Niall Ferguson recently remarked, "[Europe] is a politicial experiment gone wrong. The experiment was to see if Europeans could be forced into an even closer union - despite their wishes - by economic means, because the political means failed." In this brief clip, Lars Seier Christensen, co-CEO and co-founder of Saxo Bank, tells an audience at the Saxo #FXDebates in London that the eurozone will eventually break up as Brussels claims even more power from nation states. He warns investors that Cyprus was indeed a template for bail ins and that outright confiscatory wealth taxes, disguised as solidarity payments, could be used to raise funds. "The governments of Europe need money, and the private sector has it. It is as simple as that. Be very paranoid," he said, warning investors that the mattress may be a safer place to deposit money over the weekend than their bank accounts. "Frankly, it is a complete mess. And it is a mess that gets worse and worse every day," is how the outspoken truthiness begins, adding, "anyone with a rational view of the world now sees the currency collaboration as a historic failure that can lead to even further fatal consequences for Europe and the continent’s competitiveness vis-à-vis the rest of the world."
A lot of things have gone wrong over the past few years, but the seeds were planted many years ago. In the form of pressure for more people having the “right” to own their properties, even if they did not fulfill the traditional mortgage criteria – hence subprime. In the form of enormous “entitlements” to not just poor, but also middle-class people in the welfare states – hence ballooning deficits and debt. In the form of a Euro, a grand, political project with no practical foundation – hence crisis after crisis, with the dominoes stretching far into the distance. For sure, a lot of financial institutions took advantage of the hands they were dealt. They are not without guilt and responsibility for the current mess. But the real problems lie not in people trying to take advantage of whatever conditions they operate under. The real problem lies in the framework that is created by politicians, preventing free markets to deal with excesses in the way capitalism always does. Cyprus is a very good example of this. The problem is not Cyprus. The problem is the Euro.
Now that many are convinced we've moved into totally unjustifiable extremes of complacency in risky assets, we are having a look at some historic stock market breaks and how they have unfolded. In that light, the current setup is rather ominous. Saxo Bank's John Hardy likes to look at historic patterns, particularly when the past might provide a historic parallel for the present situation. In this case, we're interested in what many historic major equity chart tops look like in a technical sense now that if feels like we've entered into a blow-off territory technically. Somewhat to our surprise, we found that many major market tops had remarkably similar traits as the one we have just posted.
We have seen again that the Eurozone is unable to deal rationally with its problems. This has got to be the most incompetent handling of a Euro crisis event so far, but underlines the hopeless situation the 17 countries that share the common currency are in. The idea of a one-off wealth tax, however, is not new. Several research reports have pointed in recent years to the fact that the desperate need for funding in the public sector could - and probably will - eventually lead to confiscation of wealth in a monumental scale. Boston Consulting Group suggested in a recent report that about 29 percent of ALL private wealth, not just deposits, will eventually be likely to be confiscated to cover the debts already incurred. So we had better get used to seeing our money being appropriated by money-hungry politicians. This is just the beginning. The cat is out of the bag, no matter if this particular deal should fall apart.
It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors' money and 9.9 percent of big depositors' funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy? This is a breach of fundamental property rights, dictated to a small country by foreign powers and it must make every bank depositor in Europe shiver. If you can do this once, you can do it again. Depositors in other prospective bailout countries must be running scared - is it safe to keep money in an Italian, Spanish or Greek bank any more? This is a major, MAJOR game changer and the fallout will be with us for a long time to come. Market reaction? it must be very good for gold - and for safe-haven countries like Switzerland and Singapore. This is full-blown socialism and I still cannot believe this really happened. Be careful out there...
After the spectacular moves of late 2008, currency market volatility slowly reverted to more normal ranges, with a few exceptions over the course of 2009-2011. However, as Saxo Bank notes, since the start of the year, firebrand rhetoric is forcing currencies lower. The yen has fallen a stunning 17% against the US dollar and over 20% versus the Euro in the three months since Japan’s newly elected prime minister Shinzo Abe took charge. This has reignited the global currency wars. But who are the winners and losers? Follow the three step process outlined in the infographic below and have your say at the #FXdebates. As you can see, currency debasement has given rise to a rally in equity markets (for now), but major economies, both advanced and emerging, have been slow to recover.
As the European parliament attempts to create a budget and Draghi repeats how the temporary lull in European growth is merely a prelude to a growth renaissance in the second half of the year (not to be confused with the verbatim lie rehashed by European dignitaries in 2012, 2011, 2010 and 2009), it appears a few leaks of truthiness are seeing daylight in the disunion. In a shockingly frank interview, the CEO of Saxo Bank describes the Euro's recent rally as illusory and that "the whole thing is doomed," as the continent is not supported by a fiscal union. As Bloomberg reports, Lars Seier Christensen says he would be a "seller of the EUR at anything near 1.40," noting that "right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all." Confirming that the only thing holding the farce together is political not economic efforts, he sums the situation up perfectly: "people have been dramatically underestimating the problems."
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?
Desperate North Korea has exported more than 2 tons to gold hungry China over the past year to earn US $100 million. Even in tough times during the Kim Il-sung and Kim Jong-il regimes, North Korea refused to let go of its precious gold reserves. Chosun media reports that “a mysterious agency known as Room 39, which manages Kim Jong-un's money, and the People's Armed Forces are spearheading exports of gold, said an informed source in China. "They are selling not only gold that was produced since December last year, when Kim Jong-un came to power, but also gold from the country's reserves and bought from its people." This is a sign of the desperation of the North Korean regime and also signals China’s intent to vastly increase the People’s Bank of China’s gold reserves.
Confused by the implications of Draghi's pre-leaked speech? Don't worry, you are not alone. As the following sampling of opinions by Wall Street experts via Reuters confirms, opinions range from the positive to the negative, to the completely clueless.
Yesterday, Reuters royally spooked the market when it announced that Europe is in all seriousness considering full blown capital controls, including border halts and ATM closures. Subsequently, various European talking heads aggressively tried to talk down this latest development. However, overnight Saxo Bank appears to have focused on the former and not the latter, and sent out an email with the following key text: "Due to the current market environment in Europe, Saxo Bank is adjusting the margin requirement for Swiss Franc (CHF)." Specifically, the margin is going from 1% to 2% on June 14, to 4% on June 21. How soon until margins become so high that they effectively act as an FX trading prohibition- i.e., an implicit "capital control", and how long until all other exchanges get the memo next?
The US may be closed today but Europe sure is open. And while the general sentiment may be one of modest optimism in light of four highly meaningless Greek polls which fluctuate with a ferocious error rate on a daily basis, now showing New Democracy in the lead (and soon to show something totally different - after all Syriza had a 4 point leads as recently as Friday according to one of the polls), pushing equity futures higher, Spain has so far failed to benefit from either this transitory spike in optimism driven by record number of EUR shorts forced to cover (more below), with its yields touching a fresh record overnight, the 10 year hitting 6.50% and 450 bps in the spread to bunds, while re-re-nationalized Bankia, now with explicit ECB support plunging nearly 30% only to make up some of the losses and trade down 20% at last check. An earlier 2 year bond auction out of Italy did not help: the country raised the maximum €3.5 billion in zero coupon bonds, however the OID was high enough to send the yield soaring to 4.037% average compared to 3.355% just a month ago, while the Bid to Cover dropped from 1.80 to 1.66. In summary: Europe is walking on the edge right now, and the only thing preventing it from imploding this morning is some short covering as well as a furious statement out of Germany, which has to understand that its precious ECB is now directly funding nationalized banks: something Merkel and BUBA's Weidmann have said in the past is dealbreaker.
While not quite a "jarring" as the Saxo Bank "outrageous predictions", Bank of America has also put together yet another list of "other" risks for 2012, which as BofA's Martin Mauro says, "have persisted or become worse over the course of the year, but have escaped market attention due to the spotlight on Europe." The risks are as follows: i) Hard landing in China; ii) Currency wars (competitive currency devaluation); iii) Middle East oil supply shock and iv) Municipal default fears. The only thing we would add is that these are not really risks, as the are all developing processes in some stage of deterioration. And, as usually happens, they will likely all strike at the same time, just when the world is most vulnerable, likely minutes after Greece announces it has left the Eurozone, and the Euro is in legal and structural limbo. But luckily we have at least a few weeks to months before that happens. So here is Bank of America's predictive prowess in all its rhetorical glory.
As we wind down 2011, the time for predictions for what is to come as nigh. Having posted what UBS believes their biggest list of surprises for 2012 will be earlier, we next proceed with out long-term favorite - Saxobank's list of "Outrageous Predictions" for what the bank has dubbed "2012: the Perfect Storm." Mostly proposed tongue in cheek (unlike predictions by other pundits who actually believe their own delusions), the list of 10 suggestions represents nothing less than an attempt to force people "out of the box" and look at the world with a set of "what if" eyes. Because if there is anything 2011 taught is, it is not to discount any one event from happening. As Saxo says: "Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of tremendous change. This may not necessarily be a negative thing either - and given the structure and uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year where we start on the long march towards re-establishing jobs, growth and confidence." Naturally, the best outcome for 2012 would be the end of the broken status quo model, and a global fresh reset... but not even we are that deluded to believe that the quadrillions in credit money (real or synthetic) will allow such a revolutionary event to occur in such a brief period of time. At least not before everything is thrown at the intractable problem unfortunately has just one possible long-term outcome. In the meantime, here, to help readers expand their minds, is Saxo Bank's list of "Outrageous Predictions" for 2012.
BNP Paribas SA and Commerzbank AG (CBK) are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis.
BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year.