European Central Bank
When you are leveraged at these levels, you only need the assets you invest in to fall 4% before you’ve wiped out all of your underlying capital (€26 * 0.04 = €1.04).
Curious what Europe's true economic state is? The chart below, showing Europe's annual inflation or lack thereof, and which just dropped from 0.5% to 0.4%, missing estimates of an unchanged print despite the ECB's ongoing and losing war with disinflation, and soon deflation, shows all you need to know.
It has been a deja vu session of that day nearly a month ago when the Banco Espirito Santo (BES) problems were first revealed, sending European stocks and US futures, however briefly, plunging. Since then things have only gotten worse for the insolvent Portuguese megabank, and overnight BES, all three of its holdco now bankrupt, reported an epic loss despite which it will not get a bailout but instead must raise capital on its own. The result has been a record drop in both the bonds (down some 20 points earlier) and the stock (despite a shorting ban instituted last night), which crashed as much as 40% before stabilizing at new all time lows around €0.25, in the process wiping out recent investments by such "smart money" as Baupost, Goldman and DE Shaw. The result is a European financial sector that is struggling in the red, while adding to its pain are some large cap names such as Adidas which also tumbled after issuing a profit warning relating to "developments" in Russia. Then there was European inflation which printed at 0.4%, below the expected 0.5%, and the lowest in pretty much ever, and certainly since the ECB commenced its latest fight with "deflation", which so far is not going well. The European cherry on top was Greece, whose dead cat bounce is now over, after May retail sales crashed 8.5%, after rising 3.8% in April.
- Argentine holdout NML says government "choosing" to default (Reuters)
- Crunch time for Gaza truce talks as death toll passes 800 (Reuters)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- U.S. Accuses Russia of Shelling Eastern Ukraine (BBG)
- France’s Wheat Exports in Question as Rain Spoils Quality (BBG)
- Tapering in action: Lower printer sales hurt Xerox's revenue (Reuters)
- No liquidity? No Problem, there's an ETF for that: Bond ETFs Swelling in Europe as Trading Debt Gets Tougher (BBG)
- Herbalife hires ex-Biden chief to fend off regulators (NYPost)
- GM recalls far from calamity for some dealers who find new customers, business (Reuters)
- Bad weather likely cause of fatal Air Algerie crash: French officials (Reuters)
While the ECB has said it takes data security "extremely seriously" and that numerous safeguards are in place to keep sensitive data from falling into the wrong hands, the WSJ reports that The European Central Bank said Thursday that 20,000 email addresses and other contact information of people who signed up for ECB events were stolen after one of its databases was hacked. Sadly, the hack was only discovered after an anonymous emailer asked for money for the stolen information. One wonders if the hackers were looking for the mythical OMT documentation...
“A government that robs Peter to pay Paul can always depend on the support of Paul.” – George Bernard Shaw
Exactly 50 years ago last month the US Supreme Court ruled on the now famous case of Jacobellis v. Ohio. At stake was whether a French movie with graphic sexual content could be outlawed by the state via its obscenity laws. The court ruled that it could not because the film wasn’t hardcore pornography. How could they tell? In an explanation that has now turned into one of the most famous quotes in court history, Justice Potter Stewart explained that although he could not define exactly what hardcore porn was, “I know it when I see it” Like porn, asset bubbles are also hard to define, but given our economic history, and especially our recent economic history, we know it when we see it, and now we see it everywhere. We all see it. Apparently the only people that don’t see the bubbles are the people creating them.
“The fundamental problems are not solved and everybody knows it,” Maximilian Zimmerer, CEO of Allianz, said at Bloomberg LP’s London office. The “euro crisis is not over,” he said. “There is only one country where the debt level last year was lower than 2012 and this is a signal the debt crisis can’t be over, only a recognition of the debt crisis has changed,” Zimmerer said on July 9. “If the debt levels are not going down in the end we will have a problem, that is for sure.”
Felix Zulauf, James Montier and David Iben: Three legendary investors share their views on financial markets. Everything is pricey ("we will continue to swim in a sea of liquidity; but there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations.") the European periphery is a bubble ("The Euro crisis is not over...the European economies are not going to change for the better for years to come despite all the cheating and breaking of laws"), Value investors need to venture to Russia ("when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view") or buy gold mining stocks (" The down cycle could be much bigger than anybody believes if the market realizes that all the actions taken in recent years do not work.") Summing it all up, "there is no question that [sovereigns] lack the fundamental economic base to finally service their debts," trade accordingly.
Lord Overstone said it best. “No warning can save people determined to grow suddenly rich.” Case in point - CYNK Technology Corp, a listed company that as of this morning has a market capitalization in excess of $1 BILLION. According to official filings, the social media development company had one employee, no website, no revenue, no product, and no assets. What has effectively united this company with prudent investors is today’s central banker. Hyper-aggressive monetary policy has side effects. Getting out of this mess is not going to be easy, and it’s going to be messy.
Global banking regulators are considering new measures that would make it harder for banks to understate the riskiness of their assets. The BIS decision, as WSJ reports, to end the long-standing treatment of all government bonds as automatically risk-free, is clearly being priced into European banking stocks (as we noted here). Since the financial crisis European banks have backed up the truck on their domestic sovereign bond issuance (most especially Italy and Spain) - draining every fund to buy over EUR1.8 trillion of these 'risk-free' assets. However, that party is potentially ending as The Basel Committee panel is looking at barring banks from assigning very low risk levels to certain types of assets, a tactic some lenders have used to reduce their capital requirements; which could force banks to raise billions of dollars in extra capital.
What "harsh weather", aka completely unpredictable cold snaps and snow during the winter were to Q1 US GDP, which somehow cratered from an expected 2.5% increase to a -2.9% collapse (a $200 billion negative swing in the US economy due to weather, let that sink in for a second), the Brazil world cup may be to the stock market. At least that is the following chart from Bloomberg, highlighting the "World Cup Syndrome" shows.
We live in a world that is becoming increasingly unstable, and people need to understand that the period of relative stability that we are enjoying right now is extremely vulnerable and will not last long. The following are 18 signs that the global economic crisis is accelerating as we enter the last half of 2014...
There are some out there in the economic world that believe that banknotes are detrimental to the health of the economy and that they are currently stifling the recovery of the markets. Their solution: burn the damn things and let them go up in smoke. Replace them with electronic money and then the central banks around the world will be able to do more than just providing alternatives that don’t work to revamping the financial markets and boosting economic growth.
UPDATE: FIFA bites back and bans Uruguay's Luis Suarez for 4 months
As 12ET rolls around and USA's soccer team prepares to engage zee Germans with the goal of advancing to the FIFA World Cup's knockout stage, Bloomberg undertook an 'economic' face off to see just how the two powerhouse nations stack up. The result - a 4-0 win for Germany does not bode well for the soccer...