The Council on Foreign Relations has released their politically-correctly-named 'Preventive Priorities Survey' or put another way - where-in-the-world-is-stuff-going-to-hit-the-fan-next report. The report is designed to help the US policy community comprehend where the next conflict will occur in the world and the relative catastrophe factor. The 3 tiers of chaos offer a menu of drivers-for-war, likely terrorist targets, and political tensions. Notably they include such systemic factors as the European debt crisis, budgetary limits, and Saudi political instability's impact on oil supplies at Tier 1 (most critical) contingencies.
Last night, when headlines hit that it was the UK's "fault" for vetoing a joint dictatorial Fra-Ger "compromise" and in essence making the Eurozone summit a total failure (with a follow up summit scheduled for March), it became clear that a new cold war has broken out in Europe: between France (not so much Germany as Germany frankly does not want to bailout Europe if its has to pay for the bail out) and the UK. We now have official video confirmation that the latest conflict in Europe is between the countries just across the Chunnel. The video below of a diminutive Sarkozy giving David Cameron the proverbial cold shoulder (described in painful detail here) will achieve nothing but merely inflame further the animosity between the two countries: just what Europe can least afford right now.
Yay verily, Michigan Consumer Sentiment jumped more than expected and there was rejoicing all around. Of course, a simple scratch beneath the surface reveals what many realists suspect, expectations for the future are the major driver of the headline number. Unfortunately we have seen exactly this pattern before. Not only are the levels and changes similar to Q3/Q4 2008 but the underlying events (recessionary concerns, banking liquidity concerns, crisis of confidence) are eerily similar. The we've-been-down-so-long-it-has-to-get-better crowd psychology is intriguing as the rise in hope over the past four months is the largest in over 30 months as the delta between current reality and the green green grass of next year drops. While animal spirits are arguably of interest in short-term macro cycles, we note that the ramps in the hopium index tend to last 4-5 months at most and that is where we are now.
Just because Solyndra was not enough of a humiliation for the president, not to mention MF Global where inquiring minds are wondering when the president and vice-president will refund any and all campaign donations received by Jon Comminglerzine, here comes the next public fiasco for the administration, as the broader public shifts its attention to LightSquared by way of owner Harbinger capital, and its flamboyant head (and wife) - Phil Falcone. As has been just released in an SEC filing, Harbinger has received a Wells Notice from the SEC. Now in a time long, long ago, or about three years ago, before market criminality and manipulation became wholly endorsed by the US government, getting a Wells Notice was a death sentence for any hedge fund. Alas, it still is: "The Wells Notices state that the staff intends to recommend or is considering recommending that the Commission file civil injunctive actions against HCP, Harbinger Capital Partners Offshore Manager, LLC, Harbinger Capital Partners Special Situations GP, LLC, Mr. Falcone, Mr. Asali, and Ms. Roger alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors." And whether the Wells Notice is merely an inquiry into Falcone previous shady hedge fund-dipping practices described here, or a preamble to a full blown public spectacle-cum-humiliation on Harbinger's LightSquared remains to be seen. One thing is certain: Mrs Falcone will milk the newly found notoriety to its full extend, prenup firmly in gold-braceleted hand.
Confused why Tim Geithner has seemingly booked a weekly round trip ticket to Brussels to give the Eurocrats their weekly pep talk (much to his endless humiliation as Europe Tells Geithner To Take His Advice And Shove It reminds us)? Art Cashin explains not only this, but why the biggest threat to Obama's reelection chances is not who the GOP candidate is in November, but what happens in the EURUSD as early as today. Lastly, by implication, Cashin shoots down any hope that US decoupling from Europe is even remotely possible... something anyone who actually has seen a full business cycle, which automatically excludes 90% of all traders today, will know too well.
While destroying the myths and biases of the plenitude of long-only talking-heads seems to have been the mission of Mr.Market for the last decade or so, Lakshman Achuthan of ECRI does an excellent job of dismissing the coincident indicator trees for the leading indicators forest in an interview with Bloomberg TV. His 'recession is happening' call from September 30 still stands, proving he does not flip flop like all other so called experts on every up or downtick in the SPY, and is expecting a formal recessionary print in GDP within three quarters, though noting that the recession very likely did not start in Q3. The constant clamoring of the consensus that we will 'muddle through' or that we are firming in hopes we repeat the Keynesian love-fest of 2009 (which he rejects as nothing being indicative of this at all) is eschewed as the man-with-the-best-name-for-anagrams-in-finance gives Tom Keene a little history lesson on the foibles of minute-by-minute coincident (or short-leading) macro data watching (and prognosticating). The ongoing deterioration in the ECRI index (and leading indicators) combined with his noting that GDP tends to revise/revert towards GDI (even though the two should be the same given their either-side-of-the-same-coin nature) and the previous GDI print was much weaker. He ends on a less than optimistic note pointing out that the pace of each economic recovery since the 1970s has been getting lower and lower and cycle volatility has increased helping to confirm his recession-is-happening call.
So the ESM is going to be implemented ahead of schedule. Or at least that is the current plan, although it seems that Finland is insisting that it retains unanimous voting and most (all?) countries still need to ratify it. The ECB will oversee the ESM and EFSF, which is good as they have more market experience than the EFSF head, but does mean they will be reluctant to print which is what the market really wants. The ESM will have an effective lending capacity of €500 billion. That document states that the lending capacity of €500 billion includes any capacity being used by the EFSF. The EU statement confirms that. So between EFSF and ESM, the combined lending capacity is €500 billion. “The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources”. So the ESM has paid in capital but it will continue to try and raise money based on guarantees and commitments. I know this is a detail that people want to ignore in the rush to proclaim “paid in capital” but the reality is that the ESM is not so dissimilar from the EFSF... On a side note, Europeans seem to love night clubs much more than Americans. Maybe that is why they make all these announcements at 5 am? They are used to "table service" shutting down around that time and having to make a decision of what to do next. I can count how many good decisions I've made at 4 am after an all-nighter on one hand. Why will this be any different. It feels to me like at the end they shrugged their shoulders and decided to settle because it wasn't going to get any better and they didn't feel like saying the night had been a waste.
Gold traded higher after the ECB interest rate cut yesterday, prior to sharp selling that came into the market at 1335 GMT. This led to gold falling 2% on the day and it is now down 1.3% on the week – again outperforming many equity indices. Market News International (MNI) reported that market sources said that the Bank for International Settlements, the Bank of England and the Federal Reserve have been “good sellers of gold” after it had popped to a fresh session high of $1,755.90/oz. The MNI report has not been explored and there have not been any official denials of official selling. From a trading perspective there is at least a ring of truth to the MNI report as the sharp fall in the gold price was counterintuitive given there was no negative gold news and indeed the news was bullish with significant risk ahead of the EU summit and continued ultra loose monetary policies and negative real interest rates. Given the scale of the coordinated intervention in markets by central banks recently one would have to be completely naïve to dismiss the report out of hand. There is of course the historical precedent of the London Gold Pool which ended in failure. However, before jumping to conclusions it would be good if the MNI report was looked at and some questions asked - in the finest traditions of journalism.
In a new experiment that began with "The Redline: A Tale Of Collapse" , Alt-Market is trying something a little different; a short fiction series based on fact. Make no mistake; while the characters and events in this story are products of imagination, the issues presented and their probable consequences are anything but fantasy.
While futures are slowly getting reacquainted with gravity, following both the realization that the bailout was a failure, and seeing past the feeble attempt of the ECB to ramp up Spanish and Portuguese bonds (with Dupoint slashing 2012 outlook not helping) there is one indicator that has outright rejected this day's daily Hopium, and has tumbled to levels last seen at the beginning of the month, when the global Fed FX swap line rate cut was announced in a last ditch attempt to prevent Lehman 2.0. It is the all too critical primary FX liquidity mismatch indicator - the 3 month EUR-USD basis swap, which has fallen 9 bps to 126 bps, the biggest intraday drop since November 29, and the lowest since December 2, with the 1 month basis swap following. In other words, politicians can pretend and talk up the prospects of future bond issuance and crisis resolution, but the market has already spoken and once again demands the ECB (or the Fed) or else the prospect of another imminent liquidity lock up is fast approaching just like at the end of November, and with it rumors that a certain French and/or German bank will fail.
The deal seems a disappointment on almost every level and still needs approvals - UK out. Finland expressing concerns. The ECB has confirmed what they said yesterday. This agreement does not turn on the printing press (any more than it is already doing) Rating agencies likely to be underwhelmed. Countries will still be on watch and might still be downgraded. The budget rules seem unlikely to be met anytime soon. Unleveraged ESM is smaller than leveraged EFSF though ESM may actually be created. Central banks have found money to lend to the IMF so it can lend back to them - more form over substance and some debt burden shifting. Everyone seems in a rush to get ahead of the Christmas rally but that seems to require ignoring what actually happened in Europe this week.
- Tensions Rise at EU Summit (WSJ)
- Cameron faces showdown with Sarkozy (FT)
- Euro Leaders’ Fiscal Union Pact Leaves Next Step to ECB (Bloomberg)
- IMF China Chief Says Worsening Crisis May Force Hong Kong to Back Banks (Bloomberg) - same China expected to bail out Europe again
- Putin blames Moscow protests on US (FT)
- Boehner: Payroll Tax Cut Can Pass U.S. House (Bloomberg)
- EU Leaders Drop Demands for Investor Write-Offs (Bloomberg)
- Japan Imposes New Iran Sanctions (WSJ)
Who thought violent reprisals by "the people" are only contained to Greece. Following news earlier this week of an attempt to take the life of the Deutsche Bank CEO using an explosive package, Il Sole 24 Ore now reports that a parcel bomb has exploded in front of Equitalia - the country's revenue collection agency - in Rome. Google translated: "A parcel bomb exploded in front of Equital in Rome Ardeatina area. The police arrived on site and is investigating the Digos. The parcel was delivered by mail and during the explosion injured the hand of the director of the office." So is the European "Unabomber" the advent of the populist response against the encroaching take over of sovereignty by a small group of bureaucrats and bankers, and how long until someone dies and the class warfare moves from the drawing board to Europe's main street?