevated volume. Chart still shows distinct support level at zero. Time to flip coins.
UPDATE: EURUSD at 1.2478 as we post.
While European, US, and commodity markets (ex-Spain) were enjoying the hope/hype of ECB rumors and QE chatter, Egan Jones just burst the bubble. back to reality. Within minutes of their downgrade of Spain, EURUSD was plunging faster than Facebook and along with that cornerstone of correlated risk markets, gold, silver, oil, copper, and US equities had smashed lower.
The little rating agency (or is that former, now that it is public knowledge that Egan-Jones missed a comma in their NRSRO application?) that just refuses to go away, has done it again, and downgraded Spain from BB- to B (negative outlook of course), and on the edge of the dreaded triple hooks, mere days after it cut it from BB+ to BB-.
Perhaps we can finally dismiss the decoupling myths and hopes and dreams as nothing but the natural economic lags we were so clear about during the first quarter elation this year. As is clear from Citigroup's Economic Surprise Indices, Europe and the US are once again in sync from a macro-economic cycle perspective (both in terms of missed expectations and deteriorating data). What is more worrisome is the very close similarities between the last year or so evolution of the macro picture in the US and Europe with what occurred in 2008 (as is clear from the red and green ovals). We heard again and again then (as now) that markets would decouple but as the markets began to roll-over they reinforced one another in the downward spiral and we know how that ended.