The big news this morning, aside from the relatively strong economic data out of the US (of course, we’ll have to wait for the downward revision on jobs to see the real number, which is an ongoing statistical aberration for the record books but anyway) is the news that the German parliament overwhelmingly passed the measure to support the EFSF. In reality, this wasn’t really that newsworthy as passing this particular legislation had been expected since Germany originally agreed to the deal in principal earlier this summer. This was not the leveraged, CDO^2 like structure that failed NY Federal Reserve President cum Treasury Secretary Tim Geithner had been pitching recently in Europe. No, that idea has been dismissed out of hand and Mr. Geithner properly ridiculed for recommending that the already over-taxed European people be further Major Kong-style strapped to the ticking atom bomb that is the European banks’ leveraged balance sheets.
In case you haven’t noticed lately, the market doesn’t move on good or bad earnings or economic data, it moves on political rumors and innuendo about government’s willingness to continue the TARP/cheap money/QE lifeline to the terribly over-leveraged banking sector. It’s especially troubling when you consider the faith most members of Congress place in Ben Bernanke and the other Oracles of Delphi at the Fed. One area that’s going to come home to roost very soon is the zero interest rate policy (ZIRP) that has been in place since late ‘08/early ’09.
Is Dick Fuld running this show? The Eurozone bailout, now being referred to as Euro TARP, is doomed to fail. While nothing has been officially announced the markets are rallying broadly on the back of a news article published by CNBC on Monday. The details are lacking as to the actual structure but speculation is already running rampant across the financial markets as to what it might look like. What is presumed is that Euro TARP will follow the proposal originally proffered by Tim Geithner on his European trip recently. That proposal had been widely dismissed by the G20 as they couldn't come to terms on any type of structure. The current idea outlined by CNBC will bypass the G20 entirely and allow the European Investment Bank (EIB), a bank owned by the member states of the European Union, to take money from the European Financial Stability Facility (EFSF) and capitalize a special purpose vehicle (SPV) that it will create. The SPV will then issue bonds to investors and use the proceeds to purchase sovereign debt of distressed European states, which will hopefully alleviate the pressure on the distressed states (PIIGS) and the European banks that already own their sovereign debt. If alarm bells aren't already going off they will be in just moment as you get the gist of the rest of this disastrous plan.
Negligible Demand For Spanish Treasury Bills Leads To Plunge In Auction Bid To Cover From 7.62 To 2.47 In One MonthSubmitted by Tyler Durden on 09/27/2011 04:53 -0500
While Europe continues to bask in the very transitory glow of a rumor driven respite from the now daily collapse, the funding costs rise. And the market is not happy, as confirmed by the just complete Spanish auction of E3.2 billion (E3.5 billion had been targetted) in 77 and 175 Day bills, which were, for all intents and purposes, failures. Summarizing, E1.6b of 77-day bills were sold at an average yield of 1.692% compared to 1.357% on Aug. 23. The Bid-to-cover plunged to a paltry 2.47 compared to a solidly overbooked 7.62 at the last sale. The last six auction average was 1.41% for the interest and 6.46 for bid-to-cover. Spain also sold E1.6 billion 175-day bills at an average yield of 2.665%, half a percent higher compared to the August 23 auction where the country could still raise debt at a cheap 2.187%. Bid-to-cover 3.95 vs 3.60 at last sale. And since this paper has to roll constantly (or between 2 and 6 months), any transitory interest benefits have now been lost and the vicious circle of deteriorating funding will continue to impact short-term debt raises by Spain, which in turn will force primary interest rates to raise again and so ad inf.
The infographic serves as a scary reminder that America is at a treacherous debt crossroad, and most signs seem to suggest that things could get even more difficult from here on out.
While the bulk of the re-recessionary fears this morning came out of China where economic contraction is now fully raging, Europe is not helping after both Manufacturing and Services Flash PMIs came in worse than expected, and far worse than previous, and more notably with the Services PMI printing below 50, or contracting for the first time in 2 years. In a nutshell, Manufacturing came in at 48.4, Services at 49.1, both missing consensus of 48.5 and 51.0, and far lower than prior 49.0 and 51.5 respectively. As Reuters notes, "None of the 37 economists polled by Reuters had predicted that services activity would contract and this is the first time the index has been below the 50 mark that divides growth from contraction since August 2009....It was a similar picture in the manufacturing sector, which had driven a large part of the bloc's recovery. The factory index dropped to its lowest level in two years at 48.4, slightly below expectations of a fall to 48.5. "The numbers are still consistent with some GDP growth, so it does not signal recession just yet," said Martin Enlund at Handelsbanken. "That said, we are seeing a slow-motion train crash in the euro area, where credit contraction risks leading to a new recession by Christmas unless governments face up to the task swiftly and forcefully." In other words, on one hand I) the perpetual shining beacon in Europe: economic growth against all odds courtesy of Germany, has now been dimmed, and on the other, II) the liquidity run on Europe's banks is raging even harder, especially with II being reinforced by I, and immediately sending BNP 3M USD Libor from 0.385% to a year+ high of 0.39% as the average Li(e)bor has risen for nearly the 50th consecutive day from 0.356% to 0.358%.
Europe’s fiscal and debt crises have dominated the financial news for months, and with good reason: the fate of the European Union and its common currency, the euro, hang in the balance. As the world’s largest trading bloc, Europe holds sway over the global economy: if it sinks into recession or devolves, it will drag the rest of the world with it. As investors, we are not just observers, we are participants in the global economy, and what transpires in Europe will present risks and opportunities for investors around the world. The issue boils down to this: is the European Union and the euro salvageable, or is it doomed for structural reasons? The flaws are now painfully apparent, but not necessarily well-understood. The fear gripping Status Quo analysts and leaders is so strong that even discussing the euro’s demise is taboo, as if even acknowledging the possibility might spark a global loss of faith. As a result, few analysts are willing to acknowledge the fatal weaknesses built into the European Union and its single currency, the euro. In the first part of this series, we’ll examine the structural flaws built into the euro, and in the second part, we’ll consider the investment consequences of its demise.
Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist - to get mortgage rates lower and refinancing higher - is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.
While the BOE's decision came and went exactly as expected (rate unchanged at 0.50%, no new Quantitative Easing), leading to a slight jump in the GBP but nothing too notable, all eyes now turn to the ECB in 20 minutes and whether or not Jean Claude will admit defeat and announce the end of the bank's very ill-timed decision to start tightening from 6 months ago, which as much as it is overdue, will unfortunately not happen, egos and all. Here is a complete preview, but in a nutshell the consensus is for rates to remain unchanged at 1.50%, for an announcement that downside risks have intensified, and that both lower growth and lower inflation will be forecast.
Today's first Fed speech is out, this one by Chicago Fed dove, Chuck Evans who was recently interviewed by Russian speaking, guitar playing, arch-Keynesian Steve Liesman and dropped the first QE3 bomb a week ago, in which he basically says what he said before, namely that "very significant amounts" of added accommodation are needed. In other words: more of the same, and this time it will be different. After all 12 Fed presidents and 1 chairman can't all be insane all the time.