Here We Go Again: European Peripheral Spreads Explode As Safe Havens Collapse

Tyler Durden's picture

It's starting again. Japan 10 year JGBs just dropped to fresh 7 year lows of 0.95%, as UST 10 years are down at 16 month lows of 2.65% and German 30 Year yields are down to record lows of 3.09%. Maybe the Fed should just let deflation run its course to get ever closer to the target UST curve which we noted before. And while Japan is ravaged by a fresh bout of deflation, Europe is starting to crumble once again now that (lack of) vacations are generally over: the Greek/Bund spread has just hit the widest level since May 10, at 811 bps, while the Irish/German spread is at its widest ever of 303 bps, a move of 10 bps on the day. European weakness is resuming now that CPI came in at expectations (as opposed to beating them as has been the tradition for the past month) at 1.7%. The export-driven golden age, as we noted, is over. Elsewhere, the Telegraph posted rumors that the BoE is preparing to join the Fed and is about to commence a fresh round of QE as a new wave of global monetary easing is about to hit.

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Rusticus's picture

They say there is no better pump on a sinking ship than a frightened man with a bucket ... and nothing more useless than a bottomless bucket. Bail m'fuckers !

Pondmaster's picture

QEII - markets should scream up . wash rinse repeat , blah ...blah blah ...blah

Sean7k's picture

If every CB stimulates in collusion, would there be hyperinflation? Especially if they keep in contained within tight controls? Would this not be the definition of targeted growth?


redarrow's picture

It would, however by recent policy actions such as interest rate hikes the other cbs have realized (chindia) that inflation is their problem whereas deflation is a western problem. So I guess they will serve their interests first. If you think that they are going to join in monetary easing when the cost of food is going up in Chindia you are mistaken. They would rather have deflation and sacrifice growth than be lynched by a hungry mob.



Young's picture

It's time for Europe to get hit by the hammer again, the ECB is obviously clueless...


Headbanger's picture

First there is a mountain, then there is no mountain, then there is...

hellboy's picture

what would you guys say to the statement that the ECB is ready to buy if things get bad?

LeBalance's picture

What would you say to the counterstatement: "What hasn't the ECB been buying already, being as things are already bad?"

M.B. Drapier's picture

This is where the chicken-match framework helps to explain the behaviour. ECB is hanging tough by cutting bond purchases and so on, trying to force the cost of future bailing-out onto the Eurogroup governments (and the IMF etc.) as much as possible. But if things get hairy enough they can probably be expected to blink, again.

GlassHammer's picture

Two quick questions

Shouldn't the interval between QE events get shorter as time goes on?

Shouldn't the amount in each QE event increase as time goes on?


MachoMan's picture

Maybe and Maybe.  It depends on our appetite for austerity.  At least from the U.S. side, we have to create a flight to quality to move/roll over treasuries...

I believe the interval between QE events is directly a result of the amount of QE events [both cumulative and immediately preceding (probably heavily weighted)].  If we have a scenario where QE decreases, e.g. we don't roll out another $700b tarp, then I could see QE events being less frequent.  On the other hand, if we attempt to burn the wet mule with our currency, I could see QE events increasing in frequency.  The trick here is to understand that QE is a reactionary policy...  if the amount of each QE event increases (especially over the immediately preceding/recent history), then it will be because underlying fundamentals have deteriorated and we have no desire to pull up the plane. (akin to asking every hot girl on the plane to fuck before it crashes).  In this sense, it's the most objective metric to determine the state of the economy, given a mandate to print.

However, my guess is that we get one of those cigarette packs that has the periodically decreasing size of cigarettes (less nicotine in each cigarette).  If we increase the size of QE, we spook the herd.  This means not only at a snap shot at each QE, but a rolling total for a 12-24+ month period.  I believe the political termoil this November and the subsequent gridlock will ultimately cause introspection which leads to the beginning of burdensome, but manageable haircuts for all of uncle sugar's dependents.  (aside from the banks wanting to get repaid in real money).  This proces will buy us a few more years.

Domestic default before international default.  State and local governments will be forced to cut and, for a short period of time, I suspect the will attempt to utilize this weakness to take power from states.  This, of course, is a short lived plan as the itself is forced to deleverage.  There is no immunity from the deleveraging process, regardless of how big or connected.  (especially true for the FED).  

If QE is not attempted for an extended period of time, we will not revisit it.  So, QE will certainly be of fairly oft frequency.  If it increases, given the precedent set by TARP, then we're fucked in short order.  I just don't believe the wherewithal nor desire exists to prop this bitch up enough to compensate for how damaging continued QE will be to objective indicators of futility.  In short, the jig will obviously be up in short order if we keep our foot on the gas.  But, I think we go the other way for a while... 

Zero Debt's picture

In a system of exponentially increasing debt, you must either increase the flow of QE exponentially or you must default.

If you have no intention of paying off the principal, you must keep lending as the debt compounds faster and faster. So, yes and yes on your questions, as far as debt junkies on non-self-liquidating debt are concerned.

MachoMan's picture

Yes, there will be plenty of nonperforming assets to liquidate.  But, we have to differentiate between domestic and international debts...  Also, state debt versus private debt...  In other words, who knows where we come out in the wash (likely international default, eventually).

The other issue is that you only have to liquidate enough nonperforming assets to start making payments again...  not the whole shebang.

BurningFuld's picture

Yes and Yes......until it becomes continuous.

MachoMan's picture

Some aspects will be seemingly continuous...  for example, food stamps and the like.  However, these are more closely associated with socialism (or capitalism when it's gone too far and the handlers are afraid of the plebs breaking shit) than a sincere effort to stimulate the economy.  I seriously doubt that QE 2.0 (the show) is multi trillion...   

Goldenballs's picture

If the unaccountable European Union collapses along with the Euro only those who get more out than they pay in will miss it.Most countries want a free lunch and in the EU most of em get it,so they take money out of other countries contributions and then provide cheap labour to undercut the contributors industries.Gone on to long enough and now the currencies are due to be squashed and shown for the joke they are.The lesson here is don,t let an unelected superstate make decisions about matters they don,t understand and don,t comprehend.When an organisation has to create laws to stop people voting on their performance and membership this is what you end up with.In 28 years I have never been able to vote on membership because they dare not ask us because they know what our answer will be.Most in the West will not lament its passing.

GlassHammer's picture

A group of state leaders deciding whats best for states other than their own represents the ultimate pretense of knowledge.



MachoMan's picture

Ultimately, this is the foundation of liberalism...  It's inherent in the self nomination process of all of our elected officials.  The notion that they know what's best for us.  It's how the state expands perpetually until it collapses under its own complexity.  This is a concept that should be broken down to the micro level, not just between member states...  it's an individual human issue.

Vampyroteuthis infernalis's picture

They can print Euros to the cows come home! The ECB will most likely do that. The amount of money to service the debt will consume all available liquidity. Interest rates will spike and Euro states will default. This is the last desperate attempt as the end game approaches.

iPood's picture

Would love for ZH subscribers to predict the precise event they foresee will initiate the popping of the US debt bubble (e.g., failed debt auction), thereby ushering in the next (more serious) leg of the global downturn. Thank you.

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