Despite another weekend of hope-driven chatter of a support-the-profligacy, print-til-we-die, mutually assured destruction game of chicken, we remain as far from the fiscal federalism, that we discussed earlier in the week (and the four critical questions that need to be answered) as ever. As we embark on yet another critical week in Europe's (and perhaps the world's future), ING addressed a critical aspect of the conundrum - that of Merkel's (read Germany's) reluctance to step on the gas and save the known universe. While attempting to quantify the price of break-up and the pay-now or pay-later perspective, they describe perfectly the 'Paradox of Merkelism' in that the core countries' attempts to limit their exposure have served only to increase it. They further worry that while a plan for a Grand Bargain may appear, this may rapidly give way to the recognition that the reality is not so grand - the bargain would still have to be delivered.
A few weeks ago, SocGen's Dylan Grice released a piece which quickly became a scathing focal point in the inflation-deflation debate, in that he speculated that it was not the Weimar-unleashed hyperinflation (which incidentally is the primary reason why most Germany now dread what the outcome of a profligate ECB would look like) that led to the surge of the Nazi party, but in fact the opposite: the stinginess of German monetary authorities in the 1930s that further exacerbated the situation and helped unleash the Hitler juggernaut. Many promptly took sides in the argument, the bulk of which were shocked that Grice - traditionally a defender of prudent monetary and fiscal policy, would go so far as suggest that it is the ECB's duty to print or else it may justify another "Hitler"-type advent. Well it seems there was more than meets the eye, and in a follow up piece the strategist says: "The purpose of the historical analysis, therefore, was not to reach conclusions about how adherence to hard money principles will linearly lead to resurgent fascism, or war on a par with that seen in the 1930s. Neither was it in any way a defence of Keynesian fiscal activism. It was to illustrate that adherence to even the best principles must come at a price, making a judgment on whether or not that price is prohibitive or not is unavoidable, and today Germany and the ECB have to make that judgment." And his conclusion: "From the beginning of this crisis I've believed the only way politicians will get ahead of it is to bring in the ECB. Since I believe politicians do want to get ahead of it, I expect the ECB to print, and print copiously. I've repeatedly emphasized that printing will solve nothing, beyond buying market confidence for a while... All ECB printing will do is buy the politicians time and space to reset government and private sector balance sheets, to reform how their economies function and be honest with their own citizens. Whether they use that time or not is a separate question (frankly, I'm not hopeful)." But instead of us putting words in Grice's mouth, here is the explanation straight from the horse's mouth. Incidentally we agree 100% with Grice on the issue that eventual printing is inevitable. Which for the TLDR crowd means the entire Grice missive can be summarized as follows: 'buy gold.'
In the following video Chris Martenson - economic analyst at chrismartenson.com and regular guest contributor to Zero Hedge, and James Turk, Director of the GoldMoney Foundation talk about the problems facing the eurozone as well as the global economy. Chris Martenson points out that the whole world simply has too much debt. This is why he believes that there won’t be a real solution to the euro crisis. The big question will rather be who will take losses on the debt, which can’t possibly be repaid. The lack of political leadership and unwillingness to accept reality is contributing to this crisis. Additionally, the monetary tools central banks have traditionally used to revive economies are starting to show less and less effect. In Martenson’s view, the financial sector has become way too large and interlinked across borders, so that a default by one country could bring down the whole financial systems, because credit default swaps would get triggered and could bring down the writers of those derivatives.
This mornings release of the Employment Situation report from the Bureau of Labor Statistics was in truth bitter sweet. On the positive side there were 120,000 jobs created in the previous month and the unemployment rate fell from 9.0% to 8.6%. Furthermore, September and October jobs were also revised higher. That is the sweet part. Unfortunately, while the headlines give us the sweetness the underlying data provides the bitter. As we discussed earlier this week with the ADP Employment report, which showed a 206,000 job increase, this is the seasonally strong time of year for employment increases due to the retail shopping season. Therefore, it is no surprise that we saw a fairly healthy jump in employment but unfortunately these jobs tend to be very temporary in nature. Secondly, 120,000 new jobs is well below the necessary job creation level to return the country to full, healthy, emplyment. I say "healthy employment" because technically if enough people fall off the rolls into the category of "discouraged worker", where they are no longer counted, we could have a much lower unemployment rate - it just won't be a good thing.
There is a Bloomberg story out there stating that the debt negotiations are “complex”. So long as the TROIKA keeps making the payments, the banks have no reason to reach a settlement, particularly on their shorter dated paper. In fact, given the movements in the Greek CDS-Cash basis, we wonder how much debt is even held by banks? The daily dialogue that some sort of bailout and some sort of solution and some central bank action seems to be churning along, but the Greek haircut will ultimately have to be dealt with and we don’t see how it is accomplished without a failure to pay and involves all bond holders. Some holders may receive preferential offers (ECB and Greek Institutions) but avoiding a honest to goodness failure to pay seems impossible, and avoiding the writedowns altogether also seems impossible.
As rumors and chatter circulate across trading desks, European equity and credit markets are starting to lose their giddiness. European sovereigns are leaking back wider and financials starting to underperform and it is being noted that, as reported by The Hill, that conservatives say they will try to block the IMF from bailing out Italy and Spain. Pointing to the huge bill this could leave at US taxpayer's feet, Republicans are concerned at the secrecy with which Geithner has acted. Sen. Tom Coburn appears to be at the helm of this legislation, noting:
"We're throwing good money after bad down a hole that I think is not a solvable problem. Europe is going to default eventually, so why would you socialize their profligate spending."
As we have been saying all along, with every reincarnation of the idiotic "IMF to bailout [XXX]" rumor, there always is just one snag. A rather substantial one at that: US congressional approval for expanded IMF bailout capabilities.
The Bank of Korea’s continued diversification of its foreign exchange reserves is a bullish factor which may have led to the price gains today. The central bank of South Korea announced that it had purchased 15 metric tonnes of gold in November to raise its reserve of bullion in an effort to diversify its portfolio of its foreign reserve investment and reduce risks caused by market volatilities. According to the Bank of Korea (BOK), it made a purchase of 15 tons of gold last month to increase the nation’s gold reserves to 54.4 tons worth $2.17 billion as of the end of November. It boosted the size of its gold reserves by US$850mn in November, up a massive 39% from the previous month. Its total gold reserves are now worth US$2.17bn.
- Liquidity remains thin as market participants await release of the Nonfarm Payrolls data from the US. Early market talk has been for a number as high as +200k
- The Eurozone 10-year government bond yield spreads remained generally tighter across the board, with the exception of the French/German spread
- Eurodollar and Euribor futures traded under pressure during the European session on continued bank funding fears
- According to reports, EU finance chiefs gave go-ahead for work on central bank loans, and ECB lending via IMF is seen in the EUR 100-200bln range
- Merkel Says Joint Euro Bonds Unthinkable as EU Faces Marathon (Bloomberg)
- Draghi hints at eurozone aid plan (FT)
- Europe prepares oil imports embargo on Iran (FT)
- RIMM cuits guidance.... again (Marketwire)
- Sarkozy Says Euro Zone Risks a Breakup Without Further Fiscal Convergence (Bloomberg)
- King warns of ‘spiral’ into systemic crisis (FT)
- JPMorgan Follows UBS Cutting Carbon Jobs (Bloomberg)
- Merkel fights for euro she says is stronger than D-mark (Reuters)
- Hilsenrath: Fed Officials Don’t See Central Bank Cutting Discount Rate (WSJ)
A week ago, Zero Hedge brought up the last Hail Mary available in Europe's fiscal arsenal: the Redemption Fund. Specifically we said, " There are currently three options being discussed for the Stabilittee bonds - all of which have more than short-term time horizons for any potential implementation and so we suspect, as CS mentions, that the talk of the Redemption Fund from the German Council of Economic Experts will grow louder as an interim step" and quoting Credit Suisse, " One proposal that might be able to co-exist with the Treaties as they are is the recommendation of the German Council of Economic Experts, pooling sovereign debt in a Redemption Fund as we discussed briefly last week. We are quite surprised that the idea does not seem to have generated more traction in the press since it is one of few proposals that actually provides a means for reducing debt (rather than moving it around the euro area) and is aimed not to fall foul of the German Constitution. Something based around this idea might be a contender for a precursor to permanent Eurobonds, buying time while the Treaties are changed." Sure enough here is Reuters showing that it only took Germany one week to catch up to what our readers already knew, from Reuters: "Germany will propose setting up special national funds for euro zone sovereign debt that is over 60 percent of gross domestic product to help build market confidence, the country's finance minister said on Thursday. Wolfgang Schaeuble told reporters that Germany would make the proposal at a European Union summit next week. The funds should be supported by public revenues and dismantled within 20 years, he said." In other words even Europe now admits that the EFSF as even as stop gap measure to fill the void before the ECB acquiesces to print, is dead, and is looking at the last measure available to fix the fundamental problem at the heart of the Eurozone (yesterday's liquidity band aid is just that) which is the rolling of untenable amounts of leverage. Unfortunately, the core provision of Schauble's redemption fund variation which is that the fund is national, "which would get around German concerns about the "communitarization" of debt between European states" means that the idea is hardly unlikely to pick up as it relies on already insolvent countries to fund it. If this is indeed the final backstop to be presented at the European Summit, it may be time to turn bearish on Europe all over again, today's surging sovereign bond prices notwithstanding.
- Lower than expected manufacturing PMI data from China prompted concerns surrounding sustainability of the Chinese growth, and raised hopes for further monetary easing measures by the PBOC soon
- Successful bond auctions from Spain and France resulted in significant tightening of the Spanish/German and French/German 10-year government bond yield spreads with heavy buying from domestic accounts
- Market talk of the ECB buying in Italian and Spanish government debt via SMP
- Gilt futures dropped more than 50 ticks following a lackluster Gilt auction from the UK’s DMO
- Fed Dollar-funding Cut Shows Limits of Action (Bloomberg)
- Global euphoria runs out of steam (AP)
- Chinese Manufacturing Activity Slows (FT)
- Draghi calls for eurozone ‘compact’ (Dow Jones)
- Close Ties Facilitated Coordinated Moves (Hilsenrath)
- Congress Push to Relax US Securities Laws (FT)
- ECB hints at action if euro zone adopts fiscal pact (Reuters)
- Japan to Compile Fourth Extra Budget (Bloomberg)
Hey, at least a handful of Ben's buddies will make a bundle ...