Archive - Jun 21, 2012 - Story

Am hearing the Moody's downgrades of UK banks likely to be at 6.30 our time, with US banks downgraded later tonight

— Robert Peston (@Peston) June 21, 2012

UPDATE: Channel Breached on heavy volume

Having lost its post-Spanish-bailout open high and Pre-Greek-Election closing high, S&P 500 e-mini futures look set to lose the QE-Hope-driven upward-sloping channel...

While Citi's Willem Buiter believes that the new coalition in Greece removes the very short-term risk of GRexit, as he notes in an Op-Ed in the FT today that "minimum demands for relaxation of fiscal austerity by the new government will not exceed the maximum fiscal austerity concessions Germany is willing to make", he does think the TROIKA "unlikely to tolerate another failure to comply on all fronts by the December assessment" leading to an end-2012 Armageddon a la the Maya. The "willful non-compliance" with the conditionality of the TROIKA program also brings doubt on the willingness of core eurozone nations to "take on significant exposures to Spain and Italy unless it can be established unambiguously that a willfully and persistently non-compliant program beneficiary will be denied further funding". His succinct summation of the "onion-like unpeeling and unraveling" of the Euro's endgame is perfectly described as: "The greatest fear of the core nations is not the collapse of the euro area but the creation of an open-ended, uncapped transfer union without a surrender of national sovereignty to the supra-national European level" as he sees material risk of "procrastination and policy paralysis".

The primary "news" narrative may be the failure of the euro, but the master narrative is much, much bigger: centralization has failed. The failure of Europe's "ultimate centralization project" is but a symptom of a global failure of centralization. Though many look at China's command-economy as proof that the model of Elite-controlled centralization is a roaring success, let's check in on China's stability and distribution of prosperity in 2021 before declaring centralization an enduring success. The pressure cooker is already hissing and the flame is being turned up every day. What's the key driver of this master narrative? Technology, specifically, the Internet. Gatekeepers and centralized authority are no match for decentralized knowledge and decision-making. Once a people don't need to rely on a centralized authority to tell them what to do, the centralized authority becomes a costly impediment, a tax on the entire society and economy. In a cost-benefit analysis, centralization once paid significant dividends. Now it is a drag that only inhibits growth and progress. The Eurozone is the ultimate attempt to impose an intrinsically inefficient and unproductive centralized authority on disparate economies, and we are witnessing its spectacular implosion. Centralization acts as a positive feedback, i.e. a self-reinforcing loop that leads to a runaway death spiral.

For our Spanish-speaking viewers, here is the webcast during which the final results of the Oliver Wyman et al consultancy report identifying insolvent Spanish bank capital needs will be presented. This conference is not to be confused with the July 2011 stress test which saw all Spanish banks passing with flying colors. We know very well that the cap at this conference is €100 billion even if the final need will be far higher. The only question is how much of its credibility will Oliver Wyman sacrifice to create a short term bounce in Spanish bonds by undercutting the real number, even as the real bailout needs creep ever higher.

'Risks are all to the downside for Asia' is the view of UBS' global macro team. It appears the markets are pinning their optimism on growth and earnings over the next year on three hopes: that the US will not fall off its 'fiscal cliff'; that Europe will 'muddle through'; and that China will pull Asia out of the current morass. Duncan Wooldridge takes on each of these 'hopes' noting that he expects Asian exporters to be far more likely to pull back on investment and take a wait and see attitude than simply ride into the breach.

"We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390."

The chart below, courtesy of Stone McCarthy, shows monthly exports to Europe. It says enough.

Greece's newly confident coalition party has issued a list of zee-demands, via Bloomberg:

• GREECE TO PRESS TROIKA ON NO JOB CUTS IN PUBLIC SECTOR
• GREEK COALITION PARTIES WANT TO RETRACT CUT TO MINIMUM WAGE
• GREECE TO PRESS TROIKA ON NO FURTHER WAGE CUTS FOR 2013-2014

And of course TROIKA will be happy to comply, in exchange for some of that shiny yellow stuff (as we noted here). Though we have a response already:

• DE JAGER: THERE WILL BE NO SOFTENING OF CONDITIONS FOR GREECE

One word to explain the Philly Fed which just printed at -16.6, or the weakest since August 2011, on expectations of an unchanged print: abysmal. Basically every subcomponent of the index was negative except for number of employees, although luckily we already know that US jobs (even part-time ones) are collapsing too. In short: if this horrendous print does not boost stocks higher, nothing can.

Overnight, the WSJ had an interesting article starting with "Italy, France and Spain are trying to take a united stand against Germany in finding new ways to fight the euro-zone debt crisis." This merely confirms what Greece has been trying to tell us for months: that beggars can be choosers. Well, turns out they can't, because at the end of the day, the only thing that does matter is the Golden Rule as Mark Grant reminded us earlier. Which is why trying to force Germany to do anything will backfire massively - as a reminder: it is in Germany interest to keep Europe weak, the EURUSD low, and the periphery on the edge of insolvency (just memorize the bolded sentence - it is all you need to know about Europe). Case in point: "Germany's constitutional court said on Thursday it will need time to study the euro zone's permanent bailout mechanism after its expected approval in the German parliament next Friday, which could delay its scheduled start date on July 1." In other words, the bailout fund on which Europe's entire rescue dreams lie (and which will gladly subordinate European creditors) and which still does not exist, is now being delayed. You are welcome Europe. Love, Germany.

With West Texas Intermediate crude oil trading with an $80 handle, near two year lows, while stocks remain within a few percent of their four-year highs, one has to question just what it is that stocks believe about our bright new future of growth and demand that the all-important energy markets do not. Between Europe's recession, last night's dismal China PMI, and a significantly trending rise in US unemployment claims, it seems more likely that the global demand picture painted by the oil market is a better reflection of reality than the earnings/multiple picture painted by the nominal price of US equities. We know that bad is good when it comes to the front-running of Bernanke's print button but wouldn't bad being good raise the USD-nominal price of oil also?

The middle class has a gut feeling they are being screwed by somebody, they just can’t figure out who to blame. The ultra-wealthy elite keep up an endless cacophony of propaganda and misinformation designed to confuse an increasingly uneducated and willfully ignorant public while blurring the facts for those educated few capable of understanding the truth. They have been able to keep the masses dumbed down through government run education; distracted by sports, reality TV, Facebook, internet porn, and igadgets; lured by mass media messages of materialism; and shackled with the chains of debt used to acquire the goods sold by mega-corporations. We’ve become a society oppressed by a small faction of ultra-wealthy masters served by millions of impoverished, uneducated, sedated slaves. But the slaves are getting restless and angry. The illegally generated wealth disparity chasm is growing so large that even the ideologue talking head representatives of the elite are having difficulty spinning it. Even uneducated rubes understand when they are getting pissed on.