#FF: A Truth-Telling Financial TV Talk Show? Lew Rockwell Interviews Lauren Lyster and Demetri Kofinas of RT's Capital AccountSubmitted by EB on 07/27/2012 18:00 -0400
Discussing the bull market in alternative media, a Grecian return to the Drachma, and how savings empower the individual (as opposed to state confiscation)
While it would appear that all news is good news; good news (or no news) is better news; and old-news is the best news; here is your one stop summary of all the notable bullish and bearish events in the past seven days.
We discussed the use of Game Theory as a useful tool for analyzing Europe's predicament in February and noted that it was far from optimal for any (peripheral or core) sovereign to pre-emptively 'agree' to austerity or Eurobonds respectively (even though that would make both better off). This Prisoner's Dilemma left the ugly Nash-Equilibrium game swinging from a catastrophic break-up to a long, painful (and volatile) continuation of the crisis. Recent work by BofAML's FX team takes this a step further and in assigning incentives and from a 'do-not-cooperate' Nash-equilibrium between Greece and Germany (no Greek austerity and no Eurobonds) they extend the single-period game across the entire group of European nations - with an ugly outcome. Analyzing the costs and benefits of a voluntary exit from the euro-area for the core and periphery countries, the admittedly over-simplified results are worrying. Italy and Ireland (not Greece) are expected to exit first (with Italy having a decent chance of an orderly exit) and while Germany is the most likely to achieve an orderly exit, it has the lowest incentive to exit the euro-zone - since growth, borrowing costs, and a weakening balance sheet would cause more pain. Ultimately, they play the game out and find while Germany could 'bribe' Italy to stay, they will not accept and Italy will optimally exit first - suggesting a very dark future ahead for the Eurozone and with EUR tail-risk so cheap, it seems an optimal trade - as only a weaker EUR can save the Euro.
Confirming what we described in detail in March, Bridgewater's Ray Dalio notes in his Daily Observations that "Spanish banks' collateral is running out in a way that could force them into an ELA." The manager of the largest hedge fund in the world - so not some self-perpetuating political mouthpiece - estimates that the Spanish banking system has only a few hundred billion euros left in eligible collateral and that some of the weaker banks are likely already getting close to a point where their collateral is exhausted. Critically, if this occurs, then Spanish banks will need to turn to its own Emergency Liquidity Assistance (ELA) program. An ELA for Spanish banks would likely be several times the size of those in place for Greece and Ireland, further fracturing the uniformity of central bank standards across the eurozone, and the magnitude of funding coming through the national central banks could accelerate rapidly. This increasing Balkanization of European central banks and funding capabilities only entrenches the impossible task of fiscal union as 'more' sovereign control transfer will be required in return for any core backstopping. Furthermore, those who are hoping for LTRO3: no collateral, no deal! Which the IMF just confirmed is a flashing red warning:
- IMF: COLLATERAL AT ECB VULNERABLE TO DOWNGRADES, MARGIN CALLS
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.
Whether it is central bank policy leaked as a strawman or as Stephen Roach notes, Jon Hilsenrath is the new Fed head (as what he writes - prompted by 'friends' - must be adhered to for fear of disappointing markets), UBS' Art Cashin notes a strange coincidence this week. While WSJ's Hilsenrath is the unofficial floater-of-ideas-and-saver-of-markets in the US, it appears The Economist's Greg Ip is the ECB's unofficial suggester-in-chief. As the avuncular Art notes "Mario Draghi's comments stunned the markets. What prompted the timing of the move? We'd like to present a possibility"
While the EUR was soaring, and Spanish bond yield were (very briefly) plunging in the past 48 hours, the reality behind the scenes was very different than what was blasted publicly in the headlines. Namely, Spain was on the verge of requesting a full blown sovereign bailout, one which would see it become the next country after Greece, Ireland and Portugal to fall under the Troika's control. From Reuters: "Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said. Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said. If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year." So why the sudden attempt to talk up European risk in the last two days? Simple - Germany did not agree to fund Spain's bailout. Which meant it was suddenly up to Europe's apparatchiks to jawbone markets into cooperation. "De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now," the official told Reuters."
How can such a small country blow through so much money?
On one hand we have Mario Draghi promising he has a magic wand (not a printer - remember the keys to that are now held by Angela Merkel who is on vacation) and to "believe him" that the EUR will survive. On the other we have Greece which is a poster child of everything that is wrong in Europe. And that we summarize as follows: i) an epic and now relentless deposit outflow from Greek banks which continues as all trust in the local banking system is now gone, as €7 billion in deposits or the second biggest amount ever, is pulled and 20% of the entire corporate and household deposit base has vaporized in the past year, and ii) an economy in which it is every man for himself and where nobody pays any taxes any more, period. Good luck Super Mario.
In Hong Kong they are completing work on its largest gold vault due to open in September which can hold 22% of the gold that is in the US facility Fort Knox. The new secure storage facility will compete with services set up by the Airport Authority Hong Kong in 2009 that serviced governments, commodity exchanges, bullion banks, refiners, wealthy individuals and exchange-traded funds. The new facility is within the international airport compound and its capacity is 1,000 metric tons. This signals the growing interest from China currently the world’s second largest consumer of gold in owning physical gold bullion.
The Europeans have played the Great Game badly; are playing it badly and there will be consequences for their failures. All of this nonsense with Greece, with Spain, could have been avoided by telling the truth about the numbers, by not goose stepping with plans meant to mislead instead of illuminating the truth, with trying to hide the self-evident and presenting scams as solutions or by addressing the size of firewalls instead of trying to cure the sickness of the nations that lie within them. There is no Prince, there are no glass slippers and the bills have to be paid and the money to pay them will not be found in the pot of gold at the end of some rainbow. Unless the Germans are willing to have the same standard of living as those in Greece and that will not be happening so that it can be foretold that the play will end badly. It is not economics that will determine the end of the European fantasy but politics.
European markets started off on a quiet note with thin volumes as equities drifted lower and fixed income gradually made gains, however newsflow rapidly picked up as commentary from the ECB President Draghi picked up wide attention. The ECB President was very upbeat on the Eurozone’s future, commenting that the bank will do whatever is needed to preserve the Euro, fuelling the asset classes with risk appetite across the board. European equities as well as the single currency erased all losses and the Bund moved solidly into negative territory. As such, EUR/USD is seen comfortably back above 1.2200, with both the core and peripheral bourses making progress. In the wake of the moves, attention is particularly being paid to Draghi’s comment that if monetary policy transmission is affected by government borrowing, it would come within the bank’s policy mandate. As such, much of the focus now lies firmly on next week’s policy decision from the ECB.
A giant celebration idolizing the globalist ideals of corporatism, consumerism and leverage
Up until this point, Europe has been transfixed with severing the linkage between the sovereign and the banking system. This has been a particularly big issue in Spain because as is now well known, its banks are insolvent, yet the country is trying to pass off as not needing a bailout. Of course, if RBS is correct, that is all going to change very soon as the entire country demands a formal bailout. Yet link that has been largely ignored is the link between the sovereign, the financial sector and the broad corporate sector. Because if the first two are imploding, it is only a matter of time before the latter is also dragging into the maelstrom. As of minutes ago, this has just happened, following an announcement by Telefonica, Spain's second largest company, that it has cancelled its dividend and share buyback for the entire year.
- TELEFONICA SAYS CANCELS DIVIDEND AND SHARE BUYBACK FOR 2012
Why is Telefonica doing this? Simple - to conserve cash ahead of what may be a sovereign default which will have a huge adverse impact on all Spanish corporations.
With GGB prices, down 53% from post-PSI, plunging to all-time lows (offering Greywolf more opportunities to add to its 'no-brainer' trade) it appears Europe's ever-hopeful self-perpetuating banks are turning tail and realizing that the truth will set them free. In a turnabout from a late May note detailing 'why Greece will not leave the Euro', Credit Suisse now expects a return to some form of local currency for Greece within one year (an event they now assign a probability greater than 50%). The reason for their change of view is the slowness of structural reforms/privatizations and the lack of available capital to bail out the increasing number of distressed euro zone countries. It seems almost impossible for Greece to pull itself out of the contractionary hole it's in without additional support that few are politically able or willing to provide. Expecting another round of PSI - extending to ECB losses - and ending the ridiculous state of affairs that exists currently whereby the euro area is providing funding to Greece to enable them to repay the ECB. Ominously, they note, against the backdrop of the situation in Spain, we believe that such a development in Greece will have a highly negative impact on sentiment, further putting into question the sustainability of the euro area as a whole.
"The global growth picture is, as per our long-term contention, weak and deteriorating, pretty much everywhere – in the US, in the eurozone and in the emerging markets/BRICs.... We in the Global Macro Strategy team still think the market consensus is far too optimistic on policy expectations both in terms of the likelihood of seeing more (timely) fiscal and/or monetary policy assistance (globally), and in terms of any meaningful and/or lasting success of any such policy moves. In particular, we think that the period August through to November (inclusive) represents a major global policy and political vacuum. Based on the reasons set out earlier and also covered in my two prior notes, over the August to November period I am looking for the S&P500 to trade off down from around 1400 to 1100/1000 – in other words, I expect over the next four months to see global equity markets fall by 20% to 25% from current levels and to trade at or below the lows of 2011! US equity markets, along with parts of the EM spectrum, will I think underperform eurozone equity markets, where already very little hope resides. For iTraxx crossover, this equates to a spread wide for 2012 of – in my view – 800/1000bp.... And of course I still see a very clear path to 800 on the S&P500 at some point in 2013/2014, driven by market revulsion against pump-priming money printing central bankers, but this discussion is also for nearer the time."