The primarily sovereign credit crunch in Europe, which has resulted in part due to the ECB's disastrous, and since reversed decision just like in 2008, to hike rates early in the year, only to go ahead and not only cut but expand its balance sheet by a record EUR 800 billion in the past six months, has finally started trickling down to the corporate, and more importantly financial levels, where as was just reported today, the broadest monetary aggregate, the M3, rose by a only 2.0% in November, dropping by a whopping 60 bps from October (keep in mind this is a huge amount on a number that is in the tens of trillions), which happened to be the biggest annualized contraction change since 2009. What is worse, and what confirms that the daily "near default" state Europe finds itself in every single day has sent shockwaves of uncertainty around the continent, is that the loans to private businesses grew at just a 1.7% rate in November, a plunge from October's 2.7% and missing expectations of 2.6% by a wide margin. Said otherwise, corporate credit (far more important than its sovereign equivalent) is being turned off. And as has been widely discussed without credit flowing, there is not only no growth, but the threat of imminent economic depression. Lastly, that this has happened even as the ECB's balance sheet has risen from EUR 1.9 trillion to $2.7 trillion in 6 months is truly humiliating from Trichet as none of the money he injected into the banks has made it to the broader public, and instead all has been used to prop up Europe's failing banks, something we know all too well here in the US.
Now that we have had a day to digest the move from yesterday, we go to the only voice in the market worth listening to, that of Art Cashin. Not surprisingly, he doesn' tell us anything we did not already report or know, but good to hear the confirmation nonetheless.
"Not many market participants will lament the passing of 2011" is how Goldman starts a brief note today looking back at a year full of adverse shocks in order to judge the year-ahead's potential to destroy forecaster's perspectives. The 'shocks' as well as the known unknowns are summarized effectively as the experience of 2011 suggests that the global economy remains at a delicate juncture as we head into 2012. They note that by definition, shocks are unpredictable. But slowing growth (and in places outright contraction), public sector cuts, and a renegotiation of the social compact between state and society in different parts of the world is an environment ripe for political turmoil, and this may well be a source of more shocks as the year progresses.
Following 4 weeks of supposed improvements in the labor picture courtesy of declining initial jobless claims, even as we all know too well that Wall Street has been firing thousands and thousands of highly paid bankers and CNBC talking heads left and right (are bankers too good for that $400/week paycheck from Uncle Sam?) today initial claims for the week ended December 24 once again resumed their drift higher, printing at 381k, up 15k from the perpetually upward revised prior week total of 366K (previously 364K). And as usual, the Seasonal Adjustment process smoothed out a whooping jump in actual terminations of 69k, which rose from 421K to 490K. Continuing claims also rose by 34K, from 3567K (upwardly revised, duh) to 3601K. Finally, those on EUCs and Extended Benefits once again saw a net drop off from the 99 week cliff as more and more people fall out out of the workforce in perpetuity following 2 years of being unable to find a job. The total amount of jobless on extended claims is now down by 1 million from a year ago, down from 4.5 million to 3.5 million, and dropping. We for one, can't wait to hear what the media spin will be next month when employers put the pinkslipmobile on turbo boost next month and fire all those temp workers they has been stockpiling to help with the EOY inventory liquidations, and we get another 400K claims print.
While the technocrats cling to their vision for a European Bloc (amid a tumbling 'stable' EUR), Italian Prime-Minister-in-lieu Mario Monti is spreading the good word. Presented with little comment, via Bloomberg headlines, from a press conference in Rome, the Goldmanite builds the bridge to nowhere that the Socialist construct is unsustainable, yet the EFSF needs more funding to ensure the unsustainable social welfare model remains, err, unsustainable?
- *MONTI SAYS EUROPE MUST NOT GIVE UP MODEL OF SOCIAL WELFARE
- *MONTI SAYS EUROPE CAN'T SUSTAIN CURRENT WELFARE SPENDING
- *MONTI SAYS EFSF NEED `SIGNIFICANTLY MORE' FUNDING
Oh and this...
- *MONTI SAYS NOTHING JUSTIFIES CURRENT ITALIAN SPREAD
Over the last week we have spent a lot of time focused on what drives markets. More specifically the notion that while earnings and 'confidence' are often driveled out by strategist after strategist as the drivers for why the S&P will hit 1525 next year, it is the credit impulse or credit creation that drives everything as Central Bankers try their hardest to out-create one another. Furthermore, exactly a week ago we indicated that the primary correlation for 2012 would be the relationship between the balance sheets of the ECB and the Fed and the level of the EURUSD. Sure enough RBC has taken our suggestion to the next level in predicting just what the next steps for the Euro will be. It seems evident that is the ECB continues to 'not print' at this rate, and its balance sheet expands by another 500-1000 billion, the next target for the EURUSD is about 1.10 - which of course leaves no choice for the Fed other than to print as well.
It seems funds left redemptions until the last minute in the vain hope that everything will be fine in the European dis-Union as we see renewed selling pressure in EURUSD - taking out the January 2011 swing lows (as a mediocre Italian auction and failed Hungarian auction weigh heavily on the expectations for a 'solution' or firewall). Gold and Silver are also legging down hard (the latter now -9.5% from Christmas Eve) and the former loses $1550. Gold took out its September 2011 swing lows back to near six-month lows.
Today's most anticipated economic headline - the sale of 3 and 10 Year Italian bond - auction has crossed, and judging by the selloff in the Italian secondary bond market (north of 7% now) and the drop in the EURUSD, now under 1.2900, it was a solid disappointment. Italy sold well below the targeted EUR 8.5 billion in 2014, 2018, 2021 and 2022 notes, with the key 10 Year 5% bonds pricing in line with the target EUR 2.5 billion, and optically successful at 6.98%, just inside the 7% critical level. The Bid To Cover was a weak 1.36, barely an improvement from the 1.34 from November 29, the day before the coordinated Fed bailout of Europe, when the same auction cost Italy 7.56%. And this was the good news: virtually all the other discrete auctions were far uglier than the headline indicated with demand weaker across the board.
In an interview making the rounds this morning, which appeared in German "for the people" daily Bild, one of the German Council of Economic Experts, Beatrice Weder di Mauro, who is one of five economic advisors to Angela Merkel, put it in no uncertain terms (Bild readers don't like the kind of "political talk" other politicians are best known for) that while a breakup of the Eurozone in 2012 would be "bad for everyone involved" it can not be completely excluded. She also warned that unless the financial crisis is intercepted quickly, it can lead to a recession in Germany, with the economy contracting 0.5%, and leading to an increase in unemployment. Finally, she made it all too clear how Germany plans to deal with the PIIGS laggards: "Over-indebted euro-zone nations must submit to a long-term insolvency rule." Now granted this was google translated, but somehow we believe it captures the essence of the underlying thought quite succinctly. In other words, Germany is once again toying with the "expulsion" nuclear option, the same one that according to UBS analysts as recently as a few weeks back, would make precious metals, tinned goods and small caliber weapons the best investment option. How this will impact the EURUSD on this day when the currency is already at a near 2011 low is unclear, but will hardly be favorable.
Following yesterday's surge to an all time record high of EUR 452 billion, which confirmed that virtually all LTRO cash had been redposited back at the ECB to lose 75 bps as per the "inverse carry trade" first presented here, today's update shows that yesterday the cash held by banks at the ECB declined by EUR 15 billion to EUR 437 billion - a delta of just over the amount raised by Italy in its 6 month and Zero Coupon bond issues yesterday. And despite said successful auctions, today the Italian 10 Year BTP is once again over the critical 7% benchmark level, even as Italy prepares to issue between 8 and 11 billion in 3 and 10 Year bonds - an auction which will prove far more challenging as it falls outside the LTRO maturity date and thus leaves banks exposed to non-carry trade covered risk.
While the Iranian war game naval exercises have been ongoing for almost five days, or half of the projected 10, tensions in the Straits of Hormuz region have been rising culminating with today's interchange between the head of the Iranian Navy and the US 5th Fleet (which for various reasons we can not present you with a status update today). One question that remains is just what would a closure of the Straits looks like. Luckily, the Middle East Media Research Institute's blog has caught a release by an Iranian website Mashreq News, which spells out the step by step details of just how such a closure would be enacted.
When a week ago we reported the latest weekly data from the Public Policy Polling institute, many were stunned to learn that Ron Paul was in the lead in the Iowa caucuses. In light of the neverending media onslaught against the Texan, this is not very surprising. The discrepancy between PPP and other, more "accepted" polls such as the CNN/Time was borderline ridiculous, when it came to the standing of the anti-Fed crusader (attacks against whom have recently passed into the Twilight Zone as per this NYT article). Just released, however, is the latest CNN poll information, which is far more in line with what PPP predicts, namely an Iowa photofinish between Paul and Romney. "Twenty-five percent of people questioned say if the caucuses were held today, they'd most likely back Mitt Romney, with 22% saying they'd support Rep. Ron Paul of Texas. Romney's three point margin is within the poll's sampling error. The poll's Wednesday release comes six days before Iowa's January 3 caucuses, which kickoff the presidential primary and caucus calendar. The Iowa caucuses are followed one week later by the New Hampshire primary." In its previous poll, CNN had Gingrich in the lead with 33%, followed by Romney and Paul with 20% and 17%. So while CNN implicitly admits that Paul may well be in the lead net of sampling error, it masks this by making the story focus on something totally irrelevant: the fact that somehow Santorum's support is surging.
With everyone and the kitchen sink busy sneaking away from the trading floor or holiday dinner to pen predictions for 2012 that will "hopefully" have a success rate of at least 50%+1 (or in Byron Wien's case, even just 1%), others such as Grant Williams have taken the opposite route, and in his latest Things that Make You Go Hmm, he has writen a retrospective, from the point of view of a man sitting on the edge of the end of the world, namely December 20, 2012, and looking back at the key events of the year. Among the primary "memories" of 2012 was the capitulation of Germany and the full backstop of the ECB of sovereign debt, the departure of Greece, Portugal and Spain from the Eurozone, the attack by the US of the Bushehr nuclear reactor leading to an oil price surge to $188 and $5 gas prices at the pump, the nail-biting electoral win of Hilary Clinton over Michael Bloomberg, the predicted but delayed municipal bond meltdown, the announcement of QE3 with $800 billion of MBS purchases in February followed by QE4 in which the Fed cut the rate on overnight reserves, this time however promptly followed by a spike in inflation, the parallel surge of gold to $2400, especially after the MF Global whistleblower revelation that gold had, after all, been manipulated all those years, the epic collapse of the Chinese housing market and the economy' hard sinking, and much, much more.