Synopsis: Chancellor Merkel continues to resist calls for EU bonds (shared liabs.) and money printing and is pushing for fiscal controls and the seniority of bailout funding. Germany is likely to be outvoted by other ECB members and therefore will have greater prospective exposure. Watch for the EFSF and the ESM morphing into banks (thereby depressing eventual recoveries) and a rise in the number of euros. Watch progress on the EU banking union. We used the IMF's data for Germany's debt which is greater than Eurostat's data. Downgrading.
First it was floating dead pigs, then ducks, then black swans, then mass chicken exterminations, then fish, and now more pigs and also a brand new entrant to the Chinese animal apocalypse: dogs. AP reports that hundreds more pigs have been found dead in China - this time together with dozens of dogs. "A total of 410 pigs and 122 dogs were discovered in homes and at farms earlier this week in a village that comes under Yanshi city's jurisdiction in central Henan province, authorities said Wednesday. The city's propaganda office said that the deaths were being investigated but that they suspected they had to do with nearby chemical factories. The factories have been ordered to suspend production and help police with a criminal investigation into the incident, according to a report on a Henan provincial news website."
Little comment necessary here except a reminder for US investors that return of capital is a higher priority than return on capital and the divergences are becoming increasingly unsustainable. As investors stare blankly, pointing fingers at gold, we also address what it means when Gold and Treasuries are rallying at the same time...
Once again the words that dominate the Fed Beige Book are those of underwhelming medicority:
- *FED SAYS `MODERATE' GROWTH IN U.S. WAS LED BY HOUSING, AUTOS
- *FED SAYS U.S. CONSUMER SPENDING `GREW MODESTLY'
- *FED SAYS `PRICE PRESSURES REMAINED MOSTLY SUBDUED'
- *FED SAYS `EMPLOYMENT CONDITIONS REMAINED UNCHANGED OR IMPROVED'
It seems even the Fed is forced to admit that what little 'growth' there is in the US is that funded by zero-cost Federal debt: Housing and Autos. After a few trillion dollars and with stocks at all-time highs, the deafening roar of animal spirits remains subdued... which must mean we need moar... The market's reaction is nothing - reflecting the value of the report's content.
It appears the hunt for the so far unidentified Boston nomber may be coming to an end. From Bloomberg:
- OFFICIALS BELIEVE BOMBING SUSPECT IDENTIFIED, CNN SAYS
- ONE SUSPECT CLEARLY IDENTIFIED IN VIDEO, CNN'S KING SAYS
- AUTHORITIES HAVE IMAGE OF SUSPECT W/BAG AT 2ND BOMB SITE:GLOBE
- IDENTIFICATION COMING FROM STORE SECURITY CAMERA, CNN SAYS
- Authorities have an image of a suspect carrying, and perhaps dropping, a black bag at the second bombing scene - Globe.com
And the kicker:
- Suspect is a "dark-skinned male" according to CNN. Apparently that is the proper nomenclature.
We will bring readers the picture when it is released.
Apple has broken the 'magic' $400 level for the first time in 16 months as we probe for the next generational low in this unbeatable stock amid chatter that iPad-mini shipments for next quarter will be down 20-30%. Apple is down 43.5% from its 'generational high'. Now cheaper than an iPad2, but less tasty, it appears more than a few 'smart' index-tracking momentum-monkeys are jumping ship heading into earnings. With AAPL down around 5% (the biggest open-to-low drop in 5 months), anyone who bought the stock in 2012 is now underwater...
Yesterday Sarin for Senators, now suspicious substances sent to Obama? CNN reports:
- LETTER WITH SUSPICIOUS SUBSTANCE WAS SENT TO OBAMA: CNN
- SECRET SERVICE: SUSPICIOUS LETTER TO OBAMA RECEIVED YESTERDAY
- CNN says letter was found at off-site mail-screening facility, substance is unknown, cites unidentified Secret Service officials.
It appears the "suspicious substance" was not a balanced budget, but sarin toxin instead, as the letter received in the Senate yesterday.
Suspicious letter addressed to Obama has tested positive for ricin (as did letter to Sen Roger Wicker (R-MS)
Our take home from all of this is that the USPS appears to still be in business. Amazing.
The imperial tree falls not because the challenges are too great but because the core of the tree has been weakened by the gradual loss of surplus, purpose, institutional effectiveness, intellectual vigor and productive investment. Comparing the American Empire with the Roman Empire in its terminal decline is a popular intellectual parlor game. The comparison is inexact on a number of fronts but despite the apparent difference, the two empires share the key characteristic of all enduring empires: they extract the cost of maintaining the empire from client states and/or allies. The mechanisms differ, but the results are the same: the empire's cost is distributed to those who benefit from its secure trade routes.
Europe's 'Dow', the EuroStoxx 50, has suffered the biggest 4-day rout in 10 months as the broad Bloomberg 500 index plunged by the most in five months today amid terrible consumer, car registration, and economic collapse on the continent. DAX is at 4-month slows. Despite the bloodbath in European stocks, the ever-efficient European bond market (free to trade and totally un-manipulated) is now around unchanged on the week (while stocks are down 3-4%). European financials are leading the drop but it is broad-based. EURUSD also rolled back over nearing its biggest drop in 9 months. Swiss 2Y at 3 month lows. Bunds bid. European VIX surged to 5 week highs over 23%.
Back in 2010, Goldman's Jan Hatzius, fresh on the heels of QE2, committed rookie Economist mistake 101, and mistook a centrally-planned market response to what then was a record liquidity infusion, for an improvement in the economy (a move we appropriately mocked at the time, as it was quite clear that the Fed's intervention meant the economy was getting worse not better). It took him about 4 months to realize the folly of his ways and realize no recovery for the US or anyone else was on the horizon. He then wised up for a couple of years until some time in December he did the very same mistake again, and once again jumped the shark, forecasting an improvement to the US economy in 2013, albeit in the second half (after all nobody want to predict an improvement in the immediate future: they will be proven wrong very soon) based on consumer strength when in reality the only "reaction function" was that of the market to the Fed's QE4 (or is it 5, and does it even matter any more?). Four months later we get this...
That escalated quickly. Germany's DAX is now negative year-to-date (at 5-month lows), Copper is at 18-month lows, the bid for safety has driven 2Y Swiss rates under -10bps, their lowest in 3 months, and US equity markets are crumbling after yesterday's dead-cat-bounce. There was little to no pre-open ramp this morning, no EUR-levered pump, and VIX is not playing ball with the manipulators. Something changed; the denial is beginning to unwind. Gold and silver are modestly bid as we suspect physical demand bleeds back into paper. Maybe stocks are catching down to the 'WTF' reality (as we discussed here and here).
We noted here that the plunge in the paper price of gold (and silver) had prompted considerable renewed demand for physical and now it seems the scramble among the "more stable investor base" is increasing. The shake out of ETFs and futures has left the Australian mint short of deliverables and Japanese and Chinese gold retailers seeing a "frenzied" surge in demand. The customers are not just the 'rich' or 'elderly'; in China "they tend to wear water shoes and come directly from the market...;" in Australia, "the volume of business... is way in excess of double what we did last week,... there’s been people running through the gate," and Japanese individual investors doubled gold purchases yesterday at Tokuriki Honten, the country’s second-largest retailer of the precious metal. The panic selling by a weaker 'imminent inflation-based' investor base has sparked physical shortages - "there’s been significant sales made as people see this as great value." It seems our previous discussions of a rotation from paper to physical were correct and this physical demand will eventually leak back into the paper markets.
First it was former ECB executive board member Lorenzo Bini-Smaghi saying that "policy makers led by President Mario Draghi will act to weaken the euro" which led to the first shock in the European currency this morning, and now it is Bundesbank head Weidmann, reminding the world that in a monetarist currency war world, he who crushes their currency last, loses. As a result moments ago he said that the ECB may cut rates if new info warrants, something that was actually quite obvious two weeks ago and some 300 pips lower, yet the relentless purchases of Italian bonds by Japanese financials drove the EUR ever higher to its highest level since February yesterday. Net result: time to reacquaint the EUR with gravity.
When the final "bailout" structure of the Cypriot deposit-confiscatory bail-in was revealed in late March, the implied victory for the Troika (which has since notched up its demands for the insolvent country to now sell its 14 tons of gold) was that instead of the deposit haircut passing as a tax, and thus needing a parliament ratification, it would come in the form of a bank resolution, with Laiki bank liquidating and being subsumed by the remaining Bank of Cyprus, and with uninsured depositors in both banks ending up crushed. However, as previously reported, in the interim period deposit outflows have continued and accelerated despite the assorted ineffective "capital controls" which has led to additional underfunding for the local banks, and to a second bailout of Cyprus, this one rising to €23 billion or a 35% increase from the original, as part of which the Troika has demanded that Cyprus sell their gold in the open market. Now, a month later, it appears that the Troika's initial victory may have been a Pyrrhic one, as yesterday the Cypriot attorney general announced, and today the government's spokesman confirmed, that the parliament will have to ratify the €23 billion bailout of the tiny island nation after all, thereby refocusing the popular anger from some ephemeral technocrat in Europe to the country's own elected representatives, thereby changing the calculus of the Cypriot decision by 180 degrees.