“Equities in Dallas” was the worst job a trainee at Salomon brothers could get. I have to believe that the G-20 sovereign debt rating group was the equivalent at the rating agencies. It wasn’t volatile and sexy like Emerging Markets. It had nothing to do with the core business of rating corporate debt. It had even less to do with the fast growing structured product business. It must have been a pretty dull place to work. I think that is important because it means, certainly at this stage that all the decisions on sovereign debt are being made at a very high level within the rating agencies. Someone isn’t running some numbers and coming up with a rating proposal. Some people are sitting around in a room, trying to figure out what rating they want to give, or need to give, or can get away with giving. Knowing that these decisions are being made at the highest levels of the firm and have nothing to do with what any analyst in the area says or does is important in trying to figure out where the ratings go next.
If today's broad market action is confusing you, it shouldn't be.
Your one stop summary of all the bullish and bearish events of the past week.
Juvenal makes reference to the Roman practice of providing free wheat to Roman citizens as well as costly circus games and other forms of entertainment as a means of gaining political power through populism. Roman politicians devised a plan in 140 B.C. to win the votes of the poor: giving out cheap food and entertainment, “bread and circuses”. The Roman politicians realized this would be the most effective way to rise to power and stay in power. With the revolting display of political theater in the last few weeks, I couldn’t help but consider the parallels between the Roman Empire and the American Empire. The entire debt ceiling farce was a circus on an epic scale – The Greatest Show on Earth. The American public was treated to high wire acts of near debt experiences, Senators putting their heads into the mouths of lions, and hundreds of clowns riding tiny bikes with squeaking horns. In the end, American politicians did what they do best - pretended to solve a spending problem without cutting spending. Only in America could politicians put the country on course to increase its national debt from $14.5 trillion to $23 trillion by 2021 and declare they are cutting spending. For those that need to visualize the lies of politicians, take a gander at this chart and try to find the cuts in spending.
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The irony about the blow up over the past month in "all things Italian" is that the facts about its sovereign debt and viability profile have always been available for anyone to not only see, but make the conclusion that the situation is unsustainable. The fact that so few dared to do so only confirms that affirmative confirmation bias that dominates within 99% of the investing population. Sites such as Zero Hedge and others had been warning for over a year that the Italian "contagion" (which is a misnomer: Italy's lack of viability is perfectly-self contained: it does not need Greece or Portugal to blow up, and can do so perfectly well on its own, but the punditry certainly needs a scapegoat, in this case the incremental layering of "revelations" about how insolvent Europe is) and we have long presented primary source data confirming just how precarious the house of cards is not only in Italy but everywhere else too. Regardless, no matter how conventional wisdom got to the big picture revelation of just how ugly Italy's reality is (and don't think for a minute that Spain is any better) the truth is that the cat is not only out of the bag, but is widely rampaging through the china store (no pun intended), high on speed and methadone. So for everyone who still wishes to know why the Italian jobs is very much hopeless absent the ECB stepping in an bailout out the country, below is a succinct list of 15 bullet points courtesy of The Telegraph, which explains all there is to know about the country's current predicament. In retrospect we certainly can not blame Tremonti for wanting to get the hell out of there.
Italian Treasury "Discovered" Larger Cash Pile Than Expected; Likely To Withdraw From More If Not All 2011 Bond AuctionsSubmitted by Tyler Durden on 08/04/2011 08:51 -0500
And the news just gets uber-surreal. According to a Reuters report, the Italian Treasury has a "larger cash pile than generally perceived according to sources." As a reminder this is precisely the excuse that Italy used when it scrambled to cancel medium and long-term auctions for late August as was previously noted. Which can only mean one thing: in order to prevent more ongoing routs, Italy will likely now withdraw from all bond auctions for the "foreseeable future" in order to not give the market a chance to do some real price discovery. Sure enough, the subsequent Reuters headline says that the "Italian Treasury's cash pile is enough to last most of 2011." Odd that we predicted this, and the next steps, just this morning, when we said: "look for Spain to follow Italy in a self-imposed bond market exile." Translation: while Greece, Portugal and Ireland are unable to access capital markets, Italy, as we predicted, has just self-imposed a capital markets exile likely until the end of the year.
• The ECB is expected to keep its benchmark interest rate unchanged at 1.50% as expected
• Analysts will look to see any comments by Trichet on the use of the Securities Markets Programme (SMP)
• Trichet may be asked on the possibility of further extensions to ECB’s 3-month LTRO
I think it's time to go long Argentina...
The easy way out of turning to bigger, more solvent governments for bailouts has run its course.
My primary point over the last year: that at some point the markets will no longer respond to any Fed intervention, because it will be clear that the Fed can’tsolve the problems facing the financial system. When this happens, the result will make the 2008 Crisis look like a joke
The EFSF plan to let countries buy bonds at a discount is a true Catch-22 proposition. If they don’t source many bonds, the benefit to the country is too small to make a difference at the sovereign level, and sovereign contagion risk remains in play. But if they are able to buy a meaningful amount of bonds, those bonds will be coming from banks that had been desperately avoiding taking the mark to market hit, potentially triggering contagion among the banks. The narrow window where this program might stop sovereign contagion without triggering bank contagion is too small to think that a bunch of politicians or economists will be able to steer the course accurately and that some other unintended consequence won’t rear its ugly head.
If there is one thing the Italian Bourse needs to stop the relentless bleeding, it is the uber-credible Silvio Berlusconi addressing the country and the various vacuum tubes that trade on the MIB and putting an end to all this selling silliness. Lucky for them, this is precisely what is happening, although not at the originally scheduled time of 3 PM Italian Bailout Time, but only after the market closes, or 5:30 pm. We can't wait to see the limit down in everything tomorrow if indeed someone is pricing in any good news to come out from ole' Silvio whose days are now very much numbered. Reuters reports "Prime Minister Silvio Berlusconi will address parliament on Wednesday seeking to calm escalating market fears that Italy may be dragged into a Greek-style financial crisis that would threaten the euro zone. Italy's Economy Minister Giulio Tremonti met the chairman of euro zone finance ministers, Jean-Claude Juncker, for emergency talks as the yields on Italian and Spanish 10-year bonds flirted with new 14-year highs. Berlusconi, weakened by scandals and largely silent over the past weeks, delayed his address to the lower house, originally scheduled for 3.00 p.m. (1300 GMT), to 5.30 p.m. after the close of the Milan bourse." And the kicker: "It is not clear, however, whether he will have any major new structural reforms or one-off tax measures to announce." In other words this will be merely a Ponzi pep talk...and nothing else.
So it begins, the unraveling of the great Pan-European Ponzi Scheme!
Italy and Spain, and now France, CDS hitting all time highs? Been a few hours since Unicredit was last halted? Europe looking like it is about to implode all over again (and nobody even remembers Greece any more)? Have no fear. President (he was elected?) Barroso is here, telling us all the imploding sovereign bond markets of Italy and Spain are "unwarranted." All this and many more jokes in the full just released statement which confirms that Europe is starting to freak out all over again.