Archive - Apr 3, 2012 - Story

When one cuts out all the noise, the only true purpose of aggressive (or not) central bank asset expansion, is to be a "buyer" of last resort of sovereign debt funding. Think of it as the source of credit money demand (and hence supply) when every other sector is deleveraging, and when a given Treasury authority needs to pump trillions in debt into the market but when nobody can afford to lever up and buy said incremental debt. Call it monetization, call it funding the deficit, call it whatever: that's what it is. And when people think of monetization, they think, first and foremost of the Chairman, who recently was caught praising the fiat system at a university named for a person who said the following prophetic line: "Paper money has had the effect... it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." Irony aside, when one cuts to the chase, and ignores even further noise about monetization being direct, indirect, sterilized, shadow, etc, there are just two metrics that are relevant: change in sovereign debt and change in Central Bank Assets. In this regard, of the US' $5.5 trillion in sovereign debt increase, the Fed matched Geithner for $2.0 trillion of the total, or 37%. An admirable number and certainly better than the BoE's 29%. Yet who gets the absolute top prize? Why none other than the ECB, which with $2 trillion in expansion (of which about 60% took place under Goldman apparatchik Mario Draghi in just the past 6 months) represents a whopping 63% of total Eurozone sovereign debt expansion of $3.1 trillion!

European cash equities are trading in the red heading towards the US session, with particular underperformance in the periphery as financials continue to remain the biggest laggard. The EU session so far has consisted of downbeat commentary in regards to both Ireland and Portugal. An EU/ECB report noted that, Portuguese debt is now predicted to peak at 115% of GDP in 2013 and that contraction in 2012 is likely more pronounced than thought. Elsewhere, the Irish Fiscal panel said Ireland may need extra budget cuts to reach its 2012 target and 2012 growth has weakened. In terms of economic releases the UK observed a stronger than expected reading on its Construction PMI hitting a 21-month high, which saw some brief strength in GBP.

• China's Central Banker to Fed: Act Responsibly (WSJ)
• Spain's debt to jump to 78 percent of GDP: De Guindos (Reuters)
• Rajoy Needs All the Luck He Can Get (WSJ)
• Spain Faces Risks in Budget Refit (WSJ)
• Top JP Morgan banker resigns to fight abuse fine (Reuters)
• Reinhart-Rogoff See No Quick U.S. Recovery Even as Data Improve (Bloomberg)
• Program to help spur spending in domestic sector (China Daily)
• Barnier hits out at lobbying ‘rearguard’ (FT)
• U.S. CEOs' take-home pay climbs on stock awards (Reuters)

The "down in European hours, and surge as soon as Europe is closed" trade is once again so well telegraphed even Mrs. Watanabe is now in it. Sure enough US futures are red as European shares slide for the second consecutive day, with 16 out of 19 sectors down, led by banks, travel and leisure. Spanish and Portuguese bond yields are up. Not much data overnight, except for Chinese Non-manufacturing PMI which rose modestly from massively revised numbers: February adjusted to 57.3 from 48.4; January to 55.7 from 52.9 - and that, BLS, is how you do it. European PPI rose 3.6% Y/Y on estimates of a 3.5% rise, while the employment situation, or rather lack thereof, in Spain gets worse with an 8th consecutive increase in jobless claims, rising by 38,769 to 4.75 million. Bloomberg reports that Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Francois Hollande, France’s Socialist presidential candidate, widened his lead over President Nicolas Sarkozy in voting intentions for the second round of the 2012 election, a BVA poll showed. Italian bank stocks are notably down and today seems set to be the third consecutive day in which we see trading halts in Intesa and Banca Popolare. Few more weeks of this and the financial short-selling ban is coming back with a vengeance. Yet all of this is irrelevant: the bad news will simply mean the global central banks will pump more money, putting even more cracks in the monetary dam wall, and the only question is how long before US stocks decide to front-run the European close, and whether European stocks will rise in sympathy, just because they get to close one more day.