Archive - Aug 13, 2012

Italy just announced its all-time record high general government debt load at EUR 1.973 trillion. What is perhaps most stunning, given all the talk of austerity, cutting back, reforms, and change is that the size of this debt is growing at an ever-increasing pace that is simply stunning. Pre-Euro (1999), Italy's debt was growing at a rate of just less than EUR 2 billion per month; in the eight years from then until the crisis in 2008, Italy's pace of debt growth (fostered we are sure by the convergent cheapness of funding and their immutable belief in invincibility) almost perfectly doubled to EUR 3.8bn per month. Since 2008, and the onset of excess Keynesian ridicule we assume, Italy's debt load has grown at a stunning pace of EUR 6.4 billion per month and perhaps most incredible; however, the last nine-months (since the peak 'peak' of the crisis in September of last year) has seen the pace of debt-load growth surge to EUR 9.5 billion per month. Sustainable levels of exponential debt growth - sure!

We think as a matter of political reality, given the German polls, that Berlin will refuse to adequately fund Greece and that they will be forced back to the Drachma as a matter of Ms. Merkel’s desire for re-election. The honest truth is that the Greek debts have become so large and so impossible to pay that unless there is absolute debt forgiveness, which we think is politically impossible in Germany and a number of other European countries; the country must roll over as a matter of fiscal reality. In March, the last figures that are available, the Spanish banks lost $66 billion of capital as the citizens of Spain moved their money to safer havens. What the LTRO gave, the populace took away and the situation is unsustainable. Spain will soon be forced into a full-fledged bailout in my opinion which will require money for the regions and for the banks. What amazes us the most is that so many people have the honest opinion that Sir Draghi is going to come charging out from the round table, from the gilded gates of the ECB and save Europe. That White Knight is subject to the whims of Germany and the rest and all of the talk of independence and the separation of Church and State is just that; talk.

European equities are trading flat to minor positive territory at the North American crossover having pared losses made following the weaker than expected Japanese Q2 preliminary GDP and reports from Chinese press that China's RRR cut might have been postponed as the People's Bank of China's reverse repo activity still satisfies liquidity needs. Elsewhere, Bank of America cut China's growth forecast from 7.7% to 8.0% for the year, commenting that the country's ability for monetary easing was constrained by house prices. Volumes have been particularly thin, however, and as there is no economic data scheduled for release from the US, it is likely to stay that way. Greek Q2 advanced GDP surprised markets, contracting at a slower pace year-over-year than Q1 and than was expected, boosting risk appetite across the board. As such, Spanish and Italian spreads are seen tighter by 12.6bps and 9.1bps respectively, with the Spanish 10-year yield holding below the key 7% and the Italian's under 6% despite the Italian government debt coming in at a record high of EUR 1972.9bln.

Two years ago, in August of 2010, Ben Bernanke pre-announced QE2 at the annual Jackson Hole economic policy symposium. What followed was a 20% spike in the stock market as the impact of another liquidity deluge was digested by the market, leading to such luminaries as Tepper to make his first ever TV appearance telling everyone he was "balls to the wall" long. The QE effect came and went, and Tepper made money, and then lost it, as QE2 was followed by Twist, and then by more easing out of Europe, including a global coordinated intervention. This year, as the US and global economies have been floundering, the Fed has so far disappointed, and despite a "mere" continuation of Twist, has so far refused to implement the same bazooka measure that it did 2 years ago, no doubt well aware that doing so would merely confirm that every successive intervention has less of an impact, and last about half as long as each previous one (as we demonstrated over the weekend). The market, however, like the honey badger, does not care: and with stocks trading just shy of 2012 highs, and with Crude having soared by 20% since July, and with Brent at 3 month highs, is very much convinced that the imminent Jackson Hole symposium of 2012 will be a repeat of 2010, and Bernanke will announce something (and if not, there is always September, and if the disappoints then there is October, and December - in a world addicted to Fed liquidity the only thing that matters is when is the next fix). So what happened in the last run up to the 2010 Jackson Hole meeting? Here is a visual and factual summary.

After declining to an overnight session low of 1.2260 following very disappointing Japanese GDP news, which saw another Q/Q drop in nominal terms and missed every economist expectation, the market leading indicator - the highly leveraged EURUSD pair which is a proxy for risk when it is rising, and ignored when dropping (because the ECB will lower rates, or so thinking goes) was boosted higher starting at 5 am eastern time. What happened then? Greek Q2 GDP was announced, and instead of declining from -6.5% to -7.0% annualized, the number declined at "only" a 6.2% annualized run rate. Apparently that was the only catalyst needed to launch today's risk on phase, sending the EURUSD 70 pips higher, and futures back to green. So to summarize: the world's 3rd largest economy grew far less than expected despite 30 years of central planning, while Europe's worst economy imploded by just that much less than the worst case expected, and this is "good enough." What's worse is that this may well be the high point of the day as there is nothing else left on the docket.

• Oil hits 3-month high above $114 on supply concern (Reuters)
• G20 plans response to rising food prices (FT)
• First centrally planned FX, now real estate - SNB Seen Targeting Bank Capital to Curb Property Boom (Bloomberg)
• EU hedge funds face pay threat (FT)
• Euro-Area Crisis Has ‘No Obvious End in Sight,’ BOE’s King Says (Bloomberg)
• King urged to widen recovery measures (FT)
• All threats "dwarfed" by Iran nuclear work: Israel PM (Reuters)
• Obama campaign attacks Romney’s pick (FT)
• Romney, Ryan hit the road in an energized campaign (Reuters)
• Yellen Must Show How 12 Fed Opinions Become One Policy (Bloomberg)

Last week was a scratch in terms of events, if not in terms of multiple expansion, as 2012 forward EPS continued contraction even as the market continued rising and is on the verge of taking out 2012 highs - surely an immediate catalyst for the New QE it is pricing in. This week promises to be just as boring with few events on the global docket as Europe continues to bask in mid-August vacation, and prepare for the September event crunch. Via DB, In Europe, apart from GDP tomorrow we will also get inflation data from the UK, Spain and France as well as the German ZEW survey. Greece will also auction EU3.125bn in 12-week T-bills to help repay a EU3.2bn bond due 20 August held by the ECB. Elsewhere will get Spanish trade balance and euroland inflation data on Thursday, German PPI and the Euroland trade balance on Friday. In the US we will get PPI, retail sales and business inventories tomorrow. On Wednesday we get US CPI, industrial production, NY Fed manufacturing, and the NAHB  housing index. Building permits/Housing starts and Philly Fed survey are the highlights for Thursday before the preliminary UofM consumer sentiment survey on Friday.

After many instances of prodding from readers, I finally bought and read The Fourth Turning, and I'm sorry that I waited so long.