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When (Not If) Germany Slows, The Whole House Of Cards Collapses!!!

Reggie Middleton's picture




 

The MSM has this as a leading headline today... Recession Stalks Germany as Breakeven Rates Drop: Euro Credit

The falling cost of protecting against inflation in the German bond market portends a deeper slowdown in Europe’s largest economy, signalling the effects of the continent’s debt crisis are edging closer to the core.

The two-year breakeven rate, a gauge of inflation expectations, dropped to minus 0.45 percentage point for Germany from 1.04 percentage point a year ago, and has remained negative since the end of May. The rate reflects investors selling index- linked bonds in favor of regular securities because they reckon consumer prices will start declining. 

“Germany is most probably heading for a recession,” said Humayun Shahryar, chief executive officer of Auvest Capital Management Ltd., a fund company in Nicosia, Cyprus, overseeing $100 million. “We are going through a debt crisis inEurope, and massive global economic slowdown. I’m not sure how Germany will be able to escape that.”

As the biggest contributor to bailouts for indebted euro partners, the risk is that economic travails at home make it even harder to convince German voters to loosen their purse strings just as yields on Spanish bonds suggest the country will be next in line for a rescue.

German exporters Puma SE, Europe’s second-largest sporting- goods maker, and Siemens AG, the region’s largest engineering company, both said this month they are suffering from the debt crisis as sales and orders fail to meet expectations. Eight of the 17 euro nations are in recession.

Already Slowing

The year-on-year growth rate for the German economy, which accounts for 27 percent of the euro region’s gross domestic product, has fallen for four consecutive quarters.

I gave a very stern warning concerning the over reliance on Germany for economic stability in January via The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... - to wit:

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see Exposure of European insurers to PIIGS) sovereign debt holdings.

image004image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

thumb_Reggie_Middleton_on_Street_Signs_Fire

 

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Mon, 07/30/2012 - 16:06 | 2663283 sunnyside
sunnyside's picture

The important question Reggie still hasn't answered is did he get a peak "down under" with Amanda Drury on his last visit to CNBC?

Mon, 07/30/2012 - 16:00 | 2663270 Haddock
Haddock's picture

"a fund manager from Cyprus managing over $100m' - you've spent too much time in Moscow Reggie!

Mon, 07/30/2012 - 15:49 | 2663246 jimcg
jimcg's picture

Unfortunately, this too, although true, doesn't matter. The Anglo/American central bankers together with their owned governments and media will continue to manipulate the markets and news until everyone just accepts things as being normal the way they are and/or they inflate their way out of this.

The Masters steal and the Serfs pay.

J

 

Mon, 07/30/2012 - 14:47 | 2663029 shovelhead
shovelhead's picture

That's some job offshoring I can live with.

Mon, 07/30/2012 - 14:35 | 2662997 gjp
gjp's picture

The US bond bubble is way worse than Germany's, even if it has to backstop its banks.

Mon, 07/30/2012 - 14:34 | 2662990 Gloomy
Gloomy's picture

This is how to deal with banksters:

 

 

July 30, 2012 Iran Sentences Four to Death Over $2.6 Billion Bank Fraud

 

By

 

In the first sentences to be handed down in a $2.6 billion embezzlement case, an Iranian court ordered the death penalty for four people in the fraud that was uncovered in a network of Iranian banks last year, Iranian state media reported on Monday.

Mon, 07/30/2012 - 21:26 | 2663926 Anusocracy
Anusocracy's picture

Time to rendition some banksters to Iran.

Mon, 07/30/2012 - 16:10 | 2663296 Papasmurf
Papasmurf's picture

I bet they have a low recidivism rate.

Mon, 07/30/2012 - 14:28 | 2662961 madcows
madcows's picture

What is the equivalent of a margin call for insurers?

Mon, 07/30/2012 - 15:15 | 2663114 Carl Spackler
Carl Spackler's picture

Well, for life companies its called...

CSVLI - Cash Surrender Value of Last Inhale

When the policy holders start cashing in chips, then the run begins, and ends, with corporate asphyxiation.

Mon, 07/30/2012 - 16:08 | 2663292 sabra1
sabra1's picture

well, if you had read the ultra fine print on these policies, which states, that if death occured from dying, insured cannot make a claim.

Mon, 07/30/2012 - 14:27 | 2662959 JohnnyBriefcase
JohnnyBriefcase's picture

But, but China! Yeah China said that they might, like, do stuff!

 

*Markets skyrocket*

 

*Passes champagne*

Mon, 07/30/2012 - 14:24 | 2662950 Lost Wages
Lost Wages's picture

Is this bullish for US Treasuries? :)

Mon, 07/30/2012 - 14:15 | 2662922 bigdumbnugly
bigdumbnugly's picture

and to make matters even worse, sales of hasselhoff cd's are waning.

Mon, 07/30/2012 - 14:12 | 2662912 Snakeeyes
Snakeeyes's picture

Absolutely right! And Germany is like the US -- massive entitlements and the bills are coming due.

Look at US debt table -- it is horrifying!

http://confoundedinterest.wordpress.com/2012/07/30/sovereign-debt-rollov...

Mon, 07/30/2012 - 14:31 | 2662978 LawsofPhysics
LawsofPhysics's picture

Correct.  Now that everyone wants to talk about "fair taxation" let us also talk about "fair inflation" < crickets >

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