Two weeks ago we touched upon the possibility that the US climatic deep fried black swan could soon stretch to India where the Monsoon season was 22% below normal conditions for this time of year. Today India is the locus of another flightless bird sighting following an epic powergrid meltdown which left half of its 1.2 billion people without power on Tuesday "as the grids covering a dozen states broke down, the second major blackout in as many days and an embarrassment for the government as it struggles to revive economic growth... More than a dozen states with a total population of 670 million people were without power, with the lights out even at major hospitals in Kolkata." Indicatively this is the same as every man, woman and child in America having no electricity. Twice over."Stretching from Assam, near China, to the Himalayas and the deserts of Rajasthan, the power cut was the worst to hit India in more than a decade. Trains were stranded in Kolkata and Delhi and thousands of people poured out of the sweltering capital's modern metro system when it ground to a halt at lunchtime. Office buildings switched to diesel generators and traffic jammed the roads." Hopefully, two events in a row don't confirm a trend. Although if indeed systemic, and if suddenly the Indian power infrastructure is unable to handle the local drought-related conditions, thus serving as a natural cap on economic expansion, all bets may be off as to the unlimited upside potential capacity of the BRICs.
As I’ve stated many times, Germany is THE REAL backstop of the EU. And it’s comprised its own solvency as a result: the country is only €328 billion away from reaching an official Debt to GDP of 90%, the level at which national solvency is called into question. Moreover, that €328 billion has already been spent via various EU props. Indeed, when we account for all the backdoor schemes Germany has engaged in to prop up the EU, Germany's REAL Debt to GDP is closer to 300%.
It would be odd to suggest that one of the most scathing critiques of the ECB's attempts to talk up the market on nothing but hope, promises and expectations would come from rating agency Moody's, yet that is precisely what has happened. With Swiss, Dutch, Finnish, and German short-dated bonds once again hitting new record low (negative) rates (and Italian 10Y is weakening), it would appear that at least some of the market is not drinking the all-things-risk kool-aid.
Anyone hoping that the bitter animosity between Mario Draghi and Germany will be any less hostile this morning, following last week's guarantee by Draghi that all shall be well and the ECB will do "anything" to preserve the EUR, only to be followed by Germany's Schauble essentially saying this is certainly not the case, today we get a clarificationary follow up by Joerg-Uwe Hahn, a member of Merkel's junior coalition partner, FDP, who said that the German government should consider the "unusual step" of taking legal action against the European Central Bank over bond purchases. While Hahn's comments are for now seen fringe, the fact that Die Welt has openly broached the topic to an increasingly angrier population (and Spain's remarks that Germany itself has to be grateful for being bailed out after WWII will not help) will likely only strengthen the resolve of Germany to not relent to provocations by either Monti, as of the June 29 summit, but to demands from both Draghi and Juncker to accept that the ECB's printing utopia is in fact reality.
Gold held steady above $1,620/oz on Monday, as investors wait for the central banks from Europe and the US to give definite signs on their plans for more QE. QE3 would be bullish for gold and increase the inflation outlook which would benefit gold as a hedge against the rising prices. The public is now interested in the yellow metal again, with investors adding to their physical positions. Market watchers will take their clues from the data out this week. More investors are trading euro gold than ever before and using euro gold as the barometer of internal health of the gold market right now, says analyst Edel Tully of UBS. Euro gold is up 9% this year versus US dollar gold's +3% performance. The markets await the Fed’s move. Certainly some form of QE3 is inevitable whether it is announced this week or at the next FOMC meeting scheduled in early September
- Schäuble View on Eurozone at Odds With US (FT)
- Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
- German Banks Cut Back Periphery Lending (FT)
- Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
- Bond Trading Loses Some Swagger Amid Upheaval (NYT)
- As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
- Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
- Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
- Chinese Investment in US 'set for record year' (China Daily)
The insolvent banana continent is back. Recall back in May 2011:
“When it becomes serious, you have to lie." -Jean Claude Juncker
Ergo, things in Europe are very serious again because the Eurogroup's head, who until recently promised he was quitting his post because "he had gotten tired of the Franco-German interference in managing the region's debt crisis", only to spoil the fun and say he was lying about that too, is back to doing what he does best - lying. To wit: "the euro countries are preparing together with the bailout fund EFSF and the European Central Bank to buy government bonds if necessary clip euro countries." And now cue Schauble: "Federal Finance Minister Wolfgang Schaeuble has rejected speculation about impending purchases of government bonds by Spanish EFSF and ECB."
"September will undoubtedly be the crunch time," one senior euro zone policymaker said. "In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."
“Humanitarian” War Contradicts 200 Years of Liberal Thought
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."
- Bundesbank Maintains Opposition to ECB Bond Buying (WSJ)
- Greek Budget Talks Stumble as EU Urges Samaras to Deliver (Bloomberg)
- Fortified by euro, Finns take bailouts on the chin (Reuters)
- China Job Market for Graduates Shows Stress on Slowdown (Bloomberg)
- China Exports Fade as Inflation Eludes Targets: Cutting Research (Bloomberg)
- Japan Falters as Ito Calls for Euro Buys to Rein in Yen: Economy (Bloomberg)
- Government weighs social insurance reforms (China Daily)
- Colombia’s Split Central Bank to Weigh First Rate Cut Since 2010 (Bloomberg)
Following two days of desperate attempts by the ECB to talk down record peripheral bond yields without any actual action, it is only logical that while Merkel is on holiday, we get a third day of talking to buy some time purely thanks to rhetoric and jawboning, before the Chancellor comes back and spoils the party. Sure enough, here it comes via French Le Monde, whose host nation knows very well that after Spain and Italy, France is next:
- ECB PREPARING TO BUY SPANISH, ITALIAN DEBT, LE MONDE SAYS
But while the cat may be away, the Bundesbank has decided to take at least some matters into its own hands:
- BUNDESBANK SAYS IT HASN’T CHANGED STANCE ON ECB BOND BUYING, REMAINS OPPOSED TO FURTHER BOND BUYING BY THE ECB
Then just to confirm that nobody in Europe has any clue what is going on and its politicians are now just making things up on the fly, we get this:
- HOLLANDE-MERKEL TO SPEAK BY PHONE AT 1 PM ON HELP: LE MONDE
And the logical response:
- STREITER SAYS `DOESN'T KNOW' ABOUT MERKEL-HOLLANDE CALL
Sigh - when one sees such relentless lies and confusion what else can one say but... "Europe."
Both earnings and revenues for 2012 have been cut dramatically in the last three months, rejuvenating a sliding consensus trend for 2012 that began in the middle of last year, and now Q3 expectations are negative YoY for the first time since Q3 2009. However, as we are told again and again, the economy must be doing fine because the market is up so much in that period. In fact, what is even more fun to hear is that the market is cheap (never mind the incredulous hockey-stick expectations for Q4 this year). In fact, the market is not cheap at all. The correlation between the S&P 500 in the last two years and the P/E multiple shows that performance has been driven almost entirely by multiple-expansion alone. Forward P/E is now getting close to recent peaks suggesting the market is far from cheap and on a longer-term view (based on both an as-reported and operating basis), the S&P 500 appears expensive - and perhaps these charts will re-anchor whatever cognitive bias that seems to pervade the long-only manager's herding mentality.
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.
- Draghi Says ECB To Do Whatever Needed As Yields Threaten Europe (Bloomberg)
- Spain not mulling seeking further EU help (Reuters)... and it won't need a Bank bailout either. Oh wait
- Weak lending adds pressure for ECB action (Reuters)
- Sweden's economy still resilient to eurozone woes (Reuters)
- Bo Xilai’s Wife, Zhang Xiaojun, Prosecuted for Homicide (Xinhua)
- China’s Changsha City Unveils $130 Billion Investment Plan (Bloomberg)
- Foreclosure Filings Increase in 60% of Large U.S. Cities (Bloomberg)
- Free ECB’s hand to aid states, says minister (FT)
- Hungarian Premier Says Aid Deal Not Near (WSJ)
- Nomura Chief Resigns Over Insider Trading Scandal (NYT)