Archive - Aug 29, 2011

Earlier today we speculated that the latest ECB monetization tally of insolvent PIIGS debt would be between €10 and €15 billion. Well, the final number was below the bottom end of the range or €6.7 billion (with €1.3 billion maturing). This follows €22 billion and €14.3 billion in the past two weeks, bringing the total under the ECB's debt monetization facility to €120.3 billion, a number that Germany must be simply ecstatic about. Keep in mind this is debt that local banks can not pledge to the ECB in return for 100 cents on the euro, and in essence removes liquidity from the system. What was hilarious, however, is the immediate defensive posture by the ECB's Trichet who said on the subject of whether ECB taking on too much risk, that the increase in ECB's balance sheet not as large as Fed or BoE. He also said that "Everybody understands that particularly in the present situation that the ECB would maintain a solid anchoring of inflation expectations,” Trichet told the European Parliament’s economic committee during a special session called to discuss the debt crisis. "All countries would be hampered” if they became unanchored, Trichet added. Bottom line - the most modern spin on an old maxim: "the ECB is not the Fed" - we are not sure if that is a good or a bad thing: frankly it is all central planning. What we are concerned about is that contrary to what self-aggrandizing economist PhD's, somehow the ECB did not refute the fact that there is central bank risk. Yes, even with all that fiat printing capacity.

July personal income and expenditures were quite surprising in that while many were expecting the drop in the market to force consumer saving to upshift (lower spending than income), not only was this not true, but expenditures spiked by 1 whole percent from -0.2% to 0.8%, on expectations of 0.5%, even as Personal Income came in line with expectations of 0.3%, up from a revised 0.2% (concurrent with extensive prior data revisions). This was the biggest difference between a monthly change in income and spending since October 209. The net result was a plunge in the savings rate from 5.5% to 5.0%. And while on the surface this would be good news, as in Americans are spending again, a quick look at the PCE components indicates that virtually the entire surge is due to a spike in Energy goods and services. In other words, the entire spike in spending was to... pay for gas and associated energy expenses. Which makes sense: in June this was a drop of -4.5%, it is only logical that the subsequent jump in Brent and WTI forced American savings to drop. All in all: in July Americans continued to max out their credit cards to pay for gas. As for the income side, transfer payments as a % of spending refuse to budge: thank you Uncle Sam.

Positive comments from German Chancellor Merkel on her coalition's support towards enhancing the power of the EFSF, together with comments from Moody's that the Spanish proposed fiscal rule is credit positive for the sovereign promoted risk-appetite during the session. European equities traded higher with particular strength seen in financials after European officials dismissed a suggestion by the IMF's chief Lagarde on a mandatory recapitalisation of European banks. Elsewhere, weakness in the USD-Index provided support to EUR/USD, GBP/USD and commodity-linked currencies, however EUR did come under some pressure following lower than expected German states' CPI data. In other forex news, weakness in CHF was observed across the board, however no confirmation of any intervention has surfaced. Meanwhile, according to a document, Finland has proposed the creation of a Luxembourg-based company to hold Greek assets as security for new loans to Greece. The document further said that in case of a Greek default on the EFSF loans, ownership of holding company shares would transfer to the member states.

• Noda Wins Party Election (WSJ)
• Tremonti out? Italy readies austerity changes (Reuters)
• European officials round on Lagarde (FT)
• China to Lock Up More Cash to Tighten Liquidity (Bloomberg)
• Central Bankers Worry Economy Still in Peril (WSJ)
• Italy Tests Appetite for Debt When ECB Is Absent: Euro Credit (Bloomberg)
• As U.S. Households Save, Economy Sputters (WSJ)

Three B-grade economic updates today to serve as an appetizer to the ISM release on Thursday and the NFP data (very likely negative - more shortly) on Friday.

As of minutes ago, the speculation that Greek Alpha Bank and Eurobank are merging, in the process creating the largest Greek bank, and first TBTF candidate, has been confirmed, leading to a 30% jump in the stock prices of both Alpha and Eurobank. Not only that, but as AP reports, "the news triggered a Greek share rally, with the benchmark General Index on the Athens bourse gaining more than nine percent in early trading. On Friday, it had hit its lowest in nearly 15 years due to concerns over the future of the country's latest rescue package. The banking sector was up nearly 20 percent, while shares in National Bank of Greece, the country's largest lender, were up 29 percent." This move, which is nothing more than an attempt to pool deposit bases at these two very troubled institutions and thus prevent a bank run, needed a back stop to be credible: sure enough here comes the Petrodollar patsy: "Qatar Investment Authority (QIA), which is already an Alpha shareholder, is expected to take a bigger stake in the new bank. QIA holds 5% of Alpha and is expected to take 15% of the merged entity." The new bank will be the biggest bank in southeastern Europe, with assets of 146bn euros ($212bn; £129bn) and 1,300 branches. Eurobank shareholders will receive five new Alpha Bank shares for every seven Eurobank shares they own. And what would a bank merger be without ridiculous talk of synergies: The banks estimate that the merger will create about 650 million euros of synergy saving per year. Naturally nobody cares about this, as long as the first stake in the Greek bid for TBTFness proceeds as planned. That this step only delays the inevitable is irrelevant: for now the buying spree must resume. We fully expect the pro forma entity to eventually subsume all other Greek banks before finally it reverse mergers with the hollow ECB shell.

William James saw an increasing tendency to extend the then budding scientific method of controlled experiments in the physical sciences into intractable social and political problems. He warned it would not work, perhaps as much based on his psychological understanding as his philosophical logic, that is, as the old saying goes, people will be people.

When the dust settled on gold’s volatile week, despite much “noise” from uninformed commentators, it showed that gold fell 2.96% on the week. This must be put in context. The previous week alone gold had risen 6.2%. Despite the 3% sell off last week gold remains up 11.6% in dollar terms (and by similar amounts in other currencies) so far in August with just three trading days left in the month. Meanwhile, global stock markets are down by similar amounts in August, with the FTSE down 11.7%, the DAX down 21.6%, the S&P down 8.95% and the MSCI World down 10.95%. Thus, gold has again proven its hedging and safe haven status. The data shows that sentiment in the futures market towards both gold and silver remains muted with very little evidence of participants ‘piling in’ on the long side. Indeed, it shows that the sharp margin increases seen in silver and the margin increase seen in gold last week have had the desired effect of cooling sentiment thereby making the fundamentals in both markets sounder. The COT data in conjunction with very robust physical demand globally and especially in China (see news) means that any correction is likely to be shallow and short prior to the primary trend reasserting itself.

A quick update at the liquidity conditions in Europe comes courtesy of the ECB's posting of data on the Friday Marginal lending facility (aka emergency overnight) as well as the Deposit facility (last recourse cash dump), which paints a mixed picture. Because while the Marginal Lending saw its first zero usage, down from €1 million on Thursday, the lowest since August 5, Deposit Facility usage once again rose from €104 billion to €121.2 billion. The latter is a concern as it means that the only place that European banks would be willing to allocate excess capital, is the safety of the European money printing poliburo. Next up from the ECB we get data on SMP usage, i.e., secondary debt purchases, in the past week: somewhere between €10 and 15 billion, although it could easily be greater.

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