Archive - Jan 24, 2012 - Story

Earlier today, the IMF tongue-in-cheekly attempted to make a serious case that Europe and the US could, for the first time since the formation of the Eurozone, decouple, with a worst-case scenario seeing European growth dropping 4% below baseline, or roughly -5% in late 2012 merely as an attempt to stoke Europeans to finally agree to fiscal easing, even as America grew contently on its merry way of monetary easing. While any hopes of a European "spriteness" are a guaranteed dead end, as confirmed by the Luxembourg finance minister who told Spiegel that "Merkel's Fiscal Pact a 'Waste of Time and Energy'", the bigger question remains what happens to the US, once i) Europe does not react aggressively to the threat of the biggest recession since 2008, and ii) its GDP does contract by 4% or more. We don't know. What we do know, courtesy of StreetTalk Advisors, is that whereever the US GDP goes, so does the Eurozone. And vice versa. Think the US won't experience a full blown recession if European growth implodes? Think again.

Successive plans to restore confidence in the euro area have failed. Proposals currently on the table also seem likely to fail. The market cost of borrowing is at unsustainable levels for many banks and a significant number of governments that share the euro. In three short sentences, the Peterson Institute for International Economics' (PIIE) Simon Johnson introduces the clear and present danger that Europe has become in a comprehensive article on the deepening European crisis. The circular nature of the realization of sovereign credit risk realities and the subsequent effective insolvency of banks exacerbates a credit crunch and exaggerates problems in the real economy - most specifically in the periphery. Johnson outlines five measures that are needed to enable the euro area to survive but the big bazooka of up to EUR5tn just for the PIIGS is what the PIIE senior fellow fears as the ECB is pushed down a dangerous path. The coordination of 17 disaparate nations leaves the former IMF man greatly concerned as the unique nature of this crisis leaves "four economic, social, and political events as possible causes of systemic collapse with each at risk of occurring in the next weeks, months, or years and these risks will not disappear quickly." As European sovereign bonds are now deeply subordinated claims on recessionary economies, it is no surprise that Johnson ends by noting that Europe's economy remains in a dangerous state.

Even with rigged electronic voting, media manipulation, and political co-option, I feel our efforts this year will resonate for many decades to come.  Whether we are able to take back social power for regular citizens is not as important as making them aware that they have allowed themselves to lose that power in the first place.  The elections of 2012, ultimately, should be treated as a vehicle for enlightenment, and this enlightenment begins when we are able to recognize the lies we live, and the men who sell them to us…

This is neither here nor there, but is, for all intents and purposes, the best take down of the utter and complete hypocrisy that now reigns supreme in the GOP primary process. Thank you Jon Stewart for doing the thinking that so many other Americans seem utterly incapable of any longer.

This is the scariest chart out of the IMF's World Economic Outlook report released today. Naturally it was purely included in there to emphasize the IMF's Mutual Assured Destruction point that Europe has to immediately proceed with fiscal easing (something which Germany will not agree to until it is too late, if then), or else this is what happens. And since this is Europe, and no fiscal resolution will come (but many, many, many summits are in store before the world figures this out), this is precisely the sad reality in store for Europe, and thus for the US and China, as 2012 will be the first year since the Second Great Depression in which official statistics will represent a global economic contraction. As for Europe's 4% decline relative to baseline: good luck.

The latest IMF Global Financial Stability Report is out and it is not pretty. The IMF now sees:

• 2012 world growth outlook cut to 3.3% from 4.0%, 2013 growth revised lower to 3.9% from 4.5%
• 2012 US growth of 1.8%, 2013 at 2.2%
• 2012 UK growth of 0.6%, down from 1.6%
• 2012 China growth of 8.2%, down from 9.0%
• Eurozone to enter "mild" recession, whatever that is, with -0.5% economic growth, to grow again in 2013 by 0.8%. Unclear just how with all the deleveraging...

IMF also adds that without action, the debt crisis may force a 4% Euro-area contraction, in line with what the World Bank, controlled by a former Goldmanite, said. Lastly, the IMF says that Europe needs a larger firewall and bank deleveraging limits. Well there is always that €X trillion February 29 LTRO.

Where did all the bears go?  We cannot find more than one person willing to be outright bearish.  What is particularly strange is that the reasons most people are bullish seem to have little, if anything to do with fundamentals – either macro or micro.  The reason for being long that is closest to being “fundamental” is that Europe is muddling through.  We're not sure Europe is muddling through, but in any case, wasn’t the bullish case for US stocks that we were decoupling?  Conspicuously absent as a reason to be long is earnings. It seems as though everyone is reasonably long (though not fully committed), but thinks everyone else is underweight.  It really feels like the “consensus” is that everyone else is underweight so you better be long for when that money comes into the market. The conversations are far more bearish than the positioning.

The USS Europa Discorida story just gets more and more surreal.

• ITALY PROSECUTORS WIDEN RATINGS AGENCY PROBE TO FITCH, UNDER INVESTIGATION FOR MARKET ABUSE, INSIDER TRADING - INVESTIGATIVE SOURCE
• ITALY FINANCE POLICE SEARCHING FITCH OFFICE IN MILAN, ANSA SAYS

S&P maybe? Sure. But piss off the French rating agency? As if anyone even trades in collusion with the completely unmoving announcements by the most irrelevant of the NRSROs? This is just the definition of irrational Italian scapegoating which will do nothing to help Italy-French relations, but at least it will provide "justification" for Fitch's evil downgrade when it comes - after all it was obviously in retaliation for the Italian police just doing its job. Finally, how long would an Egan-Jones office in Milan stand before it was burned to the ground: 1 week? 1 day? 1 hour?

The Chairman of the Fermentation Committee takes the fizz out of the market once again.

Just a week over the last time S&P said Greece would likely default any second, it reminds us once again why we should care.

• GREECE IN ALL LIKELIHOOD WOULD QUALIFY AS A DEFAULT: CHAMBERS
• S&P'S CHAMBERS SAYS IT'S NOT GIVEN THAT GREECE DEFAULT WOULD HAVE DOMINO EFFECT IN THE EURO ZONE

Perhaps just as irrelevant if notable is that S&P basically said just that back on May 9, 2011. As for Greece, it is a given that if the country proceeds with CACs it will default. Period. And yet that is just what will happen. However a far bigger question, as we touched on yesterday, is what happens next, when Portugal decides to follow the same framework of "deleveraging" only to find that courtesy of having strong creditor protection bonds it can't? Or when the Troika figures out that due to strong negative pledges, the country's balance sheet can not be primed and thus subordinated, and thus is ineligible for secured financing. And what happens when Europe realizes that Portugal is ineligible for saving in the conventional sense? Or Spain? and so forth.

Just when one thinks American crony capitalism couldn't hit new lows, here comes Warren Buffett and his personal puppet, the president, proving everyone wrong once more. Because if one thinks there is no (s)quid pro quo for all that "sage" advice that Buffett has been giving to Obama on extracting as much wealth as possible from future wealthy Americans (before they decide they have had enough with this crony shit and leave the country for good), one would be fatally wrong. As it turns out, it is not just natural resources and aquifer purity that Obama had in mind when sealing the fate of the Keystone XL pipeline. No - it appears there were far more relevant numerial metrics that determined Obama's decisions. Such as the bottom line number of Buffett's Burlington Northern, which according to Bloomberg, is among U.S. and Canadian railroads that stand to benefit from the Obama administration’s decision to reject TransCanada Corp.’s Keystone XL oil pipeline permit. '“Whatever people bring to us, we’re ready to haul,” Krista York-Wooley, a spokeswoman for Burlington Northern, a unit of Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in an interview. If Keystone XL “doesn’t happen, we’re here to haul." And quite delighted to reap the windfalls of unfounded populist fears she forgot to add. Because while the whole "carbon-credit" multi-trillion top line expansion scheme for Goldman under the pretense of actually caring for the environment may have collapsed, it is not preventing others from trying and succeeding where even Goldman has failed.

Despite German and French Manufacturing and Services PMI data outperforming expectations, European equity indices are trading down at the mid-point of the European session on extended concerns over the still-not-settled Greek PSI agreement.  Further downward pressure on German markets came from Siemens’ earnings report earlier this morning, with the company missing their revenue targets and foreseeing a difficult economic environment for them in Q2 of this year. In UK news, despite an unexpected fall in government spending, UK debt has topped the GBP 1tln mark for the first time.

Investors are waiting on the outcome of a 2 day Federal Reserve meeting which ends on Wednesday.  Here they are following any signs that interest rates will remain low, as that could put pressure on the U.S. dollar. The Tokyo Commodity Exchange, December, gold contracts climbed as high as 4,167 yen/gram, its biggest gain since mid-December. The gains initially propelled cash gold even though trading was slow during the Lunar New Year break. Japan has been notably absent in the gold market in recent years. This may be changing as concerns about the Japanese economy and continuing debasement of the yen may be leading to Japanese diversification into gold.  The scale of domestic savings in Japan remains enormous. This would be a new and potentially extremely important source of demand in the gold market which could help contribute to much higher gold prices.