We think as a matter of political reality, given the German polls, that Berlin will refuse to adequately fund Greece and that they will be forced back to the Drachma as a matter of Ms. Merkel’s desire for re-election. The honest truth is that the Greek debts have become so large and so impossible to pay that unless there is absolute debt forgiveness, which we think is politically impossible in Germany and a number of other European countries; the country must roll over as a matter of fiscal reality. In March, the last figures that are available, the Spanish banks lost $66 billion of capital as the citizens of Spain moved their money to safer havens. What the LTRO gave, the populace took away and the situation is unsustainable. Spain will soon be forced into a full-fledged bailout in my opinion which will require money for the regions and for the banks. What amazes us the most is that so many people have the honest opinion that Sir Draghi is going to come charging out from the round table, from the gilded gates of the ECB and save Europe. That White Knight is subject to the whims of Germany and the rest and all of the talk of independence and the separation of Church and State is just that; talk.
European equities are trading flat to minor positive territory at the North American crossover having pared losses made following the weaker than expected Japanese Q2 preliminary GDP and reports from Chinese press that China's RRR cut might have been postponed as the People's Bank of China's reverse repo activity still satisfies liquidity needs. Elsewhere, Bank of America cut China's growth forecast from 7.7% to 8.0% for the year, commenting that the country's ability for monetary easing was constrained by house prices. Volumes have been particularly thin, however, and as there is no economic data scheduled for release from the US, it is likely to stay that way. Greek Q2 advanced GDP surprised markets, contracting at a slower pace year-over-year than Q1 and than was expected, boosting risk appetite across the board. As such, Spanish and Italian spreads are seen tighter by 12.6bps and 9.1bps respectively, with the Spanish 10-year yield holding below the key 7% and the Italian's under 6% despite the Italian government debt coming in at a record high of EUR 1972.9bln.
Two years ago, in August of 2010, Ben Bernanke pre-announced QE2 at the annual Jackson Hole economic policy symposium. What followed was a 20% spike in the stock market as the impact of another liquidity deluge was digested by the market, leading to such luminaries as Tepper to make his first ever TV appearance telling everyone he was "balls to the wall" long. The QE effect came and went, and Tepper made money, and then lost it, as QE2 was followed by Twist, and then by more easing out of Europe, including a global coordinated intervention. This year, as the US and global economies have been floundering, the Fed has so far disappointed, and despite a "mere" continuation of Twist, has so far refused to implement the same bazooka measure that it did 2 years ago, no doubt well aware that doing so would merely confirm that every successive intervention has less of an impact, and last about half as long as each previous one (as we demonstrated over the weekend). The market, however, like the honey badger, does not care: and with stocks trading just shy of 2012 highs, and with Crude having soared by 20% since July, and with Brent at 3 month highs, is very much convinced that the imminent Jackson Hole symposium of 2012 will be a repeat of 2010, and Bernanke will announce something (and if not, there is always September, and if the disappoints then there is October, and December - in a world addicted to Fed liquidity the only thing that matters is when is the next fix). So what happened in the last run up to the 2010 Jackson Hole meeting? Here is a visual and factual summary.
After declining to an overnight session low of 1.2260 following very disappointing Japanese GDP news, which saw another Q/Q drop in nominal terms and missed every economist expectation, the market leading indicator - the highly leveraged EURUSD pair which is a proxy for risk when it is rising, and ignored when dropping (because the ECB will lower rates, or so thinking goes) was boosted higher starting at 5 am eastern time. What happened then? Greek Q2 GDP was announced, and instead of declining from -6.5% to -7.0% annualized, the number declined at "only" a 6.2% annualized run rate. Apparently that was the only catalyst needed to launch today's risk on phase, sending the EURUSD 70 pips higher, and futures back to green. So to summarize: the world's 3rd largest economy grew far less than expected despite 30 years of central planning, while Europe's worst economy imploded by just that much less than the worst case expected, and this is "good enough." What's worse is that this may well be the high point of the day as there is nothing else left on the docket.
- Oil hits 3-month high above $114 on supply concern (Reuters)
- G20 plans response to rising food prices (FT)
- First centrally planned FX, now real estate - SNB Seen Targeting Bank Capital to Curb Property Boom (Bloomberg)
- EU hedge funds face pay threat (FT)
- Euro-Area Crisis Has ‘No Obvious End in Sight,’ BOE’s King Says (Bloomberg)
- King urged to widen recovery measures (FT)
- All threats "dwarfed" by Iran nuclear work: Israel PM (Reuters)
- Obama campaign attacks Romney’s pick (FT)
- Romney, Ryan hit the road in an energized campaign (Reuters)
- Yellen Must Show How 12 Fed Opinions Become One Policy (Bloomberg)
Last week was a scratch in terms of events, if not in terms of multiple expansion, as 2012 forward EPS continued contraction even as the market continued rising and is on the verge of taking out 2012 highs - surely an immediate catalyst for the New QE it is pricing in. This week promises to be just as boring with few events on the global docket as Europe continues to bask in mid-August vacation, and prepare for the September event crunch. Via DB, In Europe, apart from GDP tomorrow we will also get inflation data from the UK, Spain and France as well as the German ZEW survey. Greece will also auction EU3.125bn in 12-week T-bills to help repay a EU3.2bn bond due 20 August held by the ECB. Elsewhere will get Spanish trade balance and euroland inflation data on Thursday, German PPI and the Euroland trade balance on Friday. In the US we will get PPI, retail sales and business inventories tomorrow. On Wednesday we get US CPI, industrial production, NY Fed manufacturing, and the NAHB housing index. Building permits/Housing starts and Philly Fed survey are the highlights for Thursday before the preliminary UofM consumer sentiment survey on Friday.
Some might be surprised by the title's positivity, but while the barbarous relic has meandered in an ever-compressing (triangle pattern) series of waves in the last few months, it has rather notably outperformed relative to global risk aversion, CFTC positioning, and central bank balance sheet dynamics - especially in the last few weeks. Whether the yellow metal's zero-yield is now 'technically' attractive to safe-haven flows relative to the NIRPs of Germany and Switzerland - or in fundamental anticipation of the next bout of central bank largesse, Citi's global macro strategy group remain bullish of the precious metal and the charts below suggest they are not alone - as the view that precious metals are a put on political stupidity remains front-and-center.
Hold on tight boys and girls, cause Merkel is back from vacation, and she is not happy despite that healthy Santorini due diligence-inspired tan (as deputy-Chancellor Fuchs telegraphed earlier today, when he made it quite clear what his boss thinks about Greece, and about more printing). Per Bloomberg: "German Chancellor Angela Merkel returns to the front line of the European debt crisis this week as the bloc’s leaders squabble over measures including bond purchases to relieve concerns the single currency may fragment. Merkel ends her summer vacation and travels to Canada Aug. 15-16 for talks with Prime Minister Stephen Harper as a spiraling euro crisis threatens to constrain the global economy. With the region’s leaders awaiting a German high court decision on bailout funding next month, they’re struggling to smooth divisions over a European Central Bank plan to buy the bonds of indebted nations."
Last week Obama insinuated that in the aftermath of the "amazing" post-bankruptcy GM recovery, his next plan is to bailout, well, everyone: "I believe in American workers, I believe in this American industry, and now the American auto industry has come roaring back... Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry." Also, as it appears, the Bailout'er-In-Chief has taken the saying "make it rain" a little too close to heart, and is now taking the worst drought in decades as a personal central planning challenge. Just because he can. There is one thing preventing him for bailing out US farmers: that thing apparently is evil congress. From his weekly address: "This is an all hands on deck response... But my administration can't do it alone. Congress needs to do its part too. They need to pass a farm bill that not only helps farmers and ranchers respond to these kinds of disasters, but also makes necessary reforms and gives them certainly year round.... So call your members of congress, write them an email and tell them that now is the time to come together and get this done. Too many Americans are suffering right now to let politics get in the way." All righty then GOP - you heard the president: stop blocking the man who would end the drought if not for your disturbing lack of faith, and vote promptly for "Let's All Make It Rain: It's Only Fair" bill. How else can the systematic bailout of everyone and everything proceed as planned?
Baupost's Seth Klarman sums it all up:
"It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplishes virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic."
The debt levels of advanced economies remains unsustainably high - bringing with it the considerable risk of renewed crisis - and while strong growth is the best way to deleverage, this solution appears out of reach for most (if not all) economies. Financial repression, austerity, inflation, or default are the remaining options - all of which come with considerable costs to economic growth and employment. While 'muddling-through' appears to be heralded as a positive by many market-savants currently, SocGen notes that the line between a virtuous (expansionary fiscal contraction) and vicious austerity trap comes down largely to policy confidence. Most (if not all) advanced economy politicians entirely lack the public's or market's confidence in credible policy direction (and in fact we are seeing policy uncertainty at extremes) which leads to SocGen's conclusion that the muddle-through strategy (which comes with a high price tag economically and socially) is too high a burden politically and will inevitably lead to spillover to core-Europe and the global financial system.
Many folks were surprised Friday night as rumors began leaking that Romney tapped Paul Ryan of Wisconsin, for the prestigious VP slot. The surprise came largely because many were expecting a more mundane pick like Tim Pawlenty or Rob Portman. The reactions from the GOP base is positive overall, although the story is still fresh and drawing conclusions is difficult. The reactions from the Democrat/Liberal base are predictable and we are guessing that the Obama campaign is licking its lips over the prospect of skewering Ryan like a kabob. We have a slightly different take, my feeling is that this pick is an indication that the Romney team is struggling and sees the prospect of winning in November diminishing with each passing day. People like Pawlenty and Portman is the equivalent of swinging for a base hit - the selection of Ryan is swinging for the fences. It is desperation and an attempt to shake things up substantially in the hopes of energizing a splintered and unimpressed Conservative base. However we prefer to focus on the economics of politics, not the politics of politics - so lets take a look at what exactly makes Ryan such a risk.