Citi On Whether Europe Can Ruin The World; Or How To Use An Insolvent Continent As An Excuse For Global Printing

Tyler Durden's picture

While Citi's Stephen Englander does not go as far as concluding that a collapse of Europe would be sufficient (but certainly necessary) to "ruin" the world, he does have a very relevant conclusion in a piece just released to clients: namely that central banks everywhere, but in Europe, are using the recessionary slow down in the insolvent continent, which nobody seems to believe any more will be able to avoid a recession (an event which S&P stated in no uncertain terms would lead to a downgrade in France and other core countries), as the perfect political smokescreen to push the turbo print button on their respective money printers. To wit: "Eurozone weakness has also generated indications that policy will be eased elsewhere (even if not in Europe). Policymakers in the US, UK and elsewhere [ZH: and Japan as of 2 hours ago] are using the euro crisis as cover to ease policy. For example, the FRBNY's Dudley yesterday characterized even the improved US numbers as disappointing and pointed to further measures if growth did not improve. Chinese growth targets and policy maker comments imply that measures might be taken if there is any sign of slowing. The BoE has already expanded it QE program. At a minimum the comments are suggesting that the policymakers are willing to take aggressive action to offset any weakness. Overall the bias towards stimulus appears to remain in place outside Europe." What is supremely paradoxical is that with the ECB stuck, any incremental QEasing by the world will merely result in an ever stronger euro, until exports by Germany become almost as impossible as those of Switzerland pr peg. As a result, organic European growth at whatever remaining centers of productivity and commerce will be truncated until it is gone completely, even as the EURUSD approaches 2.00, as the Fed embarks on what will be by then something between QE5 and QE10. And there are those who wonder why gold makes sense not only here, not only at $1570 a month ago, but at $1900 under two months ago...

From Citi's Stephen Englander:

The downgrading of euro zone growth rates has led to concern that euro zone economic weakness will derail global growth. For FX, a global downturn driven by euro zone weakness would dramatically change the prospects for risk-correlated G10 currencies along with EM currencies.
 
We think these concerns are significant, but are probably somewhat overstated. Europe matters and the direct effect on global GDP from a likely drop in European imports will matter. However, there are other forces that could matter more. We think the major threat from Europe is through financial markets and financial institutions in the event that no adequate resolution is reached to the euro sovereign debt crisis, rather than from the direct demand effects.  However our economists and we expect that the euro zone leaders will cobble together enough of a solution to keep the worst from happening on the financial side, even if the comprehensive solution still eludes them.
 
First consider the bad news:
 
1) Figures 1 and 2 show EU imports from the US as about  1 3/4% of US GDP and 5 1/2% of China GDP. In 2009, EU GDP dropped 4 1/4% in 2009 and the drop in US exports to the EU  was about 0.5% of US GDP; the drop in Chinese exports to the EU was about 1.5% of China's GDP.  Such a drag to growth is perceptible, although far from the worst problems these economies faced in 2008/09 or are facing now.
 
Also, a 4% GDP drop in the EU is well below what our economists and other analysts expect so far. European policymakers would have to make a bad situation a lot worse to for the global growth impact to be truly first order.

2) The other side is that the weakness in the euro zone is not happening in a vacuum. Figure 3 shows that as sovereign risk spreads have driven euro zone rates up (and are contributing to the slowdown in the euro zone), they also have driven rates down elsewhere in the world. So as was the case in 2008/09, the sharp drop in demand in hard-hit countries is driving liquidity provision elsewhere. This is crowding-in, however imperfectly. At a minimum the rate drop will serve to mitigate the external demand impact of slow growth in Europe.

3) Eurozone weakness has also generated indications that policy will be eased elsewhere (even if not in Europe). Policymakers in the US, UK and elsewhere are using the euro crisis as cover to ease policy. For example, the FRBNY's Dudley yesterday characterized even the improved US numbers as disappointing and pointed to further measures if growth did not improve. Chinese growth targets and policy maker comments imply that measures might be taken if there is any sign of slowing. The BoE has already expanded it QE program. At a minimum the comments are suggesting that the policymakers are willing to take aggressive action to offset any weakness. Overall the bias towards stimulus appears to remain in place outside Europe
 
It may seem paradoxical to argue that risk will be bought when the EU's expected contribution to global growth is being downgraded. However, as we have seen over the last two years, Newton's third law should be modified to 'every negative shock generates an equal or stronger policy response', so we would still argue that the few currencies with attractive fundamentals will be bought, even if the mechanical arithmetic of growth points otherwise.

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jdelano's picture

I've figured out when the Lehman moment will occur.  Some day soon, someone fed up or jilted on the inside is going to blow the lid off the fact that the 3:30 pumps are actually Bernanke via HFT shops.  It will become widely known by the mainstream and in a rage, investors will pull every red cent from the market.  This will happen.  In their arrogance they are taking the manipulation far too obvious. 

DormRoom's picture

9:30-10 & 3:30-4 moves are from leverage ETF rebalancing, not the Feds.

jdelano's picture

Where'd you read that--school paper?  Try again dormie.

 

Feel bad about leaving it like that--ought to at least shine a light on your ignorance.  Marinate on this for a second---if a triple levered long SPY and a triple levered short SPY are both "rebalancing" at the end of the day, what would the net effect be?  Depends on the color of the index ticker, you'd have to say--but, the action on your 3:30 move only goes one way, up up up.  Now, get off the computer and go get laid kid.  I'm old.  At least I have excuse for being a ZH cretin.  

Manthong's picture

You just need to look at the little DIA/S&P/NASDAQ  chart on Google Finance.

If they had a thicker crayon, it would be one brown line. The markets are being manipulated in unison.

Interesting to note that the colors blue, amber and red blended together produce a brown color.. how apropos.

disabledvet's picture

"manipulation" and "correlation" are two different words...both with negative meanings however. We like our markets highly "un-correlated." for example "oil falls to 20 bucks" and "equities power higher."

El Viejo's picture

I think an American received a Nobel prize in Economics for showing that when markets(assets) start moving together that a recession soon follows. Hasn't ECRI's Lachsman Achuthan stated we are entering into another recession? (he's been batting 1000 by the way)

dclaz's picture

That's just negative correlation. :-p

ZeroPower's picture

lol wut..

I suggest you get yourself an internship on a trading desk to understand market dynamics. ETF rebalancing is done overnight and merely dictates what the first print will be during the very early premarket where only institutions trade. Into the close its corr and stat arb desks making sure their deltas are flat on the day, among other voodoo.

Belarus's picture

If they squel, they'll likely end up dead first. But yeah, they do this machine stuff so brazenly that it's unbelievable to me know one questions it.

As I was drinking coffee this morning, I just had to turn on CNBC to see what the monkey's were saying. "A reader chimed in and asked me (Cramer) if I thought this rally was all a big fake." To which Cramer replied to this question: "Who cares! The market went up!."

And that pretty much sums it all up. 

xcehn's picture

"Savers Protect Your Deposits From Bankrupting Banks and Quantitative Inflation"

http://www.marketoracle.co.uk/Article31124.html

KingdomKum's picture

we few, we happy few, we band of silver holders  !

 

 

DoChenRollingBearing's picture

And of course we gold holders are happy too.

It should be clear to all that everyone should have 5% - 10% (minimum, even mainstream financial advisors are OK with 5% in gold) of their (liquid or total, you pick) assets in gold and silver.  I am there and I sleep better as a result.

Last I checked, gold was up $50 + and silver even higher on a percentage basis.

El Viejo's picture

And somewhere between gold and silver being the currency of choice and food and fuel becoming the currency of choice the Feds will take your currency of choice and everyone will laugh at you like you are laughing now.

DoChenRollingBearing's picture

Viejito: Since no one can predict the future you are correct to not be at the All Inn.  Food, fuel, water, guns & ammo and medical supplies are all good.

Depending on each person's situation.  Condo dwelling Bearing chooses not to store gasoline...

Re Feds coming to take what belongs to me (and millions more), that will STOP once somewhere between 20 - 50 Cops / Feds / Fascist Thugs are shot DEAD by thoise who say "No".  Come and get it, bitchez.

DormRoom's picture

hedgefunds and daytraders are picking up pennies in front of a steamroller.  Modern finance is too interconnected  to prevent the logical conclusion of systemic collapse. When agents try to rebalance one part, it creates shocks to other parts.  There hasn't been  proper international supervision. There is no structure, but spaghetti code, as financial agents arbitrage regulation with exotic financial products.

 

If you run the linear programming model to solve all the variables, and find equilibrium, the output is this  :(

 

capital is fucked.  welcome to labor's world. project mayhem.

 

#occupywallstreet

CharlieSDT's picture

Dormroom, can you PM me your email address please?

 

 

DormRoom's picture

 I prefer to remain anonymous. =S

Ahmeexnal's picture

If you run the linear programming model to solve all the variables

 

Fool, trying to use a linear model on a non-linear quantum stochastic system.  Let me guess, you are using Excel to model the market.

 

defencev's picture

Linear programming model, nonlinear quantum stochastic system: you are a bunch of ignorant monkeys here, using various smart words without glimse of any understanding. That is the reason why the world collapses: it is overrun by growing group of idiots just pretending that they are in the know.

 The price of gold will depend on Bernanke (and others) printing machines. Other than that it is just seasonal variations.

Remove Bernanke. Defeat Marxist Obama!

dclaz's picture

What the hell is Quantum about it?

LongSoupLine's picture

Off topic, but watching Herb Greenberg call Cramer out on the table over his Netflix calls is F'ing hilarious!!!  Cramer is getting louder and backpeddling like a MF'er.

Spitzer's picture

Cramer was also touting none other then Agnico Eagle mines when he was on his little gold trip. AEM dropped by 18% recently because one of their mines is caving in.

AEM is a solid company but their misfortunes look good on Cramer.

Randall Cabot's picture

PAL cratered about 70% after Cramer pumped it. 

Cognitive Dissonance's picture

The hypocrisy is getting a little too thick even for me. Time to pull on my full body head to toe shit waders.

danger close here's picture

picked up some Amazon oct 205 and 215 puts; wish me luck

jdelano's picture

was tempted but didn't have the balls.  Good luck, sincerely.

Smithovsky's picture

i wish i had read your comment half an hour ago, d.c.h.

but on the bright side, the beers are on you

well played

PaperBear's picture

Good ahead and print you slave paper, Mr non-Federal non-Reserve, it will transfer some of the stolen wealth to those with physical gold/silver.

To the ZH audience, keep educating your fellow humans about the real story of gold/silver.

Ahmeexnal's picture

I've pretty much given up on "educating fellow humans" about MONEY.

They've been conditioned far too long....it's like trying to teach Quantum Field Theory to an audience of kakkerlakken.

NotApplicable's picture

Anybody else read Insolvent Continent as Incontinence?

Not that there's much difference.

Ghordius's picture

I had thought Incontinent is more when you print and print and print...

PulauHantu29's picture

$1.2 Trillion....(plus a Gyro and a case of Ouzo) for starters.

Another $1 trillion the next 6 months...this is just for the Eurostan.

Spitzer's picture
How To Use An Insolvent Continent As An Excuse For Global Printing

Euro land does not want to print. They want to liquidate and consolidate.

Been saying this for a while now....

 

http://freegoldobserver.blogspot.com/2011_09_01_archive.html

FinHits's picture

Agreed, Eurozone does not want to print. I wonder if the adjustement mechanism can really be internal devaluation (hard cuts in salaries and benefits) and hard write-offs of debt.

Greece certainly would point that Europeans prefers the above hard torture over the seductive inflationary sedative pain.

Ghordius's picture

EuroZone does not want to print and is trying to find any excuse for delays, yes

According to the Austrian School this would cause a sharper, stronger, shorter pain...

FeralSerf's picture

Very painful.

Nature abhors a vacuum.

FinHits's picture

Would be great to know when that shorter uber-schock arrives: supposedly Euro tanks then and Eurozone share prices shoot trough the roof.

Until then Euro strengthens and share prices drop.

bernorange's picture

QE to infinity!  Or at least until they run out of digital ones and zeros.

www.pmbug.com

DoChenRollingBearing's picture

Nice forum.  pmbug.com is a is little less hectic that Turd Ferguson's.  Best of luck with your site!

QE will obviously not go to infinity, but QE10 is certainly possible.  Inflation is almost always more politically palatable than .gov cutting spending, debt haircuts, etc.

Odin's picture

Here comes your daily 3pm algo rally! Brought to you by your friends at PPT!

falak pema's picture

THIS IS TOTAL BS. BEFORE EUROZONE WENT INSOLVENT, THE US IN 2008 SHOWED THE WAY IN PAX AMERICANA FINANCIAL DECAY.

THIS IS ALL PART OF THE SAME SAD FILM OF THE DEMISE OF PAX AMERICANA...BOTH FINANCIAL AND SUBSEQUENTLY GEO-POLITICAL.

I hope the sons of Jefferson will find a way out of this mess like the sons of Voltaire and Beethoven.

Belarus's picture

What is supremely paradoxical is that with the ECB stuck, any incremental QEasing by the world will merely result in an ever stronger euro, until exports by Germany become almost as impossible as those of Switzerland pr peg.

I'm skeptical that the EUR will be able to be held together without "new" money coming from somewhere. It's clear why there are zero grand plans to date: Germany isn't going to go all-in Willy-Nilly WITHOUT serious control over budgets in Greece, Italy, Spain, and possibly even France.

So, expect some very loud thuds coming soon.  

Spitzer's picture

until exports by Germany become almost as impossible as those of Switzerland pr peg.

The US dollar has been falling for 10 years yet the trade deficit got larger and not smaller. Sure puts that theroy to rest...

qussl3's picture

How much of that is with China, Japan and the oil producers?

 

Spitzer's picture

Quite allot.

Funny how Japan has higher wages then the US and they have trade surpluses with China.

qussl3's picture

Kinda helps those trade barriers and cultural resistance to imported goods.

EZ and China both depend on the US as a final export market, the quid pro quo is that they buy its debt.

China is now trying to do the same to the EZ, but isnt near as enthused about repeating the same mistake with EZ debt as it did with USTs.

There is no final export market with any residual savings left to export to big enough to allow the EZ or China to export its way out.

The Japanese arent interested in the crap everyone else makes, the Chinese have a monstrously skewed income pyramid, the ME is too busy shooting each other and well the Germans, French and Italians are going to have to pay for the banks at some point.

Perhaps the martians will buy?