A critical - and under-asked - question for investors and 'believers' in Europe is "in what way the new 'fiscal compact' is actually different from the Maastricht treaty when it comes to enforcing compliance". It turns out, there really isn't any difference, and it is for the very same reasons that stood in the way of countries respecting the Maastrich treaty's limits. If there are 'no constraints on public spending', then why negotiate another 'fiscal pact' at all? As Philip Bagus has shown, the euro area is a good example for the 'tragedy of the commons'. Evidently that is not going to change until the monetary union simply falls apart.
Recession drives contingent liabilities into present liabilities quickly and with force and the cattle are now out of control and the stampede has begun. For those of you perhaps wishing for and certainly waiting for some type of “Lehman Moment” to flee; you may find it soon. The danger has always been that Europe will believe its own stuff and then make judgments based upon it and if this turns out to be the case then the decisions will be wrong and the consequences horrific.
We have lately noticed that there is an ongoing debate on whether (or not) the world can again embrace the gold standard. We join the debate today, with an historical as well as technical perspective. The gold standard will be the last option: If adopted, it will be out of necessity and in desperation. We are not historians. In our limited knowledge, we note however that historically, the experiment of adopting a gold standard –or a currency board system- was usually preceded by extremely trying moments, including the loss by a government of its legal tender amidst hyperinflation. The change to a commodity standard has often been then out of necessity. In summary, the Argentine case and the Dutch Golden Age suggest that the elimination of the credit multiplier (i.e. extinction of shadow banking) is more important than the asset backing a currency.
On the inaugural day of the much-awaited holy grail of Europe - the ESM - DutchNews.nl reports that Dutch diplomats in Athens have been secretly planning for an eventual Greek exit from the eurozone (along four themes - liquidity, energy, communications, and security). "We have deliberately strictly kept this behind closed doors", a Dutch diplomat told Volkskrant, adding "I do not know who has trumpeted." Among the Dutch companies doing business in Greece are Heineken, Unilever, and Philips as one business owner note that they "send cash back to the Netherlands as soon as possible - holding as little money in Greece as possible." While the foreign affairs ministry would not confirm, the paper cites a diplomat who commented: "we do not want to awaken any sleeping giants." We suspect you just did - sshh!
The Wars in the Middle East and North Africa Are NOT Just About Oil ... They're Also About GAS
As we all await the next, next, next meeting of the European Finance Ministers and our eyes are turned to Spain and what machinations are going to be brought to our attention, we wonder if actual decisions are going to actually be forthcoming. These people “applaud and hail and congratulate” each other on various non-accomplishments and they tap dance on the world’s stage as if each and every problem is not only solved but light years behind them while there are giant dificulties to their forefront that are largely ignored in the continuing attempt to obscure everyone’s field of vision. We remain skeptical however; we can see just fine thank you and it is not the poppy fields of Oz at which we stare.
Europe, and its apparent Union, is rapidly fragmenting as tensions mount on large and small scales across all of its regions and nations. From Scotland's independence referendum to Flanders' autonomy and now Catalonian separatism on the rise once more, this is no longer a north-south divide, but a rich/poor, debt/no-debt divide. As the NY Times notes, this seems to emerge from the ebbing of the concept of shared sovereignty (richer - or less debt-saturated - nations increasing anger at having to bail out their poorer neighbors), or as Stratfor describes it - the paradox of integration - as 'more Europe' means vastly different things depending on which side of the fence you sit on. Now, as Russia Today reports, Venice is pushing for independence from Rome and there is increasing independence movements in Sicily and Sardinia. As old battles and historical grievance come back to the fore, "when it comes to the crunch, while money may be the catalyst (who commits what to central budgets); it is, as the NY Times puts it, "the meta-narrative and emotions of 'do we feel oppressed?... as the ghosts of history return." From Bannockburn to WWII, "Europe seems shakier; some of the taboo questions are coming out again!"
The market is so focused on this morning's BLS number it has completely ignored the latest round of Reuters "news" (after their last two market-testing, unsourced "exclusives" about European developments were roundly refuted nobody can blame it) on how the OMT will proceed once operational (assuming of course Spain ever requests an activation of the mechanism that has allowed it to consider not requesting it). So, on to the thing of importance via BBG: expectations is for a NFP print of 115,000 and an unemployment rate of 8.2%. Any major surprises to either side will likely be risk negative. The unemployment rate has held above 8% level for 43 consecutive months; U.S. labor force participation rate last month declined to 63.5%, lowest since Sept. 1981. Back to Europe, a possible bailout for Spain is not imminent, a European Union official said, as concerns grow over the country’s ability to reach its deficit-reduction targets. The German recession accelerates as factory orders fell 1.3% in August, more than forecast. Switzerland’s foreign-currency reserves rose to a record 429.3 billion francs at the end of September from 420.8 billion francs at the end of August.Around the world: the Bank of Japan held off from more easing after adding to stimulus last month; shoppers from China’s mainland curbed spending at Hong Kong luxury stores during the Golden Week holiday.
A gang of 16 shady individuals have been arrested by Iranian officials for allegedly smuggling currencies outside the banking network in order to increase the value of foreign currencies and to disturb the public. As CNN reports, amid the protests in the clip below, Iran says the 16 unidentified individuals "had used an atmosphere of psychological war created by the enemy" and colluded with "certain domestic and foreign groups" to exacerbate conditions. One of the accused, allegedly, had $300mm going through a bank account and "will be dealt with soon." Those arrested "were the main players in the recent fluctuations in the foreign currency market," the Tehran Judiciary said in a statement as the public panics over a 60% drop in its currency's purchasing power in the last few weeks. Of course, a 99% drop in the USD's purchasing power is acceptable to the US public since it has been achieved over a century or so...
One of the constant and consistent themes found in Europe is the lack of acknowledgement of what is there and not there. It is a pervasive infection that has gripped the Continent as this manner of doing business clouds the reality of what is at hand and pushes consequences out to some date in the future. After the first Greek bailout both the IMF and the EU informed us, in no uncertain terms, that the new measures would bring the debt to GDP ratio of Greece to 120% by 2020; today we hear a new, new number that the debt to GDP ratio for Greece is 190% and that the country will have a primary surplus in the next few years. These statements have all of the truth to them as Lithuania is part of the United States or that penguins can be found in the Amazon. The problem then, in believing this kind of nonsense is also exactly what we are facing now; Greece cannot pay her bills, the PSI card has already been played and someone is going to have to pay the piper and no one wants to pay him. Whatever remains of some coalition between the EU and the IMF is now in tatters as neither entity wants to take the hit. In fact, neither entity can afford the hit without devastating consequences and yet the hit is going to be taken, of that much I can assure you, because there is nothing left to do.
- No Joy on Wall Street as Biggest Banks Earn $63 Billion (Bloomberg)
- And more good news: IMF’s Blanchard Says Crisis Will Last a Decade (Reuters)
- Hobbit Returns to Find Middle Earth Has Become Expensive (Bloomberg)
- Freddie's Foreclosure Plan Hits Roadblock (WSJ)
- Who will buy the FT? Pearson CEO Scardino Will Step Down as Fallon Takes Over (BBG)
- Jeremy Lin Said to Be in Talks With Harvard on Licensing Deal (Bloomberg)
- Jon Weil tears apart the NYAG "prosecution" - Eric Schneiderman Will Have to Do Better Than This (BBG)
- Portugal Offers to Exchange Bonds as It Seeks Debt Market Access (Bloomberg)
- Is unlimited growth a thing of the past? (FT-Martin Wolf)
- European Bank Capital Results Overtaken by Tougher Global Rules (Bloomberg)
- China’s Slowdown Reverberates as ADB Cuts Forecasts (Bloomberg)
- Tokyo has no plan to extend currency swap deal with Seoul (Reuters)
While some may think that having an unelected technocrat is all fun and games, in Rome at least one person begs to differ. The person is Marcello Di Finizo, an Italian restaurateur, who has "staged a spectacular protest by spending the night between Tuesday and Wednesday on top of Saint Peter's Church in Rome." He is still there now and his expliot can be seen live on the webcast below.
Leading up to the American Financial Crisis. We all had the data, we all saw the sub-prime mess, we all saw the leverage, we all saw the money handed out for nothing and the non-disclosure documents, we all saw the lack of credible ratings supplied by the ratings agencies and yet we went on like it would all continue forever. We ignored it all. We turned our backs but then; we got scalped and so the prime questions must be asked: Are we wise men or are we fools? Did we learning anything from the last go round? Should we act now before we are scalped again considering we only have one head? Since the American Financial Crisis the world has lived off the largesse of the major central banks. It has been a slippery slope and each capital injection or “save the world” speech has been met by risk-on and higher markets as liquidity floods the system. It is a judgment call on our part but we think we are about done with the effectiveness of moves by the central banks.
The US takes... and China makes. With the Western world doing all it can to cripple the Iranian regime with embargo after embargo, desperate to provoke the country into an offensive move that would be promptly retaliated as a move of "liberation", Iran, which in a few short months has achieved just what all the Western central banks have been desperate to do and see its currency collapse to record lows, continues to find eager allies in the unlikeliest of places. Namely China, which today delivered the first of 12 crudesupertankers to Iran " giving Tehran extra capacity to transport its oil to Asia as it struggles against Western sanctions, but it is unclear if the ship has the permits necessary to call at global ports." What is most amusing is the glaring override of the western isolation of Iran by China, which together with India and Russia, have now become critical trading and strategic partners of Iran, a consideration which any offensive moves by Israel or the US will most likely need to factor in.
- China accuses Bo Xilai of multiple crimes, expels him from communist party (Reuters), China seals Bo's fate ahead of November 8 leadership congress (Reuters)
- "Dozens of phone calls on days, nights and weekends" - How Bernanke Pulled the Fed His Way - Hilsenrath (WSJ)
- Fed won't "enable" irresponsible fiscal policy-Bullard (Reuters)
- PBOC Adviser Says Easing Restrained by Concerns on Homes (Bloomberg)
- Data Point to Euro-Zone Recession (WSJ)
- Fiscal cliff dims business mood (FT)
- FSA to Oversee Libor in Streamlining of Tarnished Rates (Bloomberg)
- Monti Says ECB Conditions, IMF Role Hinder Bond Requests (Bloomberg)
- Japan Heads for GDP Contraction as South Korea Weakens (Bloomberg)
- Moody’s downgrades South Africa (FT)
- Madrid Struggles With Homage to Catalonia (WSJ)