Greece

Stagflation: Eurozone Unemployment Hits Record High As Inflation Rises Above Expectations

In July European unemployment rose to 11.3% - a record post-Euro rate, and the highest since 1990 for the constituent countries. While this was in line with estimates, what surprised the market, and has sent the EUR paradoxically higher (paradoxically, because all a continent in stagflation, which Europe by now most certainly is, is to have its currency rise just when it needs to export more goods, in the process entrentching its economic plight even further) is that inflation in August picked up from 2.4% to 2.6%, beating expectations of a 2.5% increase, allowing the European misery index to stand head and shoulders above the rest of the world.

Bundesbank's Weidmann Wanted To Resign Last Week, Bild Reports; Is Goldman's "Ambassador" To Germany In Play?

Confirming that the ECB soap opera must go on, German Bild reports overnight that Bundesbank head, and most vocal critic of Goldman's pro-inflationary European policy, conducted by the firm's Italian alum Mario Draghi, last week considered joining other such German luminaires as Axel Weber and Jurgen Stark in following the red Egress signs at the Bundesbank headquarters, ironically located in downtown Frankfurt. From Bild: "In recent weeks, Bundesbank President Jens Weidmann has repeatedly seriously considered his resignation." Citing unnamed sources, which is merely a polite way of denying the other side's just as credible "unnamed sources", Bild says Weidmann discussed the possible resignation with the Bundesbank's board. Bild condludes that Weidmann has decided against resignation for now because hwants to fight against the ECB’s bond-purchasing program at next week’s meeting, and that the German government has urged Weidmann to remain in post. In other words, just as has been expected all along Merkel may say this, or that, but in the end she will adamantly fight Goldman and its inflation spreading tentacles in Europe as long as she has to (with recent German data of accelerating inflation and unemployment merely helping her cause).

Guest Post: The End Of ECB Rate Cuts Or Draghi Against Weidmann To Be Continued...

Even in the unlikely case of a fiscal union, the conflict “Draghi against Weidmann”, between the ECB and the Bundesbank will continue for years. The ECB mandate and many european inflation figures do not allow for excessive ECB rate cuts or for state financing via the printing press, but Draghi wants to help his struggling home country.

Negative Euro Headlines Are Back Sending EURUSD And Its Derivative, S&P500 To Day's Lows

As the Dow crosses 13000 and S&P crosses 1400 - the wrong way - the noise from Europe is picking up:

*IMF SAYS IMPLEMENTING MEASURES A `MAJOR CHALLENGE' FOR GREECE
*IMF: No Request From Spain For IMF Financial Help
*SLOVAK PREMIER FICO SEES 5O% CHANCE OF EURO AREA BREAKUP

Bah, what does the Slovak premier know: it is not like he is a member of the Eurozone. Oh wait...

EURUSD has fallen 50pips from its intraday highs; Spain 10Y (+19bps to 525bps) is at 3-week wides.

Germany Is Cornered

Several recent releases of data bring the problem into focus; a sharp focus. In Germany, once thought to be almost invincible and somehow outside the recession that is raging in Europe, the crisis is just beginning - but it is clearly indicated by the newest data which shows that Germany has begun the descent down the rabbit hole with the rest of its brethren. Germany is now trapped; having lost control of the situation - first by the way the game has been played; and second by the limitations of her capital. We suspect you will soon find a politician in Germany who is opposed to the policies of Ms. Merkel and who will rise to power based upon "Germany for the Germans". All of this is also defined by a very warped time-line. The problems are now, the recession is now, the economic difficulties are now and the solutions that have been proposed are one to three years out. Germany is in the box and we are afraid that it is now Frau Pandora and not Frau Merkel who owns the key.

Overnight Sentiment And Key Events

Unlike the last two weeks, overnight sentiment for once can not be simply described as zombified, as there has been a decidedly negative undertone to risk, first in Asia, then in Europe, and finally in the US, accompanying the stealthy climb in the VIX which from a 13 handle a few days ago has quietly crept to 17. Will the market, finally realizing Bernanke will not say anything groundbreaking tomorrow, sell off just in time for J-Hole, or will the mysterious buying force-cum-Knight Algo reappear at one or more inflection points and push stocks to unchanged or green on the day. Find out in 9 hours. As for the key events of the past several hours, here is Bloomberg's dealbook summary of all the news that's fit to copy and paste.

The "China Bails Out Europe" Rumor Is Back

It's been a while since the ridiculous "China bails out Europe" rumor made the scene: in fact, the last time we can find with definitive confirmation was back in September of 2011, just before the bottom fell out of Europe, and when the FT, based on "anonymous sources" tripped over itself to report that "[insert European country] is in talks with China to buy bonds, assets." Sure enough, now that Merkel came, and saw, but hardly conquered Beijing, it is the turn of China's Wen Jiabao to add his 10 pips to the EURUSD rumormill: Reuters reports: "China is prepared to buy more EU government bonds amid a worsening European debt crisis that is dragging on the world economy, Premier Wen Jiabao said, in the strongest sign of support for its biggest trading partner in months." Naturally, considering how often this rumor (re)appeared in the past it will be excusable if nobody but the dumbest vacuum tubes fall for it this time, especially considering that the Chinese economy itself is going down in flames faster than the October Iron Ore contract. And lest there be any confusion, China's commitment is about as definitive as a Best Buy LBO "preunderwritten" with a Jefferies highly confident letter: "China is willing, on condition of fully evaluating the risks, to continue to invest in the euro zone sovereign debt market, and strengthen communication and discussion with the European Union, the European Central Bank the IMF and other key countries to support the indebted euro zone countries in overcoming hardships," [Wen] said after meeting Merkel." Ah, conditional aid. The kind that gets Mario Monti to break out the petulant ex-Goldman child act and refuse to leave the Belgian catered dining room until the beggees succumb to his technocratic platitudes. Needless to say, we'll believe China's "continued" investment in Europe when we see it.

Place Your Bets

The Chinese Stock Markets are returning to the lows of 2009 and the Europe is mired in a recession. The American Stock Markets are not far off their highs and we do not think this will continue. Mark Grant is quite negative, for all kinds of reasons, about our equity markets now and would be taking profits and returning to the more assured bets of getting yield from bonds and not from dividends. A dividend may be reduced or cancelled by the wave of some Boards’ hand one afternoon while senior debt cannot be cancelled without the company or the municipality going into bankruptcy so that the top of the capital structure is far safer than relying upon dividends for income. In the next sixty days we are faced with Greece, Portugal, Spain, Italy and ECB issues that are quite serious both economically and politically. You may think what you like but there is a lot of risk on the table; of that you may be assured. When someone says, “Buddy can you spare a dime” we would like to be the one being asked and not the one doing the asking. It is here where we stand and wait.

Fingerboning Escalates: Buba Strikes Back To Draghi OpEd With Weidmann Interview

The first shot in the fingerboning wars (a key step up from mere jawboning) has barely been fired following Draghi's earlier OpEd in Zeit (posted here in its entirety), when the Bundesbank already had its response ready for print in the form of yet another interview with its head, Jens Weidmann, who says nothing new or unexpected, but merely emphasizes that no matter how loud the chatter, how empty the promises, or how hollow the bluffing, Germany's response continues to be, especially after today's higher than expected inflation across the country, 9, 9 and once again, 9. Perhaps the most notable part of the interview is Weidmann's comparison between the ECB and the Fed, and why one is allowed to monetize bonds, while the other shouldn't be: "The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe....When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks." Of course, when the wealth of the status quo is at risk, such trivialities as democracies are promptly brushed by the sideline...

Judgment Day For The Euro And What's At Stake

Europe and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism. The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). Nobody knows how the Constitutional Court will rule on these objections. It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned. The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.

Guest Post: China's Difficult Choice

Over the weekend, we pointed out that the old mechanism for the People’s Bank of China to expand its balance sheet and create base money has been broken by new funds flow pattern, and it will sooner or later require some sort of large scale asset purchases programme a.k.a. quantitative easing to offset the impact of the broken mechanism (after other tools such as cutting RRR reach their limits). However, we also mentioned that as the private sector is currently quite overstretched and will start the deleveraging process (if they have not already started), and that would render traditional monetary tools useless, and quantitative easing ineffective. And that would necessitate deficit spending at both local and central government levels. If we have read the social mood correctly that China might be more pro-austerity than pro-Keynesian, and if policymakers indeed share that view, then the consequence in the near term could be rather grim. The delay in stimulus as well as the small size of it so far has already done damage, if you like. The economy is already on course to a hard landing.