- Obituary: Kim Jong-il (FT)
- Draghi Warns on Eurozone Break-up (FT)
- EU Ministers Seek Crisis IMF Funding Deal (Bloomberg)
- China November Home Prices Post Worse Performance This Year (Bloomberg)
- China Debts Dwarf Official Data With Too-Big-to-Finish Alarm (Bloomberg)
- China opens up to offshore renminbi investors (FT)
- Voters to Read Recovery Signs (Hilsenrath)
- Germany May Pay Full ESM Contribution in 2012 (Reuters)
- U.S. Housing Heals Even as its Damage Widens (Reuters)
- S&P Cut Proves Absurd as Investors Prefer U.S. (Bloomberg)
On a day when data confirms Spanish bad loans creeping up to recent highs and deposits continuing to stream out of the periphery, Boston Consulting Group has released an excellent treatise on the "What Next? Where Next?" perspective of the impact of collateral damage in and out of the Eurozone. The critical questions for most market watchers and prognosticators remain, how likely is an exit, and what would be the implications for 'leaver' and 'left behind'? BCG offers an at-a-glance chart of the economic, social, and market expectations for the ins-and-outs and notes, in less-than-Deutsche-Bank-like mutually assured destruction language, the cost of leaving the Euro varying from EUR3,500 to 11,500 depending on weak or strong exiting country per person per year. No matter what, an exit would impact the world economy considerably and BCG strongly suggests corporate management consider a Euro-zone breakup as a possible scenario for next year, along with a muddle-through, a Japanese deflation-like evolution, or a significant inflation possibility.
As first reported here, two weeks ago European banks saw the amount of USD-loans from the Fed, via the ECB's revised swap line, surge to over $50 billion - a total first hit in the aftermath of the Bear Stearns failure prompting us to ask "When is Lehman coming?" However, according to little noted prepared remarks by Anthony Sanders in his Friday testimony to the Congress Oversight Committee, "What the Euro Crisis Means for Taxpayers and the U.S. Economy, Pt. 1", we may have been optimistic, because the end result will be not when is Lehman coming, but when are the next two Lehmans coming, as according to Sanders, the relaunch of the Fed's swaps program may "get to the $1 trillion level, or perhaps even higher." As a reference, FX swap line usage peaked at $583 billion in the Lehman aftermath (see chart). Needless to say, this estimate is rather ironic because as Bloomberg's Bradely Keoun reports, "Fed Chairman Ben S. Bernanke yesterday told a closed-door gathering of Republican senators that the Fed won’t provide more aid to European banks beyond the swap lines and the discount window -- another Fed program that provides emergency funds to U.S. banks, including U.S. branches of foreign banks." Well, between a trillion plus in FX swap lines, and a surge in discount window usage which only Zero Hedge has noted so far, there really is nothing else that the Fed can possibly do, as these actions along amount to a QE equivalent liquidity injection, only denominated in US Dollars. Aside of course to shower Europe with dollars from the ChairsatanCopter. Then again, before this is all over, we are certain that paradollardop will be part of the vernacular.
Two weeks ago in "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" we suggested that according to recent fund flow data, "the Bundesbank wants slowly and quietly out." Out of what? Why the European intertwined monetary mechanism of course, where surplus nations' central bank continue to fund deficit countries' accounts via an ECB intermediary. We speculated that according to the recent ECB proposal, the primary beneficiary of direct ECB intermediation in fund flows, as Draghi has been pushing for past month, would be to disentangle solvent entities like the Bundesbank, allowing it to prepare for D-Day without the shackles of trillions of Euros in deficit capital by virtually all of its counterparties. Today it is the turn of Goldman's Dirk Schumacher to pick up where our argument left off, and to suggest that it is indeed a possibility that the Buba would suffer irreparable consequences as a result of Eurozone implosion, and thus, implicitly, it is Jens Wiedmann's role to accelerate the plan of extracting the Buba from the continent's rapidly unwinding monetary (and fiscal) system. Needless to say, the possibility that a European country can leave at will, as the European Nash Equilibrium finally fails, is something the Bundesbank not only knows all too well, but is actively preparing for: here is what we said on December 6: "we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it." After all, Germany has been sending the periphery enough messages to where only the most vacuous is not preparing to exit. The question is just how self-serving is Germany being, and whether once Buba is fully disintermediated, Germany will finally push the domino, letting the chips fall where they may?
As is by now well known, it was the British refusal to budge and thus agree to the fiscal compact from the December 9th summit, that led to the realization that the European bailout is now further away than ever before. And as reported earlier, tomorrow European finance ministers will sit down to finalize the terms of a €200 billion IMF injection, funded by various European governments, which is the last ditch rescue effort now that the EFSF and ESM have both failed to convince the market of a long-term solution. Enter Britain. Again. Because as the Telegraph reports, it will be up to Britain to fund not just any portion of the upcoming €200 billion payment, but the second largest one, a commitment which David Cameron and the majority of Britain will likely balk at. "Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal...An EU official said Britain was still expected to contribute €30.9 billion (£25.9 billion), leaving the country as the second biggest contributor to the new IMF fund behind Germany and equal with France." So ten days after British obstinacy to "on the fly" European bailout plans led to the EURUSD dropping to 2011 lows, will it be the Albion that once again leads to another step down in the European currency, as it now becomes clear that the last ditch Plan Z "IMF Bailout" plan is now worthless? We will find out shortly, although we are confident that anyone hoping that Britain will do an about face and revert on its controversial position, will be disappointed.
The MF Global Trade Is Not Coming To (European) Town - Why The ECB's 3 Year LTRO Is The Latest Bailout FlopSubmitted by Tyler Durden on 12/18/2011 13:22 -0400
On Friday, as the Eurobond market was briefly soaring, we attributed the move to sentiment that was best captured by a note out of Morgan Stanley's govvie desk: "The carry trade is happening, there is no doubt about it. In SPGBs (45bps tighter t0) we estimate 15-20bn (incl 6bn auction) of buying from domestic mid sized banks and cajas THIS WEEK (500mm is usual 2way trading volume per day). We are seeing the same starting with Italian mid tier banks in BTPs today (35bps tighter t0). Also Ireland seems to be very well bid up to 2016 maturities (75bps tighter on day). While Huw and Laurence anticipated this in their research piece on the LTRO from yesterday, we certainly did not expect it to be this intense and front loaded, this is the strongest buying we have seen all year, it feels a lot like QE." In simple summary, what MS was hoping and praying (because if clients are buying, MS is selling) its clients would believe, is that European banks would promptly forget that Europe has trillions of rolling over financial corporate debt, and instead of focusing on generating the cash needed to pay down maturities if no buyer stepped up, banks would somehow re-lever, by buying up even more sovereign debt in hopes of catching a few bps of carry, and completely ignoring the "#1 issue at the heart of the Eurozone crisis"TM - the fundamental supply/demand paper maturity mismatch. Not to mention that any statement which needs the redundant "there is no doubt about it" is a 100% lie. It took the market about 3 hours to wake up from its zombified state and to do a 180, proceeding to rapidly sell off European debt following the realization that the Morgan Stanely thesis is nothing but a purely self-serving lie. The folks at Reuters IFR explain why MS completely botched this one up, and why Eurobanks are finally starting to wake up to the realization that the MF Global trade just may not be coming to town.
The possibility of a Euro breakup is looming larger than ever. Forecast by ING sees an immediate fall in individual currencies in 2012, and GDP output falls ranging from 7% in Germany to 13% in Greece.
As we wind down 2011, the time for predictions for what is to come as nigh. Having posted what UBS believes their biggest list of surprises for 2012 will be earlier, we next proceed with out long-term favorite - Saxobank's list of "Outrageous Predictions" for what the bank has dubbed "2012: the Perfect Storm." Mostly proposed tongue in cheek (unlike predictions by other pundits who actually believe their own delusions), the list of 10 suggestions represents nothing less than an attempt to force people "out of the box" and look at the world with a set of "what if" eyes. Because if there is anything 2011 taught is, it is not to discount any one event from happening. As Saxo says: "Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of tremendous change. This may not necessarily be a negative thing either - and given the structure and uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year where we start on the long march towards re-establishing jobs, growth and confidence." Naturally, the best outcome for 2012 would be the end of the broken status quo model, and a global fresh reset... but not even we are that deluded to believe that the quadrillions in credit money (real or synthetic) will allow such a revolutionary event to occur in such a brief period of time. At least not before everything is thrown at the intractable problem unfortunately has just one possible long-term outcome. In the meantime, here, to help readers expand their minds, is Saxo Bank's list of "Outrageous Predictions" for 2012.
Traders in the market (what little is left of them) always seek out the investment thesis with the highest upside/downside ratio to a delta in any fundamental forecast. In other words, what derivative play to a secular trend generates the higher IRR? A good example is the ABX which allowed contrarians in 2006 and early 2007 to bet on a collapse in subprime and put on a "short" at next to now cost of carry, with practically no downside if the thesis ended up being wrong, and unlimited upside (just ask Paolo Pellegrini and Kyle Bass). Well, as we just learned, one of UBS "surprises" for 2012 is that oil could drop below $70/barrell. Is this possible? Absolutely - should the Eurozone collapse, and/or China experience the long-overdue hard landing, a deflationary shock (which will naturally only precipitate the central banks into an even more rapid devaluation of legacy paper currencies) can and likely will send crude tumbling (Iran geopolitical concerns aside) as happened back in early 2009 when crude collapsed to around $30/barrel however briefly. So is there a better option to play crude downside than merely shorting CL? Perhaps one idea with better "upside" in case of a deflationary collapse in crude is to get bearish on Boeing instead. As the following chart from Goldman shows, 3 of the 4 biggest widebody (and thus most profitable) aircraft orders are from Gulf airline companies - Emirates, Qatar and Etihad. Together, they amount to about 450 profitable future orders... which could well be cancelled if Gulf states revert to their panicked state last seen so vividly in the spring of 2009 when they were cancelling orders left and right.
Unlike other, more humorous instances, such as Byron Wein and his 10 endlessly entertaining year end forecasts, some banks take the smarter approach not of predicting what will happen, because only idiots think they have any clue what tomorrow may bring with any sense of certainty, especially under global central planning - a regime that is by definition irrational, but instead of stating what would be a surprise to a base case forecast. And with "surprise" now the new normal, it would be prudent to anticipate what to the status quo may represent as fat tails in the coming year. Especially since even UBS now mocks the Wall Street consensus, and the traditional upside biad: "Let’s face it: Bottom-up consensus earnings forecasts have a miserable track record. The traditional bias is well known. And even when analysts, as a group, rein in their enthusiasm, they are typically the last ones to anticipate swings in margins." Which is why, with that advance mea culpa in hand, we bring to readers the Ten Surprises for 2012 from UBS' Larry Hatheway: "At the end of each year, in our final strategy note, the global asset allocation and global equity strategy teams join up to consider possible surprises for investors in the year ahead. Inside, we briefly describe ten such outcomes, and also provide a review of how last year’s surprise candidates fared." For those pressed for time, here is the full list: i) The consensus of bottom-up earnings estimates is right; ii) Financials outperform; iii) The euro rallies; iv) Oil prices fall below $70/barrel; v) Sovereign default outside the Eurozone; vi) Rising Treasury yields; vii) An Italian sovereign upgrade; viii) EU or EMU disintegration; ix) Fewer than five governments switch hands and, last but not least, x) Britain does Great at next summer’s Olympics. Let's dig in.
The gloves are off! As the French prepare for the loss of their AAA status, the governor of the Bank of France, Christian Noyer, suggests that the UK should be first in the firing line as the data for inflation, real GDP growth and government deficit to GDP are worse across la Manche from where he sits. A month ago French 10 year yields were 3.8%. Today they are just above 3%, so maybe the markets are giving him the benefit of the doubt, but let us not forget that the maturity timeline of French bonds is considerably shorter than the UK. They are about to have a funding problem and that is one of the many issues that the much maligned ratings agencies are concerned about.
We spoke to soon: it appears suicide is painless after all, as Fitch just changed the French outlook to negative.The punchline: "The Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon." As for the line that will finally shut up France in its diplomatic spat with the UK: "Relative to other 'AAA' Euro Area Member States, France is in Fitch's judgement the most exposed to a further intensification of the crisis." And now, the market shifts its attention to non-French rating agencies, who will downgrade France in a "slightly" shorter timeframe... more like 2 hours according to some rumors.
Never a dull Friday when dealing with continents that have a terminal solvency, pardon, liquidity crisis.
- FITCH PLACES BELGIUM, SPAIN, ITALY, IRELAND, SLOVENIA AND CYPRUS ON RATING WATCH NEGATIVE
Shockingly, French-owned Fitch has nothing to say about... France.
Yesterday when gold was trading in the $1570 we suggested that based on the very volatile shifts in the funding environment for gold, whereby the gold lease rate had moved from record negative to borderline flat, the plunge in the yellow metal is likely coming to an end. Less than 24 hours later, gold has just passed $1600 yet again. And as the following note from Sandeep Jaitly of First International Group (whose interview with Max Keiser exposing economics for fraud back in June was quite the hit) observes, by analyzing the continued funding unwind pressure, the recent liquidation move in gold is one that has to be taken advantage of. To wit: "The movements in the bases confirm that the recent downward move in gold against Dollars was as a result of Dollar funding pressures. Gold was lent on the swap against United States Dollars. This swap must be unwound and where a bid for gold was sought to raise Dollar liquidity, an offer of gold will be sought to unwind the swaps. The co-bases for Feb-12 and Apr-12 gold contracts are starting to advance – an exceptionally bullish signal following the selloff and a sign that physical buying is being prompted by these lower prices. It would be very prudent to accumulate gold against United States Dollars aggressively over the next fortnight."
The market's reaction to Draghi's comments over the last week have been visceral in its schizophrenia. While his 'temporary' provisions, three-year LTROs specifically, provide a life-line of liquidity (a la TLGP - and how is that working out for the US banks having to roll now?), they hardly address the real underlying problem of the vicious circle between sovereign debt's now-risky nature and financial balance sheets bloated with zero-risk-weighted re-hypothecated peripheral bonds. The last week has seen a roller-coaster of Senior-Sub debt decompression and compression, liquidation-like drops in commodities, lower correlation across European sovereign debt, and significant dispersion in high- and low-beta equity and credit markets (notably as we have previously discussed, some of which will have been driven by index roll technicals). The issue comes down to whether this is the Bazooka (buy-buy-buy) or not enough (fade-the-rallies) and BARCAP's macro sales and European Banks' research team have, like the rest of the market, been exchanging views on this perspective. While their take on the liquidity explosion is that it doesn't solve the almost unsolvable solvency problem but it the deeper insight that perhaps it is not the actual mechanics of this liquidity bazooka but the perception that democracy itself has been suspended in favor of bank and sovereign survival that interests us more. Furthermore, they do an excellent job on breaking down the mythical carry trade potential of these LTROs and mutual sovereign financing benefits since near-term (carry-trade) profit potential would be offset by additional sovereign risk - meaning that funding markets could stay closed for longer. Once again the issue of collateralization, risk-weightings, and deleveraging are front-and-center as bank 'managers' and politicians may be at loggerheads on the carry-trade-savior potential and the ECB's status on the balance sheet only serves to further subordinate existing bondholders.