If there was one catalyst for the market to be "convinced" of an imminent coordinated liquidity injection, as Zero Hedge first hinted yesterday, or simply a 25-50 bps rate cut from the ECB as some other banks are suggesting and Spain's ever more desperate Rajoy is now demanding, it was the overnight battery of European Flash PMI, all of which came abysmal, throughout Europe, the consolidated Eurozone PMI posting the worst monthly downturn since mid-2009, the PMI Composite Output and Manufacturing Index printing at a 35 month low of 45.9 and 44.7 respectively. PMIs by core country were atrocious: France Mfg PMI at 44.4 on Exp of 47.0 and down from 46.9, a 36 month low; German Mfg PMI at 45.0 on Exp. of 47.0 and down from 46.2. The implication, as the charts below show, is that GDP in Europe is now negative virtually across the board. Adding insult to injury was the UK whose GDP fell 0.3%, more than the 0.2% drop initially expected. The cherry on top was German IFO business climate, which tumbled from 109.9 to 106.9 on Expectations of 109.4 print, as the European crisis is finally starting to drag the German economy down, or as Goldman classifies it, "a clear loss in momentum." What does it all add up to? Why nothing but a massive surge in risk, as the market's entire future is now once again in the hands of the #POMOList, pardon, the central banks: unless the ECB steps up, Europe will implode due to not only political but economic tensions at this point. Sadly, as in the US, by frontrunning this event, the markets make it more improbable, thus setting itself up for an even bigger drop the next time there is no validation of an intervention rumor: after all recall what sent stocks up 1.5% yesterday - a completely false rumor of a deposit insurance proposal to come out of the European Summit. It didn't, but that didn't prevent markets to not only keep their massive end of day gains, but to add to them. it is officially: we have entered the summer doldrums, when bad is good, and horrible is miraculous.
In the Garden of Eden there is no scarcity. Food, clothing, and shelter in are abundance. Resources merely fall from the heavens upon command. It is economic paradise precisely because economics does not exist. The universal laws that hold in the world of scarce goods vanquish in the land of the plenty. The vision of Eden is the politician’s main source of employment. That is, promising to lead the suffering masses toward utopia by government decree makes for great electoral results. The voting fodder ignorant of economics falls in line to cast a ballot to grant themselves other people’s money. But of course many voters don’t see it this way. Their vision of the state is that of Eden. They see the bureaucrats and enforcers capable of tapping an infinite pot of wealth to pass along prosperity to those subservient enough to put them in office. This in turn has lead to the establishment of the welfare state and its plethora of entitlement programs. For those who see the modern day welfare state as corrosive to the productive capacity of any given country, no where is this theory more evident than the scheme of unemployment insurance.
Our entire society is in a downward social and economic spiral. We are just at different levels of decay (Dante’s circles of hell). At the current pace it won’t be long before I’m writing about the 50 States of Squalor. It is virtually impossible to reverse a decline that has been underway for the last three decades. We sold our souls to Wall Street and chose a debt financed illusion of wealth over productive savings and investment which would have led to real wealth. Our choices are reflected in the continued deterioration and decay along West Chester Pike and the squalor that is West Philly. Grey and decay will carry the day. The words on the Statue of Liberty should be revised from, ”Give me your tired, your poor, Your huddled masses yearning to breathe free”, to “we have become your indebted, materialistic, obese, aging masses yearning for the government to protect and sustain us as our once great nation decays.”
As a nation, we have chosen this path. We made the choices and now we will suffer the consequences.
PIMCO vs GARY SHILLING - ROUND 1
- Rajoy to ask for ECB assistance, according to reports (Sharecast)
- Bundesbank Suggests Greek Exit From Euro Would Be Manageable (Bloomberg)
- Unemployed Burn as Fed Fiddles in Debate Over Natural Rate (Bloomberg)
- Regulators, investors turn up heat over Facebook IPO (Reuters)
- China to boost private energy investment to bolster economy (Reuters)
- OECD fears euro woe to snap brittle world recovery (Reuters)
- China slowdown threatens Australia - World Bank (Herald Sun)
- Guessing game begins over next Treasury chief (Reuters)
- Italians spurn main parties in local polls (FT)
- A fragile Europe must change fast (FT)
- Spain to outline Bankia plan, may announce bailout size (Reuters)
- China Should Adjust Policy Early - Government Researcher (WSJ)
From Egan-Jones: "Spain will inevitably be faced with sizable payments to support its banking sector and for its weaker provinces. Assets of Spain's largest two banks exceed its GDP. We are slipping our rating to "BB"; watch for requests for support from the banks."
There was some hope that today's European summit would provide some more clarity for something else than just the local caterer's 2012 tax payment. It wont. Per Reuters: "Germany does not believe that jointly issued euro zone bonds offer a solution to the bloc's debt crisis and will not change its stance despite calls from France and other countries to consider such a step, a senior German official said on Tuesday. "That's a firm conviction which will not change in June," the official said at a German government briefing before an informal summit of EU leaders on Wednesday. A second summit will be held at the end of June. The official, requesting anonymity, also said he saw no need for leaders to discuss a loosening of deficit goals for struggling euro zone countries like Greece or Spain, nor to explore new ways for recapitalise vulnerable banks at Wednesday's meeting." In other words absolutely the same as in August 2011 when Europe came, saw, and did nothing. Yes, yes, deja vu. Bottom line: just as Citi predicted, until the bottom falls out of the market, nothing will change. They were right. As for the summit, just recycle the Einhorn chart from below. Elsewhere, the OECD slashed world growth forecasts and now officially sees Europe contracting, something everyone else has known for months. "In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November... The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013." Concluding the overnight news was a meaningless auction of €2.5 billion in 3 and 6 month bills (recall, Bill issuance in LTRO Europe is completely meaningless) in which borrowing rates rose, and a very meaningful downgrade of Japan to A+ from AA, outlook negative, by Fitch which lowered Japan's long-term foreign currency rating to A plus from AA, the local currency rating to A plus from AA minus, and to the country ceiling rating to AA+ from AAA. Yes, Kyle Bass is right. Just a matter of time. Just like with subprime.
Michael Hudson argues that Mr. Krugman is a conservative in disguise.
The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.
The two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!
The reality is that — with the exception of Obama — Americans have again and again opted for a candidate who has paid lip-service to small government. Even Bill Clinton paid lip service to the idea that “the era of big government is over” (yeah, right). And then once in office, they have bucked their promises and massively increased the size and scope of government. Reagan’s administration increased the debt by 190% alone, and successive Presidents — especially George W. Bush and Barack Obama — just went bigger and bigger, in total contradict to voters’ expressed preferences. The choice between the Republicans and Democrats has been one of rhetoric and not policy. Republicans may consistently talk about reducing the size and scope of government, but they don’t follow through.Today Ron Paul, the only Republican candidate who is putting forth a seriously reduced notion of government, has been marginalised and sidelined by the major media and Republican establishment. The establishment candidate — Mitt Romney — as governor of Massachusetts left that state with the biggest per-capita debt of any state. His track record in government and his choice of advisers strongly suggest that he will follow in the George W. Bush school of promising smaller government and delivering massive government and massive debt.
The Spanish government has promised to reform the public sector to make it thinner and more efficient. In practice, however, the political machinery based on spoils is being kept intact while some very critical public functions are coming apart at the seams. This results, for example, in overcrowded courts with insufficient staff and resources that bear no resemblance to a developed nation's judiciary. Angry and less motivated public employees feel robbed of their dignity and pockets while the general population’s dissatisfaction with tax-draining, yet increasingly inefficient, public services grows. Public workers fear a new wave of cuts in their salaries as a result of the debt-laden regional governments’ asking for more "solidarity" from those who have a secure job. Naturally, in a nation with almost 6 million unemployed, public servants will not find much support from society if they opt to go on strikes to protest additional salary cutbacks. Just how far is the government willing to make itself redundant, especially in a time of economic crisis? Does Spain need state-journalists working for state-owned radio and television stations (there are 48 public television stations across the country)? How about the double, triple and sometimes quadruple existence of government officials and agencies due to layers and layers of local, regional and central government institutions? Unions and political parties sustained with taxpayers' money? As far as public servants are concerned, more and more are realizing that a false concept of merit astutely devised by mediocre politicians secured them not a job for life, but a lifetime of serfdom.