European Central Bank

With GREXIT once again knocking on the Euro's door, Mario Draghi has come out swinging (or jawboning). As Reuters reports, the non-political, non-meddling, completely independent central bank chief explains, structural reforms were needed to "ensure that each country is better off permanently belonging to the euro area," adding that Euro zone countries must "complete" their monetary union by integrating economic policies further and working towards a capital markets union. Brussels Uber Alles... (or else "the threat of an exit (from the euro) whose consequences would ultimately hit all members").

Greek bank shares collapsed by even more. Two of Greece’s largest banks, Piraeus bank and Alpha bank, shed more than 14% of their share value as concerns of bank solvency, bank runs and Cyprus style bail-ins reemerged. Fail to prepare ... prepare to fail ...

Things for Europe (and liquidity addicts around the globe) just got a little more complicated. Earlier today, moments after the failed Greek presidential vote pulled the forgotten topic of a Grexit up front and center, the IMF announced that it is suspending financial aid to Greece under its huge rescue program until a new government is formed. RTE quotes IMF spokesperson Gerry Rice who said discussion on the completion of the sixth review of Greece's bailout will resume once a new government is in place. Mr Rice added that the holdup in the program would not impact the country's finances in the short term.

Recall that just over two weeks ago, none other than Greek currency swap expert Goldman (alongside Jean-Claude Juncker who quite explicitly warned Greeks not "to vote wrong") came out with a Fire and Brimstone worst-case scenario which was nothing but an attempt at fearmongering designed to scare Greek MPs into doing Samaras' bidding, in which it said not electing the designated presidential candidate may lead to a worst-case scenario which involves a "Cyprus-style prolonged bank holiday." Basically what Goldman said is that unless Greece quickly folds back in line and does as the unelected Brussels eurocrats demand, there will be a Cyprus-style bank closure coupled with preemptied bank runs. Well.... oops. Because if that was the doubled-down bluff, then Greece just called it, and the "downside scenario" is now in play.

With Greek CDS surging to near post-bailout highs (and short-end bond yields back above 11%), it appears the market is anxious of the endgame as tomorrow's 3rd and final 'snap-election'-saving vote looms. Following Samaras fearmongering yesterday, it appears Germany is starting to fear the worst (and play down its effect), as Merkel's bloc states "the prospect of a Greek sovereign default is no longer a concern for euro member countries and financial markets," adding "hope that Greece’s international partners would pay if the country’s policymakers refuse to carry out necessary reforms is misplaced." However, as Bruno de Landevoisin notes, "what is at stake is none other than the prosperity of the common man pitted against the privilege of concentrated power."

On the old continent, this December 29th, a succinct political showdown is scheduled to take place which may well become a defining moment for our entirely unsettled new millenium. 

America’s Federal Reserve is headed down a familiar — and highly dangerous — path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic. The Fed’s incrementalism of 2004-2006 was a policy blunder of epic proportions. The Fed seems poised to make a similar — and possibly even more serious — misstep in the current environment. In these days of froth, the persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger.

ECB's Vitor Constancio, October 26, 2014: "The scenario of deflation is not there because indeed we don't consider that deflation is going to happen."

ECB's Vitor Constancio, December 20, 2014:" "We now expect negative inflation in the coming months."

Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."

A specter is haunting the world, the specter of two percent inflationism. Whether pronounced by the U.S. Federal Reserve or the European Central Bank, or from the Bank of Japan, many monetary central planners have declared their determination to impose a certain minimum of rising prices on their societies and economies. One of the oldest of economic fallacies continues to dominate and guide the thinking of monetary policy makers: that printing money is the magic elixir for the creating of sustainable prosperity. Once the inflationary monetary expansion ends or is slowed down, it is discovered that the artificially created supply and demand patterns and relative price and wage structure are inconsistent with non-inflationary market conditions. Governments and their monetary central planners, therefore, are the cause and not the solution to the instabilities and hardships of inflations and recessions.

Once again oil is not even the biggest story today. It’s plenty big enough by itself to bring down large swaths of the economy, but in the background there’s an even bigger tale a-waiting. Not entirely unconnected, but by no means the exact same story either. It’s like them tsunami waves as they come rolling in. It’s exactly like that. That is, in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And we're not talking Putin, he’ll be fine, as he showed again yesterday in his big press-op. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. And make no mistake: to be a contender for bigger story than oil going into 2015, you have to be major league large. This one is.

"There is no automatic adjustment of current account deficits and surpluses, they can get totally out of hand. There are effects from big countries to little ones, like Switzerland. The system is dangerously unanchored. It is every man for himself. And we do not know what the long-term consequences of this will be. And if countries get in serious trouble, think of the Russians at the moment, there is nobody at the center of the system who has the responsibility of providing liquidity to people who desperately need it. If we have a number of small countries or one big country which run into trouble, the resources of the International Monetary Fund to deal with this are very limited. The idea that all countries act in their own individual interest, that you just let the exchange rate float and the whole system will be fine: This all is a dangerous illusion."

Shifting consumption from gasoline sales to retail sales does not create economic growth. It is just a "shift" in where the same dollars are spent. However, there has been much "hoopla" over the recent retail sales report for November that saw retail sales jump for the month by 0.7%. While on the surface this appears to be a strong retail sales report, a quick look below the surface quickly destroys that claim.

• Sydney Siege Sparks Muslim Call for Calm Amid Backlash Fear (BBG)
• Oil Spilling Over Into Central Bank Policy as Fed Enters Fray (BBG)
• Biggest LBO of 2014: BC Partners to acquire PetSmart for $8.7 billion (Reuters)
• Tremble algos: the SEC has hired... "QUANTS" (WSJ)
• When the bubble just isn't bubbly enough: There’s $1.7 Trillion Locked Out of China’s Stock Rally (BBG)
• Oil price slide roils emerging markets, yen rises (Reuters) - may want to hit F5 on that
• Libya Imposes Force Majeure on 2 Oil Ports After Clashes (BBG) ... and will resume production in days
• Amid Crisis, Pimco Steadies Itself (WSJ)

In space, no one can hear you scream... unless you happen to be Venezuela's (soon to be former) leader Nicolas Maduro, who has been doing a lot of screaming this morning following news that UAE's Energy Minister Suhail Al-Mazrouei said OPEC will stand by its decision not to cut crude output "even if oil prices fall as low as $40 a barrel" and will wait at least three months before considering an emergency meeting.