Big Picture Update From David Rosenberg

Tyler Durden's picture

From David Rosenberg of Gluskin-Sheff:

The drama continues following S&P’s slice to Greece’s debt rating (to junk status of BB+, a three-notch decline, which prompted a surge in 2-year bond yields to a Zeus-like 15%) and the two-notch decline to Portugal’s rating, to A- from A+. The Euro has bounced back this morning and the flight to higher quality German and French bonds has partly reversed course as the markets are swirling with speculation that the IMF is about to announce a stepped-up aid package (yet again!) and the ECB’s Trichet (“Mr. Euro” himself) is set to make a trip to Berlin to meet with German parliamentarians today. (In the U.S., the huge rally in Treasuries has subsided too as the bond market braces for $42 billion of fresh 5-year T-notes today). JGBs have rallied all the way to four-month lows, in terms of yield, to 1.28% — talk about a switch to defense (not to mention a slap in the face to the conventional wisdom that JGBs are an accident waiting to happen — see Clock is Ticking on Japan’s Low Debt Yields on page 23 of the FT).

The problem of course is that if Greece is bailed out then surely Portugal, Ireland, Spain and perhaps even Italy may not be too far behind. The inability of Greece — and others within EMU — to enact an independent monetary policy at a time of crisis has exposed the flaws of the union. The lack of a cohesive national government is another flaw in times of turbulence, which is why the U.S.A. has longevity and the Eurozone likely does not. It may well be the time to assess why it was that past attempts at unionization in the region — the Latin Monetary Union and the Scandinavian Monetary Union in the late 19th century — ultimately fizzled out.

While the Euro has come back this morning (temporary) from its year-low abyss, global equities are still reeling from the contagion concerns (the MSCI Asia Pac index down 1.5% today) and a stock market priced for perfection is once again confronting a world with blemishes. (Add to that the U.S. government’s attacks on Goldman Sachs as another blemish, at least as far as the investment community is concerned — even John McCain got involved in yesterday’s populist lynching: “From the reading of these emails, there is no doubt their behavior was unethical and the American people will render a judgment.”)

Anyone notice the volume on the U.S. exchanges swell as the selling picked up steam yesterday in yet another in the long list of “distribution” sessions? (Volume on the exchanges surged to a combined 7.6 billion shares — the second highest level for the year.) Portugal’s stock market has traded down to a 12-month low and it’s so bad in Greece that the government has banned short selling for two months. (Hey, it worked in the once-capitalistic U.S.A. didn’t it?) We see in the NYT that Barclay’s analysts believe that Greece needs €90 billion to see them through, €40 billion for Portugal and €350 billion for Spain!

That is €480 billion of refinancing help, which dwarfs the latest €45 billion EU-IMF joint aid announcement by a factor of TEN (according to Ken Rogoff, the IMF is maxed out after €200 billion)! Do euros grow on trees as fast as Bernanke-bucks? Would the ECB, modeled after the Bundesbank, ever resort to the printing press for a fiscal bailout? Where exactly is this money going to come from? You can see why commodities are still under pressure as V-shaped recovery hopes are given a sober second thought. Even in countries like Canada, small and open as it is, has seen its currency lose some of its altitude despite the widespread perception that the local economic and financial backdrop is pristine as can be (Canada is in relatively good shape, indeed, but we challenge some of that conventional wisdom below). What a time for the Bank of Canada to have moved the domestic money market to price in a 275 basis point tightening cycle. (Remember how the Asian crisis, which started with tiny Thailand, stopped the Fed’s planned rate hikes in 1997 in its tracks and who knew that time that more rate cuts were coming down the pike? How many times has the front end of the Canada curve looked this attractive before?)

With that in mind, the Fed had better be very careful about changing any of its wordings in today’s post-meeting press release (especially the day after the VIX index soars 30%). Recall the Bank of Canada’s strident tone last week (watered down a tad by Governor Carney in yesterday’s statement to the House of Commons) which prompted the money market or immediately price-in a rate hike at the June 1 meeting.

Yesterday was really as much, if not more, about Portugal than it was about Greece. Contagion risks are spreading as they were amidst the turmoil around Bear Stearns in early 2008 and we know how that turned out. Bear was not too big to fail; neither was Lehman thought to be at the time. And then the Obama team decided to bail out the other large banks with fiscal costs in the future that will massively constrain domestic economic growth.

Let’s look ahead — beyond Greece and Portugal to Spain. Its combined fiscal and current deficits are the highest in the industrialized world, save for Iceland (and we know what shape it is in). The amount of debt it has to refinance in the coming year is as large as the entire Greek economy (though the latter is getting smaller by the day). So this is not even a case of being too big to fail as much as being too interconnected globally to default. Think of all the global banks, most of them in Europe, which hold onto all this spurious Club Med debt. Moreover, if the other two major rating agencies follow S&P’s lead and cuts Greece to “junk”, then the ECB would be in a real bind for it cannot hold below-investment-grade bonds on its balance sheet. If the ECB does accept junk-rated Greek debt as collateral, then the sanctity of its balance sheet will be seriously undermined; though this ostensibly didn’t matter too much to the Fed in the name of saving the system.

At the same time, refusing to accept Greek debt would exert tremendous strains on the European banking system (see Hobson’s Choice for Germany ECB on page C16 of the WSJ; and also have a look at Debt Crisis Poses Risks to ECB Balance Sheet on page A12 of the WSJ). Whether or not all these countries can be saved by the IMF, Germany or the ECB, the reality is that the downside to the Euro, even at 1.32, is huge. Think of a retest to the lifetime lows of 0.85 at some point down the line.

The Chinese stock market is down now for the fifth session in a row — the longest losing streak in 16 months and the lowest close since October 12, 2009 (dare we say when the S&P 500 was trading 100 points south of where it is today, and the Dow lower by a 1,000 points). And the index leads commodities by four months, so this is not exactly a constructive signpost as far as the near-term outlook for resource prices is concerned (see more below).

So, we have the problems in Euroland, signs of a property bubble in China, and the darling Brazilian economy now in overheating phase to such an extent that the central bank is about to hike rates 100bps in one fell swoop (did we mention the Henry Tax Review in Australia, which is due out on Sunday and set to propose tax changes for the resource and banking sectors?) — and yet all we hear from the rose-coloured bullish pundits is how we have to now measure the U.S. equity market based on “global considerations”, not merely the American economy. Yesterday, we heard a classic rear-view-mirror comment from UPS CEO Scott Davis that went: “Economies around the world are showing signs of recovery.” Every word in that comment was accurate except the tense — replace “are” with “were” (not to mention that this is classic top-of-the-market that defines the term “famous last words”).

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yoodman_jimmyy's picture

What is this about a rumor of Fed Funds going to MINUS 1 percent?  WTF!?

akak's picture

Before responding to the virtually ubiquitous ZH poster "HarryWanger", please be aware of just whom and what you are dealing with in this person:

His real name is James Kostorhyz, and he is here posing as a troll in dishonesty and in disregard for the fundamental purposes of this forum. He is NOT posting here in good faith, but is purposely antagonizing those with independent, anti-establishment views and opinions for his own selfish and cynical purposes, as part of a study on "the psychology of permabears". 

He believes that anyone who opposes the current widespread fraud, corruption and rampant lies within our societies and governments are "utopian" and unrealistic, pollyannish dreamers.

And for those ZeroHedgers who are advocates of sound money backed by gold, this bankster shill is already out there with one of the most disingenuous, dishonest pieces of pro-establishment propaganda on the topic, expounding on how such financial integrity is "impossible", and merely "the rants of an ideological fringe":

Please do NOT respond to this reprehensible troll, here or anywhere else on ZeroHedge.  He is NOT here in good faith, and should be shunned!

HarryWanger's picture

If I listened to Rosenberg in August when he screamed that we were at a top and shorted, I'd be living in the streets. Again, I don't see the fascination with someone who has been pretty consistently wrong regarding the markets for the past 8 months.

reading's picture

You have obviously never listened or read what he said.  He clearly said that the market could continue higher on the back of the fed, however, it was not creating a sustainable recovery that would launch anything more than a bear market rally.  

Ripped Chunk's picture

And you may yet be (living in the street) Harry.  Odds are its likely.

anynonmous's picture

Harry, ZH is the best blog out there but beware that here and at Business Insider there exists a cult of Rosie Groupies that like to bask in the glow of his permabearish and dead wrong prognostications.  (perhaps they are members of the Roubini diaspora created when the professor relaunched his website:)

aaronvelasquez's picture

I'd rather be eight months early than flat broke.

Deflationburger with Fleas's picture

Rosenberg is all about long term structural problems, not what the market will do next week or next month, you myopic troll. 


Nice that Yahoo Finance has started to migrate some of its message board users over here.

anynonmous's picture

Def., surely you could come up with a better response than to deny that Rosie makes predictions on the equity markets.

BernankeFed's picture

Rosenberg isn't very good with timing the market for sure but it is definitely a good read to get the bearish view point.  I think it is similar to reading ZH, where one gets news or articles with a bearish angle that aren't found in majority of media, who inherently are bullish.  But I wouldn't take trading ideas from ZH (which I have been reading since blogspot days) seriously for the same reason.

Mako's picture

S&P just downgraded Spain from what I am hearing.


Germany is going to have to pony up big time.  Good luck trying to sustain the unsustainable. 


HarryWanger's picture

Knee jerk reaction to news then a base formed in SPX at 1187 support. Fed will ease all fears with the "extended period" language. If looking for a short term trade, this dip and support at 1187 seems to be a good entry.

Mako's picture

Enjoy while you can in a few years will not be able to go short or long.  Party on Garth until then. 

You'll be getting a whole new round of downgrades by the end of the week or early next week.  Death spirals are actually cool to watch.

Some money will come to the US to avoid Europe.  It all works until the US goes down the same path... Portugal, Spain, Italy, Ireland, insert another here, etc.  then we go onto California, New York, NJ, IL, insert state here, eventually collaps of the whole system. 


HarryWanger's picture

Oh, now I get it. It was "just wait til Greece goes". Then "just wait til PIIGS follow". Now it's "Some money will come to the US to avoid Europe.  It all works until the US goes down the same path..."

This is exactly the time to be buying US equities just based on your rationale.


fuggetaboutit's picture

harry, seriously

does this website pay you to post this stuff to up the number of comments per page?

if you think 1/100th of the drivel you post in here, you should be co-anchoring Street Signs with whats his name and the other chick.

Species8472's picture

No, not equities you twit, BONDS!!

BoeingSpaceliner797's picture

"Death spirals are actually cool to watch."

The coolest part of watching the the death spiral that is the collapse of the debt-based/fiat/fractional reserve financial/monetary system?  Watching it happen knowing that I'm watching a very sick and fraudulent system cannibalize itself. 

aaronvelasquez's picture

Death spirals remind me of tornados, whirlpools and hand grenades.  It's hard to get close enough to watch without becoming part of the event.

BoeingSpaceliner797's picture

We live on planet Earth, therefore we are part of the event and this cannot be changed.  However, as the aforementioned system is corrupt and fraudulent, watching it cannibalize itself fills me with the sense of witnessing the delivery of cosmic justice. 

Quintus's picture

"Moreover, if the other two major rating agencies follow S&P’s lead and cuts Greece to “junk”, then the ECB would be in a real bind for it cannot hold below-investment-grade bonds on its balance sheet"

Not so.  I recall that the ECB abandoned this policy last month.  The word 'Greece' was not, of course, mentioned in the reasoning behind the decision.

Racer's picture

As is usual in this fake market, they can change the rules to keep the pretence going that all is well

DoChenRollingBearing's picture

Each day I am here in Europe I get more and more scared that "something big" will happen before I get back.  Like a volcano blowing up in Iceland...

As long as no one has broken in and stolen my guns & gold we should be OK and as long as we do not have TEOTWAWKI.

But, hey, it was nice to take out 200 Euros with my ATM card today knowing I saved a little bit...

Pure Evil's picture

You better hurry back and check your mother lode, last I heard all the biker gangs were going on a rampage and scooping up peoples gold, silver, and munitions after reading about all the hoarding by ZH readers.

lbrecken's picture

Hey harry does that mean when you are proven wrong you can stop your posts too?  I hope so......

HarryWanger's picture

As I said, if the market corrects 10% and there are global and US economic concerns surfacing again, I'll go short. I stay flexible. But I don't think there's a snowball's chance in hell of that happening.

Pure Evil's picture

Hey Pollyanna, I think Bill Bonner is missing his mosquito.

anynonmous's picture

The real question is how long will it be before Gluskin punts Rosie?

Zombie Investor's picture

As long as Spain doesn't get downgraded, everything will be fine.

dabullify's picture

Davids work points out an opportunity up here in the great white north.

When things turn real estate wise in Canada, the big five banks here will get cut in half.

New highs have been rejected, and vols are cheap.

Just sayin'

Mitchman's picture

"JGBs have rallied all the way to four-month lows, in terms of yield, to 1.28% — talk about a switch to defense (not to mention a slap in the face to the conventional wisdom that JGBs are an accident waiting to happen..."

All in all, a pretty tepid analysis.  Money moves instantaneously and for now, JPY looks good.  That dough can leave at the push of a button.So it's hardly any more than an overnight "slap" to the CW.

What happens when there are no more fiat safe havens?