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Macro And Market Thoughts From David Rosenberg
- Belgium
- Bond
- CDS
- Credit Default Swaps
- Creditors
- David Rosenberg
- default
- Eurozone
- Federal Reserve
- Germany
- Gluskin Sheff
- Greece
- Gross Domestic Product
- Housing Market
- Housing Prices
- Ireland
- Italy
- Japan
- Lehman
- M3
- Money Supply
- Nominal GDP
- Portugal
- Reserve Currency
- Rosenberg
- Sovereigns
- Vigilantes
- Volatility
- Yen
David Rosenberg summarizes his latest views on Europe, the EURUSD, risk, volatility, bond curves, gold, geopolitics, oil, a subsidized shopping season courtesy of no mortgage payments, and two years of home inventories.
MACRO AND MARKET THOUGHTS
All these “rescue” packages in euroland really do is provide bridge financing — they do not resolve the underlying structural problems in these countries or the deflating asset values in bank balance sheets. Greece has already breached its deficit target and a Greek default is likely only a matter of “when”, not “if” at this stage. To suggest that its economy is too small or that its debt obligations are tiny ignores the uncertainty that would prevail as credit default swaps have this nasty way of redistributing those liabilities around the world. This is what the Lehman shock taught everyone. Plus we have to consider that all these funds being earmarked for bailing out sovereigns and shoring up undercapitalized banks.
The massive selloff in government bond markets, even in countries like Belgium and Italy (let alone Portugal and Spain), is a clear sign that the bond vigilantes are now targeting the supposedly stronger governments in the eurozone. These bond vigilantes are also speculating that the national purse will be needed to keep their banks afloat and the relentless widening in CDS spreads is an added suggestion from the markets that these governments may not have the resources to fully repay their creditors once they have moved to support their banking systems.
What is notable that does not get a lot of press is that both the M3 money supply and private sector credit has contracted in the euro area in each of the past two months. The austerity packages needed to bring intractable deficits down will fuel the deflationary pressures, which will only further destabilize the financial system and add damage to the economy. While Germany is viewed as a darling in the region, its trade and banking exposures to the euroland periphery is huge. Judging by the market action, the contagion through to Belgium, Italy (never mind Portugal and Spain) is increasingly apparent. This is very much like how the problems in Thailand ultimately spread to Singapore and South Korea back in the 1998 Asian crisis. The question ultimately will be how the banking systems in the rest of the world will be affected.
Tack on the tensions from North and South Korea and how that will play into U.S.-Chinese relation. Plus the intensifying inflation pressures in emerging markets, which in turn raises the specter of capital controls.
In the U.S, as the lame duck Congress reconvenes, with the influence of Reid and Pelosi still around, gridlock may not be good in terms of getting any of the tax/benefit goodies extended into next year. Gridlock isn’t always good. And the new Congress intends on politicizing the Federal Reserve, which is another source of uncertainty. And all this at a time when the latest batch of U.S. economic data — at least outside of the housing market — has started to improve. Consider the following:
- The VIX index (a measure of volatility), at 22x, looks inexpensive. From late April to late May, it jumped from that level to 45x on the back of the round of Greek-related concerns at the time.
- Larry Fink is dead on — dollar-euro is very likely going to go back and re-test 1.20.
- Recall that the risk-on trade that worked so well in September-October was highly correlated to a weak U.S. dollar. These now go into reverse.
- The long bond, at 4.2%, relative to core inflation and the funds rate looks cheap, in my view.
- The 5-year government of Canada bond is very attractive at today’s level if the Bank of Canada goes on hold.
- Gold has emerged as a reserve currency, which is why it rallies even on days that the U.S. dollar is bid. It continues to hug the uptrend in the 50-day moving average very nicely. Although we remain long-term bullish on gold, we are near-term cautious given the technical picture and the high net speculative long positions.
- The tensions between the Koreas should be a negative for the Asian FX complex and bullish for the U.S. dollar. Weakness in the yen is a positive for Japan’s large-cap exporters.
- Oil should be viewed as a strategy here and should be bought on the dips. Same for base metals and food. Government procurement policies and inventory hoarding are likely to support raw materials.
- A great holiday shopping season is priced into U.S. retailing stocks. Utilities, health care and staples have been laggards but could make up some ground if growth expectations recede.
- With a total of 6.3 million in inventory of U.S. homes, or about two years’ supply, another leg down in housing prices is underway. Apartment space looks much better from an investment standpoint.
What is remarkable is that since the Greek bailout was unveiled back in May, instead of alleviating fiscal concerns in the Eurozone periphery, contagion risks have actually intensified. Even with German 10-year bond yields declining 25bps, they have risen nearly 70bps in Italy, 150bps in Spain, 225bps in Portugal, 420bps in Greece and 460bps in Ireland. Once the stabilization fund ends in 2013, there is no way these countries can fund themselves at current debt-service cost levels.
Ireland may have secured funding, but at a 5.8% interest with nominal GDP declining, the situation is untenable in terms of sustaining any balance sheet improvement. Debt restructuring is inevitable. Looking at current CDS spreads, we are up to around 80% on default risks in Greece, 60% in Ireland, over 50% in Portugal, nearly 40% in Spain (this is big), nearly 30% in Italy and 20% in Belgium. No wonder the VIX is breaking out.
The risk is one of financial contagion to be sure, but there is the added macro risk as U.S. exports to the EU account for over 20% of the total volume of shipments sent abroad — about double the relative importance of the B.R.I.C.s in relation to U.S. producers. Plus, there is the added deflationary thrust from the strengthening U.S. dollar, which will come home to roost in that large share of corporate earnings derived from foreign sources.
From Gluskin Sheff
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Not if China is serious about getting its inflation under control. If they revalue the RMB, the dollar will go down.
Maybe gives something for China to sell into.
Bovespa-H&S Top, All Ords-H&S Top, (?)Gold-H&S Top, AAPL- H&S Top, Oil H&S Top.
Head and Shoulders patterns form over the course of a year or more, not in a couple of months.
Lern2technical.
I guess we will know shortly...
Where's the head and shoulders pattern on Silver? Looks more like an over-the-shoulder-holder-boulder to me.
Lern2fundamental
Technical patterns can and do form in all time frames, even down to the tick level.
Yes, as in the small H&S on SPY 5 min chart between 118.25 - 118.9.
so we're calling H&S in 5 min charts now? Is this what it's coming to? WOW!! have a good one.
No, just pointing out that patterns form on many timeframes, as sy said
you're obviously into top calling..so coupled that with this comment..what exactly is your point? oh i get it..here's a top, there's a top, everywhere top top? ol mcTworiver saw a top...pimples also form in many time frames too..
Head and Shoulders patterns signal major reversals. A head and shoulders over an hour time frame does NOT signal a reversal. It doesn't signify anything. At that level, they are just noise.
At the level we are seeing in gold and silver, they are artificial patterns that are being painted by market manipulators. They would love to be able to paint a nice, long term H&S pattern, but they can't. The market is too strong over that time scale. So they do the best they can, which is a 1-2 month pattern. They have done this MANY times, and it has always failed.
Spitzer is right, this is about fundamentals. Technical analysis has its place, but only when done properly, not by the Mickey Mouse squad who see H&S patterns on the interday charts and claim it means something.
Refer to a a weekly chart of the AUD/USD and tell me what you see.
Should I give back all the money those "noise" patterns have made me over the years ?
Some of us actually trade 2 and 5 minute charts, rather successfully.
If Gold trades below 1365 at any time today it will be very bearish. If Gold trades above 1400 today, it would be bullish. We are at the decision point on the chart.
im a technicals skeptic and its been and I have been doing well with that for the last 3 years, in gold.
BELGIUM OBLIGATIONS CROSS 4% MARK!
EURUSD
http://99ercharts.blogspot.com/2010/11/eurusd_30.html
http://www.zerohedge.com/forum/99er-charts
The stock market is trading in lock-step with the EUR-USD right now. It is pretty ridiculous. The question is which is the horse and which is the cart?
From my one minute charts it looks like the market topped at 10:27AM and the EUR-USD topped at 10:28AM. Same goes for the reversal at 10:52AM.
This suggests the stock market is leading the EUR-USD and not the other way around.
This suggests the stock market is leading the EUR-USD and not the other way around.
IMO neither is true. They're both being led around by the fiat vs. real battle.
Obama's pay freeze is a big diversionary fart:
freeze is really just a partial freeze that applies only to 2011 and 2012 cost of living increases.
Obama cannot freeze federal pay unilaterally. He is going to need Congress to act on his proposal, which calls for the freeze to begin effective January 1
http://blog.heritage.org/2010/11/30/morning-bell-dont-let-obama-pay-plan-freeze-real-reform/
World economy is like a Titanic sinking in the night...Bow end ( Europe ) is already going under the waves, while Stern section ( Chinamerica ) is providing illusion of safety as it rises above and away from the water...The little Lifeboats that are far too few are Gold and Silver...
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Gold, silver, yea fine but remember you can go a long way with a couple years worth of food stored and some good firearms with plenty of ammo. Instead of wondering what the best thing to buy things with in the future will be, just buy it all now.
my thinking is that with some Gold, Silver survival of the impending wreck is more likely but not guaranteed.
You could make a lifeboat out of gold. When I was at Berkeley, the engineering department would have a concrete boat design competition. If you can make a boat out of concrete, you should be able to build one out of gold. A golden boat would be so Mithradates
people do stranger things, I read that somebody made boat out of ice.
@ Johny2 : Excellent analogy, +1000 !
thanks
"God" and "the World" is expecting a Dec Rally, I beg to differ! After all this time "it's different"! Tops where ever you look, POMO not really meaning anything anymore, Huge Headline and Geo-Politcal Risk, also everywhere, not to mention Bushie Taxes "un"cut?! All this makes for a potentially VERY UGLY Dec, eh?
Thats certainly the way I see it. Projections of soon to be euphoria rallies over what?
USD dropping off across the board today against many. Random GBP run and strange goings on in JPY pairs. Interesting days.
Fix It Again Tomorrow.
Once the small European countries realize that they have power to hold the EU and ECB hostage, then it is game over. The small countries can say: "give me the money or else we default ... now get out of here you greasy goons".
Ireland, Greece and the other countries who thought they were joining an exclusive club and then found they were given waiters costumes, as they entered the facility, so that they could tend to the needs and desires of the REAL members are probably feeling a little bit betrayed by now.... and of course the REAL members will try to make the little countries feel inferior and make them feel as if the extortion they have been subjected to is their own fault ... like the US small homeowner, forced to pay double price and take land-mine loans (so that they could afford payments) at the height of the housing boom.
The con men always have the upper hand and all the mark can do is say "no".
What pressures were brought on Greece and Ireland? Was there really an option for them to say no? They may have thought not ... but my guess is they can say "yes, but on my conditions".
The leadership in these PIIGS countries is beholden to their own banking system's interests. Ireland didn't tell the EU to piss off because their own banking system would collapse. Self-interest works both ways.
Ireland chose to lose sovereignty over having their banking system collapse.
I agree though that the EU needs the bailouts more than the PIIGS do. However, politically, as a leader you cannot reject the EU, you need the people to speak up first, then you can reject the EU and when the banking system collapses you can blame the people for bringing it upon themselves.
It is the recovery that will get us. The administrations have enough fingers to plug leaks in the dam. It is the wall of water that will spill over that is the problem.
Korea: is just political theater, as usual, with a big payday for Kim JongIl at the end.
China: should revalue RMB, but asian economies are very very loathe to relinquish mercantilist ways. First resort is price controls through death threats.
But inflationary forces are back in play in the global economy. And since the answer to any trouble in the US or Euro economy is print, print, print: hello $100 oil and $1500 Gold. Hello food inflation. And the Fed will not deal with it because over 40% of CPI is housing. Biflation will ensure that all their metrics will stay flatline while the house is burning down.
Gold breaking out, beechez!
The "shadow" housing inventory is at least a 3 yr supply, possibly more. They won't be coming out of the shadows any time soon.
I just figure the longer the authorities can "extend and pretend", and continue to paper things over, then the longer people with foresight can get their houses in order, so to speak. Keep your job a little longer, pay down some debts, lay in a bit more gold and silver, etc.
I'm not on the side of those who say let's just have armageddon and get it over with.
In upward trending markets technical analysis doesnt work, or work as well as buy and hold. I have tested simple moving average (50-200) based buy sell signals on SP500. During 90s buy and hold was as good as this even better, for example if you sold with LTCM in 98, you would buy in at higher price with Tech bubble in 99. But bubble is the keyword here, such a system would protect you from meltdown in 00/01. If you are not sure when it is a bubble , or when it may implode, it is wise to look at averages. H S patterns, I am not sure since they are subjective.
By the way if you used this strategy for gold, in last 5 years, when there was a clear trend you would buy at 421 at 2005, sell at 806 in Sep 2008, rebuy at 897 at Jan 09, and hold on. I think this is not much worse than buy and hold in this timeframe. With a shorter MA system like 20-50, you might do better.
Lest we forget the role Credit Anstalt of Austria played two years into the start of the great depression. The Austrian govt gauranteed the debts which resulted in a run on the currency. Deja vu all over again. Worth a read....
http://econ161.berkeley.edu/tceh/slouch_crash14.html