Archive - Sep 2012

You've seen Spanish youth unemployment rates soaring; been brow-beaten with data on the dramatic rise and acceleration of Spanish bank non-performing loans; and the rate of Spanish capital outflows chart is now ubiquitous; but where there is pain, there is also pleasure. As we are always looking on the bright-side and trying to find a silver-lining, Michael Cembalest provides just such a chart. To wit, the unprecedented surge in corporate bankruptcies in Spain; without question, a boon for the bankruptcy-lawyer industry and perhaps just the economic boost the country needs. Tongue-out-of-cheek, this is just a disastrous chart of reality on the ground.

Breaking news from now from France 24, which follows the massive7.9 Costa Rica earthquake moments ago.

• BREAKING FRANCE: FIRE BREAKS OUT AT FESSENHEIM NUCLEAR PLAN, INJURIES REPORTED

Fessenheim is France's oldest nuclear power plant located in the Alsace region.

In the words of Sesame Street, one of these spending components of the long-run budget plan is not like the others; one of these entitlements is not the same; can you spot which one? As BofAML notes, "no long-run budget plan would likely be effective if this rapidly growing program is not significantly constrained. This cost reflects growth in the economy, an aging population and an 'excess' growth factor that includes both medical advances and presumably inefficiencies."

Whether it is "buying-the-rumor" to "sell tomorrow's news" or some contagion from domestic bank-to-sovereign credit arbitrage, European credit markets are giddy with the Draghi rumors. European sovereigns are better but are leaking back a little now - with 2Y limping higher in yield. European stocks seem thoroughly unimpressed for now broadly-speaking (despite EUR strength helping drag US equities higher?) The world, it seems, has no idea what is going on once again... and then Merkel adds this:

• *MERKEL TELLS LAWMAKERS SHE OPPOSES UNLIMITED ECB BOND PURCHASES
• *MERKEL CAN ACCEPT TEMPORARY ECB BOND BUYING, BARTHLE SAYS
• *MERKEL CAN ACCEPT ECB BOND BUYING OF SHORT MATURITIES: BARTHLE

Which sends EURUSD into spasm...

Just a few hours before someone (cough Draghi cough) leaked the details of the sterilized - though unlimited, peripheral spread-reducing - though not capped or fundamentally-based, SMP 2.0, Goldman Sachs released their 'view' of what Super-Mario will do. Rather unsurprisingly, almost verbatim, the rumors fit that 'guess' rather well as the chaps at Goldman fully expected demanded this 'compromise' solution. They also expect no rate cut - since economic data is not a broadly dismal and falling as it was - but do expect further non-standard measures including collateral-easing (which has been pre-announced to some extent in the 'credit-easing' camp).

It appears China's growth trajectory just dead-cat-bounced and is now resuming its downward trend. With Industrial Production at its lowest since March 2009 (though we are sure we will be told - "yeah, but it's still growing at 9.2% YoY"); perhaps it is better to look at this chart with no 'government-sponsored' y-axis since the bottom line is - it's bad and getting worse (and the PBoC remains 'stuck').

The first responses by the Wall Street sellside brigade to the ECB's "unlimited" yet somehow "sterilized", no longer rate capping thus unsterilized plan emerge and they are, in a word and as expected, unimpressed.

Saving the World somehow seems like an extreme sport. It is talked about by many but practiced by few. The newest attempt has been claimed by Mario Draghi but it may be one of those Lance Armstrong kind of things where the steroids of the moment pushed the claimer past his boundaries. The markets, the equity markets in particular, have been betting for weeks that the world was going to be saved and have been waiting for the evidence of the transformation as I have stood on the sidelines and shook my head. I have seen the prophets before; the world is going straight to Heaven, the world is going straight to Hell and yet somehow we always find ourselves stuck in Perdition where mankind vacillates between the two. In Mario Draghi’s case, you see, he needs the parishioners to go along with the scheme and while everyone may share the same Bible the interpretation is not the same.

Gold prices languished from 1980 to 2000 and had declining correlations with debt levels because GDP growth was sufficient to mute fears about budget and deficit issues. The current economic recovery has been too weak to support a sustained rise in real rates above the 2% level that has acted an inflection point for gold prices. With energy and food inflation deepening and soon to affect consumer price indices, interest rates may have to rise significantly in order to restore real interest rates above 2%.  This is with ex Federal Reserve Chairman Volcker did in the late 1970’s - when he increased interest rates to above 15% in order to protect the dollar and aggressively tackle inflation. It is unlikely that similar ‘hawkish’ monetary policy would be implemented by the Bernanke Fed today. It is unlikely that they would and even doubtful if they could – given the appalling fiscal situation and levels of debt in the US and global economy.  A continuing succession of higher real gold prices above the inflation adjusted high, or real record high, of $2,500/oz is likely until we see interest return to more normal levels and zero percent interest policies are supplanted by positive real interest rates.

As we described in detail yesterday, things are going from worse to worserer as the problems in Spain - more specifically in its banking sector - are deepening as deposit flight accelerates, and "the private sector is leaving the banking system." But the Bank of Spain isn't leaving anything to chance. The WSJ disconcertingly highlights that last month the central bank appears for the first time to have activated an emergency lending program that will enable its banks to borrow from the Bank of Spain directly, bypassing the ECB's relatively tough collateral demands. That would make Spain at least the fourth euro-zone country - following Greece, Ireland and Portugal - to use the ELA, which generally is reserved for situations when banks have exhausted all other financing options. As we pointed out yesterday, this would appear to confirm a "full-blown bailout" is imminent, as the collateral problems mount.

In what can only be interpreted as a huge disappointment for the ECB and Draghi yielding to German demands, Bloomberg has leaked what likely will be the final plan of the ECB tomorrow, which contrary to previously rumors stating that the ECB will pursue yield caps, or even just buy bonds on an unsterilized basis, appears to be a huge dud:

• ECB BOND PLAN SAID TO REFRAIN FROM SETTING PUBLIC YIELD CAPS
• DRAGHI'S BOND PLAN SAID TO PLEDGE UNLIMITED, STERILIZED BUYING
• ECB PLAN SAID TO FOCUS ON GOVT BONDS, MATURITIES UP TO 3 YEARS
• ECB SAID TO CONSIDER SELLING BONDS IF CONDITIONS NOT MET
• ECB PLAN SAID TO STRESS CONDITIONALITY OF ANY BOND PURCHASES
• ECB BOND PLAN SAID TO HAVE BROAD COUNCIL SUPPORT - but not unanimous, as Germany again objects

The keyword above is highlighted: sterilized, which simply means for those who are unaware, such as all the algos taking the EURUSD higher, that the ECB's entire overhyped plan is nothing more than a continuation of the Securities Market Program, or the SMP, which has been dormant for over 25 weeks, and which was deactivated because it did not work! Because sterilized means no new money enters the system, something which for Europe is unacceptable considering Spain alone is now seeing $100 billion in outflows each month.

Having operatied for years under ZIRP, and with the NIRP neutron bomb just around the corner, and already implemented in various European countries, one question remains: can banks be banks, i.e., can they make money, in a world in which borrowing short and lending long, no longer works, courtesy of ubiquitous and pervasive central planning which is now engaged solely and almost exclusively (the other central bank ventures being of course to keep FX rates and equities within an acceptable range) on the shape of the yield curve. Since 2009 our answer has been a resounding no. Today, Bill Gross speaks up as well, and his answer is even more distrubing: "If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction. That he is right we have no doubt. The only question: how soon until he is proven right.

• The bankers are coming: Banker Plan Would Fund Super-PACs to Sway U.S. Senate Elections (Bloomberg)
• Risk Increases of Prolonged World Slowdown, BOJ’s Miyao Says (Bloomberg)
• Spain Seeks to Stem Its Banking Crisis (WSJ)
• Deadly shooting mars new Quebec premier's victory rally (NBC)
• Democrats Keep Tax-Raising Focus On Top 2% Of Households (Bloomberg)
• Merkel Swings Into 2013 Election Mode Evoking Crisis, China (Bloomberg)
• Europe’s money market funds future in focus (FT)
• Pressure Mounts on ECB to Bring Down Bond Yields (Reuters)
• Swiss bank vows to hold franc down (FT)
• Australia economy still solid in Q2 despite GDP miss, but threats mount (Reuters)
• Clinton Brings to Beijing Plea for Maritime Solution (Bloomberg)
• The End of a 1,400-Year-Old Business (BusinessWeek)

With one day to go until the European soap opera hits its peak, and with the ECB doing all it can to spread disinformation and sow discord and disunity between Germany and everyone else on both the ECB governing council and everywhere else, Germany has decided to again make it clear just where it stands on the topic of hyperinflation and other printing matters. The punchline:

• ECB'S DRAGHI DOESN'T HAVE 'TOO MUCH' SUPPORT FROM MERKEL, MERKEL BACKS WEIDMANN
  
• ECB CAN ONLY BUY BONDS ATTACHED TO CONDITIONALITY

But wait, there is much more. Readers may recall that yesterday that one of the articles we pointed out came from Dutch Dagblad which suggested that it was Weidmann who was isolated on the ECB governing council, and that the Dutch member of the ECB council Klass Knot as well as all other members was "for buying government bonds of Southern European countries." Well, prepare to be shocked, because what kind of soap opera would it be if it wasn't for unexpected narrative plot lines. Today, Frankfurt-based Market News reported precisely the opposite, and not only is Knot on the same side as the Germans, but so are virtually all the other "virtuous" European countries, aka the non-beggars.

After opening on a very weak note, it was only expected that following some even weaker economic news overnight which continue to confirm the global turn into a sharp recession, futures are doing all they can to remain unchanged, and in some cases are even green as the traditional Pavlovian reaction kicks in: the worse the news, the likelier the intervention. Of course, the market's dogs are ignoring the fact that right now both gas (never higher on this US day in history) and food prices are surging and the central planners are quite aware of this, not to mention the US presidential election, although at this point nobody really believes that the Fed is impartial so that is a secondary consideration, even as actual fundamentals continue to deteriorate and the spread between cash-flow implied valuations and central bank set risk prices has never been wider. Which brings us to the overnight session, which is slowly picking up in activity but is nothing compared to what will be unleashed tomorrow early in the morning and continuing likely through the end of the year.