France

A lot.

In simple terms, the Fed’s hands are tied and the ECB is out of ammo. The End Game for Central Bank intervention is approaching. And it won’t be pretty…  First Europe. Then Japan. Then the US. So if you’re not already taking steps to prepare for the coming collapse, you need to do so now.

Do you think the US will always and forever be able to pay for our over-bloated military-industrial complex and our wars of choice? Do you think the federal housing agencies will always and forever be able to subsidize the real estate industry with money losing, non-economic mortgage loans? Do you think the government will always and forever be able to pay on the promises they've made regarding Social Security, Medicare and Medicade? Do you think the government will always and forever be able to extend debt-enslaving, subsidized student loans to anyone with a pulse? Do you think the fiat ponzi central planners at the Fed will always and forever be able to manipulate the Treasury curve to whatever levels the Oracles of Delphi decide? If you answer yes to the above, ask yourself this: how would all of these things be affected if the average interest rate paid by the US was to rise to 5%? At today's debt level of $15.6 trillion, the interest expense would be approximately $780 billion or about 35% of total government revenues. Welcome to the United States of Greece. Next stop, bankruptcy.

More pain in Spain has been the theme so far in the European morning as poor auction results across three lines has resulted in significant widening in the 10-yr government bond yield spreads over benchmark bunds with the Spanish 10yr yield up some 24bps on the day. In combination with this the latest Germany Factory orders also fell short of analysts’ expectations and as such the lower open in bund futures following yesterday’s less than dovish FOMC minutes has been completed retracted and we now sit above last Friday’s high at 138.58.

• Low cost era over for China's workshops to the world (Reuters)
• The HFT scourge never ends: SEC Probes Ties to High-Speed Traders (WSJ)
• Rehn says Portugal may need "bridge" (Reuters)
• China's GDP likely to have slowed in the first quarter (China Daily)
• Chinese Premier Blasts Banks (WSJ)

In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years. Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.

As the first day of the quarter brings new money and new hope for global asset allocators, Credit Suisse has shifted to a more negative 'underweight' stance to European equities. Laying out 10 reasons for their displeasure, they dig into the details a little with a positive view on domestic German equities and the broad DAX index (and USD earners) while notably negative on France and Spain in general (with Spain expected to underperform Italy). Varying from too much complacency on the resolution to the crisis, to political flash points, valuations, and relative economic momentum. This smorgasbord of anxiety-inducing 'facts' may well prove enough to topple the 'fiction' of a liquidity-levitated equity market - that credit seems to have already realized. Most notably the five factors that need to be 'fixed' before the Euro crisis is resolved, and the under-estimation of the de-leveraging required in the periphery, leaves mutualization of debt as the game-changer that still seems a long-way off. The complacency angle seems the most relevant to us - and we see equities once again pull away from any sense of reason indicated by the sovereign, financial, and corporate credit market, this complacency becomes more and more dangerous.

In my continuing attempt to debunk what the European Union presents as facts; I turn my attention to France. I have already given you the correct debt to GDP ratios for Spain, Italy, Portugal and Germany which follows the exact principles of what any corporation in America or Europe would be mandated to report or suffer the slings and arrows of being held accountable for Fraud. I include contingent liabilities, derivatives, promises to pay, various guarantees and all of the normal accounting practices to be considered on any balance sheet except the sovereign nations of Europe. In the end, of course, it is your decision but at least we can begin any consideration based upon the facts and not based upon a fictitious account. Again, I divide up the liabilities into two categories, their national obligations and their European obligations; the European Union, the European Central Bank and finally for the other European institutions for which they bear some burden. Then I add it all up, divide by their GDP and we arrive at a factual accounting. Nothing complicated here except sleuthing about to get the data which is no easy task as it is hidden in various nooks and crannies.

• Mixed signals from China's factories in March (Reuters)
• EU wants G20 to boost IMF funds after Eurogroup move (Reuters)
• Euro Leaders Seek Global Help After Firewall Boosted (Bloomberg)
• Euro-Region Unemployment Surges to Highest in More Than 14 Years (Bloomberg)
• Big banks prepare to pay back LTRO loans (FT) ... don't hold your breath
• Coty Inc. Proposes to Acquire Avon Products, Inc. for $23.25 Per Share in Cash (PRnewswire)
• Spain Record Home Price Drop Seen With Bank Pressure (Bloomberg)
• Firm dropped by Visa says under 1.5 million card numbers stolen (Reuters)
• Japan Tankan Stagnates With Yen Seen as Threat (Bloomberg)
• Fed to buy $44 billion Treasuries in April, sell $43 billion (Reuters)

It appears that these days a EUR1 trillion hot liquidity injection (such as that from the ECB's LTRO 1+2) will buy you about 3 months of breathing room. Then the ostriches have no choice but to pull their head out of the sand, especially in Europe, where after three months of spread tightening, and hence the belief that "all is fixed", things are starting to turn ugly again: sovereign government spreads are beginning to widen, Europe is demanding more money from the IMF (i.e. America, even as the BRIC countries are starting to consider a world without the USD as a reserve currency, and are now forming their own bank) to boost its firewall, strikes are promptly converting to riots, Italian bank stocks are being halted due to rapid moves lower, the LTRO stigma trade is at 2012 wides, in short everything we grew to know and love in Q3 and Q4 of 2011. Ironically, having papered over the symptoms courtesy of fresh new money, the underlying causes were never addressed, and only got worse as the deteriorating European economic data suggests. What is scary, as UBS shows, is that this is just the delayed carryover from 2011! Just like the US which had the benefit of abnormally warm weather to mask a "bounce" in the economy which was never structural, so Europe had a relatively quiet quarter in terms of newsflow. Things are about to change: read the following for why the eye of the hurricane is about to pass over Europe and why this time around there is $1.3 trillion less in firepower to delay the onset of reality.

They've got to be kidding: abstinence hell is coming to Italy’s technocrat reformers and professional politicians, unless....

The real story of Germany, to be blunt, is that it is a parasite economy. Its domestic demand lags. It has a labor force with different values than most. It will live with low wage increases and low inflation. It has lured other EMU members into a currency bloc and let them run such persistently higher rates of inflation (with no criticism of it!) that Germany now OWNS any domestic demand that other EMU countries can generate. Germany is like the vampire squid economy of Europe. Now it’s kind of caught in its own huge blinding squirt of ink, since its banks have lent to these other EMU countries to finance their excessive consumption and Germany is entangled. But on the real-economy side of things, the German economy is eating their lunch, however, meager.

A core piece of last week's European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European "firewall" in the form of a combined EFSF and ESM rescue mechanisms, to bring the total "firepower" to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB's agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the 'firewall" does not represent new money, nor is a "firewall" to begin with - it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that "Even a 1-Trillion Euro Firewall wouldn't be enough." And they are correct, because the size of the firewall is completely irrelevant, as explained later. All the "firewall" does is shift even more backstop responsibility on the only true AAA-country left in the Eurozone, Germany. However, the main cause of problems in Europe - a massive debt overhang which can at best be rolled over but never paid down due to the increasingly lower cash flow generation of Europe's (and America's) assets, still remains, and will do so until the debt is finally written down. However, it can't because one bank's liability is another bank's asset. And so we go back to square one, which is that the system is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damning conclusion is finally being understood by most.

The last hour has spewed forth more disingenuous clap-trap from European finance ministers. From 'sufficiency of the firewall' to the 'absurdity of Spain needing a bailout', it beggars belief that these humans can look at themselves in the mirror every morning (as they feel the 'need' to lie' - or are simply ignorant of the reality). At some point in the near future there will be about €40 billion of money sitting in the ESM and a bunch of promises from countries failing to live up to existing debt obligations, and that is the big firewall? The correlation between who is providing the guarantees and who will need them cannot be ignored. This new €500 billion number doesn’t exist, it’s not just meaningless, it’s non-existent if Italy or Spain needs money. People can take away whatever they want, but unlike LTRO which had real injections of liquidity, this is just like the July plans from last year and the November “grand” plans. It sounds great, especially when too many people are willing to blindly follow what the politicians want them to, but it doesn’t work in practice.