Judging by the futures one may be forgiven to assume that sovereign default risk in Europe has moderated today. One would also be 100% wrong. It's contract roll day and Italy downgrade day (first of many: Moody's on deck) not to mention algo ES futures ramp up ignore day, and as a result everything is wider across the board, and Italy 5 Year hit 520 earlier, a new all time record.
To anyone short the USD/EUR-CHF who just went to the bathroom a minute ago, our condolences. The rumor is that the SNB will expand its EURCHF peg to 1.25 tomorrow. Completely unfounded of course. It may just as easily be another forceful intervention round. Or just plain and simple central planner rumor mongering: as noted, Swiss August exports plunged and Hildebrand will take any help he can get.
Gone are the days when rating agencies couched the big fat inconvenient truth in big words and wordy phrases like "Selective Default" (predicated upon 90% acceptances of effective bond tender offers, which as has now become clear is not happening) when discussing Greece. French-owned Fitch let the genie out of the bottle this morning when it announced that it now expects Greece to "probably default" (as in the real deal, not some transitory paper definition), "but not leave the Eurozone." In other words, we have replaced one wishful thinking (partially default) with another (full default, but partial implications). Because unfortunately as most know, there is no charter precedent for keeping a bankrupt country in the EU and currency union. Which means eurocrats are now scrambling to not only lay the liquidity groundwork for a Greek bankruptcy (which they did last week with the global USD liquidity lines, which also conveniently lay out the timing for such an event) but also changing the laws furiously behind the scenes to make sure a Greek default does not violate some European clause, which it certainly will. All of this ignores the fact that the financial aftermath of a Greek default will hit the credibility of the ECB more than anything else. How bureaucracy can provision for that we are not too clear.
An interesting interview in Frankfurter Rundschau with German government advisor Lars Feld shares Germany's latest perspective on Greece, which is, as many expect, that the country at the heart of the Eurozone is merely setting the liquidity framework and backup preparations for the inevitable. To wit: "Restructuring Greece’s debt would cause “limited” reaction in financial markets because they have been expecting a Greek default for some time." Alas, that was the hubris that drove the decision to send Lehman over the cliff. But the world has never learned from history, why should it now? When asked if Greece is broke, Feld cuts to the chase "I fear that Greece has a solvency problem" translation - yes. Not that we needed to get confirmation with 1 Year yields in the mid 100s, mind you. Yet despite recognition of the inevitable, when asked whether Greece will leave the Eurozone, his response: "That would be a disaster - for Greece and for the euro-zone... Greece's economy and its financial system would sink into chaos, at least for a brief period time. And the speculative floodgate against the euro and its member states would open. Those who believe a Greek ouster is possible is at best naive." And therein lies the rub.
- S&P downgraded the sovereign rating for Italy to A from A+, with a negative outlook
- According to Kathimerini, the Greek PM is considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the Eurozone or by exiting the single currency. However, a Greek government spokesman denied this report
- According to FT, Siemens withdrew more than EUR 500mln in cash deposits from a large French bank two weeks ago and transferred it to the ECB. However, Siemens denied the FT article and termed it as factually incorrect
- According to two sources, a big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks
- A Greek government source commented that the country has fully paid EUR 769mln in bond coupons due on September 20th. Meanwhile, the Greek 13-week T-Bill auction observed a healthy bid
Following up on the previous story of a gold referendum push driven by the SNB's last ditch choice to peg the CHF to the EUR and potentially pay for this by selling gold, we next learn that when it comes to its currency, the Swiss National Bank really has no options, following a long overdue collapse in exports in August when the CHF soared on global risk aversion and just before Hildebrand started loading up the "asset" side of his balance sheet with Euros. Unfortunately, just like last year when the SNB intervened and loaded up on dollars only to end its intervention following massive paper losses, this time will be no different and we expect that the Swiss people will see the trade off between keeping a viable currency and a sound export sector as one that will ultimately benefit the former. As to what happens to the latter, here is Goldman with a discussion of the huge collapse in Swiss August exports, which is a harbinger of things to come when the SNB's latest intervention attempt is overruled in several months, and reality reasserts itself.
According to an article in Swiss newspaper NZZ (Neue Zuercher Zeitung) the SVP party (Swiss People’s Party) launched a referendum to “protect” the 1,000 tonnes of gold owned by the Swiss National Bank (SNB). Their aim is to:
- make it unconstitutional to sell gold
- force the SNB to hold 20% of its assets in gold (currently 16%)
The SVP said the sale of 1,500 of the SNB’s 2,500 tonnes of gold was regrettable, especially given the Swiss population had no say in this.
Markets In Risk On Mode Following Greek Non-Default And Denials Of Greek Referendum And Siemens SocGen Bank RunSubmitted by Tyler Durden on 09/20/2011 - 07:32
Anyone who may have gone to bed last night assuming some version of long-termist reality would finally creep back into the market following rumblings of all out trade war between China and Europe will be sorely disappointed as instead stocks are once again focused on the purely superficial, such as that Greece did not go bankrupt last night and did make its €770 million payment this time, although what will happen in the future depends entirely on the Troica. As for the Troica, their animosity toward Greece will hopefully be moderated after Greece denied a report from Kathimerini, which as we expected had about zero percent chance of any credibility to it, that it would go ahead with a eurozone participation referendum, which obviously would have ended the Euro as the majority of people in Greece (and all of Europe) are well over the monetary experiment. Lastly, Siemens scrambled overnight to clarify the FT news that it had pulled money from a French bank, SocGen as it turns out, but says that this happened back in July, and had nothing to do with the current troubles at the French bank. Lastly, two bond auctions by Spain and Greece came at around previous result, and hence much better than the collapse expected further adding to the short covering pressure.
This paper shows the kind of brilliant research that gets done now that economic commentary is only pursued by Ph.D.s. In this paper, Johansen and Simonsen (2011) come to the surprising conclusion that (spoiler alert!) the US economy operates on Keynesian principles; which differs significantly from its official policy of creating credit whenever a problem appears. The principal evidence offered in support of the author's conclusions is the following chart, showing that both the value of the Dow Jones Industrial Average (DJIA) and the amount of public debt have increased logarithmically since the late 18th century. And since correlation implies causation, the rise of the DJIA must be due to the increasing public debt. Now that we understand how the economy works, it becomes clear how we move forward. Raise public debt. Boost the DJIA! The trickle down effects on the economy shall enrich us all.
China Pulls The Rug From Under Europe, Halts French Bank Transactions, Makes Good On Trade War UltimatumSubmitted by Tyler Durden on 09/19/2011 - 23:20
A flurry of headlines out of China suggest global macro-economic volatility may be ready to take it to the next level. We discussed last week how China's oh-so-generous offer of help to Europe was merely a veiled threat playing US against Europe in a game of who-gets-the-funding. Well, tonight, it seems, they are making good on some of those threats. Aggravated by EU's lack of market economy recognition, they pull trading lines with French banks, express concern at the EUR's safety (preferring US Treasuries) and indicate a clear preference for bonds over stocks - all the while warning of growing trade tensions - consider the sabre-rattled.
UPDATE: Xinhua News claims Fitch bearishness on China's banking industry is 'suspicious' and the US and Europe should ditch 'protectionist' measures; Ambassador Locke then opines on China's business climate and policies casting doubt in investor's minds.
Where a million essays, debates, rants, and denials have been littered over the past month arguing whether or not Social Security is a ponzi or not, we believe one simple chart should suffice to explain to the reader just where we stand. As those who follow the data series know too well, outlays exceeded revenues in 2010 for the first time ever, for a backward looking basis, and so when applying CBO data on future SSTF revenues and outlays (as a % of taxable payrolls), using 10 year moving average data, for forward looking projections, outlays surpass revenues and basically never look back until at least the end of the century. In other words: this is a construct that relies exclusively on new capital coming in to keep it funded and from imploding under its own weight, something better known in literature as a pyramid scheme. But yes: it is not a ponzi scheme in that it most certainly is not voluntary.
As more developments arise in the Solyndra case, we find the specifics of how it was none other than Jacob Lew, the head of the Office Management Bureau, elsewhere known as the guy who puts together all those forecasts that Obama pulls out of his hat as seeing growth of 3.7% in 2012 here and budget savings of $4 trillion there, got subpoenaed, and not just over anything, but over the deal that is rapidly becoming Obama's Solargate: Solyndra. As a recap: the man who is the "expert" on how the US will get out of its multi-trillion deficit had to be subpoenaed by Congress to explain his secretive actions that ended up most likely harming US taxpayers for reasons still unknown (but not for long), and what is far worse, Congress has to subpoena the head of the OMB because it failed to exercise proper oversight of the stimulus money in the $787 billion American Recovery and Reinvestment Act... and all this under the tutelage of a White House which recently won an award for Anti-Secrecy....which was present to the president by among other Gary Bass of OMB Watch...And somehow we are expected to believe that fiscal stimulus in America has even a remote chance of being allocated productively (a fatal Keynesian flaw which Andy Lees described earlier) instead of pumping up crony capitalism schemes that enrich vested interests, and which drown in opacity and obscurity over which not even Congress has any supervision?
Day after day we are brain-washed with the mantra of equity dividend yields being greater than treasury yields implies 'cheapness' or "who wants a 2% return from treasuries?". While we have tried again and again to put this dead-end of apples-to-unicorns valuation to bed, SocGen has an excellent treatise on the subject that should make all but the most ardent Bill Miller fan comprehend the ultimate risk-reward trade-off. Yes, bonds at sub 2% offer miserable returns, but equities will always offer a higher probability of major losses and until we have an investor base that is able to take such losses, low yields and a systematic preference for bonds is likely to be with us for a while. Risk capital will also be in short supply - if you have it, better use it wisely.
Peter Schiff On Obamanomics: "There Are Not Enough Open Minds In The Capitol To Keep This Ship From Sinking"Submitted by Tyler Durden on 09/19/2011 - 20:11
Peter Schiff wraps his congressional testimony on the Obama jobs plan, which was one of the most memorable such Congressional hearings on the topic to date, with the following letter of caution to all Americans. To wit: "I don't think those few open minds in the Capitol are going to be enough to keep this ship from sinking. There just isn't enough time or a strong enough will for reform from the American people. That is why it is so important for you to act individually to protect yourself and your family from the new age of stagflation. Please take the time to view my testimony, understand the problems we face, and align your investments accordingly." We urge anyone who has not watched Peter's testimony yet to do so below.