It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March. Call it Ostrich Economics. But do it quick. Those side-effects are coming to the casino some day real soon.
"Short-term, markets seem intent on forcing either the Fed to pass in September, or the Chinese to launch a more comprehensive and credible policy package to boost growth expectations. Alternatively, a credit event in commodities (note CDS is widening sharply for resources companies – front page chart) may be necessary to cause policy-makers to panic. Markets stop panicking when central banks start panicking."
The preposterous Gong Show in Brussels over the weekend was the financial “Ben Tre” moment for the Euro and ECB. That is, it was the moment when the Germans - imitating the American military on that ghastly morning in February 1968 - set fire to the Eurozone in order to save it. In short, Greece will become an outright debtors’ colony and its government will function as page-boy legislators for the Troika occupiers. Needless to say, political and social upheaval will erupt when the full extent of the Tsipras surrender becomes evident, and the resulting political contagion will spread throughout the length and breadth of Europe as Greece implodes. In due course, the euro will collapse and the baleful Keynesian money printers’ regime in Frankfurt will be repudiated and dismantled. But not before European democracy has a brush with death, and European prosperity is extinguished for a generation.
Greece, Europe and the world are being crucified on a cross of Keynesian central banking. The latter’s two-decade long deluge of money printing and ZIRP has generated a fantastic worldwide financial bubble, and one which has accrued to just a tiny slice of mankind. That much is blindingly evident, but there’s more and it’s worse. The present replay of high noon on Greece’s impossible mountain of debt clarifies an even greater evil. Namely, that the central bank printing presses have also utterly destroyed the fundamental requisite of fiscal democracy. To wit, in the modern world of massive, interventionist welfare states, fiscal governance desperately needs an honest bond market.
The scandal-surrounded, junk-rated, state-managed Brazilian oil producer Petrobras managed to successfully issue a $2.5 billion notional 100-year bond yesterday. Mainstream media is cock-a-hoop over the fact that the 'market' seemed to soak this bond up so easily and at a yield of 8.45% (which was 20-30bps below guidance) amid an order book apparently up to asround $10 billion. However, for those with some math skills, the truth is that it cost Petrobras around $380 million more than market-implied levels to successfully launch the bond (and so it should).
5Y Treasury yields have swung 16bps from the immediate post-payrolls reaction trough. Across the entire curve yields are exploding higher and for the first time in 2015, all yields are now higher since the start of the year... 30Y yields are still 24bps lower post-QE3 but 2Y yields are 24bps higher.
The global financial system desperately needs a big, bloody sovereign default - a profoundly disruptive financial event capable of shattering the current rotten regime of bank bailouts and central bank financial repression. Needless to say, Greece is just the ticket: A default on its crushing debt and exit from the Euro would stick a fork in it like no other. But don’t count on the Greeks.
Our clueless President observed, "You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts..." No, paying off their debts is exactly the wrong medicine. You do not kick the can and extend and pretend that Greece can service its crushing debt. Instead, you permit it to default, and then to rebuild it’s economy and credit the old fashioned way. In any event, its a problem for the Europeans and the Greeks to resolve. Obama should stop sending Keynesian witch doctors to spread more policy poison around Europe.
Switzerland`s 10-Year Bond Yield is now negative 15 basis points. Yes even neutral Switzerland`s bond market has been broken...
Moments ago, the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding opinion on issue of Mario Draghi's "unconditional" OMT. Here are the details from Reuters and Bloomberg:
- EU COURT ADVISER SAYS OMT PROGRAMME IN LINE WITH EU LAW SO LONG AS CERTAIN CONDITIONS MET
- EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION
- EU COURT ADVISER SAYS ECB MUST OUTLINE REASONS FOR ADOPTING UNCONVENTIONAL MEASURES SUCH AS OMT PROGRAMME
In other words, Draghi's "unconditional" bazooka just became conditional, but it is still a bazooka, albeit one that will never actually be used since well over two years after it was revealed following Draghi's famous "whatever it takes" speech, it still has no legal termsheet or basis, and no definition on its pari passu or burden-sharing status. And it never will: after all it was merely meant as a precautionary device designed to scare away the bond vigilantes, and never to be actually implemented.
Every couple of years the same identical European drill repeats itself: 1) Greece makes loud noises as it approaches an election, 2) Europe says it couldn't care what the outcome is and that Greece should stay in the Euro but if it exits it won't be a disaster, 3) the ECB reminds everyone of the lie that it is not preparing for Plan B (it is) despite holding on to over €100 billion in "credibility-crushing" Greek bonds, 4) panicking Greek banks say the deposit outflow situation is completely under control (adding that "The Bank of Greece along with the European Central Bank are monitoring closely the developments and intervene whenever this is necessary," which is code word for far more familiar, five-letter word), and meanwhile 5) all non-Greek banks quietly start preparing for the worst case scenario. So far this time around, we had everything but step "5". We do now.
One of our old rules of trading is that whenever a major asset class, index, or other benchmark has a sudden, rapid move in price, something blows up. Sky high. That’s because people get used to regimes. They get used to a certain state of affairs with a lack of volatility. They become complacent. Maybe they stop hedging. Maybe they allow themselves to have unbounded downside risk. Maybe they start gambling. So what's going to blow up?
"The stock market just keeps zooming up. A low equity allocation must be hurting you now... For all purposes, this is a hideously expensive market. I don’t care if it’s a bubble or not. It’s too expensive, and I don’t need to own it. That is the problem. This is the first central bank sponsored near-bubble. There is just nowhere to hide... but... to think that central banks will always be there to bail out equity investors is incredibly dangerous."