'By George' author, UBS George Magnus asks the right question, and one posed by Zero Hedge two weeks ago, namely even assuming Germany relents and allows the ECB to print, what happens then? "Some argue that Germany will, sooner or later, capitulate on this issue too, since the only real alternative to the ECB adopting a full lender of last resort role is the slimming down of the EZ in what would be dangerous, unpredictable and almost certainly acrimonious circumstances. If the crisis escalates alarmingly, the ECB does look a little more likely to be given the light to widen its remit, even if under conditions. But then what? How would German voters and the powerful banking elite react to ECB policies that would turn the Bundesbank white? And what would the political consequences of further printing of money be? I ask the questions not to disagree, but to emphasise that what many of us think as the logical way out also has consequences that may not be immediately transparent."
The spread between Spanish 2Y and 10Y bonds has dropped to record lows as the yield curve inverts most since 1994. Troughing intraday at -12bps at its most inverted, today's as-good-as-failed Spanish bill auction sends an ugly message to the market that risk appetite is non-existent. At -5bps, if we end today at this level, it will be the first inverted close since August 1994.
Scaremongering aside, the demise of the euro does not end European integration. It only means that which is unsustainable has been relinquished and a return to stability is finally possible. So the euro is doomed. Toast. History. This will lead to:
- The end of civilization
- The end of European integration
- The start of new Dark Ages
- The return to a sustainable reality
The correct answer is 4. The euro was an unsustainable, self-destructing extension of the integration that has long simplified trade, travel and work throughout the EU (European Union).
Our favorite trade since Friday, November 11, when Whitney Tilson went public with his short GMCR, Long NFLX theses, namely to do the opposite and Buy GMCR and Sell NFLX has now returned 40% in 6 days. And we don't even collect 2 and 20, nor do we organize hedge fund hotel symposia.
It was nice knowing you "sovereign" Italy. Next time get a "technocrat" PM/FinMin who is not a certified card carrying agent for a major banking cartel.
- MONTI SAYS EUROPE'S INDICATIONS ARE IN ITALY'S BEST INTERSETS
- MONTI SAYS EU CAN HELP ITALY DEVELOP BETTER POLICIES
- MONTI SAYS EU IS NOT A `CONSTRAINT' FOR ITALY
- MONTI SAYS ITALY'S PROGRAM PRESENTED TO EU IS `STARTING POINT'
One of the most crowded trades around is short-dated credit - especially short-dated positions in higher yielding debt. Its the Goldilocks trade - not too hot (low duration and things will be ok for the short-run) and not too cold (carry and yield advantage is relatively good) - for every fixed income manager with new money to put to work. However, recent events are bringing stress into the here-and-now and jump risk (or more immediate concerns of significant credit events)is rising. Credit curves have flattened significantly in the last few weeks and are back to 'normal' given spread levels but it is the composition of the CSJ ETF (short-dated credit bond fund) that is most worrisome. Heavy exposure to Supranationals, Agencies, and Financials - all of which we have highlighted in recent weeks as showing significant systemic weakness - makes us and Peter Tchir of TF Market Advisors nervous.
In addition to broad bloodletting across the board, with Belgium and Spain getting crushed as noted earlier, the core confusion continues with Germany back in triple digits, and the UK, which has roughly 500% total debt/GDP including all debt - corporate and private, or double Germany's, still shockingly in double digits. This won't last long.
Yesterday we posted a note on Austria, titled "35 Seconds Of TV Air Time Explaining Why Austria's AAA Rating Is Doomed" which among other things demonstrated in very vivid fashion, why courtesy of its massive Hungarian and broadly Eastern European exposure, an Austrian downgrade is virtually imminent. The follow up news that the Austrian Central Bank has henceforth forbidden any incremental Eastern European loan issuance is merely the cherry on top, and confirms that Austria's biggest banks are now on the verge. As the chart below demonstrates which shows Austria benchmarks (which like Spain we expect will be promptly changed to a lower yielding piece to buy 1-2 days of breathing room), the hammering has returned. And elsewhere, Belgium is also getting annihilated as the ECB is now left with far too many plates to juggle.
So much for the miraculous inventory expansion. JPM's Michael Feroli was spot on: the strategist who predicted a significantly below par revised Q3 GDP print of 2.0%, was right on the dot. Advance GDP dropped from 2.5% to 2.0%, missing expectations of an unchanged print. The impact was entirely due to Inventories detracting from growth, with the Private Inventory number declining from -1.08% to -1.55%. And to those expecting a surge in Q4 GDP based on inventory restocking, which would be virtually all Wall Street economists who missed today's number by 2 standard deviations, we have one thing to say: it ain't happening. In fact, liquidations are coming first, fast and furious with Personal Consumption coming at 2.3%, and missing estimates. Needless to say futures, are not happy.
You can feel the tension. Traders with one eye on European bonds prices deteriorating and the other eye watching the headlines, hoping for some positive news. Without a doubt the situation in Europe has deteriorated. Spanish t-bills priced above 5%. Greek bonds at new lows. French and Belgium debt under pressure. The banks are struggling too. The desperate pleas and self-righteous demands for the ECB to do something have reached a crescendo. The market is clinging to hope that the ECB or IMF or China or anyone will step up and do something or anything. We may still get a print it all rally, but I am getting more hopeful that Europe will finally do the right thing and take some near term pain to create a sustainable rally and economy.
A few months ago, we noted that according to SocGen, Commerzbank is Germany's second most undercapitalized bank... Right after Deutsche Bank. Today, the market appears to have figured this out. Following media reports that the bank is in desperate need to raise €5 billion to satisfy capitalization requirements, the stock has gotten pummeled and at last check was down just under 9%. And articles such as the aptly titled "Commerzbank Bankrupt Again" from MM News are not helping.
When discussing European sovereign bond purchases it is never polite to say the ECB "monetizes" when talking to "very serious people" - after all they "sterilize", or in other words, don't see an actual balance sheet expansion, as they offload the entire cumulative balance (which as of this week was €194.5 billion) onto other financial institutions. In this way, the bank supposedly does not take on interest rate risk, which in a feedback loop, is the cause and event of such modestly unpleasant monetary expansion episodes as the Weimar republic. What few discuss, however, is just where the banks get the money to actually buy bonds from the ECB. Well, as it turns out, all the money used for sterilization comes from, you guessed it, the ECB, in what is one massive several hundred billion circle jerk. In essence what the ECB does, by pretending to not monetize and pretending to sterilize, is taking on not only interest rate risk one level removed, but also bank solvency and liquidity risk! In turn, this makes the central bank even more undercapitalized in practice than it is (and at 50+ leverage, it is already pretty, pretty undercapitalized), as once the banking dominos start crumbling, it will be the ECB that is left on the hook... and thus the Fed and the US taxpayer. So perhaps while Germany is complaining every single day about the possibility of outright money printing by the ECB, it will be wise to ask itself: who is giving Europe's insolvent banks, which just borrowed a record amount of short-term cash from the ECB to be recycled precisely into such indirect monetization, their cash?
Recent years have seen a trend of gold and silver selling off aggressively in the run into options expiries. This pattern has been less marked in 2011 but was more frequently seen in recent years. Investors have complained to the CFTC about violations of law in the gold and silver markets and some have sued JPMorgan Chase & Co and HSBC Holdings Plc accusing them of conspiring to drive down prices, and reaping an estimated hundreds of millions of dollars of illegal profits. The sell off had all the hallmarks of a bear raid by concentrated leveraged shorts as the news flow was extremely gold positive – both from Europe and the US. This most recent sell off may again be completely coincidental but the CFTC might want to keep an eye on such unusual trends in the precious metal markets in order to ensure fair and free markets and protect the interests of all investors.
It has been a busy morning for the ECB already, as the central banks has been buying up Spanish short-dated bonds following yet another disastrous auction out of Spain, this time a 3 and 6 month Bill auction. Reuters reports: "Spain's Treasury paid the highest yields recorded in 14 years to issue 3 billion euros ($4 billion)of short-term bills on Tuesday, a sign that a resounding election victory for the centre-right People's Party on Sunday has done little to soothe investor nerves. The average yield on the 3-month T-bill more than doubled to to 5.11 percent from 2.292 percent one month earlier, the highest level since the bill was re-introduced in 2003. It sold 2.01 billion euros and was 2.9 times subscribed, after 3.1 times at the October auction. The 6-month T-bill saw yields jump to 5.227 percent from 3.302 percent at the last auction, selling 0.97 billion euros at a bid-to-cover ratio of 4.9 after 2.6 in October" Ironically, yesterday's pathetic attempt to mask market weakness, when Spain forced data vendors to switch their benchmark bonds, as was reported by the FT first, has not fooled the market: "Just a day after borrowing costs soared in a lacklustre auction, the yield on 10-year Spanish debt, which moves inversely to prices, dropped by about 35 basis points on Friday, mystifying traders. However, it has emerged that Thomson Reuters and Bloomberg, the main providers of government bond price data, were asked by the Spanish Treasury to change the main quoted benchmark price, from the new 10-year bond launched on Thursday back to an older one." The result: once again pervasive credit market weakness, which has since spread ot Italy, and at last check forced Draghi to also start buying BTPs. One wonders just how quickly Europe would implode if the buyer of last resort was to actually take a 24 hour vacation.