With the second version of the ECB's enhanced LTRO (back-door QE) starting tomorrow, there has been a great deal of speculation on what the take-up will be, what banks will do with the funds they receive, and more importantly how will this effect global asset markets. SocGen provides a comprehensive top-down analysis of the drivers of LTRO demand, the likely uses of those funds, and estimates how much of this will be used to finance the carry trade (placebo or no placebo). Italian (25%) and Spanish (20%) banks are unsurprisingly at the forefront in their take-up of ECB liquidity (likely undertaking the M.A.D. reach-around carry trade ) and have been since long before the first LTRO. On the other side, German banks have dramatically reduced their collective share of ECB liquidity from 30% to only 6%. SocGen skews their detailed forecast to EUR300-400bn, disappointing relative to the near EUR500bn consensus - and so likely modestly bad news for risk assets. Furthermore, they expect around EUR116bn of this to be used for carry trade 'revenue' production which will however lead to only a 0.6% improvement in sectoral equity levels (though some banks will benefit more than others), as they discuss the misunderstanding of LTRO-to-ECB-deposit facility rotation. We, however, remind readers that collateralized (and self-subordinating) debt is not a substitute for capital and if the ECB adamantly defines this as the last enhanced LTRO (until the next one of course) then European banks face an uphill battle without that crutch - whether or not they even have collateral to post. Its further important to note that LTRO 2 cannot be wholly disentangled from the March 1-2 EU Summit event risk and we fear expectations, priced into markets, are a little excessive. We suspect this will not be a Goldilocks 'just right' moment.
With an economy of just $3.2Tn versus the United States $14.3Tn Germany is trying to prop up a Eurozone that is more than one trillion dollars bigger than America. They just do not have the resources for the task they are undertaking and I predict serious consequences, eventually, from their efforts. Germany is “best of class” and will be the last to go but they cannot evade the European recession in the end and I think it is only a matter of time and unfortunate decisions before the austerity demands made on so many will wind their way back home to those who made the demands. They used a timeline that was much too short for the job at hand and payment will eventually be forced upon them. They obviously get the joke where Eurobonds and other ploys of this nature average the economies of Europe and the standards of living over some period of time so that Germany, in the end, will suffer most as they have the furthest to fall. They have approached the G-20, China, the emerging market countries and all polite responses to the side; the results have been about zip. The Germans are running out of both time and money and Franz is squirming in the beer hall.
- Germany Crisis Role in Focus After G-20 Rebuff (Bloomberg)
- G20 to Europe: Show us the money (Reuters)
- Draghi’s Unlimited Loans Are No Panacea (Bloomberg)
- Geithner says Europe has lowered risks of "catastrophe" (Reuters)
- Gone in 22 Seconds (WSJ)
- Gillard beats Rudd to stay Australian PM (FT)
- Brazil Will Continue Reducing Interest Rates, Tombini Says (Bloomberg)
- China to Have ‘Soft Landing’ Soon: Zoellick (Bloomberg)
- China To Be Largest Economy Before 2030: World Bank (Reuters)
- Obama pressed to open emergency oil stocks (FT)
While we are aware of politicians' repeated vows about the uniqueness of the Greek case, we remain deeply skeptical. After all, hasn't it been a winning investment strategy to assume that the exact opposite of whatever Europe's elite says will become fact? The recently overheard and filmed conversation between Germany's and Portugal's finmins (http://t.co/iDA9HJPo) points in the direction of an imminent review of the Portuguese case and might be a harbinger of PSI, OSI etc à la Gréce. And why stop there? Why not relieve the Italians, Spaniards, Portuguese etc. of their troublesome load? Wouldn't it be nice to pull a Greek and finally make it for those pesky Maastricht criteria? But regardless of one's view on the ongoing crisis, it makes perfect sense to go where no investor has gone before. We did the unthinkable, read the unreadable and made it back alive to tell the tale: we ploughed through all of the individual bond prospectuses of our favorite list of countries in peril and actually found a lot of useful information for the investor. Given that the sovereign bonds of the Eurozone used to be looked at as riskless assets, it is safe to assume that the exercise hasn't been done by a lot of investors on a regular basis. Judging by the difficulty to even obtain the information, both the interest of investors to obtain it and that of issuers and underwriters to provide it has been and remains extremely limited.
The 1922 German hyperinflation experience was undoubtedly propelled by printing massive amounts of money. Yet, the Japanese money printing experience has had no impact whatsoever on inflation. Here we are in 2012, and the World’s four main central banks (USA, Britain, Europe and Japan) continue to print gobs of money. Will the outcome be 1922 Germany or 1990 Japan?...The bottom line is as follows – the combination of the bursting of property prices and the refusal of the big banks to write-off the corresponding bad debt is resulting in a big wave of deflation. We expect this to continue. Yet, we also are mindful enough to know that pockets of inflation will occur in various countries and within various industries. The real threat of hyper inflation will occur when a major currency collapses. Any country that leaves the Eurozone will undoubtedly see extreme inflation during their transition years. Outside of the Euro-zone, Britain remains at risk due to it being a key center of global finance and at risk should the World’s super-size banks implode once again.
My advice is to put all of the headlines aside because they are not accurate. No deal has actually been struck and there is just the possibility of one at present. The PSI is also nowhere near certain. There has certainly been a proposal made with innumerable and probably impossible conditions to be met by Greece including a demand for a Constitutional change, which under the current Constitution, cannot even be voted on until 2013. I often wonder if Europe really wants to bail Greece out or if Germany is not forcing so many conditions that they are trying to have them exit the Euro on their own so the Germans are not seen as the Lord High Executioner; to quote Mr. Gilbert & Sullivan.
And it was brutal. No more diplomatic niceties.
The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short - we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick (and then some: Crude's WTI return is now higher than that of stocks), there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama's reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the "realizations" that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market's preoccupation all too soon.
When even the bullshitters get tired of the bullshit! Financial contagion tale of Greece, the need for Grease & what happens to those without it, featuring the "Bad Ass" interview...
Greece Issues Exchange Offer Terms; Raises Minimum Acceptance Threshold To 75% From 66%; €10 Billion Buys PSI KillerSubmitted by Tyler Durden on 02/24/2012 12:39 -0500
Three days ago we recoiled in terror at the stupidity of Greek leaders, when we learned that the Greek exchange offer would be deemed satisfactory if only 66% of bondholders accept it as valid, as it would mean an immediate abrogation of UK-law bonds which have a 75% minimum covenant threshold as specified in the indenture. Apparently this was a "small oversight" on behalf of the gross amateurs in charge of this process as according to the just released full exchange offer doc, this threshold was mysteriously raised to the proper minimum acceptance threshold of 75%. Of course, it is needless to say that at least 25% of Greek bondholders will decline the offer, either in the current Greek law exchange, or the forthcoming UK-law one, which would throw the whole process into a tailspin. Because here is the kicker, from the release: "if less than 75% of the aggregate face amount of the bonds selected to participate in PSI are validly tendered for exchange, and the Republic does not receive consents that would enable it to complete the proposed exchange with respect to bonds selected to participate in PSI representing at least 75% of the aggregate face amount of all bonds selected to participate in PSI, the Republic will not proceed with any of the transactions described above." So here's the math: if one has 25% +1 of the €177 billion in Greek-law bonds, they can smash the entire process (and give Germany a way out, wink wink). At today's price of about 20 cents on the dollar, this means that one can hold Greece, and thus Europe (assuming Europe wants Greece in the Eurozone and Germany itself is not the biggest shadow hold out) hostage for less than €9 billion. Or better yet, since the total bonds subject to PSI are about €206 billion, this means UK law bonds of just €29 billion are part of the deal, and one can buy a blocking stake there, at roughly 30 cents on the euro, for a meager €2 billion in cash out today. Furthermore since many hedge funds already have built up blocking stakes, this almost certainly means that Greece will not get the requisite needed votes to pass the exchange. Wondering if these hold-outs are actively shorting the market knowing they can bring Europe to its knees with virtually no capital at risk? You should be.
2012 is proving to be the 'Year of the Central Bank'. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.... All of this pervasive intervention most likely explains more than 90 percent of the market's positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for "coordinated action". It does work in the short-term.... But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.
While the bulk of tangential themes in Albert Edwards' latest letter to clients "The Ice Age only ends when the market loses hope: there is still too much hope" is in line with what we have been discussing recently: myopic markets focused on momentum not fundamentals ("It's amazing though how the market can get itself all bulled up and becomes convinced that we are the start of a self-sustaining recovery. And funnily enough there's nothing more likely to get investors bullish than a rising market"), short-termism ("One thing you can say for the market is that it has an extremely short memory"), and that so far 2012 is a carbon copy of 2011 ("One thing you can say for the market is that it has an extremely short memory. Let us not forget that the performance of the equity market so far this year is almost exactly the same as we saw at the start of 2011 (in fact the performance has been similar for the last 5 months"), his prevailing topic is one of hope. Or rather the lack thereof, and how it has to be totally and utterly crushed before there is any hope of a true bull market. And just to make sure there is no confusion, unlike that other flip flopper, Edwards makes it all too clear that he is as bearish as ever. Which only makes sense: regardless of what the market does, which merely shows that inflation, read liquidity, is appearing in the most unexpected of places (read Edwards' colleague Grice must read piece on why CPI is the worst indicator of asset price inflation when everyone goes CTRL+P), the reality is that had it not been for another $2 trillion liquidity injection in the past 4-6 months by global central banks, the floor would have fallen out of the market, and thus the global economy. In fact, how the hell can one be bullish when the only exponential chart out there is that of global central bank assets proving beyond a doubt that every risk indicator is fake???
Despite the release of better than expected German IFO survey, stocks in Europe remained on the back foot after the EU Commission slashed forecasts for 2012 Eurozone GDP to -0.3% vs. 0.5% previously, while EU's Rehn added that the Euroarea has entered a mild recession. As a result Bunds advanced back towards 139.00, whereas the spread between the Italian/German 10-year bond yields widened marginally on the back of touted selling by both domestic and foreign accounts ahead of the upcoming supply on Friday. Looking elsewhere, EUR/USD erased barriers at 1.3300 and 1.3325, while today’s strength in GBP/USD can be attributed to a weaker USD, as well as touted EUR/GBP selling by a UK clearer.
- IMF Official: 'Huge' Greek Program Implementation Risks In Next Few Days (WSJ)
- European Banks Take Greek Hit After Deal (Bloomberg)
- Obama Urged to Resist Calls to Use Oil Reserves Amid Iran Risks (Bloomberg)
- Hungary hits at Brussels funds threat (FT)
- Bank Lobby Widened Volcker Rule Before Inciting Foreign Outrage (Bloomberg)
- Germany fights eurozone firewall moves (FT)
- New York Federal Reserve Said to Plan Sale of AIG-Linked Mortgage Bonds (Bloomberg)
- G-20 Asks Europe to Beef Up Funds (WSJ)
- New Push for Reform in China (WSJ)
The phenomenon of market and confidence reflexivity is quite well known to the US, where not one but two indices, the UMichigan and Conference Board, provide upward boosts to the market when the market is going up, which in turn boosts confidence even more, and so on in a closed loop well used by agents of the central planning bureaus, especially during economic slides, when the "economy" is nothing but the Russell 2000. Europe is no stranger to this, and early this morning despite Germany's recent economic data coming out nothing short of atrocious, Germany announced its business managers are quite confident, and more so than expected whatever that means, after the IFO Business Survey printed at 109.6 on expectations of 108.3 - the highest reading since July 2011. As a reminder, 9 days ago "The German Industrial Output Slides More Than Greek, Despite Favorable ZEW" - in other words, the propaganda machine is out in full force, desperate to break the linkage between Europe's recessionary economy, and the market which has soared over the past 4 months for one reason only - trillions in central bank liquidity. Alas, the bill has now come in in the form of record Brent in British pounds, fresh all time highs in energy prices, and WTI which if Goldman is right, will hit $120 this summer and send Obama's reelection chances down the toilet. Anyway, here is Goldman with a note on the German confidence index which briefly sent the EURUSD up 80 pips to a high of 1.3340, showing just how volatile the fulcrum security now is with 148K net shorts, since retracing most of the gains as apparently not even the market is that stupid to believe the confidence is more important than hard data following the EU's announcement that the Eurozone will officially see a GDP decline of -0.3% in 2012 vs previous expectations of +0.5% rise.