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."
In reality, there is nothing surprising in Matt Taibbi's latest piece since returning to Rolling Stone from the Intercept, as it tells a story everyone is by now is all too familiar with: a former bank employee (in this case Alayne Fleischmann) who was a worker in a bank's (in this case JPM) mortgage operations group, where she observed and engaged in what she describes as "massive criminal securities fraud" and who was fired after trying to bring the attention of those above her to said "criminal" activity. The story doesn't stop there, and as Carmen Segarra already showed, when she revealed that Goldman runs the NY Fed, once Alayne was let go and tried to "whistleblow" on the house of Jimon from the outside, she found the that US Department of Justice headed by Eric Holder is just as, if not more, corrupt, and in his desperate attempt to prevent discovery and bring JPM et al to justice, he would stretch the statue of limitations on frauds committed during the crisis long enough to where nobody had any legal recourse any more, up to and including the US taxpayer.
Central Banks shorting Gold and Silver to preserve their status as Masters of the Universe.
A quick anecdote that should quickly confirm just how broken everything is: earlier today MarkIt reported European manufacturing data that was atrocious, with both German and European PMIs tumbling to levels not seen since mid-2013, and with Europe's growth dynamo now in a contraction phase clearly signalling what has been long overdue: a European triple dip recession. So what happens? Moments later Germany sells €4.1 billion in 10 Year paper at a record low yield below 1%.... even as the Bundesbank had to retain a whopping 17.84% of the auction, the highest since June, with only €4.663 Bn in bids for the €5 Bn target, the first miss since May 21. So hurray for the central banks, boo for the economy, and as for that mythical creature, once known as bond vigilantes, our condolences: good luck figuring out what the hell just happened, and good luck recalling what a free market is.
The fundamental mistake is to think in terms of a low yield telling you anything about the economy, as it is price that you should be focusing on.
Alarm bells in the European banking system have been ringing for quite a while but nobody seems to be listening. The roaring capital markets are just too loud. But we have been keeping track of a few things.