Eurozone

When losing is "winning".

The new year’s worldwide economic downturn has an interlocking effect: every national economy is searching to accommodate itself politically as well as economically to what looks to be an extended period of low growth. After longer or shorter periods of historically unrivaled prosperity, they are feeling for a “bottom” – a level to wait out new growth. That is the proverbial “soft landing”.

Following today's release of European manufacturing PMI data we are sadly no closer to getting any resolution on which way the great US-European divergence will compress. Because all we learned is that, very much as expected, Europe managed to contract for a fifth month in a row, with the average PMI in Q4 2011 the weakest since Q2 2009, essentially guaranteeing a sharp recession once the manufacturing slow down spills over to GDP. The only silver lining was that the contraction across the continent was modesty better than expected, however if this merely means that the band aid is being pull off slowly and painfully instead of tearing it off is up for question.

While we’re not bubbling over with optimism, we believe the New Year will be anything but boring. 

Continuing our tradition of listing what according to Zero Hedge readers were the key news events of the year for the third year in a row (2009 and 2010 can be found here and here), we present, as is now customary, the most popular posts of the year as determined by the number of page views, or said otherwise - by the readers themselves. So without further ado, here are this year's top 20.

In an interview making the rounds this morning, which appeared in German "for the people" daily Bild, one of the German Council of Economic Experts, Beatrice Weder di Mauro, who is one of five economic advisors to Angela Merkel, put it in no uncertain terms (Bild readers don't like the kind of "political talk" other politicians are best known for) that while a breakup of the Eurozone in 2012 would be "bad for everyone involved" it can not be completely excluded. She also warned that unless the financial crisis is intercepted quickly, it can lead to a recession in Germany, with the economy contracting 0.5%, and leading to an increase in unemployment. Finally, she made it all too clear how Germany plans to deal with the PIIGS laggards: "Over-indebted euro-zone nations must submit to a long-term insolvency rule." Now granted this was google translated, but somehow we believe it captures the essence of the underlying thought quite succinctly. In other words, Germany is once again toying with the "expulsion" nuclear option, the same one that according to UBS analysts as recently as a few weeks back, would make precious metals, tinned goods and small caliber weapons the best investment option. How this will impact the EURUSD on this day when the currency is already at a near 2011 low is unclear, but will hardly be favorable.

When six out of five economists (thanks to the magic of Keynesianism... and self promotion from general counsel to general expert) all agree on the same topic, and the very definition of groupthink is that the Eurozone will survive, the glaringly obvious call is precisely the opposite. If there was ever an argument to say that 2012 is the year the Eurozone finally dies, the below video is it.

All neoclassical-Keynesians or whatever else they like to call themselves these days (mendacious voodoo shamans works great but for some reason is considered insulting), should flip through this great flowchart from the BBC which explains how it was nothing else than simply untenable debt that both precipitated and exacerbated the debt crisis, resulting in various derivative offshoots that led to a feedback loop that required ever more debt to artificially smooth out the developing divergences between Europe's two opposite worlds. And yes, while cutting spending involves significant pain, it means a soft reset for the system which will lead to a viable outcome for everyone in the long-run. On the other hand, the Keynesian espoused lunacy is to keep doing more of the same, and hoping for a better outcome which i) will never come and ii) will result in a hard reset from which there will be no recovery. Ironically, it is Europe doing the right thing, and while it will suffer a very deep recession shortly, it will come out stronger at the end. More importantly - it will come out. Which is much more than we can say about America.

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?

Last week's biggest political shock was David Cameron telling Europe to shove its authoritarian ambitions and breaking away from the Group of 27, in effect killing any chance of a favorable summit outcome. Watch him live now as he explains why he did what he did.

In his latest weekly chartology, Goldman's David Kostin takes a different route to recapping the week's events and instead of merely summarizing the market action, explains what the views of Goldman's clients are, especially the bulls among them ("Bullish investors hold more positive outlooks for margins and Europe, and argue that our target is too low. Some investors generally agree with our muted outlook for the economy and corporate earnings, but feel that an agreement to end Europe’s debt crisis will inevitably be reached next year. They argue that the stabilization of sovereign balance sheets, recapitalization of European banks, and clarity in the region’s future will cause a surge in investor confidence. Investors commonly quote 1400 as a target S&P 500 price level in this “risk-on” scenario of multiple-expansion.") and then juxtaposes to its why Goldman continues to be bearish: "We expect the situation to worsen before it gets better with market pressure necessary for progress. EU Summit demonstrates progress but lacked “regime change.” Overall, policymakers are making progress and signaled a commitment to address the twin sovereign and banking system crises. However, lack of clarity on the IMF’s role and no clear change in the ECB’s activities in sovereign debt markets will likely leave some investors disappointed." Which is precisely what we have been claiming for weeks - that unlike the other banks who are preaching rosy outlooks out of sheer terror for what a European crash would mean for them, Goldman is hoping it comes quickly, so that ostensibly several big banks can blow up, and the ECB steps in forceefully but not before Goldman's extended web of control in political Europe allows it to step into the void and become a major market presence on the continent.

Last night, when headlines hit that it was the UK's "fault" for vetoing a joint dictatorial Fra-Ger "compromise" and in essence making the Eurozone summit a total failure (with a follow up summit scheduled for March), it became clear that a new cold war has broken out in Europe: between France (not so much Germany as Germany frankly does not want to bailout Europe if its has to pay for the bail out) and the UK. We now have official video confirmation that the latest conflict in Europe is between the countries just across the Chunnel. The video below of a diminutive Sarkozy giving David Cameron the proverbial cold shoulder (described in painful detail here) will achieve nothing but merely inflame further the animosity between the two countries: just what Europe can least afford right now.

It was only a matter of time... Needless to say, this is obviously so wrong on so many levels, but what can you do. At this point the endgame is in play so at least we can all laugh about it.

Reposting by popular demand, and because everyone has to understand the embedded risks in this market, courtesy of the shadow banking system.

In an oddly prescient turn of events, yesterday we penned a post titled "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" in which we explained how it was not only the repo market, but the far broader and massively unregulated shadow banking system in Europe that was becoming thoroughly unhinged, and was manifesting itself in a complete "lock up in interbank liquidity" and which, we speculated, is pressuring the Bundesbank, which is well aware of what is going on behind the scenes, to slowly back away from what will soon be an "apocalyptic" event (not our words... read on). Why was this prescient? Because today, Reuters' Christopher Elias has written the logical follow up analysis to our post, in which he explains in layman's terms not only how but why the lock up has occurred and will get far more acute, but also why the MF Global bankruptcy, much more than merely a one-off instance of "repo-to-maturity" of sovereign bonds gone horribly wrong is a symptom of two things: i) the lax London-based unregulated and unsupervised system which has allowed such unprecedented, leveraged monsters as AIG, Lehman and now as it turns out MF Global, to flourish until they end up imploding and threatening the world's entire financial system, and ii) an implicit construct embedded within the shadow banking model which permitted the heaping of leverage upon leverage upon leverage, probably more so than any structured finance product in the past (up to and including synthetic CDO cubeds), and certainly on par with the AIG cataclysm which saw $2.7 trillion of CDS notional sold with virtually zero margin. Simply said: when one truly digs in, MF Global exposes the 2011 equivalent of the 2008 AIG: virtually unlimited leverage via the shadow banking system, in which there are practically no hard assets backing the infinite layers of debt created above, and which when finally unwound, will create a cataclysmic collapse of all financial institutions, where every bank is daisy-chained to each other courtesy of multiple layers of "hypothecation, and re-hypothecation." In fact, it is a link so sinister it touches every corner of modern finance up to and including such supposedly "stable" institutions as Jefferies, which as it turns out has spent weeks defending itself, however against all the wrong things,  and Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant (and in fact just announced soaring profits and bonuses), yet which have all the same if not far greater risk factors as MF Global. Yet nobody has called them out on it. Until now.

Looking at this Friday's n^th European summit, one could be forgiven to forget that so far in 2011 there have been no less than 10 Eurozone finance minister meetings and summits. TEN. And courtesy of Reuters we have an annotated overlay of the MSCI Eurozone bank index' performance so far in 2011. Unfortunately, one quick glance at the chart leads us to two very sad conclusions: i) the time will not be different, and ii) a "favorable" market response will require an hourly barrage of FT/Guardian/La Stampa/Nikkei rumors just to get the ES green, if only for a few minutes. So without further ado, here is the interactive annotated superimposed analysis showing the Eurozone historical meetings/summits and the reaction in bank stocks, Greek and Italian bonds, and the all important Euro.