Whether it's Chuck Schumer or another headline-hungry banker/politician/long-only-equity-strategist, the one note of constancy among global macro perspectives has been - China needs to re-value the Yuan. The "it's not fair" crowd or "everything will be fixed if we can just compete on equal terms" talking-heads may want to take a look at the BIS effective exchange rates. It is evidently clear that since 2005 the USA has been on a path of very considerable currency devaluation - down almost 16% while the Yuan has strengthened almost 38% based on the BIS effective exchange rates. The effective exchange rates (EER) provide a better indicator of the macroeconomic effects of exchange rates than any single bilateral rate and are described here. After this morning's comments from China, perhaps it is time for our Asian trade partners (or should we say vendor financiers) to raise the rhetoric that the US is the one not playing fair?
There's that name again: BlackRock, the world's largest asset manager, and the firm that was forced to deny last Wednesday it is in any trouble courtesy of accumulating unknown amounts of Italian bonds (how about a nice little Cusip list there Rick Reider?), just made the news following a report in Reuters that the firm anticipates massive haircuts in 3 of the 5 PIIGS. From Reuters: "Debt restructuring in Greece, Portugal and Ireland with write-downs for private creditors of 75 percent to 80 percent are needed to help stop Europe's debt crisis turning into a global meltdown, said BlackRock, one of the world's largest asset managers. "Governments are falling, bond yields are zig-zagging by whole percentage points and markets around the world are locking up: the euro zone turmoil risks turning into a global crisis," BlackRock said in a research note on Monday." So, let's see: Greece, Portugal and Ireland... But not Italy of course? The country that has the second largest amount of debt in Europe is somehow excluded from a very conflicted BlackRock's "objective" analysis. Why is that? "BlackRock also said the European Central Bank should buy more bonds and that policymakers should provide more details on the rescue fund and implement fiscal discipline without hurting growth, according to the note." Is BlackRock betting the farm that the ECB will bail it out? That didn't work too well for MF... Seriously, Rick, some CUSIP level breakdown of your Italian exposure would be terrific. Even if it is at the "net" level. We can wait. So can the market.
It seems that rotating a few pawns at the top is not quite the bazooka everyone expected it to be last week. Case in point: CDS in the core European trio of France, Spain and Belgium just hit new all time wides. But before anyone blames evil CDS speculators, it is notable that CDS is significantly outperforming cash bonds. And since everything that can be said about Europe's ongoing implosion has been said already, the only question is which Goldman "advisor" will replace Sarko in a few weeks.
Main China Daily Xinhua Pens Epic Anti-US Tirade, Bashes America As Source Of All Global Financial IllsSubmitted by Tyler Durden on 11/14/2011 - 10:12
You thought China was going to take this weekend's endless bashing by Obama, telling it to grow up and act as "an adult", lying down? You thought wrong. China main daily publication Xinhua has just released possibly the most scathing anti-America editorial via Liu Tian, to ever see the very public light of day. "For the United States, it should put its house in order before chiding others. Since the onset of U.S. subprime crisis in 2007, it was the country's domestic economic problems that triggered a disastrous financial crisis that swept the world. Excessive spending for many years has added up debts. Meanwhile, traditional strong industries such as finance and auto were devastated by the crisis, pushing up unemployment. In face of such serious domestic problems which probably could trigger a new global economic tsunami, many U.S. politicians seemed only to care about how many votes they could get, without having a single thought about what kind of the global responsibilities the country should take. Thus it should come as no surprise that the angry "Occupy Wall Street" protesters are calling for an end to the political tricks in Washington." Ball is in your court president Obama: it is now your turn to piss off your biggest creditor (at least until QE3 ends) even further.
The world has reached the point of debt saturation. Creating more debt no longer generates "free lunch" growth, even in China, though the central bank in China is still playing as if shifting debt off-balance sheet into a "shadow" system will fool the money gods. It won't. Everybody in Europe is playing the same sort of games, hoping to fool the money gods and keep the "free lunch" economy "growing." While everybody focuses on the circular firing squad in Italy, untold billions of euros of impaired private mortgage debt in housing-bubble-popped Spain still sits on the books of Spanish banks at full value, lest a sneeze of reality send Spain's entire banking sector to Davy Jones Locker. Though no official publicly admits it, nobody really knows how much debt there is in Greece, or who even holds it. Here's the fig leaf confession: "Scarce data makes estimates difficult." Yes, I'm sure it does. So the true size of Europe's debt is unknown because everyone with a stake in the charade is trying desperately to keep the true scope hidden. (Ditto in China.) The debt will get renounced, and debt as the "engine of growth" will also be renounced. Europe is an inept 3-card monte player attempting to swindle the money gods. The gods aren't fooled by such shallow shuffling games, in fact they are greatly annoyed that humans even dare to attempt such flimsy tricks. Their wrath is building, and human hubris will only make the reckoning worse.
As was just reported by the ECB, the amount of debt monetizations (sterilized supposedly, but when the banks exist purely due to ECB funding it is not really sterilization) in the past week was €4.5 billion. As explained previously, this does not include T+3 operations since Wednesday which have yet to settle, and which is where the kicker is as can be seen on the chart below as the move from 82 to 89 on the 4.75% of 2021 occurred on Thursday and Friday. The week's number is notable because in the week before €9.5 billion was monetized (bringing the total purchases under the SMP to €192.5 billion). Of course, by Thursday Silvio was out. And that's when the buying really started. Expect to see a surge in the next week's reported ECB purchases even as the Italian bond market once again begins selling off.
For what it's worth, Goldman likes gold. "Consumers: We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates. Further, with our US economics team now forecasting slower US economic growth in 2011 and 2012, we expect US real interest rates to remain lower for longer, supporting higher gold prices through 2012. Consequently, we recommend near-dated consumer hedges in gold through 2012. Producers: With gold prices expected to continue to climb through 2012, we find hedging opportunities less attractive for gold producers at this time." In other news, Goldman also likes Silver, Copper, Zinc, WTI and Brent. In other words: QE3 is coming.
UniCredit Reports Massive €10.6 Billion Loss On Estimate Of €7.4 Million Profit; Will Raise €7.5 Billion In New EquitySubmitted by Tyler Durden on 11/14/2011 - 08:57
- UNICREDIT 3Q NET LOSS EU10.6 BLN; ANA EST EU7.4 MLN PROFIT
We haven't seen the press release, but we have a sinking suspicion the bank's "perfectly hedged' sovereign exposure, when all the accounting gimmicks are said and done, will be the culprit. And the natural conclusion:
- UNICREDIT RIGHTS OFFER TO BE AS MUCH AS EU7.5 BILLION
- UNICREDIT FURTHER STRENGTHENING ITS LIQUIDITY POSITION - and further diluting its impoverished shareholders
This is just the start.
Since the derivatives and housing market implosion of 2008, America and the rest of the world has been spiraling down a chasm some in this country still refuse to take note of. The question has never been whether there “will be” a full scale financial disaster. The end to that chapter of this story was already written years ago. Rather, the real question has been “when” will this inevitable event culminate? Sadly, speculation on the matter has met an irreconcilable road block. The fact is, all the necessary elements are in place to bring down our fiscal shelter not in five years, not in one year, not in six months, but today. That’s right…..the economy as we know it has the potential to derail completely before you wake up for your morning poptart. Some skeptics might shrug off this statement as mere sensationalism for effect. I wish that were the case. Frankly, I would enjoy writing a little fiction for once. The truth is far too bizarre and disturbing lately. In the case of economics, traditional views and standards have gone completely out the window in a way that I and probably every other analyst in the field have never heard of or encountered. All expectations are now null and void. Manipulation of the marketplace is no longer a subversive and secretive process, but open government and central banking policy! Who could have guessed five years ago, for instance, that U.S. taxpayers would be saddled with bailouts of the EU? Who could have predicted that global stock market psychology would be dominated for over a year by the debt drama of a country as economically insignificant as Greece? And, who could have foreseen that destructive fiat stimulus policies would soon be common knowledge events amongst the citizens of various faltering nations?
This update out of Goldman's Dirk Schumacher is probably not good news for anyone who believes that a high EURUSD, contrary to conventional wisdom, is a good thing for Europe. "German Q3 GDP: a last hurrah before the recession. The statistical office will release third quarter GDP figures tomorrow morning and we expect a quarterly increase of +0.3% after +0.1%; BBG consensus is +0.4%qoq. The risks of this forecast are to the upside and the strong industrial production figure as well as the robust trade figures would argue for a stronger quarterly growth figure. We see, however, a good chance for an upward revision of the disappointingly low Q2 figure (+0.1%qoq), implying a higher starting level for GDP in Q3 and therefore a somewhat smaller increase in Q3. In any case, the latest monthly figures, in particular business sentiment, point to a clear loss of momentum during the quarter and we think that the German economy has slid into recession in Q4. Whether this will be major recession or not will obviously depend on several factors not least the question whether some stabilisation in peripheral sovereign debt markets can be achieved or not. One factor that points to moderate recession is the on-going relative favourable funding conditions for German banks and corporate (see chart)." In other words: a "soft recessionary landing" - those predictions always work out just fine.
Bank Of America Desperately Does Not Need The Cash...But Will Take It; Sells Remainder Of China Construction Bank StakeSubmitted by Tyler Durden on 11/14/2011 - 08:05
The bank that never, ever needs capital, but will dilute the living daylights out of anyone to get it, and will sell all of its actually valuable assets as soon as a buyer materializes, has just gone ahead and proven its critics right yet again. Several minutes ago Brian Moynihan's rotting carcass of toxic Countrwide Financial mortgages, which has some negligible banking businesses on the side, just announced it would sell about 10.4 billion common shares of China Construction Bank Corp through private transactions with a group of investors. The purposes of the follow up CCB disposition - to pump about $2.9 billion in additional Tier 1 common capital at Bank of America. And with this the easy disposition targets are gone. Next up: just how will Bank of America be able to spin off Merrill. Have fun with all those CDS successor issues. And once that phase is over, the debate over just how Bank of America will spin the hundreds of billions of legacy CFC contingency liabilities off into an "asbestos" trust will resume.
- Mario Monti was handed the task on Sunday night of forming an emergency government led by technocrats
- The Italian/German 10-year government bond yield spread widened despite a well-bid BTP auction from Italy, as concerns surrounding the Italian debt remained in focus
- According to IFR, European banks are planning to dump more of the EUR 300bln they own in Italian government debt. Also, president of the European Banking Federation said that Europe’s banks need to keep dumping Italian banks
- The EFSF denied a Sunday Telegraph report that it spent more than EUR 100mln buying its own bonds after failing to achieve its funding target as a sale last week
- The Swiss economy minister warned against exerting pressure on the SNB to weaken the currency
There is that thing we said about the European "communicating vessels/whack-a-mole" - the second one is down, several others pop up. Today, it is Spain's turn, whose 10 Year bond yield just passed 6%: the first time it has done so since August 5. The catalyst was the discovery earlier that Spanish bank borrowings from the ECB rose to €76 billion ($104.1 billion) in October, the highest level in more than a year, as the ECB remains the LOLR contrary to Jen Weidmann's claims to the opposite. So which bonds does the ECB buy next? When we said last week that Mario Draghi should hire all the fired bond traders from UBS, RBS, HSBC and Jefferies we were not kidding.
Well, about 99% of the world’s bankers, politicians, and finance ministers are demanding that the ECB step up its purchases of sovereign debt. Basically anyone who will make money, gain power, retain their jobs, etc., has voiced their desire to see the ECB change the rules yet again, and grow their balance sheet to support the sovereign debt (and banks) of nations that are insolvent or bordering on insolvent. The only problem, so far, is that the country with the money and credibility is still saying NO. German 2 year bonds yield 0.34%. That is a fraction of the ECB’s overnight rate. France, by comparison trades at 1.37%. Maybe someone should listen to the one country that has been able to manage its credit? The issue seems to be print and all is good, or don’t print and risk disaster. Neither of these views are necessarily true. Without a doubt, printing, and buying massive amounts of sovereign debt, would give a short term benefit to the markets and to the politicians. Yet, there is no evidence that it would help longer term. The EU and ECB have changed, bent, or broken rule after rule, and the consequences have been universally bad. They let countries in that didn’t really meet the criteria. They let annual budgets slip. The ECB changed rules so that they could lend to countries and banks that were below investment grade. Every time they have broken a rule to get a solution to a “temporary” problem, it has turned out that only the solution is temporary.
ECB intervention half-life: 30 minutes. BTPs are now at day lows, with the cash price on the 10 Year dropping to just above 87. Next support is last week's record low in the 82s. However, with one Super Mario brother certainly more friendly toward the other, Goldman planted one, we are confident the ECB will bring ze Germans to a boiling point before it ceases trying to offset the unstoppable plunge in Italian bonds.