Yesterday, the progressive "think-tankers" from the CEPR first voiced the idea that it is time for America to finally come to the aid of Europe, because you see, the liberals, ever so generous with other peoples' money, have had enough of a sinking financial system brought to its knees by the intersection of a financial system perpetually bailed out at the taxpayers' expense, and a insolvent global welfare state, and just wish it was all back to where it was a decade ago, where everyone lived in perpetual bliss and stupidity. We truly hope Messrs Baker and Weisbrot lead by example and dispose of all their net worth, by dispatching it in Europe's direction, post haste: after all, anything less would be just seem so very hypocritical. Today, to nobody's shock at all, the "think tank" is joined by everyone's favorite TV hobby economist: Steve Liesman, who in an op-ed on CNBC writes: "It’s time to change the narrative and for the United States to step up and abandon its policies of praising Europe’s incremental progress, gently prompting it to action and insisting that it be a Euro only solution... The US should lead the world in creating a large pot of money available to the Europeans to recapitalize their banks. A $2 or $3 trillion fund should get the market’s attention." It should Steve. And just like in the case of CEPR, we hope you can lead the US by creating a large pot of all your money that you would send to Spain and Greece first. Then everyone promises to follow in your so very generous footsteps.
What would a day be without recycling of tired and expired rumors out of Europe. Sure enough:
- EFSF PROVISIONAL CREDIT LINE COMPROMISE BETWEEN MADRID AND BERLIN
- EFSF is to prepare a credit line for Spain in the case of need - Dow Jones
- EFSF provisional credit line for Spain is one option according to a German newspaper
Ah, the good old EFSF, which was last summer's magical bailout mechanism which with 3-4 turns of leverage, would bring the total to €1 trillion... until the realization that there is nothing to lever, as nobody (except for Japan occasionally) wanted to put any money in it. Oh well: the rumor is good to get stocks into the green for at least a few minutes.
For the second day-in-a-row, European volumes are light with stocks and credit generally trading sideways in a tight range. European credit spreads are illiquid (and mostly just reracked by skeleton desks in mainland Europe) as sovereign CDS are generally closed completely (we've seen very few runs). Optically, much is being made of the 4th day in a row of compression in Spanish and Italian bond yields - which is ironic given the Spanish comments on being shut-out of the markets and their pending auction this week - but as we pointed out last week, the lack of CDS discipline being enforced (with London shut) as basis traders and financials-versus-sovereign trades become the marginal drivers of demand for sovereign debt. Do not believe that the markets of the last two days in Europe represent anything but marginal flow - tomorrow's return of the credit market will be the test of where reality is really perceived by market participants. EURUSD weakness today, reverting to unch from Friday and the deterioration in EUR-USD basis swaps is all you need to know on where liquidity is. Clearly the LTRO3 trade is being placed in financials-sovereigns-land, we only hope they are not disappointed.
We are delighted to present to the world the Deus ex Machina that Europe has been searching for in the past 2 years. Courtesy of Michael Belkin, here is the Uncollateralized BWCGTFBCWT Obligation, Series 17.01, also known as the solution to all of Europe's problems.
Two months ago, Carmel Asset Management came out with what we dubbed "Spain: The Ultimate Doomsday Presentation." Since that day Spanish yields have exploded, the domestic (and global) stock market has collapsed, and as of hours ago, Spain for the first time requested an official bail out from its European partners. But Spain was easy - only Nobel prize winning economists and TV anchors could not foresee the final outcome for the country. Today, we redirect our attention to real elephant in the room: Germany. Recall that it was right here on Zero Hedge where we warned, just under a year ago, that "the cost of the euro not plunging today as a result of the ECB not proceeding with outright monetization, is that Germany is now the ultimate backstopper of all of Europe's risk... Germany has directly onboarded the risk associated with terminal failure of this latest and riskiest "bailout" plan and in doing so may have jeopardized anywhere between 32% and 56% of its entire annual economic output. One wonders if the risk of runaway inflation is worth offsetting the risk of a plunge into the worst depression in the nation's history?" Simply said: Germany's opportunity cost to preserving the status quo right now, is at a cost of hundreds of billions in the future, yet even that pales to the cost of letting it all fall apart. But this was a year ago, and out of headlines means out of mind. Today, we are happy to remind readers of just this dilemma, once again courtesy of Carmel. If their predictive ability is gauged by the response in the Spanish market (and economy), Germany should be worried. Very worried.
We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that “austerity” is the only way forward. Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe. For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality (as we first pointed out here). With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing. We have argued since the beginning that all these guarantees were dangerous. Guarantees are more dangerous than CDS since it is truly impossible to figure out how much debt has been guaranteed or how likely the guarantees are to be honored. Germany is the ultimate backstop and seems to have forgotten that debt exists in two states - Debt is either Repaid or It Isn’t! No wonder Josef Ackermann came out in favor of more support for Europe. He has the good sense to see how bad this is - from EFSF/ESM support to bank losses to TARGET2 imbalances, it's just not pretty at all.
Putting some housing things into perspective. From the (less than credible) NAR: "Total housing inventory at the end of April rose 9.5 percent to 2.54 million existing homes available for sale"... And on the other side of the world: "The Beijing Public Security Bureau Population Administration Department said yesterday that vacant houses are 3.812 million."
There was a little for everyone in the latest "baffle them with bullshit" economic data report: while the Services ISM popped modestly from the prior 53.5 to 53.7, on expectations of a slight decline to 53.4, something which in itself is bad because it is good, and makes prospects of more outright QE less of a slamdunk, the all important employment index tumbled from 54.2 to 50.8, the lowest print of the Year, and the largest two month slide in the Employment index since March of 2009. Finaly, with half of the Manufacturing ISM indices in contraction territory already, we finally got the first sub-50 print in the Services ISM as well, with the Prices component declining from 53.6 to 49.8: a/k/a contraction, and the biggest 3 month drop in prices paid since December 2008, and the lowest since July 2009.
Stripped of acronyms and pseudo-economics, Central banks have one lever: monetary easing. Whatever the name offered for creating money electronically and suppressing interest rates, it boils down to making money abundant and cheap to borrow, at least for banks and other favored players, such as buyers of homes using 3% down-payment FHA mortgages. The problem is that easy money doesn't fix what's broken. Incentivizing debt and leverage does nothing to reduce leverage or debt, and incentivizing speculation does not reduce household debt loads or increase household incomes. And without improving household incomes, you have a recessionary economy held aloft by unsustainably profligate Federal borrowing and spending.
Is this a "solution"? No. Is this sustainable? No.
With much of Europe's credit trading parents to the unruly equity trading children still on vacation, it is still clear that Europe's liquidity situation remains as critical as ever. 2-year EUR-USD basis swaps have pushed to new post-LTRO record lows (its costs more now than in the last five months to create USD funding from EUR for a two-year term). With performing collateral in short-supply and a world awaiting the ECB to save the day, it seems odd that basis-swaps would be bleeding worse unless the reality is that the ECB is not about to put on its cape of invincibility. European Banks are nothing but desperate to lock in term funding at these premia and while hope prevails, it would seem the banks are indeed preparing for the worst.
Germany remains vehemently opposed to any euro-wide deposit guarantee scheme as the head of the association of savings banks believes it: "would lead to a spreading of risks to the detriment of German financial institutions" and that this would "increase the burden for national protection schemes, which is not in the interest of German banking clients". Not exactly encouraging and along with the fact that Goldman notes that Germany's 'growth plan' (which includes increasing EIB capital and redirecting existing funds to the periphery) with which it will attempt to bolster its opposition to soaking up more peripheral risk, contains 'nothing really new in it'. For this reason Goldman is far less sanguine heading into the ECB meetings as they hope for the best and prepare for the worst. They expect Draghi's forward-looking statements on being ready to act, conditional on events in the periphery, will be the most important headlines but expect him to remain stoic in his position on governments contributing to the solution. Goldman's view remains that, at least for the time being, the ECB has to play a leading role in stabilising the system (though SMP remains marginalized given its potential to sit outside of the ECB mandate) given that it can operate more quickly and more effectively, given the many political constraints governments face. A genuine long-term solution, however, falls once again in the domain of governments.