Archive - Nov 13, 2011

US data is turning up while European political hurdles are being cleared and Chinese inflation is cooling. But will the resilience of the US consumer be sustained with the current drop in income and savings? Will Europe experience any sustainable solution without the ECB engaging in explicit sovereign bond yield targeting/unsterilized QE? And will China be able to rebalance its economy away from exports and fixed asset investment toward consumption without a sharp drop in its GDP growth rate?

UPDATE: EFSF is denying it bought its own bonds. We suspect semantics as the denial is very specifically worded and EIB or ECB involvement is possible and frankly just as incredible. Perhaps the ECB really is the lender of ONLY resort.

We earlier discussed the desperate actions that occurred surrounding the EFSF self-aggrandizement this week and Peter Tchir, of TF Market Advisors, notes that the whole situation was bizarre and is becoming more and more Enronesque every day. But the lack of demand for EFSF debt is simply, as we have repeatedly pointed out, a factor of their own design and a symptom of the actions that a bloated lobbying IIF and the feckless politicians have taken. One of the obvious consequences of the EU and IIF decision to pursue this restructuring is they cannot fully rely on CDS, and markets will treat net exposure numbers with skepticism.

So banks will sell bonds/loans and unwind their CDS positions and manage their exposure the old fashioned way, by adding or reducing to their bond/loan position. That impact seemed obvious to everyone other than the EU and IIF. So the pseudo-private money (EU banks, EU pension funds, and EU insurance companies) are reluctant to buy EFSF bonds because they already have too much sovereign exposure, and the EU is likely to force "voluntary" changes on EFSF debt before it would on actual outright sovereign debt.  Real private money is confused by the structure. Who does that leave?  Only sovereign wealth funds and other supra-national entities.

EFSF is the bond only a mother could love.

The combination of Mr. Obama’s continued denigration of America’s historic role, the Washington domestic economic policy tangle, the increasingly aggressive Chinese menace, all challenge the Obama Administration’s modeling a new American Pacific presence.

The European Union next week unveils its third broadside against credit rating agencies since the financial crisis began, and this time the Big Three face a direct hit where it hurts.

Thursday's mistaken downgrade by Standard & Poor's of France's sovereign debt won't help a sector seen by policymakers as an "oligopoly" that fomented and exacerbated market turmoil globally and more recently in the euro zone.

The 'tragedy of the commons' or 'free-rider' dilemma of game theoretical cocktail parties is a great framework for considering the current tug-of-war between individual sovereign fiscal actions among the European Union and the over-arching monetary policy of the ECB. If the ECB is dovish and too many states decide to suckle on the teat of liquidity - as opposed to fiscally 'behave' - then everyone loses (as we see currently evolving). The lack of any Nash (stable and dominant) equilibrium among the European nations and their hoped-for benefactor is becoming increasingly problematic for both trading and business investment.

Nomura's Global Macro Strategy group tackle the problem that is now abundantly clear, the euro area as currently constructed is not stable and so it will have to change (hence, the Euro is dead!). The direction of travel is being set out by northern European politicians and is worth noting – more Union not less. But two points are critical to note; first that the new euro area may be so different from the one the current members signed up to as to make a process of voluntary re-application for euro stage II necessary to determine future membership, and second that any new variable geometry euro will take a long period of time to set up. How then to cover the intervening period?

Without credible pre-commitment on the part of either the ECB or the fiscal authorities, the game framework indicates either a loss of independence for the ECB under substantial political pressure to shift unilaterally to the dove camp or EFSF/IMF assistance and the pooling of fiscal risks against the backdrop of a political agenda for a new euro area.