And Greece is the model for Spain and Italy.
Two weeks of utter confusion by most market participants out there, when the complete deja vu scenario is so very clear. To help out those banging their heads over what is happening, here, once again, is the full playbook as it was laid out here for eveyone to read and prepare, because it explained to the dot precisely what will happen, and has been happening since May 19. And yes, that 1000 bps on XO is still about 25% away... Do the math.
Deflation has effectively been abolished by central banking. But is it sustainable? The endless post-Keynesian outgrowth of debt suggests not. In fact, what is ultimately suggested is that the abolition of small-scale deflationary liquidations has just primed the system for a much, much larger liquidation later on. Central bankers have shirked the historical growth cycle consisting both of periods of growth and expansion, as well as periods of contraction and liquidation. They have certainly had a good run. Those warning of impending hyperinflation following 2008 were proven wrong; deflationary forces offset the inflationary impact of bailouts and monetary expansion, even as food prices hit records, and revolutions spread throughout emerging markets. And Japan — the prototypical unliquidated zombie economy — has been stuck in a depressive rut for most of the last twenty years. These interventions, it seems, have pernicious negative side-effects. Those twin delusions central bankers have sought to cater to — for creditors, that debt is wealth and should never be liquidated, and for debtors that debt is an easy or free lunch — have been smashed by the juggernaut of history many times before. While we cannot know exactly when, or exactly how — and in spite of the best efforts of central bankers — we think they will soon be smashed again.
10 Questions ...
What would the weekend be without at least one rumor that Europe is on the verge of fixing everything, or failing that, planning for a master fix, OR failing that, planning for a master plan to fix everything. Sure enough, we just got the latter, which considering nobody really believes anything out of Europe anymore, especially not something that has not been signed, stamped and approved by Merkel herself, is rather ballsy. Nonetheless, one can't blame them for trying: "The chiefs of four European institutions are in the process of creating a master plan for the euro zone, the daily Die Welt reports Saturday, in an advance release of an article to be published Sunday. Suggestions targeting a fiscal, banking, and political union, as well as structural reforms, are being worked out..." Less than credible sources report that Spiderman towels (which are now trading at negative repo rates) and cross-rehypothecated kitchen sinks are also key components of all future "master plans" which sadly are absolutely meaningless since the signature of Europe's paymaster - the Bundesrepublik - is as usual lacking. Which is why, "the plan may well mean that the euro zone adopts measures not immediately accepted by the whole of the European Union, the article adds." So... European sub-union? Hardly strange is that just as this latest desperate attempt at distraction from the complete chaos in Europe (which will only find a resolution once XO crosses 1000 as we and Citi suggested two weeks ago and when the world is truly on the verge of the abyss), none other than George Soros has just started a 3-month countdown to European the European D(oom)-Day.
To be clear, the Fed, indeed, Global Central Banks in general, have never had to deal with a problem the size of the coming EU’s Banking Crisis. I want to stress all of these facts because I am often labeled as being just “doom and gloom” all the time. But I am not in fact doom and gloom. I am a realist. And EU is a colossal mess beyond the scope of anyone’s imagination. The World’s Central Banks cannot possibly hope to contain it. They literally have one of two choices:
- Monetize everything (hyperinflation)
- Allow the defaults and collapse to happen (mega-deflation)
Here we go again. Back in July 2011 we wrote an article entitled "The Real Banking Crisis" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.... Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe.
Well, they sold in May but did they go away? If today is any guide, they did as the swings across asset classes intraday were very reminiscent of 'death rattles' with trading scenarios becoming more and more binary and more and more extreme. Into the US macro data this morning risk assets in general were behaving in a synchronized manner. As the dismal data hit, it got wild with gold and stocks gapping down and Treasury yields crashing lower (10Y 1.53 handle!) only to be saved around the European close by chatter of IMF aid for Spain (funded by the selling of unicorn tears) at which stocks erupted (and while bonds, the USD, and Gold also reacted - they were far more muted). The afternoon was quiet until stocks had a mind of their own and went on a stop-hunt up to yesterday's late day highs (and that magical 1315 level) - pulling well away from any other asset-class reality - only to fail dismally, ending with an abrupt tumble back to sanity (just slightly in the red for the day) grabbing VWAP into the close. The signals were everywhere that risk was not 'on' no matter how hard stocks tried with high-yield credit (most notably the ETFs) surging and purging ending with a terrible dive (after popping up to VWAP after our earlier note) on heavy volume.
If it appears like it was only yesterday that Goldman was advising clients to short the 10 Year Treasury, it is because it was... give or take a few months: From January: "Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00." We added the following: "As a reminder, don't do what Goldman says, do what it does, especially when one looks the firm's Top 6 trades for 2012, of which 5 are losing money, and 2 have been stopped out less than a month into the year." Sure enough, as we tabulated last night, those who had listened to this call, and also gone long stocks as Goldman urged on March 21, have lost nearly 30% in about 2 months. Those who listened to us and did the opposite, well, didn't. Which is why the just released note from the very same Garzarelli who 4 months ago was so gung ho on shorting bonds, just cut his bond yield forecast for the entire world, US Treasurys included: "We now see 10-year US Treasuries ending this year at 2.00% (from 2.50% previously, and 30bp above current forwards), rising to 2.50% (previously 3.25%, and 60bp above the forwards) by December 2013. The corresponding numbers for German Bunds are 1.75% and 2.25%." In other words, it is now that Doug Kass should have made his short bonds call: not when he did it, a month ago and got his face bathsalted right off. For those asking - yes: Goldman is now selling bonds to clients.
Gene Arensberg of the Got Gold Report says that the COT data “suggests that dips for gold and silver should be exceedingly well bid just ahead. Indeed, the structure of the COT is about as bullish as we have seen it for silver futures.” The supply demand fundamentals remain very sound with gold demand expected to exceed supply again this year, according to the World Gold Council who have said that gold has bottomed or close to bottoming. Gold will extend annual gains for a 12th year as bullion is “near” a bottom and demand will keep exceeding mine output, according to the World Gold Council. Mine production will grow 3% this year from last year’s 2,800 metric tons, while demand may be unchanged or slightly lower from a record 4,400 tons, said Marcus Grubb, managing director of the WGC in an Bloomberg interview in Tokyo. Mine supplies will remain in a deficit “for a foreseeable future,” Grubb said. Bullion is “near to the bottom at current prices, indicating gold will move back up again,” he said. Recycling has risen to make up for the gap between demand and mine output, he said. “Some of the drivers of the increase in demand are structured, central banks for example, the rise of Chinese demand and the wealth increase in Asia, including India and China as well as smaller economies,” he said. Central banks have increased gold purchases on concern about the dollar, the euro and the sovereign debts, Grubb said. The banks’ net purchases last year were the most since 1964. In 2010, they turned to a net buyer for the first time in 15 years.
The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.
We're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.
You know the something is really, really wrong when the best rapper is a white guy, the best golfer is a black guy, the tallest guy in the NBA is Chinese, the Swiss hold the America's Cup, the Pope is German, Europe's central banker is Italian, France is accusing the U.S. of arrogance and Germany doesn't want to go to war.
For the first time ever, 3 year Japanese government bond (JGB) yields are trading below 1 year JGB yields as the world's inexorable desire to repatriate, delever, and seek safety while reaching for as much term yield as is still 'safe' come home to roost. With Swiss rates already grossly negative and German rates rapidly converging, the world's (d)evolution (since evolution conjures a rebirth into something better) is shifting investors out the yield curve as ZIRP is here to stay forever, wherever you look in so-called developed economies (who can print their own money). In the last 4-5 weeks, 3Y Japanese bond yields have dropped 6bps to around 10bps (pretty much the same as every other maturity inside of 3Y) as the entire yield curve gradually flattens pushing out investor's perception of 'cash' to longer- and longer-maturities. Be careful what you wish for US equity investors, as the Keynesian Endpoint is upon us (and perhaps, just perhaps that is why Central Banks of the world are checking to the Fed, the ECB is playing hardball, and the Fed remains on hold unless apocalypse occurs - which, by the way, is not an 8% retracement of a 30% straight line rally).