Archive - Jun 21, 2012

The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.

... The Eurogroup, which according to various newswires has informally decided to use the EFSF for Spanish financial sector bailout, likely to be transferred to the ESM later according to sources.

It seems that now they are not even trying. Like yesterday when the market idiotically ramped when Merkel said that the ESM and EFSF can do... what they are designed to do, namely buy bonds, so today, we "discover" that because the ESM is actually non-existent, and will be delayed as reported earlier due to German bickering, Europe will be stuck with the far smaller EFSF, which by the way has about €200 billion in dry powder left.

If you aren’t part of the solution, which is real relief for victims of fraud, fraud, fraud, fraud, then you are part of the problem.

The 'real' results from Oliver Wyman's stress tests are out, via Bloomberg, and there are some skeptical conclusions at best. The expected loss for Spanish banks under the adverse stress test scenario is €253-274 billion (and EUR 173-194 billion under the base-case). The announced capital deficit under the stress scenario of €51-62 billion assumes some rather interesting items: The expected loss is offset by €98 billion of exiting provisions (which will have to be offset by something and if deposit outflows continue, instead of reverse, then this merely accelerates the under-capitalization); and New profit generation of €64-68 billion seems remarkable for a banking system which is inextricably tied to its sovereign and entirely bust itself

It seems clear that adjusting these for any sense of reality means the real loss (or capital deficit) will be well north of the EUR 100 billion assigned to the country. We only wonder if Oliver Wyman was paid, as they should be, in stock of Spanish bank STD, vesting over the next 3 years.

Brian Sack, whom we have all grown to love and loathe, and whose mysterious Citadel trade tickets seemingly out of nowhere have prevented financial meltdowns on more than one occasion, may be leaving us next Friday, but that does not mean the Plunge Protection Team will remain headless. Meet Brian's replacement: Simon Potter, who before joining the NY Fed was... assistant professor of economics at UCLA, Johns Hopkins University, New York University and Princeton University and who " has written extensively on nonlinear dynamics over the business cycles. Recent topics have included forecasting the probability of recession, large panel forecasting models, modeling structural change and inflation expectations." So now we have a Keynesian economics professor with an expertise in "modeling inflation expectations" in charge of the S&P. Swell.

Am hearing the Moody's downgrades of UK banks likely to be at 6.30 our time, with US banks downgraded later tonight

— Robert Peston (@Peston) June 21, 2012

UPDATE: Channel Breached on heavy volume

Having lost its post-Spanish-bailout open high and Pre-Greek-Election closing high, S&P 500 e-mini futures look set to lose the QE-Hope-driven upward-sloping channel...

While Citi's Willem Buiter believes that the new coalition in Greece removes the very short-term risk of GRexit, as he notes in an Op-Ed in the FT today that "minimum demands for relaxation of fiscal austerity by the new government will not exceed the maximum fiscal austerity concessions Germany is willing to make", he does think the TROIKA "unlikely to tolerate another failure to comply on all fronts by the December assessment" leading to an end-2012 Armageddon a la the Maya. The "willful non-compliance" with the conditionality of the TROIKA program also brings doubt on the willingness of core eurozone nations to "take on significant exposures to Spain and Italy unless it can be established unambiguously that a willfully and persistently non-compliant program beneficiary will be denied further funding". His succinct summation of the "onion-like unpeeling and unraveling" of the Euro's endgame is perfectly described as: "The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supra-national European level" as he sees material risk of "procrastination and policy paralysis".

Months ago, I forecast that Germany will walk before it goes “all in” on the EU to prop up everyone else. I believe that day is fast approaching. Unless Angela Merkel wants to commit political suicide, she will be forced to protect Germany’s domestic issues. Whether this comes as a result of Germany pre-emptively leaving the Euro or doing so after one of the PIIGS has already left remains to be seen. But in the end, Germany WILL WALK IF IT HAS TO.

The primary "news" narrative may be the failure of the euro, but the master narrative is much, much bigger: centralization has failed. The failure of Europe's "ultimate centralization project" is but a symptom of a global failure of centralization. Though many look at China's command-economy as proof that the model of Elite-controlled centralization is a roaring success, let's check in on China's stability and distribution of prosperity in 2021 before declaring centralization an enduring success. The pressure cooker is already hissing and the flame is being turned up every day. What's the key driver of this master narrative? Technology, specifically, the Internet. Gatekeepers and centralized authority are no match for decentralized knowledge and decision-making. Once a people don't need to rely on a centralized authority to tell them what to do, the centralized authority becomes a costly impediment, a tax on the entire society and economy. In a cost-benefit analysis, centralization once paid significant dividends. Now it is a drag that only inhibits growth and progress. The Eurozone is the ultimate attempt to impose an intrinsically inefficient and unproductive centralized authority on disparate economies, and we are witnessing its spectacular implosion. Centralization acts as a positive feedback, i.e. a self-reinforcing loop that leads to a runaway death spiral.

Why hasn't anyone realized that JPM actually had negative revenue growth despite muppet maven analyst proclamations of the contrary?

For our Spanish-speaking viewers, here is the webcast during which the final results of the Oliver Wyman et al consultancy report identifying insolvent Spanish bank capital needs will be presented. This conference is not to be confused with the July 2011 stress test which saw all Spanish banks passing with flying colors. We know very well that the cap at this conference is €100 billion even if the final need will be far higher. The only question is how much of its credibility will Oliver Wyman sacrifice to create a short term bounce in Spanish bonds by undercutting the real number, even as the real bailout needs creep ever higher.

"Unlike other financial instruments, gold doesn't produce interest. But given its symbolic presence and usefulness as a safe haven in times of crisis, the BOK needs to buy more. We may do so this year," he said.

'Risks are all to the downside for Asia' is the view of UBS' global macro team. It appears the markets are pinning their optimism on growth and earnings over the next year on three hopes: that the US will not fall off its 'fiscal cliff'; that Europe will 'muddle through'; and that China will pull Asia out of the current morass. Duncan Wooldridge takes on each of these 'hopes' noting that he expects Asian exporters to be far more likely to pull back on investment and take a wait and see attitude than simply ride into the breach.