Archive - Mar 26, 2013 - Story

In all of the tortuous moments that have taken place with the European Union the one thing that has become apparent is a radical change of mindset. In the beginning there was a kind of democratic viewpoint. All nations had a voice and while some were louder than others; all were heard. This is no longer the case. There is but one mindset now and it is decidedly German. It is not that this is good or bad or even someplace in between. That is not the real issue. The Germans will do what is necessary to accomplish their goals. There is nothing inherently bad or evil about this but it is taking its toll on many nations in Europe. It is the occupation of Poland in a very real sense just accomplished without tanks or bloodshed as money is used instead of armaments to dominate and control a nation. Politically you may "Hiss" or you may "Applaud" but there are consequences here for investors that must be understood. First and foremost is that they will not stop.

While last month's durable goods was a huge headline miss of -5.2% due to a collapse in Boeing aircraft orders (just 2), the internals were strong with the core capex spending for nondefense capital goods ex-aircraft soaring 6.3%. Today, the situation is flipped with the headline number soaring by 5.7%, trouncing expectations of a 3.9% print. However, this was due entirely to the unbearably volatile transportation series, which in February saw a 95% surge in Nondefense aircraft and parts and a just as massive 68% surge in defense capital good new orders, driven once again by Boeing which reported nearly 200 airplane orders. As a result durables ex-transportation dipped by 0.5%, on expectations of a 0.6% increase, while the true core capex: non-defense capital goods orders excluding aircraft tumbled by -2.7% on expectations of a modest -1.1% decline. And with that last month's rise in Year-over-Year core Capex is over and the trendline continues into negative comps territory once more. So much for the great capex renaissance.

Even more bad news for Cyprus, which now has not only a depression to look forward to but a depressionary stagflation to boot. Bloomberg has ranked countries based on their risk of stagflation based on the following methodology: First, the average real Gross Domestic Product and average Consumer Price Index was calculated for each country from 2012 to 2014. Then the Stagflation Score was determined by multiplying average real GDP by average CPI if the average real GDP was negative or by dividing average real GDP by average CPI if the average real GDP was positive. The lower the score, the greater the risk of stagflation. The winner, or loser at the case may be? Cyprus was found to be most at risk of stagflation with a Stagflation Score of -4.733, followed by Portugal (-2.671), Italy (-2.133), Spain(-1.745) and Greece (-1.366). Switzerland was ranked least at risk with a score of (7.560), followed by China (2.612) and Japan (2.446).

After one of the most fabulous verbal faux pas in recent history was committed yesterday, in which the truth briefly escaped the lips of the new Eurogroup head who still has to learn from his masterful "when it becomes serious you have to lie" predecessor and ever since both he and all of uber-incompetent Europe have been desperate to put the genie back into the bottle to no avail, everyone has been caught in a great debate: to template, or not to template?  Below is a summary of Wall Street's thinking on this key for so many European (and soon global) depositors.

• Berezovsky Died of Hanging Without Struggle, Police Say (BBG)
• BRICS Nations Plan New Bank to Bypass World Bank, IMF (BBG)
• China pledges more investments to Africa (FT)
• BOJ's Kuroda signals targeting longer-dated JGBs (Reuters)
• North Korea orders artillery to be combat ready, targeting U.S. bases (Reuters)
• Supreme Court to take up gay marriage for the first time (Reuters)
• U.S. Cracks Down on 'Forced' Insurance (WSJ)
• Japanese courts press Abe on electoral reform (FT)
• Vietnam accuses China of attack on fishermen in South China Sea (Reuters)
• Italy's High Court Overturns Knox Acquittal (WSJ)
• Facebook’s Zuckerberg Said to Explore Forming Political Group (BBG)

Another session in which the market continues to be "cautiously optimistic" about Europe, but is confused about Cyprus which keeps sending the wrong signals: in the aftermath of the Diesel-Boom fiasco, the announcement that the preciously announced reopening of banks was also subsequently "retracted" and pushed back to at least Thursday, did little to soothe fears that anyone in Europe has any idea what they are doing. Additional confusion comes from the fact that the Chairman of the Bank of Cyprus moments ago submitted his resignation: recall that this is the bank that is supposed to survive, unlike its unluckier Laiki competitor which was made into a sacrificial lamb. This confusion has so far prevented the arrival of the traditional post-Europe open ramp, as the EURUSD is locked in a range below its 200 DMA and it is unclear what if anything can push it higher, despite the Yen increasingly becoming the funding currency of choice.