Visitor volume to Las Vegas is the highest since 2007, despite rising hotel rates, but gaming revenues are near flat. Online gambling is popular with Europeans – the Brits and Greeks in particular – yet it has slowed over the past 3 months. ConvergEx's latest off-the-beaten-path economic indicator – gambling – shows an increasing global reluctance to leave household finances at the whims of blackjack and poker tables, be they in actual casinos or online betting parlors. Discretionary spending behavior is reliant on consumer sentiment and economic outlook; gambling is the ultimate “luxury item” because there’s absolutely no guaranteed return, so gambling behavior is a near real-time indicator of changes in consumer confidence. Our gambling indicators, both domestic and abroad, show what feels a lot like recessionary behavior and point to another leg down in the latter half of 2012.
In a first for Moody's, the rating agency, traditionally about a month after Egan Jones (whose rationale and burdensharing text was virtually copied by Moody's: here and here), has decided to cut Europe's untouchable core, while still at Aaa, to Outlook negative, in the process implicitly downgrading Germany, Netherlands and Luxembourg, and putting them in line with Austria and France which have been on a negative outlook since February 13, 2012.The only good news goes to Finland, whose outlook is kept at stable for one simple reason: the country's attempts to collateralize its European bailout exposure, a move which will now be copied by all the suddenly more precarious core European countries.
In what has become one of the most widely read and distributed of our posts, we first introduced the world to the intricacies of legal 'subordination' and protection among European bonds back in January of this year (and reaffirmed it specifically for Spain in early June). This strategy proved exceptionally successful in the case of Greece, and has, in recent weeks, also done extremely well in the case of Spain. Since we first noted it, the local-law Spanish 2029s are down over 14% while the non-local 'UK-law' Spanish 2029s have managed to gain 1.1% providing arbitrageurs with a massive profit on a duration-matched low-capital pairs trade. More importantly, for all the European fixed income asset managers who owe their clients as least some fiduciary duty, we can only hope they rotated to the non-domestic-law bonds before early May - when trouble really hit. While gloating on one's success at non-vaporizing cash once again is not our way, we much more critically note that one can read the fundamentals (as opaque as they are and known to everyone) or one can look at what the market is saying. What it is saying is that the differential between UK- and non-UK-law bonds has been crushed and is absolutely on a path to repeat the Greek PSI experience. There is plenty of room left for the trade since the UK-law bonds will likely be taken out at Par (just as with GGBs) while Spain's PSI is just as likely to be the 20s/30s - and any TROIKA funding will prime everyone but the UK-Law bonds.
The coincidence of comments from Germany - both the Bundestag's Hasselfeldt "If a country is not in a position to fulfill its obligations, or is unwilling to, then it must leave the Euro zone"; and vice-Chancellor Philip Roesler (of the FDP) to the effect that the dangers associated with a Greek exit had faded - and the IMF (which has been suspect for a while in its 'steadfastness' with regard Greece, seem to suggest as UBS notes, that there is notable suspicion of collusion among the politicians to apply pressure to the Hellenic Republic. Against becoming too concerned there is the Realpolitik of the Euro area. Decisions about the direction of the Euro project are taken by a very small coterie of political leaders within the Euro area, and we should be concerned not necessarily because of the specifics of the comment or the associated “hardball” bargaining stance, but because politicians still feel that comments like this can be made at all without fear of repercussions. As silly season is set to begin, we should prepare for the impact of politicians need to hear themselves speak.
The European Union has been, in a very real sense, like a masquerade ball. The intricately painted masks covering manipulated stress tests, hiding inaccurate debt to GDP ratios, falsified accounting practices, glossing over any sort of contingent liabilities as if the scars were not there and double counting assets however, like all extravaganzas of this type, is about to reach a conclusion. The night has been long and the hour is late but one by one the masks are being removed and the characters are seen for what they are; a less than pretty sight. There are negative yields in the short maturities for Germany, France and the Netherlands which might soon be found in the United States. We are not sure what Mr. Bernanke will make of institutions paying him to leave their money with the United States government but it will be a classic example of a point in time where “Return OF Capital” became much more important that “Return ON Capital” but as we have asserted time and time again, given the 36% loss of wealth during the American Financial Crisis, that “Preservation of Capital,” are manifestly the byword of the Faith at present.
Risk-off trade is firmly dominating price action this morning in Europe, as weekend reports regarding Spanish regions garner focus, shaking investor sentiment towards the Mediterranean. The attitudes towards Spain are reflected in their 10yr government bond yield, printing Euro-era record highs of 7.565% earlier this morning and, interestingly, Spanish 2yr bill yields are approaching the levels seen in the bailed-out Portuguese equivalent. As such, the peripheral Spanish and Italian bourses are being heavily weighed upon, both lower by around 5% at the North American crossover.
Gold edged down on Monday due to the pressure from a stronger dollar, as worries about the Eurozone debt crisis grew after Spain looked like the next candidate for a sovereign bailout. Spain has two regions seeking aid from the central government and El Pais reported that six Spanish regions may ask for aid from the central government while Spanish bonds yields continue to rise. As the 4th largest economy in the Eurozone Spain looks likely to follow Greece, Portugal and Ireland seeking an international bailout. Greece’s creditors meet this week as many doubt they will meet their bailout commitments. German Vice Chancellor Philipp Roesler said he’s “very skeptical” that European leaders will be able to rescue Greece. China’s economic expansion may fall for a 7th straight quarter to 7.4% in the three months to September, said Song Guoqing, a member of the People’s Bank of China monetary policy committee.
- Greece should pay wages in drachmas - German MP (Reuters)
- Greece Seeks More Cuts as Deadlines Loom (WSJ)
- Greece Back at Center of Euro Crisis as Exit Talk Resurfaces (Bloomberg)
- Berlusconi seeks return to liberal roots (FT)
- For brokers like Peregrine, from bad times to worse (Reuters)
- Japan Sees More ‘Widespread’ Global Slowdown With China Cooling (Bloomberg)
- China Central Bank Adviser Forecasts Growth Slowdown to 7.4% (Bloomberg)
- London Out to Prove It's Still in the Game (WSJ)
- Stockton Reveals Bondholder Offers From Mediation (Bloomberg)
- US lawmakers propose greater SEC powers (FT)
Russia and the southeast Asian countries are analogs for Greece, Spain, and Cyprus, with no particular association between their references within the timeline. The timeline runs through the Russian pain; things begin to turn around after the timeline ends. This is meant to serve as a reference point: In retrospect it was clear throughout the late-90s that Russia would default on its debt and spark financial pandemonium, yet there were cheers at many of the fake-out "solution" pivot points. The Russian issues were structural and therefore immune to halfhearted solutions--the Euro Crisis is no different. This timeline analog serves as a guide to illustrate to what extent world leaders can delay the inevitable and just how significant "black swan event" probabilities are in times of structural crisis. It seems that the next step in the unfolding Euro Crisis is for sovereigns to begin to default on their loan payments. To that effect, Greece must pay its next round of bond redemptions on August 20, and over the weekend the IMF stated that they are suspending Greece's future aid tranches due to lack of reform. August 20 might be the most important day of the entire summer and very well could turn into the credit event that breaks the camel's back.
EURUSD is down over 50 pips from Friday's close, about to test a 1.20 handle for the first time in over 25 months, as headlines pour from the beleaguered disunion. The AP reports of the German vice-chancellor's "more than skeptical" view that Greece can fulfill its obligations; after which "there can be no further payments" seemingly confirms our earlier note on the IMF's reluctance (and dismisses any hope that the IMF's call for more ECB 'assistance' will go unheeded. More worrisome is the Athens News story on Alexis Tsipras (leader of the Greek Syriza party) forecasting that the government will "soon present a return to a national currency (drachma) as a national success." He went on to state rather honestly for a politician that any payment extension (of the already re-negotiated TROIKA deal) is "essentially a longer rope with which to hang ourselves." The elite-perpetuating status-quo-sustaining unreality is summed up perfectly as he notes the Greek finance minister is the definition of a finance minister that the TROIKA would have chosen. Germany's Roesler adds a little fuel to the conflagration by adding that "for many experts,... a Greek exit from the eurozone has long since lost its horror."
It appears that following the resignation letter fiasco from Friday, the venerable IMF is trying to regain some level of credibility in the world. In a note obtained by SPIEGEL, senior IMF officials patience has clearly come to an end and has decided that, with Greece likely to go bust by September, it is no longer willing to provide additional Greek aid (we assume in light of the push-backs on the promised cuts that the aid was based upon). Pointing to this now being a euro-zone problem, their cessation of Greek aid is even more critical since both Holland and Finland pledged support because the IMF was involved. August 20th marks an important short-term hurdle as Greece is required to pay back EUR3.8bn to the ECB - and with collateral being withdrawn, we wonder how long before the ECB pulls the plug entirely - even on Greek T-Bills. Whether this is sabre-rattling before the delayed TROIKA visit or the IMF (and the rest of the TROIKA) indeed deciding enough is enough and realizing finally that more debt (or even maturity extensions) does not solve the problem of too much debt - only default will do that!
With Valencia bust, Spanish bonds at all-time record spreads to bunds, and yields at euro-era record highs, Spain's access to public markets for more debt is as good as closed. What is most concerning however, as FAZ reports, is that "the money will last [only] until September", and "Spain has no 'Plan B". Yesterday's market meltdown - especially at the front-end of the Spanish curve - is now being dubbed 'Black Friday' and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do "nothing to stop the fire of the [Spanish] government debt" and when asked how he saw the future of the European Union, he replied that it could "not go on much longer." The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah - that will help) as they warn of a 'hot autumn'. It appears Spain has skipped 'worse' and gone from bad to worst as they work "to ensure that financial liabilities do not poison the national debt" - a little late we hesitate to point out.
Bulgaria speaks up in the euro fiasco. A balanced budget, growth, and an income tax rate of 10%?
Strength is fading. Parity is visible. Reform is the only option. European markets are tumbling and the euro has slipped to record lows against several major currencies. The market is in reaction mode responding Spain and Greece in the headlines.
Scandal At The IMF: Senior Economist Resigns, Says "Ashamed To Have Had Any Association With Fund At All"Submitted by Tyler Durden on 07/20/2012 14:58 -0400
The rats everywhere are now jumping furiously off the titanic, but few had taken the time to write a letter explaining in detail just how cracked and broken the hull really was. This has now changed, with the departure of Peter Doyle, formerly a division chief in the IMF’s European Department responsible for non-crisis countries and currently an adviser to the Fund. Not content with quietly slinking off the scandal ridden organization which has become the butt of all jokes in the international community, where humor about Lagarde's Louis Vuitton panhandling bag is as pervasive as punchlines about just how incompetent the organization is at actually doing its duty, Doyle has penned the following scathing letter which tears down every myth about the IMF: from its impartiality, to the selection process of its head, to its effectiveness. The letter also contains the following gem: "After twenty years of service, I am ashamed to have had any association with the Fund at all." Pretty much says it all. This is a scandal in the making, and one which may shake to the core the credibility of the IMF in the context of international organization.