Archive - Sep 3, 2012

A very sad state of affairs...

The legitimacy of vulgar acts has been making headlines recently and so this morning's rumors of Mario Draghi's insistence to the European parliament that direct ECB buying three-year sovereign bonds is not 'monetary' state-financing got us thinking - just what is 'legitimate monetization' or perhaps "It's not monetization if..."

“Believe me, it will be enough!” will request some massive outside-the-box thinking…

If one needs a shining example of why the days of Europe's artificial currency are numbered, look no further than the EU's poorest country which moments ago said "Ne Mersi" to the Eurozone and the European currency. From the WSJ: "Bulgaria, the European Union's poorest member state and a rare fiscal bright spot for the bloc, has indefinitely frozen long-held plans to adopt the single currency, marking the latest fiscally prudent country to cool its enthusiasm for the embattled currency. Speaking in interviews in Sofia, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that the decision to shelve plans to join the currency area, a longtime strategic aim of successive governments in the former communist state, came in response to deteriorating economic conditions and rising uncertainty over the prospects of the bloc, alongside a decisive shift of public opinion in Bulgaria, which is entering its third year of an austerity program. "The momentum has shifted in our thinking and among the public…Right now, I don't see any benefits of entering the euro zone, only costs," Mr. Djankov said. "The public rightly wants to know who would we have to bailout when we join? It's too risky for us and it's also not certain what the rules are and what are they likely to be in one year or two."

Between the thinness of European bond markets during the summer doldrums and the hair-trigger momo-monkeys, it would appear that all the hopes and prayers of the Draghi "promise" have been more than priced into the Spanish bond curve already. Of course, short-dated yields could drop further on ECB buying; but where exactly 'should' that risk premia be? Of course, longer-dated yields could compress but does anyone really see a solution here, as opposed to short-term support to get through some debt maturities and avoid a catastrophic contagion? The critical point being - for all the anticipation of Draghi's bond-buying plan and its implicit conditionality, the Spanish yield curve has priced it all in and more - as the 2s10s curve is now at all-time (pre- and post- Euro-era) record steeps. We have seen this pattern before - into and during LTRO - that did not end well; and the crowd is getting larger and doors smaller in this one (and don't forget Corzine won't be your fall-guy this time)...

This is a rally based upon hope and vapors.

Despite a green showing in European equity indices this morning (aside from Spain that is) - as they shrug off the dismal China/Aussie data overnight in the incessant belief that bad is good and worse is better - there is a bid in a number of the major AAA safe-haven assets in Europe. Swiss 2Y rates are dropping notably this morning, German and Danish 2Y rates are stable to dropping, and Dutch and Finnish rates remain extremely low. It seems that between Merkel's comments this morning and the following big three unanswered questions - it's not all risk-on in Europe, and expectations for a squeeze in EURUSD - with net shorts at 2012 lows and USD longs basically neutral - seem exaggerated for now. Summing up on the euro area debt crisis, SocGen notes the issues remain the same; the periphery faces an uphill battle to meet targets that few private forecasters (including ourselves) expect can be reached, the EFSF/ESM is still too small with Spain and Italy combined facing around €800bn of funding needs over the coming three years and while the ECB can be helpful, it alone is not enough.

Last night we reported that the troubles for South Africa's metal mining industry, which accounts for 20% of the nation's GDP, have spread, when in the aftermath of the Lonmin Marikana Platinum mine bloodbath which saw 44 miners shot by police another mine - this time Gold Fields' KDC mine - went dark as the bulk of the firm's miners went on strike. Moments ago AP reported that violence has erupted at a third mine, this time the gold mine owned by the nephew of Nelson Mandela, where 4 workers have been shot. So much for an amicable resolution, or for gold production returning to historical levels.

Tomorrow the Battle of Frankfurt begins. Make no mistake in your thinking as America ends its holiday weekend; it will be a battle and there will be bodies littering the field of engagement. Spain and the rest have aims, plans, schemes if not hopes and ambitions in direct opposition to Germany and her side. The outcomes prayed for are a demand for money and a resistance to those demands.  The pleas of Spain are about to be answered; first from the ECB and then from Germany’s acceptance or rejection of the Draghi plan. The “Game of Muddle” will be ended and real answers to real insistences will be given. It all comes down to this; money and how much of it and under what circumstances and whether the nations with capital are willing to hand it to their neighbors and watch their credit ratings, their own cost of funding, their standards of living decline to a mean for all of Europe.

Ahead of this week's 'critical' game-changing events - or not - it seems Europe's true overlord-ess is back, and now, tanned and relaxed, she is making clear that nothing about her (or her country's) view of the world has changed - no matter how much Draghi, Monti, Hollande, Rajoy or Samaras jawbone about it. It would seem by her words that expectations are being set and conditionality remains key - which means no matter what the ECB does - it is a can-kick no nearer an end-solution; and the market in its wisdom will price through that can-kick (after knee-jerking first of course): (via Bloomberg)

• *MERKEL SAYS `DEBT MEANS DEPENDENCY'
• *MERKEL SAYS EU MUST ENSURE THAT IT FIRST EARNS WHAT IT SPENDS
• *MERKEL SAYS `ECONOMY THERE FOR PEOPLE, NOT PEOPLE FOR ECONOMY'
• *MERKEL SAYS EUROPE HAS TO LEARN TO ONLY SPEND WHAT IT TAKES IN
• *MERKEL SAYS TOO MANY IN EUROPE HAVE LIVED BEYOND THEIR MEANS
• *MERKEL 'ABSOLUTELY CONFIDENCE' ECB TO WORK WITHIN ITS MANDATE

With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.

• Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
• As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
• Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
• Euro zone factories faltering as core crumbles (Reuters)
• Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
• French jobless tops three million, minister says (AFP)
• Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
• US investor is Ireland’s biggest creditor (FT)
• Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
• China's steel traders expose banks' bad debts (Reuters)
• NY probes private equity tax strategy  (FT)

In addition to the daily NEW QE/LSAP/ZIRP On again/Off again rumors, one of the most memorable aspects of a vacation-heavy August was the pervasive weakness in corporate top lines, coupled with a substantial portion of the S&P guiding lower into a very uncertain future. Perhaps this explains why when looking at the best performing asset classes of the past month, it is precisely those 'barbeque relish' vqrietals silver, and gold that shone, despite offering no dividends, and despite having not a single earnings call or forecast revision between them. Or perhaps in spite of.