As everyone is staring off into the distance and admiring the sunset we advise you to turn your head towards what may be truly important and that is our old friend Greece.
Greek political leader, "We agreed on one thing - that we disagree on everything. The Troika men came to Greece as doctors and prescribed the medicine that would save the Greek economy and people; but in the end they proved to be charlatans."
Uncle Scrooge. “Them that’s got the gold makes the rules”
We submit that Draghi can say what he likes. He may wave the flag in front of the gates of Hell filled with good intentions but it is not his call; will never be his call. It will always be the Bundesbank who will allow the monetary spigot to be opened or demand that it be closed.
To some, Paul’s stubborn persistence in the campaign has been just that: a stubborn unwillingness to lie down and die despite evidence of sure defeat. But what they have missed is a common misperception of a subtle yet powerful age-old strategy at play - the archetypal shi (pronounced “sure”) strategy expounded and employed by Chinese philosophers and military strategists for thousands of years. More than anything else, we can see Paul’s greatest shi advantage in his outsized support among the young. In this society of immediate gratification and winning right now at all cost we need to ask ourselves: why should future elections and platforms matter so much less than the current ones? There are powerful cognitive biases at work - among them the temporal myopia of hyperbolic discounting, or excessively undervaluing the future, while focusing on the nearer term - which make fuzzy in our minds the importance of victories in the years ahead (a view that is promulgated by the media). The ultimate war is against intrusive, burgeoning government, in the ongoing insurgencies of the battles yet to come—Ron Paul’s grand shi strategy.
It would be odd to suggest that one of the most scathing critiques of the ECB's attempts to talk up the market on nothing but hope, promises and expectations would come from rating agency Moody's, yet that is precisely what has happened. With Swiss, Dutch, Finnish, and German short-dated bonds once again hitting new record low (negative) rates (and Italian 10Y is weakening), it would appear that at least some of the market is not drinking the all-things-risk kool-aid.
Anyone hoping that the bitter animosity between Mario Draghi and Germany will be any less hostile this morning, following last week's guarantee by Draghi that all shall be well and the ECB will do "anything" to preserve the EUR, only to be followed by Germany's Schauble essentially saying this is certainly not the case, today we get a clarificationary follow up by Joerg-Uwe Hahn, a member of Merkel's junior coalition partner, FDP, who said that the German government should consider the "unusual step" of taking legal action against the European Central Bank over bond purchases. While Hahn's comments are for now seen fringe, the fact that Die Welt has openly broached the topic to an increasingly angrier population (and Spain's remarks that Germany itself has to be grateful for being bailed out after WWII will not help) will likely only strengthen the resolve of Germany to not relent to provocations by either Monti, as of the June 29 summit, but to demands from both Draghi and Juncker to accept that the ECB's printing utopia is in fact reality.
Swiss FX reserves went up by 50% in Q2, about CHF127bn and are now close to 65% of Swiss GDP, a very large number. The assumption is that in the first instance almost all of the initial purchases were of EUR (to support the 1.20 peg). The question is how may of these euros were they able to get out of to limit the SNB’s exposure. As Citi's Steven Englander notes, the extent of diversification matters for EUR, CHF, GBP and small G10 currencies. The risk is that the SNB has been unable to diversify out of the euros they bought in Q2. If the EUR share runs above 55% or worse 60%, it would mean that the SNB has had to hang on to a large chunk of their euros. Investors will see greater risk of ultimate capital loss if the peg should break and greater risk of desperation selling of EUR down the road. We get the answer when the SNB publishes its first half results on July 31.
July 27, 2011: "Speculating on Greece defaulting is a certain way of losing out. Such a speculation would be a sure-fire way of losing money given the decisions taken last Thursday" Here is what happened next to Greek bond yields (and inversely, Greek bond prices).
Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS. Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move. Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September
We doubt Mariano Rajoy had contagious diseases in mind when a month ago he told his economy minister that Spain is not the grief stricken African country, but today Spain certainly is lucky not to be Uganda, where a freak outbreak of Ebola, which has already claimed 14 lives, has spread to the capital. From BBC: "Uganda's President Yoweri Museveni has called on people to avoid physical contact, after the deadly Ebola virus spread to the capital, Kampala. Fourteen people have died, including one in Kampala, since the outbreak began in western Uganda three weeks ago, he said in a special broadcast. Ebola is one of the most virulent diseases in the world."
Goldman's ex-employee Mario Draghi is in a box: he knows he has to do something, but he also knows his options are very limited politically and financially. Yet he has no choice but to escalate and must surprise markets with a forceful intervention as per his words last week or else. What does that leave him? Well, according to Goldman's Huw Pill, nothing short of pulling a BOJ and announcing on Thursday that he will proceed with monetization of private assets, an event which so far only the Bank of Japan has publicly engaged in, and one which will confirm the world's relentless Japanization. From Pill: "Given the (to us) surprisingly bold tone of Mr. Draghi’s comments last week, we nevertheless think a new initiative may well be in the offing. We have argued in the past that the next step in the escalation of the ECB response would be outright purchases of private assets. Acting in this direction on Thursday would represent a significant event. We forecast the announcement of measures to permit NCBs to purchase private-sector assets under their own risk to implement ‘credit easing’, within a general framework approved by the Governing Council. This would allow purchases of unsecured bank debt and corporate debt, enabling NCBs to ease private-sector financial conditions where such support is most needed." Why would the ECB do this: "A natural objection to outright purchases of assets issued by the private sector is that they involve the assumption of too much credit risk by the ECB. But substantial risk is already assumed via credit operations." In other words, the only thing better than a little global central banker put is a whole lot global central banker put, and when every central planner is now all in, there is no longer any downside to putting in even more taxpayer risk on the table. Or so the thinking goes.
- Schäuble View on Eurozone at Odds With US (FT)
- Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
- German Banks Cut Back Periphery Lending (FT)
- Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
- Bond Trading Loses Some Swagger Amid Upheaval (NYT)
- As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
- Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
- Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
- Chinese Investment in US 'set for record year' (China Daily)
There are only three words that send a chill down the spine of Ben Bernanke - Ron, Paul, and Deflation. His life's work is devoted to the avoidance-at-all-costs of the latter (and probably the former in reality). As we discussed here two weeks ago, his actions in extreme monetary policy have all occurred at periods when the market's expectations of future rapid de- or dis-inflation have increased rapidly. As we noted then: without inflation break-evens dropping, the Bernanke put will not arrive; but the market in its infinitely efficient wisdom has created a self-defeating spiral of BTFD reflexive front-running on any rapid spike down in future inflation expectations - which implicitly sparks a non-dis-inflationary reaction and removes Bernanke's punchbowl for another day. This has occurred 4 times this year - with this week's early plunge being caught by Draghi and Hilsenrath - and with inflation break-evens almost at their highest in 10 months, it would appear the 'desperate-not-to-miss-the-life-giving-rally' market just removed its own blood supply.
The secular bear market that the US has been caught in for a better part of the last decade will end. Eventually. The only question is when. Last week we reported that the bulk of market gains year to date, has been driven exclusively by PE multiple expansion, which is to be expected: EPS forecasts for the end of 2012 are now the lowest they have been since the beginning of the year. Yet while such sharp, sudden and short and bear-market rallies, exclusively on the back of the global central banks, are to be expected, the bigger question is how much more of a secular decline in PE multiples is to be expected before the bear market ends and a new bull market can begin. As the following chart from Crestmont Research shows there is quite a bit more to go, even with Fed assistance (or rather, because of it, and its forced rejection of reaching a fair clearing price sooner rather than later), before the bear market is officially over. Just over 50% more. To the downside.