Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"
How can such a small country blow through so much money?
Will the Fed then just keep printing forever and ever? As an aside, financial markets are already trained to adjust their expectations regarding central bank policy according to their perceptions about economic conditions. There is a feedback loop between central bank policy and market behavior. This can easily be seen in the behavior of the US stock market: recent evidence of economic conditions worsening at a fairly fast pace has not led to a big decline in stock prices, as people already speculate on the next 'QE' type bailout. This strategy is of course self-defeating, as it is politically difficult for the Fed to justify more money printing while the stock market remains at a lofty level. Of course the stock market's level is officially not part of the Fed's mandate, but the central bank clearly keeps a close eye on market conditions. Besides, the 'success' of 'QE2' according to Ben Bernanke was inter alia proved by a big rally in stocks. But what does printing money do? And how does the self-defeating idea of perpetual QE fit with the Credit Cycle relative to Government Directed Inflation (or inability to direct inflation where they want it in the case of the ECB and BoE)?
The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics.
- Draghi Says ECB To Do Whatever Needed As Yields Threaten Europe (Bloomberg)
- Spain not mulling seeking further EU help (Reuters)... and it won't need a Bank bailout either. Oh wait
- Weak lending adds pressure for ECB action (Reuters)
- Sweden's economy still resilient to eurozone woes (Reuters)
- Bo Xilai’s Wife, Zhang Xiaojun, Prosecuted for Homicide (Xinhua)
- China’s Changsha City Unveils $130 Billion Investment Plan (Bloomberg)
- Foreclosure Filings Increase in 60% of Large U.S. Cities (Bloomberg)
- Free ECB’s hand to aid states, says minister (FT)
- Hungarian Premier Says Aid Deal Not Near (WSJ)
- Nomura Chief Resigns Over Insider Trading Scandal (NYT)
It was inevitable and despite all of the usual huffing and puffing on the Continent; the moves are correct. First Egan-Jones and then Moodys and Germany is downgraded or threatened with a downgrade and for sound reasons. The German economy is $3.2 trillion and they are trying to support the Eurozone with an economy of $15.3 trillion that is in recession and rapidly falling off the cliff. Each new European enterprise gives the markets a shorter and shorter bounce as we all watch the yields in Europe rise, the stock market’s fall and the Euro in serious decline against both the Dollar and the Yen. There has been no Lehman Moment to date but moment-by-moment the decline in the fortunes of Europe diminishes. There is almost no historical precedent where debt paid by the addition of more and more debt has been a successful operation. There is always the inevitable wall or walls and the concrete slabs of Greece and Spain fast approach.
The European Union has been, in a very real sense, like a masquerade ball. The intricately painted masks covering manipulated stress tests, hiding inaccurate debt to GDP ratios, falsified accounting practices, glossing over any sort of contingent liabilities as if the scars were not there and double counting assets however, like all extravaganzas of this type, is about to reach a conclusion. The night has been long and the hour is late but one by one the masks are being removed and the characters are seen for what they are; a less than pretty sight. There are negative yields in the short maturities for Germany, France and the Netherlands which might soon be found in the United States. We are not sure what Mr. Bernanke will make of institutions paying him to leave their money with the United States government but it will be a classic example of a point in time where “Return OF Capital” became much more important that “Return ON Capital” but as we have asserted time and time again, given the 36% loss of wealth during the American Financial Crisis, that “Preservation of Capital,” are manifestly the byword of the Faith at present.
With Valencia bust, Spanish bonds at all-time record spreads to bunds, and yields at euro-era record highs, Spain's access to public markets for more debt is as good as closed. What is most concerning however, as FAZ reports, is that "the money will last [only] until September", and "Spain has no 'Plan B". Yesterday's market meltdown - especially at the front-end of the Spanish curve - is now being dubbed 'Black Friday' and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do "nothing to stop the fire of the [Spanish] government debt" and when asked how he saw the future of the European Union, he replied that it could "not go on much longer." The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah - that will help) as they warn of a 'hot autumn'. It appears Spain has skipped 'worse' and gone from bad to worst as they work "to ensure that financial liabilities do not poison the national debt" - a little late we hesitate to point out.
So the end stage of neoliberalism threatens a Dark Age of poverty/immiseration – most characteristically, one of debt peonage. ~ Michael Hudson
Heading into the EU Summit at the end of June, talks about potential debt mutualization proposals to deal with the eurozone debt crisis had gained momentum. Ultimately, as Barclays points out, the Summit produced an agreement in principle to achieve banking and fiscal union in the medium to long term. However, this commitment was lacking detail and as we pointed out earlier, is now critically exposing once again the fundamental flaw of disunited and self-interested European union of idiosyncratic nations. While the decision to give the ESM the 'capability' to recapitalize banks directly solidified the medium-term commitment to a financial markets/banking union, there were no specific announcements/agreements from the EU Summit on various debt mutualization possibilities for the near term. If the eurozone debt crisis worsens, such that Spain loses market access and needs to be put into a full program (which a 7% yield and recent auctions suggests), policy makers will be required to give some serious thought to alternative plans, and in particular an accelerated move towards some form of debt mutualization - those options are laid out simply here (in all their unlikely transfer-of-sovereignty scenarios).
"Two weeks after a summit that promised to bring solutions to the European financial crisis, the European Union has once again revealed its fundamental contradictions" is how Stratfor's Adrian Bosoni introduces a succinct clip on the reality the European leaders faced once they arrived home after that strenuous weekend of blithering. Between Asmussen and Schaeuble who have steadfastly stuck to the no-monetary-transfer-without-sovereign-transfer tack - which actually make a fair amount of sense on a long-term basis - a robust and unified budgetary regime is precisely what Europe has lacked. Unfortunately, Bosoni notes, "even in a best case scenario this could not be achieved before 2015" thanks to treaties, referenda, and ratifications. In a little over 3 minutes, the analyst outlines exactly what is holding it back and why the short-term is all they have as budgetary discipline is proving particularly difficult for the EU members to maintain (see more Spanish riots tonight). Between Spain's delays in meeting targets, Greece's 'impossible' budgetary goals, Ireland's demands for concessions, and Finland's collateral agreement with Spain, unifying anything over there seems impractical and impossible.
Market-top economics could be an entire university course, if people cared enough about such phenomena. Most only consider the signs of a market top months or years after a crash when some unyielding economics researcher puts the pieces together. As human-beings we have developed an uncanny ability to rationalize what we know to be bad news and convince ourselves, "This time is different," despite the fact that it usually never is. In a previous article we provided analysis on economic/equity decoupling (cognitive dissonance) and showed that the economy as we know it cannot persist--we are either due for a literal gap-up in leading economic conditions, or we are due for a serious correction in US equities. With today's 5.4% slip in existing home-sales, let's go with the latter.
There was yet another European Union summit at the end of June, which (like all the others) was little more than bluff. Read the official communiqué and you will discover that there were some fine words and intentions, but not a lot actually happened. The big news in this is the implication the ECB will, in time, be able to stand behind the Eurozone banks because it will accept responsibility for them. This is probably why the markets rallied on the announcement, but it turned out to be another dead cat lacking the elastic potential energy necessary to bounce. Meanwhile, Germany, meant to be the back-stop for this lunacy, is losing patience. It has become clear that the agreements that arose out of the June summit were not agreements at all. The questions arises: How can the Eurozone stay together, and if not, how quickly is it likely to start disintegrating? And where does the exchange rate for the euro fit in all this?
There is a strange delayed reaction between the initial exposure of weakness in the financial system and the public’s realization of the truth, sort of like Wile E. Coyote dashing off a cliff in the cartoons only to continue running in mid-air above the abyss below. It is a testament to the fact that beyond the math, there is an undeniable power of psychology in our economy. The investment world naively believes it can fly, even with the weight of endless debt around its ankles, and for a very short time, that pure delirious oblivious belief sustains the markets. Eventually, though, gravity always triumphs over fantasy…
You may recall that the PSI (Private Sector Involvement) was a one-off event as heralded again and again in the Press by every political leader in the European Union. This proclamation was thundered from the rafters, held up like a banner by the ECB and trumpeted by every Parliament in Europe. The message was clear and rolled out like a red carpet for bond owners, “This will never happen again.” Amazingly, or perhaps not so, is the length of time that “never happen again” took to dissipate. The European Union and the European Central Bank are now signaling a change of position as tax payers always trump the owners of bonds and I fear one more example of this is about to be shoved down our throats. Mr. Draghi’s recent statements are all but a fait accompli in my opinion and you may expect some definitive announcements very soon. The situation is even more grave than this however as the question of “seniority,” already a distressing issue, is also going to be re-addressed and I think recalculated in some very non-conventional ways so that an owner of senior debt in European sovereigns and European banks will find himself behind an eight ball with absolutely no control and in serious jeopardy.