- SEC calls for detail on debt exposure (FT)
- Calls for US taxpayers to bear housing (FT)
- Beijing Sets Meek Tone on Reform to Banking Sector Amid Uncertainty (WSJ)
- Merkel, Sarkozy to seek growth, jobs for euro zone (Reuters)
- UK leaves door open for cash to IMF (FT)
- Hungary Runs Out of Options in Row With IMF (Bloomberg)
- Monti Says No More Budget Cutting Needed to Balance Italian Budget by 2013 (Bloomberg)
- China to maintain 'prudent' monetary policy (China Daily)
- Regional free trade talks in the pipeline (China Daily)
Markets are quiet halfway through the European session as most are awaiting the outcome of the meeting between German Chancellor Merkel and French President Sarkozy in Berlin at 1230GMT. The meeting is likely to centre around Greece, as well as the PSI update that, according to the FT may see the holders of Greek bonds accept higher losses as the contentious negotiation over writing down Greece’s debt burden are due to be concluded soon. German Industrial Production figures for November came in roughly in line with expectations, with the German Economic Minister commenting that this measure is likely to remain subdued over the winter months. Data released from Switzerland today shows Retail sales performing much stronger than expected, showing strong consumer demand in Switzerland across November.
Continuing the schizoid overnight theme, we look at Germany which just sold €3.9 billion in 6 month zero-coupon Bubills at a record low yield of -0.0122% (negative) compared to 0.001% previously. The bid to cover was 1.8 compared to 3.8 before. As per the FT: "German short-term debt has traded at negative yields in the secondary market for some weeks with three-month, six-month and one-year debt all below zero. Bills for six-month debt hit a low of minus 0.3 per cent shortly after Christmas...The German auction marks the start of another busy week of debt sales across Europe. France and Slovakia are also selling bills on Monday, with Austria and the Netherlands selling bonds on Tuesday. Germany will auction five-year bonds on Wednesday, while Thursday sees sales of Spanish bonds and Italian bills. Italy finishes the week with a sale of bonds on Friday." Still the fact that the ECB deposit facility, already at a new record as pointed out previously, is not enough for banks to parks cash is grounds for alarm bells going off: the solvency crisis in Europe is not getting any easier, confirmed by the implosion of UniCredit which is down now another 11% this morning and down nearly 50% since the atrocious rights offering announced last week. On this background Germany continues to be a beacon of stability, yet even here the consensus is that recession has arrived. As Bild writes, according to a bank economist survey, Germany's economy is expected to shrink in Q1, with wage increases remaining below 3%. And as deflation grips the nation, potentially unleashing the possibility for direct ECB monetization, look for core yields to continue sliding lower, at least on the LTRO-covered short end.
Europe has opened a new week with a modestly schizophrenic session: after hitting a multi year low against the USD and an 11 year low against the Yen, the Euro has seen a constant rise and traded nearly 100 pips higher last at 1.2770 on renewed hopes that today's Merkozy meeting would finally yield success. While that is clearly an utter delusion, with the abosolute record of shorts in the EUR as we pointed out last Friday, the smallest move higher can generate an avalanche of covering, and as we said previously a "potential" margin hike by the CME at any point in Euro contracts would leads to a QE-like surge higher in the EUR. If only briefly. Elsewhere, bond yields were mostly unchanged with the 10-yr Italian yield -3bps to 7.1% after rising as much as 4bps to 7.17% earlier; the 10-yr Spanish yield -5bps to 5.66%; was +1bp to 5.72% earlier; the 10-yr bund yield +2bps to 1.88%, first rise in 3 days. Most importantly, but no longer surprisingly, the ECB Deposit Facility usage soared to a new all time high of €464 billion, an increase of €199 billion since the LTRO hit the bank balance sheets on December 21, which accounts for virtually all the non-rolled cash. Simply said, Europe remains in suspended animation with hopes that a deus ex (now that the aliens have been downgraded from "possible" to "interference") will materalize preventing an allout spread collapse.
Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.
While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.
Early Friday morning, Jon Najarian of optionMONSTER fame noted (on his site as well as CNBC) some 'unusual' action in an illiquid little stock called Inhibitex (INHX). It turns out that over the weekend, that same company was purchased by BMY for $2.5bn (or $26 per share - more than double the closing print of $9.87 on January 6th). This won't be the first time we have 'helped' Mary (Schapiro) and her little SEC lambs but it seems surprising that this would not generate at least an 'alert' when as Najarian so promptly pointed out on Friday - a total of 11,138 calls traded against only 937 puts with this call volume more than half the entire call trades of the month of December (when 19,000 calls changed hands). Friday's call activity was more than 12 times average, with the $10 Feb Calls' volume over 17 standard deviations above normal. While some of the action could potentially be discounted as front-running the JPMorgan Healthcare conference next week, we leave it to you to judge the option volume for itself: either the deal was leaked or the buyer of these calls had exceptional timing and is now considerably richer.
Curious how the US, on a state by state basis, stacks up against the rest of the world, in terms of economic (and population) prowess? The following interactive graphic from the Economist should answer all questions about what state is equivalent to what country. With some surprises: as the Economist points out: "Who would have thought that, despite years of auto-industry hardship, the economy of Michigan is still the same size as Taiwan's?" On the other hand Montana Grungeville being equal to Greece in GDP - that we could live with...
We have now entered the fifth year of this Fourth Turning Crisis. George Washington and his troops were barely holding on at Valley Forge during the fifth year of the American Revolution Fourth Turning. By year five of the Civil War Fourth Turning 700,000 Americans were dead, the South left in ruins, a President assassinated and a military victory attained that felt like defeat. By the fifth year of the Great Depression/World War II Fourth Turning, FDR’s New Deal was in place and Adolf Hitler had been democratically elected and was formulating big plans for his Third Reich. The insight from prior Fourth Turnings that applies to 2012 is that things will not improve. They call it a Crisis because the risk of calamity is constant. There is zero percent chance that 2012 will result in a recovery and return to normalcy. Not one of the issues that caused our economic collapse has been solved. The “solutions” implemented since 2008 have exacerbated the problems of debt, civic decay and global disorder. The choices we make as a nation in 2012 will determine the future course of this Fourth Turning. If we fail in our duty, this Fourth Turning could go catastrophically wrong. I pray we choose wisely. Have a great 2012.
Whether it is strong-USD-based forward revenue reductions for US corporations, rear-view mirror-based fuel-cost implicit tax-cuts, or unsustainable savings rate reductions, the recent US data has created a plethora of 'this time is different' decoupling theorists. We discussed David Rosenberg's perspective on this unsustainability last week and now his old employer (Bank of America) is notably out with a rather negative note on the chances of this 'local' European problem becoming a global issue and impacting US growth through both trade and financial linkages. In their view, we will see a steady deceleration in growth this year while the consensus sees a pick up and by the spring these negative revisions (from sell-side economists) will weigh heavily on stock markets and support bonds. They sum it up succinctly: 'Enjoy the recent price action while it lasts.'
After a weekend of dreary headlines, downbeat newspaper articles, and perhaps more realism that the euro-zone's 17-nation glory-fest just won't make it, EURUSD has opened under 1.27. EURJPY is also holding well under 98, printing at 97.38 earlier - its lowest since mid December 2000. It appears that EUR is increasingly replacing JPY as the carry currency of choice.
Russia, Iran Proceed With Bilateral Trade, Drop Dollar; Russian Warships Park In Syria; Iran Accelerates Nuclear EnrichmentSubmitted by Tyler Durden on 01/08/2012 - 16:37
For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says." And ironically, the proposal to dump the greenback did not come from Iran. Per Bloomberg: "Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow. The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said." Is Iran gradually becoming the poster child of an energy rich country that just says no to the dollar: "Iran has replaced the dollar in its oil trade with India, China and Japan, Fars reported." Next thing you know China, Russia and Japan will engage in bilateral trade agreements with the Eurozone in exchange for purchasing European or EFSF (which at last check are now forced to give 30% guaranatees) bonds, and bypassing dollars completely. But yes, aside from everyone else, virtually everyone (footnote 1) is still using the dollar as currency of global exchange.
If you ever happen to acquire an inclination for being the subject of disrepute and ridicule I highly recommend endorsing the conceit alluded to in the title. Apparently this issue is ‘so obvious’ that even gold bugs and government officials can reach common ground via the contention that I’m deluded. My folly — if you will — is to maintain that dollar debasement can be bullish for the dollar vis-à-vis other currencies at present. Since this long-standing conviction of ours is once again being corroborated by price action in the currency markets I thought I’d attempt to convince you that I’m not completely crazy. Here I outline why dollar debasement is bullish for the dollar against other fiat currencies in this environment.
The meeting between Merkel and Sarkozy on Monday is likely to be the main focus of next week, as well as continued debate of the Greek PSI. Overall, this process is likely to push the EUR lower in the next couple of weeks, while the missing details for better fiscal policy coordination are getting negotiated. On the macro side, IP in Germany will have slowed by 0.2% mom in November and consensus expects the aggregate Euro-zone IP to have contracted by the same amount. But we also get November IP in many other places, including the UK and India. Already released over the weekend, Chinese money supply data has been stronger than expected and the amount of new loans issues in December is clear evidence of policy easing.