Archive - Dec 5, 2011

While the short answer is "nothing", for those who wish to sound sophisticated in high society or while being interviewed on TV, here is the full breakdown of what to expect from Europe as we head into the latest European "end all, be all....forget all" summit this Friday, as well as the ECB's announcement on Thursday where consensus is for the adoption of dramatic monetary slash and burn practices. In summary from Bank of America: "Overall, because these meetings could fall short of making more concrete steps towards closer integration, they are unlikely to deliver more than a short term rally for markets, in our view, assuming communication is focused on delivering points for integration. Against this backdrop, we are concerned that markets may be somewhat disappointed though expectations may not be very high." Then again, disappointing is the new black, which also happens to be the new Christmas rally.

ISM non-manufacturing index and factory orders.

What is certain? If you take 1350 US dollars today, you may exchange them for 1000 euros.

Even as Italian bonds surged on hopes that the $40 billion Italian austerity plan (putting this to scale, $400 billion in Italian debt has to be refinanced in the next 12 months) proposed by Monti which is supposed to lower the nation's debt load (putting this to scale, Italy has €1.9 trillion in debt), coupled with expectations that this time (we lost track of which one this actually is) the European summit on December 9 will actually achieve something, the liquidity situation, and not just any liquidity but EUR-funded liquidity (the one that the Fed can do nothing to help by lowering the OIS swap rate) deteriorated massively overnight, as European banks deposited a whopping €20 billion in additional cash with the ECB despite the coordinate central bank intervention yesterday. Total deposits are now at €333 billion, just €50 billion short of the all time high hit in June 2010 when Greece failed for the first time and there was no clarity that the Bernanke Put had gone global, implying the need for an eventual Mars bail out. And confirming that the liquidity crunch is now shifting to the local currency, another €7 billion was borrowed from the punitive Marginal Lending Facility. So now what we have is a liquidity crisis that has been confirmed to not be only USD-based but also EUR. Congratulations Fed. Yet since the market is slow in understanding complex things it is surging, as it looks at Italian bonds which as noted earlier are soaring on nothing but hope, it will take a little before this filters to all the right places.

Gold and the dollar are Bank of America Merrill Lynch’s top currency trades for 2012. The second-biggest U.S. bank by assets after JPMorgan Chase & Co. said that investors should buy gold versus the euro as the ECB engages in quantitative easing to contain debt turmoil. David Woo, global head of rates and currencies in New York at the Bank of America Corp. unit, told clients in research note that “the ECB will be buying more government debt and doing QE, so buy gold against the euro.” “The second major theme is U.S. fiscal tightening is about to come and the U.S. economy will slow, and this will be very good for the U.S. dollar.” “The general theme for the year ahead is pretty negative for the risk environment,” Woo said.

• Monti cabinet agrees Italy austerity plans (FT)
• Sarkozy, Merkel kick off week of crisis talks in Paris (Reuters)
• China to prepare for social unrest (FT)
• China to stabilize exports, expand imports amid lackluster global demand (China Daily)
• U.K. banks face higher financing costs (FT)
• Reid Seeks to Break Impasse on Payroll Tax Cuts, Unemployment (BusinessWeek)
• U.K. Economic Growth Forecasts Cut by EEF as Manufacturers See Stagnation (Bloomberg)
• Germans Remain Unflappable During Euro Crisis (Spiegel)
• Wolfgang Munchau: France and Germany look set to fudge it yet again (FT)

All you need to read.

GPD Growth can't be solved by fiscal stimulus

Despite another weekend of hope-driven chatter of a support-the-profligacy, print-til-we-die, mutually assured destruction game of chicken, we remain as far from the fiscal federalism, that we discussed earlier in the week (and the four critical questions that need to be answered) as ever. As we embark on yet another critical week in Europe's (and perhaps the world's future), ING addressed a critical aspect of the conundrum - that of Merkel's (read Germany's) reluctance to step on the gas and save the known universe. While attempting to quantify the price of break-up and the pay-now or pay-later perspective, they describe perfectly the 'Paradox of Merkelism' in that the core countries' attempts to limit their exposure have served only to increase it. They further worry that while a plan for a Grand Bargain may appear, this may rapidly give way to the recognition that the reality is not so grand - the bargain would still have to be delivered.

The new dollar liquidity injection from 6 central banks essentially took the urgency out of a much needed decisive resolution.  More crises similar to the one in the Euro Zone popping up to the point of one Scary Grandioso--No more spare bailout capacity.