Goldman's Analyst Index Points To A Bleak September

Tyler Durden's picture

As the rapacious rally of this afternoon glides into a sulky sell-off, Goldman's global economics team provide a little more kindling on top of further Kiwi downgrades to help us on our way. The Goldman Sachs Analyst Index (GSAI) fell below the 50 mark (signifying more analysts see contraction in their sectors than expansion) for the first time since AUG09. Combine that with the new orders index registering the largest decline in the index's history (plummeting 22.5pts to 28.6) and the subdued growth outlook remains firmly in place.


From Goldman Sachs' Research: US Daily: GSAI: A Bleak September


  • The Goldman Sachs Analyst Index (GSAI) fell below the 50 mark for the first time since August 2009, dropping 8.3 points to 43.3 in September.
  • The new orders index registered the largest decline in the history of the GSAI, plummeting 22.5 points to 28.6.
  • A sharp downswing in the orders vs. inventories gap, weak reports for all other component indexes, and analyst commentaries further point to a subdued growth outlook. Inflation risks remain low as price indexes dropped.

The GSAI fell 8.3 points from 51.6 in August to 43.3 in September. This is the first sub-50 reading for the headline index since August 2009, and the lowest reading since June 2009 (a dip below the 50 mark implies that more analysts see contraction in their sectors than expansion). The largest drag came from the new orders index, which plummeted 22.5 points, dropping to 28.6 from 51.1 in August. All other components except for the inventories index also fell from the previous month. (As a reminder, we construct the headline GSAI using the following weights: 30% for new orders, 25% for sales/shipments, 20% for employment, 15% for materials prices, and 10% for inventories. These weights parallel the Institute for Supply Management’s pre-2008 practice, substituting our materials prices index for their supplier deliveries index. The GSAI includes service as well as manufacturing industries.)


The biggest decline this month came in the orders index. It plummeted 22.5 points—the largest month-on-month drop in the orders index in the history of the GSAI—to 28.6 from 51.1 in August. The level of the orders index is the lowest since March 2009, and the drop contributed 6.75 points to the decline in the headline. The shipments index fell slightly by 0.7 points and stayed below the 50 mark at 43.5; its 3-month moving average also fell for the sixth consecutive month and now dips below the 50 mark at 49.9. Overall, the headline and leading components point to further weakening of the economic environment and echo the stable but weak survey reports in September (e.g. the Richmond, Dallas, Philadelphia, and New York Fed surveys and the Conference Board’s consumer confidence report).


Changes in other component indexes as well as comments from our analysts are no more encouraging. The inventories index registered the lone gain, rising 12.5 points from 42 in August to 54.5. Coupled with the historical drop in the orders index, the orders vs. inventories gap swung sharply from +9.1 in August to -25.9. This reflects a widening gap between production and demand which will likely result in further production cutbacks going forward. The employment index dropped 8.4 points from 59.2 to 50.8, ending consecutive gains over the last three months. This decline is in line with recent drops in the Richmond and Philadelphia Fed surveys and suggests a weak but seemingly stabilizing labor market. Qualitative comments from some of our analysts (e.g. Semiconductors) further indicate weak activity, while most industries expect subdued activity going forward as high market volatility and the European crisis continue to weigh on the broader economy.


On the inflation front, all three price indexes fell. The material prices index dropped for the third straight month from 61.1 in August to 54.5; the output prices index dropped 9.7 points from 72.2 to 62.5; and the index for wage and labor dropped 9.8 points from 65 to 54.2. Falling energy prices helped contribute to broad declines, and overall the indexes continue to point to low inflation risks.


As usual, we provide a detailed table of the GSAI, along with commentary from our analysts.





Engineering & Construction:


Progress of final investment decisions on potential prospects could be impacted should European credit conditions worsen.


Financial Services:


Issuance and transaction volumes are well off pace given market volatility. Profitability is getting squeezed for service companies that depend on volumes.




Stock market volatility is beginning to impact housing fundamentals. In particular, purchase-only mortgage applications have declined in six of the last nine weeks. On a brighter note, prices are currently stable, banks have not tightened lending standards anew, and the supply of homes has been moderate as financial institutions slowly work through foreclosures.




Capital investment continues, although regulatory uncertainty is weighing on certain large projects.


Retail Broadlines:


Most retailers continue to cite a bifurcated recovery in consumer spending. In particular, spending from high-income consumers has been recovering, while mid- to low-income consumers have yet to participate.




We have had a total of 16 companies in our sector already negatively pre-announce Q3 results, mostly citing weaker demand and inventory correction, and primarily in the industrial and automotive end markets. PCs and consumer electronics remain weak as well.




The cost of debt has increased, making it slightly more expensive to finance merchant power plant development. For independent power producer (IPP) and diversified utilities, natural gas prices have shown a decrease during the last few weeks that will likely lead to modestly lower profit for the companies’ unhedged portion of generation.


Hardly the recipe for a risk-on rally into September, especially as exogenous factors contonue to weigh extremely heavily on risk appetites (or at the very least should factor significantly), no matter how cheap 'valuations' or 'credit spreads' appear to be.

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Id fight Gandhi's picture

It's bad out there, why the fuck are we rallying?

Stocks won't be cheap after shitty earnings. Us mkts are still frothy compared to any other global mkt.

Today was a total bs

Harlequin001's picture

WTF. 'Combine that with the new orders index registering the largest decline in the index's history"... Is this what it takes to make a majority of analysts bearish?

Speaks volumes about sell side mentality and hyped media bullshit...

AldousHuxley's picture

Banksters.....always asking for bailout from government/main st. when times are bad, but during good times they act like they are God's gift and spew free market/capitalism/meritocracy bullshit all over the place to protect their gambling bonuses.

Chinese_Trader's picture

Yes indeed, all self serving antics.

Michael's picture

The #1 job of the President is to enforce the law.

I don't see President Barack  H. Obama enforcing any SEC laws, do you?

Michael's picture

Serving the wealthy ruling elite at the top has been fun, while it lasted.

Michael's picture

50 to 60% debt forgiveness for Greece in bankruptcy would be good.

I would be shooting for 100% debt forgiveness.

decon's picture

3 day settlement means window dressing was finished a few days ago.

Hansel's picture

To have a position that is true, but the mark is still taken at the end of the month so prices must be kept up til the close of business tomorrow.

Chinese_Trader's picture

They simply must keep it up, and buy another 3 months against redemption.

DormRoom's picture

It's a Bull Trap.

Eurozone , Asian economies, and Japan (updated tonight) recent manufacturing PMI all below 50.  Global trade is diving.  We're entering a deflationary spiral, and the monetary way out is even more perilous.


And if you think the FED will do QE3, the threshold is very high.. USD must be high, and CPI deflationary velocity must also be high, and SPX-800  The FED should know any extra monetary stimulus will push China, India, and Brazil into hyperinflation (currency inflows).  Eurozone-NOrth, US, Canada, and Britain into stagflation (high input costs from emerging markets. turning commodities into financial assets/vehicles via ETFs. commodities bubble. cost push inflation. persistent deleveraging and stagnant wages continues. ).  PIIGs  into great recession.  Japan into recession (collapse in export from USD-YEN collapse), and sovereign default risk.


30 year debt bubble cannot be solved by monetary jiu jit su.  Fiscal stimulus! god damn it Is the proper way.. You don't use an axe, when you should be using a scaple.


The Feds can create reserves to infinity.  But if banks don't lend, or consumers/small businesses don't try to take out loans, because they are still deleveraging.  The reserves don't get turned into 'money'.  And you get no velocity of money, so sub-optimal economic activity.


The hope of QE was to raise equity market via the shadow banking system (hedgefund network) and create a wealth effect, and incentivize ppl to spend.  But most Americans are still deleveraging, so the wealth effect was diluted for this demographic.  And the rich--well they got richer--but their marginal propensity to consume is far lower than the average citizen, so not much economic activity was produced, except in the luxury good markets.

So QE has been shown to be a failure to produce economic activiy indirectly from a wealth effect.  Therefore monetary policy will not solve the overall deleveraging problem without fiscal stimulus.  What is needed is direct job programs. and other programs, which historically have been shown to have high mulitplier effects.


Worse, now there is no more QE hedge funds are deleveraging, collapsing  equity markets.  So we are getting a negative wealth effect!

chump666's picture

Yeah it's a bulltrap to the doomsday trade.

So yeah swing trade these highs.  EUR is under pressure again, USD is bid, commods are selling and stocks look tasty (sell minis shorts)

The massive YUAN liquidation that is going on is major bear news.  Smells like a credit/liquidty crunch in China all the way to a panic.

Atomizer's picture

The market stood in front of you today, she lifted her shirt and exposed her tasty boobs. Gave you a wink and spun away. Five feet later, she abuptly turns around and glares you straight in the eyes. Shoving three fingers into her mouth and then begins rubbing her moist fingers around her camel toe.. She tells you, "cum back in."

X.inf.capt's picture

i heard oct 26th, dave,

i wonder why?

Arkadaba's picture

OK being a linguist (though maybe not a cunning one) and a lover of language, I had to give this article top rating just for the opening line: "As the rapacious rally of this afternoon glides into a sulky sell-off" - love it!

HardwoodAg's picture

Doing it with a carbon based unit, of the opposite sex, is even better!

gwar5's picture

Are you a "cunning linguist"?  Tyler was tip top earlier today with that one.

caerus's picture

you may be a cunning linguist...but i am a master debater

chump666's picture

S&P futures down

awaiting the China PMI fudge

Id fight Gandhi's picture

Futures are just mindless masterbation. How many sigma move did we have in the cash mkt?

chump666's picture

Just seeing if bull/bear traps. 

LongSoupLine's picture

Let me give you all the Cliff's Notes version (and undercurrent meaning) of this article from Gold Sacks...

The Fed is now directed to unleash and hyper-oil inject the Fiat rollers for....(wait for it)...(cue-up deep, loud, echoing monster-truck promo voice)

 "Operation QE Twin-Turbo Flesh Peeler Crazy Print"

Sunday! Sunday!!!  SUNDAY!!!!!  Watch Bad-Banker-Beard-Bernanke mount his 2 Trillion hyper-ink blasting, fiat-powered, middle-class wealth destroying megaprinter in an all out dollar exploding extravaganza!!!

knukles's picture

And add in the Bernak's latest pablum about the necessity for future ease being declining inflation or declining inflation expectations.  Now, what's performed admirably on a relative basis these past few weeks?  Full Coupons or TIPS? 
Thus, the spread between the two has narrowed signifying lower inflationary expectations@

Holy Shit Bernak Man, Deflation Is Haunting Our Future!

ZDRuX's picture

Perfect entry point for shorting I think.. I don't think the markets is going much higher than this in the short term, it'll just keep bouncing up and down for the next few weeks before anything major happens.


We'll see if it'll be able to break through the resistance on this German news.

gwar5's picture

September numbers bad, just in time for October, our traditional month for epic market crashes. I'm not following the market that closely but my gut says it'll be ugly unless there's a reason to price in QE3. That's the only thing that moves the market these days.



X.inf.capt's picture

isnt oct. bullish for PM's, plus possible qe-3,

please, GOD, give me till monday, so the truck may be backist upist...

CapitalistRock's picture

Agreed. Market will go down to at least S&P 1000, at which time we have to start keeping a careful eye out for printing. Bernanke is teeing it up every time he talks. Unemployment is suddenly a "national crisis" he tells us. Inflation expectations low. Blah blah. It's coming. Buy gold and silver on the dips.

Belarus's picture

Shawdow Banking credit plunging, Velocity of Money plunging=no credit growth, no GDP growth, no employment growth and the vicious cycle begins anew. The one thing we can say about QE, at least it offsets this deleveraging cycle a little while it's in full force. Without it, stocks will ultimately head back to 2009 lows, or in all liklihood lower.

But that's non-sense. Bazooka Benny will never let that happen.

chump666's picture

Got this (on China crash), but it's from wires no source per se but still...

 *numerous reports of debt distress in Wenzhou, a wealthy city in Zhejiang known as the cradle of China's private sector, and fears that Wenzhou is the tip of an iceberg

*Yuan hits low end of daily trading band versus dollar for third consecutive day

*Yuan selloff intensifies despite PBOC's effort to guide currency to record high

Atomizer's picture

When we reduce buying China trinkets and US corporations have implemented "Chainsaw Al" lean and mean measures to handle a global depression. Someone always loses the game of cat & mouse. Shareholders will sell to protect interests, corporations will continue to saw off vital organs until the corporation goes flat lined. End of story.

Without customers, no business can exist.

anony's picture

Then they will sell to robots......wait a minute, that accounts for over 60% of the trade on the NYSE everyday.  Only a matter of time till Ford, CAT and IBM figure that out.

alien-IQ's picture

This is getting interesting:

Transport Workers Union Votes Unanimously to Support Occupy Wall Street

"...TWU Local 100's spokesman Jim Gannon, who told us that the executive board voted unanimously last night at their regular monthly business meeting to support Occupy Wall Street. TWU Local 100 has 38,000 members, the vast majority of whom work in New York City transit."

"Right now we're going to be involved in a march and rally on the 5th of October. We'll gather at City Hall at 4:30 and march to Zuccotti Park."


more here:

anony's picture

That'll show Lord Blankfien who is on an Island somewhere in the French West Indies in his Speedo, frolicking with some nude East European model, with a plentitude of pulchritude.

Put away the marching shoes and pick up a gun, write your will, and start shooting at 85 Broad.  Or the SEC.  Or the Capitol.  The Treasury. 

Until we get our own caucasian suicide bombers, marches will make good TV and nothing else.

zorba THE GREEK's picture

Ben didn't mince his words yesterday when he stated that he would ease (print) if inflation fell below his target.

I think it is clear that QE3 will be coming soon. We can't have deflation. That would mean prices would fall

making things more affordable for the struggling masses. Oh perish the thought, that would be horrible. 

anony's picture

DEflation has been happening on several fronts, including the biggest expense of all, housing and rents.  The fall in prices in those two more than offset any inflation in the utilities, taxes, and candy bars.

The struggling masses will always be a struggling mass. When has it ever been different?  The struggling masses shop at Wal-mart, Costco, and other big box stores because the prices are and have been very very low for many of our daily survival requirements. Good, right?  According to your logic.

HOWEVAH, those same struggling masses who still buy there have in the process shipped tens of miliions of their jobs away from themselves in a creeping fashion over the last 30 years.  They can't win because they are an unorganized, motley crew that cannot see in their own behavior that not buying American has cost them their jobs forever, for temporary price savings (deflation).  They have more importantly Empowered the Big Box stores to pressure their own suppliers to lower costs even more. 

"Low Prices Always", has been mantra of the struggling masses; and the cover of their coffin.

doggis's picture


News to expect in the coming days and weeks:

  • Greece defaults
  • Germany protects German banks but other countries cannot do the same thus quickly provoking multiple sovereign defaults and or bank failures, all of which may easily lead to a payments crisis in the global banking system. Derivatives are particularly at risk in terms of operation and execution.
  • The Euro falls in value especially against the US dollar
  • The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.
  • The Euro falls even more on any news that Germany is withdrawing from the Euro.
  •  Legal wrangling begins as to the legality of Germany’s decision. Resolution takes years.
  • Germany insists that the Euro continues to exist even they do not use it any longer. They emphasize thatEuropean unification will continue and suggest new legal instruments to strengthen European Unification including new EU Treaties.

The markets are focused on the imminent default by Greece. But, this is not the most important issue now. The historic development the markets have not priced in as that Germany is preparing to exit the Euro. The markets are very likely to have to contend with the re-introduction of Deutsche Marks in the near future. This is bound to mean a collapse in the value of the Euro for those countries that will remain in it (devaluation for the rest of Europe). This step may seem unthinkable but, I believe that the German government is telling us in multiple ways that there is no other solution from their point of view. It is also why you will hear various policymakers at the G7 meeting his weekend echo Christine Lagard’s comment that the world economy is entering a "dangerous new phase."[i] This was certainly the atmosphere at Jackson Hole where policymakers openly talked about entering a period of history where we would face challenges beyond the scope of anything we have seen in our careers. 

The Vice Chancellor of Germany, Philip Roesler[ii], gave a speech on September 11th in which he said there will be no more bailouts and any German politician who approves a single Euro for the debt problem of another European nation will not survive in office.  This is consistent with a German poll over the weekend that shows more than 70% of Germans oppose any more transfer of German wealth to nations with debt problems.

Please note his specific language: "Roesler told the Monday edition of Germany's Welt daily there should be "no limits to thinking" of possible scenarios of how to end the euro crisis."[iii]

The Germans have already concluded that if they are going to write any further checks then they are going to write them to their domestic institutions and protect their domestic investors. Necessarily, this means that many Eurozone countries will default on their debt. It now seems this will happen within a matter of days. Germany has, therefore, already announced its intention to ring-fence and support their own banks and only their own. This may ultimately involve the nationalization of some or even all the German banks. This is necessary because a falling Euro will further weaken the ability of the other Eurozone members to meet their commitments and thus increases the risk of multiple sovereign defaults. Eurozone countries that are going to default will do so virtually simultaneously rather than sequentially.

Eurozone countries may or may not have the resources to nationalize their banks. Therefore, we have to expect that bank failures are a real possibility. Apparently, the Europeans are warning the US to come up with a plan to nationalize Bank of America given that it is already in a precarious position, despite the injection of capital from Warren Buffet. The multiple lawsuits against Bofa and other banks alone will render the US banking system vulnerable to any dramatic announcement out of Europe. But, no doubt US banks have immense exposures to European institutions and some may even have sovereign credit risk directly on their balance sheets.

It is hard to overestimate the shock that this will bring to the financial markets.  Risk aversion will set in quickly as people start to consider the multiple possible consequences, some unintended, of such a decision. Huge fortunes will be made and lost in this moment in history.

It is worth providing a review of the evidence that led me to this conclusion.

Christine Lagarde’s speech at Jackson Hole revealed the recognition that there was a risk that Germany might not “write a check” to bailout the Eurozone members. She said, to paraphrase, “somebody needs to write a check or we are going to have historic multiple bank failures.” Everyone in the audience understood that no check is coming. The ESFS is not yet funded and a number of the contributors will not hand over cash if there is no collateral. Of course, the only collateral available is the insufficient gold reserve, or handing over ownership of the nations industrial assets[iv], which amounts to having a nationalization of industry, which is then put under the control of a foreign government. So, there really is no meaningful collateral. Also, there is no international party, including China, that can write a check large enough to fill the cumulative debt hole that exists across the various Eurozone countries.

Apparently, Lagarde and Trichet spent a day after Jackson Hole, in a heated argument with Lagarde pushing for a more realistic assessment of the Eurozone debt and of the true condition of Eurozone bank exposures to the debt. Trichet, in contrast, believes that it is possible to buy time and lead the market to believe a resolution is possible. Lagarde’s view is that many European banks are fundamentally insolvent and that’s why they are taking liquidity directly from the ECB. This is before the defaults even occur. Trichet’s view is that the banks might be able to earn their way back to health if they had more time.  The cynical view is that Trichet does not want the Euro to end or a bank crisis on his watch. It is said that this was the principal issue that led to Jurgen Stark’s resignation: Stark and Lagarde favor facing the facts as soon as possible whereas Trichet does not want his legacy marred and or he believes that it is always worth buying a little more time.

Meanwhile, the German Finance Minister recently gave a historic interview with Der Speigel[v] where he said this: Still, we would be a strange government if we didn't prepare ourselves for all eventualities, however unlikely they may be.” What eventualities might he mean? Well, he spells it out later in the interview:

SPIEGEL: In historical terms, there have been only two solutions to these kinds of problems: either inflation, which devalues a country's debts more or less by stealth, although it does the same to citizens' assets …

Schäuble: … or, in the past, a war, which is nowadays, thank God, impossible -- precisely because of the process of European unification …

SPIEGEL: … or at least a monetary reform.

His reference to “monetary reform” is telling. He did not say “fiscal reform”. Fiscal reform would potentially cure the problem. Instead he says “monetary reform” meaning Germany pulls out of the Euro and prints DMarks again. He totally rules out either Eurobonds and or bailouts when he says, “There is no collectivization of debt, and there is no unlimited support.” This is consistent with the views expressed by Otmar Issing to Bloomberg back on August 15th[vi] when he said in reference to Eurobonds, "That is a catastrophe," adding “that he does not understand why politicians in Germany would agree to such a thing given that they would threaten Germans with higher taxes or cuts in government spending.” It is clear to Shauble that this debt crisis threatens the institutions and agreements that hold the Euro and the European Union in place. If you want an EU to survive this impending blow then you need to start thinking about new agreements that can replace the ones that will be damaged or destroyed by these events. This is why he is talking about a new EU Treaty[vii].

The fact that the Troika (ECB, IMF and EU examiners) had to suspend their assessment of Greece was another important sign. The IMF wanted to be much more realistic about the magnitude of the Greek problem than the ECB wanted to be. Suspension of the mission merely confirms for Germans that the problems in the periphery are bigger than is understood and cannot be dealt with through austerity.

The Federal Constitutional Court Press Release[viii] has also been misinterpreted by those who want to believe that bailouts will occur. The FT reported that the court ruled in favor of Chancellor Merkel. But, the reality is that the court took the authority to decide away from the Chancellor and gave it to the Budget Committee in the Bundestag. This committee has 48 members and each is certainly driven by the polls and cares about re-election. The Budget Committee is deeply likely to oppose any bailouts that will cost German taxpayers, just as Dr. Issing says.

The next thing you know Dr. Joseph Ackerman gives a speech on September 5th[ix] that has been described as “terrifying”.Business Insider[x] provides a reasonably comprehensive account in English. He said, "It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels." He continued: "Most institutions have a rating of "below the book value or at best". He then spelled out the choice Germany’s politicians must make: bailout Europe or bailout us, the German Banks. But he tried to make the case based on a cost analysis (typical financial market guy). He said, "The costs of supporting weak member states, particularly from the German perspective, are less than the costs of disintegration.... It is a dangerous illusion to believe that a country could do better should it reclaim the sovereignty it has delegated to the EU." The issue for the German politicians is not the cost. The issue is the principal of sovereignty and protecting the German population from any return to their horrific experience with inflation. Eurobonds and bailouts to peripheral countries are all ways of increasing the money in circulation as a means of filling the hole. But, no politician in Germany can accept that path given their history, as Wolfgang Schäuble says so clearly in his interview. Ackerman knows that failure to go down the inflation path will probably result in a partial of full nationalization of the German banks, his own bank included. At the very least, the leadership of banks in the new world will have to be less focused on profits and more focused on safety. This is why he says, “"We must in my opinion, check all our work in all areas thoroughly again to ascertain whether we prioritize our genuine tasks as servants of the real economic needs." But, I fear it is too late for him or any other German bank leader to claim that they can be a “trusted good guy” going forward.If any doubts remain about the German inclination to return to the DMark then consider these announcements. Switzerland announces a peg to the Euro. It was crystal clear at Jackson that the Swiss leadership expected an historic event to occur which would culminate in a rush into Swiss Francs. They tested the water by announcing a “fee” which would be applied to all non-Swiss purchasers of their currency. Within a few days they announce the peg. In short, Switzerland knows what is coming and has just barred the door to anyone who might try to escape the demise of the Euro by leaping into Swiss Francs.

The statement by the central bank in Canada is similar. I happened to be in Canada when the statement was made. Canadians were deeply confused. After all, to paraphrase, the central bank said, “all the bad things we thought might happen, are now happening, so we are going to maintain a highly defensive position”. In other words, Canada is also gently warning the markets that it will do what it has to do to prevent the currency from suddenly accelerating in the event of a European currency implosion. The Japanese are hinting at this as well. According to Reuters the Finance Minister, “Azumi also said he was ready to step into the currency market to counter speculative moves, although Japan would likely struggle to gain G7 support for intervention.”[xi] 

It therefore seems likely the US Dollar and US Treasuries will be a major net beneficiary of any failure to bailout Europe. As an aside, this means the market would undertake QE3 as it were. The Fed won’t have to do “operation twist” or consider QE3. They will be able to focus their attention on the inflation “target” and finding ways to justify letting it rise.

It is fascinating that Jurgen Stark’s resignation[xii] has caused people to think the chances of a bailout are increased when in fact his resignation signals that the risk is increased that no bailout will occur AND Germany will withdraw from the Euro. Stark has been a board member at the ECB until his resignation.

The day before Jean Claude Trichet became rattled at a press conference when a journalist asked him if Germany might return to the DMark[xiii]. He used it as an opportunity to point out that Germany had experienced better price stability under the ECB than it had under the Bundesbank. I view this defence (which took six minutes) as a telling signal. Trichet could have said, “no, don’t be ridiculous”. Instead, he says Germany gets better price stability with me at the ECB than it got for fifty years with the Deustche Bundesbank. This is a plea for Germany to please stick with the ECB and not return to national monetary policy.

But, that was not enough to stop Stark’s resignation. When we look back in history we will see that all the important German policymakers resigned from the ECB before Germany formally returned to Deutschemarks, just as one would expect. It also seems too much of a coincidence to my mind that former Head of the Deutcshe Bundesbank and ECB board member Axel Weber leaves the ECB just before all the proverbial starts hitting the fan, goes to UBS as Chairman, and the next thing you knowthat describes the ways in which countries could leave the Euro including the potential costs if Germany left.


The Greek debt problem cannot be contained with the CDS spreads blowing out at the current speed. Many European countries have huge debt issuance plans for October and November. Germany is not only thinking about the risk of a Greek default, but also the risk that many other countries will need a lifeline very shortly. The only solution that meets the needs of German taxpayers and citizens is to protect their own interests first.


Banking and Payments System Crisis

The nationalization of the German banks, or the creation of a purely German Bailout mechanism, will immediately cause the markets to blow out the spreads on all debt instruments around the world with the possible exception of certain G7 countries like the US and the UK. Note that even the UK has massive bank exposures to the continent especially in Ireland. Ireland may get a bailout from the UK (again) but it is hard to imagine the UK writing a check to anybody else. This would force other Eurozone members to consider how to deal with their own bank debt problems: France, Italy, Belgium all leap to mind but the market will be bound to pressure others from Cypress and Eastern European countries to Bank of America. In fact, the entire banking and payments systems will be subject to entirely unknown shocks and logistical problems should this announcement be made.

Greece defaults and Germany will shore up the German banks. Other countries will either have to do the same or the market’s will discern which countries cannot bailout their banks due to lack of funds. The UK will be asked whether it is going to support the Irish banks. I suspect the UK will say yes but they may not be ready to answer the question when it comes. Any delay will force the UK government to reveal that the UK banks are cash rich. This will raise questions about their lack of lending. Bank failures will probably occur. Small institutions may bring significant consequences. We will see if the French have the resources to manage their banks. Christian Noyer insists that they do, but he would.


The Federal Reserve will have no choice but to make unlimited liquidity available to the market. They won’t need to announce QE3. The market will do it for them. But, the Chairman really wants to announce QE3 and may use these events as a reason to do so.

Gold, diamonds, agricultural assets, energy prices and mined asset prices will rise. Default reduces the debt burden and allows growth and inflation to return. If central banks (other than the ECB) throw huge liquidity out into the market because of this event then the liquidity is going to lean away from paper financial assets other than the most trusted and liquid (US Treasuries), and lean toward hard assets.

I would expect a major unscheduled speech from the President of Germany once it is decided to leave the Euro. After all, this step will mark the first independent move by Germany since the European Union project began with the European Iron and Steel Community after World War Two. A Germany that is not tied into monetary union requires an explanation. I imagine the Germans will emphasize their total commitment to European Unification and explain why the loss of monetary union is either temporary or can be overcome. To reiterate, the Germans will find it inconsistent to remain inside the Euro if the value of the currency plummets because the markets have no confidence about the financial position of most of the members. The idea that Germany would tie its manufacturing base and economy to a devaluing currency that has no fiscal discipline is unthinkable in Germany.

A European Bank “holiday” might be required to deal with the payments problems and with sudden and dramatic changes to valuations and therefore to the true balance sheet position of many banks and other financial institutions.

I disagree with Jim Rogers’ view. He says, "the euro will go down a fair amount. But I would buy all the Euro I could at that point because then that would mean that Europe is going to have a very strong, sound currency”. "People can not lie about their finances anyone, people have to run a tight ship."[xv] This might make sense if Greece is the only defaulting country, but it won’t be. It would make sense if Germany stayed in the Euro. But, I believe the risk is that Germany will not stay in.

Europe is about to become a very cheap place to go on holiday or to buy a beach house or a ski chalet or a vineyard.

Countries that already have inflation can expect much more once these events unfold. This is going to make the policy problem for Australia and Canada substantially more difficult. The cost of living will rise but no central bank can raise rates against the backdrop of a crisis environment.

The world is about to experience deeper stagflation. The cost of living will now rise even more but growth remains stunted. Policymakers will start to veer back and forth between dealing with unemployment and dealing with inflation. The years ahead will be referred to as “stop go” years because policy will at times try to stop price hikes and at other times policy will try to push growth.  Luckily, the world has seen this movie before in the 1970’s. Hopefully, we have learned something from the past and it ends rather more quickly this time around.

 Dr. Pippa Malmgren

jomama's picture

if germany does exit the euro (and I think that is their best option),  i guess PMs would get the smackdown in the interim... until the dust settles?

Outlaw Of The Wasteland's picture

This scenario didn't work out so well for the shorts here in the 'kwa in 2009.

Nor in chimpbabwe in 2007

Look.  A billionaire riding dirty

stocksugg's picture

Hedge Fund Blow up coming soon........

With the massive downdraft in momentum stocks today there has been speculation of a hedge fund blow-up. Those rumors now appear to be centered on John Thaler's JAT Capital. While we cannot verity if these rumors are true, the fund owns many of today's worst performers.

Some of his biggest positions includes:

Sina Corp (Nasdaq: SINA) down 10% (Nasdaq: PCLN) down 6%
Baidu (Nasdaq: BIDU) down 10%
Wynn Resorts (Nasdaq: WYNN) down 10%
Green Mountain Coffee Roasters Inc. (Nasdaq: GMCR) down 9%
NetFlix (Nasdaq: NFLX) down 12%
Molycorp, Inc. (NYSE: MCP) down 5%.

You can see the entire portfolio here.

JAT Capital  fund Holdings$/SEC/Filing.asp?T=rjtj.q1Fx_2d4


News Provided by Acquire Media Corporation

anony's picture

What we don't know:   How many times they traded those MoMos in the last severa years. If they are selling off lately then they have net gains of about 1000% or more over the last two years so being off 10% their latest buy price, is fractiona. 

May be a reason for others to get out too, but I'd be popping champagne corks to have traded them over the last three years, and being down 10% today.

chump666's picture

More China news:

*Fears Chinese growth will head under 7%

*PBOC seen unlikely to start cutting rates so soon

*Beijing could re-peg yuan to preserve growth as in 2008


Johnk's picture

Yes, I predict a bad September too. I also predict that the Red Sox will not make the playoffs, and that Freeport-McMoRan will close at $31.34 on Thursday.

Yen Cross's picture

 A g/s analyst points to a lower September, HMMMM. Must be the 9-11 factor>  i actually am trading NY again ! I love the volatility, 1/2 hour before the close. Great lead in to Asia.! The N/Y markets are just [LIQUIDITY DUMPS]!

tkinfo's picture

Unless I'm missing something, isn't tomorrow the last day of September? I guess tomorrow will be bad Then Too. Unless we have the world's most helacious rally...:)