Sovereign Debt

While Bernanke was putting the finishing touches on QE2 in DC, 50 global financial regulators met at the New York Fed to discuss regulation of world's largest market. Instead of financial reform measures, what is being created is simply a massive new power center headed by the CFTC from which those at the top will vainly attempt to manipulate market prices and entrench favored institutions within the new framework.

Even as the world wakes up to a stunner out of Korea, things in Europe are getting worse. Here is a brief summary of all the events in the increasingly troubled continent.

Exactly was we predicted in the beginning of the year, Ireland is the 2nd Euro nation that didn't need a bailout to get bailed out! Now that some may start taking this seriously, I go through a quick history of how we got to this point and prep for an intense analysis of how the contagion will unfold, how ugly the haircuts (that nobody needs, of course) will get, and who may be the next domino to fall.

WARNING: It is strongly recommended that you do not watch this clip after, during or before the consumption of food or beverage!

Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently unembargoed speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, the inkmaster considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China's fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. China now will have no choice but to either hike rates (which will pretty much end of the tech bubble), remove even more excess liquidity (real estate bubble burst) or merely export another $20 billion of crap to the US each month, pretending nothing happened (leading to more QE in the US). As Albert Edwards summarized so well earlier, the global game of chicken will continue until either China's or America's population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

Substantially more sanguine than their two key strategists Albert Edwards and Dylan Grice, SocGen's Cross Asset research has come out with a report looking at the future of the world, and the various scenarios that may end up taking us there (although the actual reality will of course be something unforeseeable). So while we play predictive games, here is how SocGen believes the upside/neutral/downside cases could look like across asset classes, and across the globe.

This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European possibly global financial and economic contagion.

Contrary to CNBC's interpretations of Irish PM Cowen's speech that the leader may have opened a door, or is "clearing the political space" for a bailout, the Irish Times has a completely opposite take on the speech, one that confirms that no matter how hard Ireland is pushed by Europe and Fed interests to exchange par recoveries to the bankers for austerity, it has so far refused to bend. To wit: "Speaking in the Dail Mr Cowen reiterated that Ireland had made no
application for external support and said there had been some
“ill-informed and inaccurate” speculation about the Government seeking a
bailout in recent days." Which of course is not to say that lack of liquidity will not end up crushing the mostly foreign banks domiciled in Ireland (which has enough funds to hold it through next summer, by which time Portugal, Italy and possibly core countries will have long been bailed out). Nonetheless, we can certainly hope that Ireland stays the course and refuses to betray its public in exchange for a few more years of debt-induced slavery, something which our own monetary authority has no problems doing.

Today's sudden spike in yields across the curve is being widely attributed to a conversation between Moody's Steven Hess, Senior Credit Officer covering sovereigns, and Market News, in which Moody's has given the point blank warning that a permanent extension in the Bush tax cuts may lead to a downgrade of the US, putting yet more pressure on the president, who despite having shown a conciliatory stance recently vis-a-vis permanent tax extensions, may suddenly find himself boxed once again, and without much choice but to prevent an all out compromise. As the market has recently been running higher on expectations that a tax cut extension is pretty much guaranteed, today's announcement by Moody's pours cold water over yet another "priced in" concept, which suddenly may not materialize. The net result: a smackdown in the 10 Year which is slowly migrating to all risk assets.

As if astute observers, the objective (and/or BoomBustBloggers) couldn't see this coming a mile away. The next prediction cum manifest destiny (Euro-toxic asset edition), many other sovereign nations - in and out of the EU will be pulled down by their extend and pretend treatment of bad bank assets.

What do "hot money," gold, sovereign debt, foreign trade, and Germany and China all have in common? Everything. They are all lined up against the U.S. and our new quantitative easing (QE2). There is fallout related to quantitative easing, and the markets are reacting, from the Fed's perspective, badly.

A few weeks ago, Hinde Capital's Ben Davies delivered a terrific speech to the The Committee for Monetary Research & Education in which the asset manager presented his insight on not only the futility of linear forecasting, on the flawed assumptions of economists, and on the very errors in the current monetary system, but went on to suggest several "Variant Themes" which put him at odds with the consensus, chief among them being of course his views on the monetary system and gold (both discussed repeatedly before on Zero Hedge), but also on specific socio-political and economic catalysts when looking at the future. Among these are : 1) "Japanese stocks are the most unloved in the world. Small-cap stocks in Japan will skyrocket in years to come, but then they would, as I see hyperinflation there in the next five years", 2) "The Swiss Franc as a bastion of safety is a fallacy. They too are debasing their currency", 3) "Turkey: the Ottoman Empire will return. Great enduring demographics and entrepreneurial spirit", and 4) "Mongolia will surpass Japan in GDP on a PPP basis." Aside from his recommendations, which may well be right or wrong, the epistemological basis of Davies view is a must read for any participant in what is becoming an increasingly chaotic, full of noise and reflexive market, in order to get a grasp of what may truly be relevant for creating, and influencing, correct opinions.

In attending a Paul Krugman lecture yesterday, we came away with two main takeaways: 1) the Perceived Wisdoms of academic dogma run rampant throughout U.S. monetary policy; and 2) Keynesians really don’t get it. - Hedgeye Risk Management

A more in depth look at Morgan Stanley’s returns on equity reveal an even uglier snapshot of performance than the unimpressive, cursory annual overview illustrated in our quarterly analysis released yesterday. Bubblicious credit, QE x 2, and regulators that look the other way from rotting assets still result in piss poor economic performance. What do you think will happen when rates resume their upward move?

Low supply+ very high demand = higher prices