You could be forgiven for believing that the ECB's talk/plans have indeed solved the European problems. The market's reaction appears to confirm all anchoring bias and thanks to overly bearish positioning (and thin summer markets) has sent all but the long-term-est bears scurrying for their rabbit-holes - as once again 'tail-risk has been removed' - just like LTRO, the SGP, and The Grand Plan before it. However, as BofAML notes in this must read note, we do not believe the ECB move will necessarily lead to a permanent stable equilibrium for the euro area for two reasons: 1) a stable equilibrium would require certainty about the ability of countries to restore debt sustainability, i.e. that they will respect an agenda of economic policy reforms and/or; 2) certainty about the ECB course of action, i.e. that the ECB will purchase bonds in such a way that we will not observe renewed financial market stress as we did this summer. Such certainty would require both Spain and Italy to put their faith in the Troika’s hands and the ECB to pre-commit in return, which seems to us very unlikey at this time. The ECB’s conditional backstop is some way from the “bazooka” that many were expecting
A funny thing happened on the way to Bernanke's wealth-creation strategy program. The unintended consequence of flooding the world with USDs, as we have pounded the table again and again on, has been 'spillover' into hard assets (or assets with relatively fixed supplies). To wit, oil prices are surging once again. Critically, as the chart below shows, each time this energy price hangover has trickled down to the consumer via $4 gas prices, it has marked a turning point in the US equity market. Of course, this time is different, but nevertheless one has to wonder how stock prices rise by any measurable amount with stagnant wage growth and price inflation in everything we buy and use (and now even the hedonically-tamped PPI is starting to show signs of instability).
Fresh out of the flashing red headline-a-tron:
- IMF OFFICIALS SAY GREECE WILL NEED A THIRD BAILOUT
- IMF SAYS GREECE CAN'T FILL FUNDING GAP ON ITS OWN, UP TO EUROZONE AND ECB TO FIND MONEY FOR GREECE
- GREECE MET ONLY 22% OF PROGRAM TARGETS FOR 2011
- EURO EXIT WOULD SET GREECE BACK BY MANY DECADES
Nobody, NOBODY, could have anticipated that fighting record debt with recorder debt, could possibly fail. And cue Germany telling Greece the party is now over, which, is what (a sliding EURUSD for those confused) it has wanted all along.
If 2011's Arab Spring was all about the propaganda "hope" of democracy (driven paradoxically by soaring global good prices as we predicted in early 2011 before the first Tunisian domino toppled), then 2012 Arab Fall, is all about the blowback to US policies and intervention in the region. And while we are amused by the media's narrative that an entire continent can suddenly come to arms against Pax Americana over a YouTube clip, we are confident that what some hate-mongering preacher has to say about Mohammed is about as relevant to what is happening in the Middle East today, as how the global economy performs impact the S&P. Absolutely none. What we do know is that the anti-American revulsion, which started on September 11 in Egypt and has since taken Libya and Yemen by storm, is spreading like wildfire. The NYT writes: 'Protests were also reported at American missions in Morocco, Sudan and Tunisia, where the police also fired tear gas to disperse crowds." It is only going to get far worse, as suddenly geopolitics, and the US response thereto, becomes the biggest issue in the presidential debate.
After almost forty years on Wall Street we understand both the joke and the punchline and you cannot pay off old debt with vastly greater amounts of new debt without consequences and, we assure you, there will be consequences. This paradigm does not work for a corporation or a sovereign nation and the borrower is eventually brought to his knees by the sheer weight of the debt that he has laden upon his back. The interest rate paid is only part of the equation with the rest being the absolute size of what is undertaken. The Euro and the equity markets rally upon misperception. It is not “unlimited” or “no cap” that are really the operative words for the scheme but the “condition” of use that is the most important part of the recent “Save the World” speech of Mario Draghi. Spain is an admitted user of “dynamic provisioning” which is a long and academic argument for shifting reserves but in the end it means but one thing and one thing only and that is they are admittedly fiddling with their books. Spain is scared to death of the “Obermeisters of the Troika,” the refrains of the three brothers Reich, that will show up in Madrid and demand explanation and sacrifice.
Stiking South Africa Miners Set To "Bring The Mining Companies To Their Knees", Call For National StrikeSubmitted by Tyler Durden on 09/13/2012 08:55 -0400
As if Bernanke promising to print, print, print until such time as the Fed's flawed policy brings unemployment lower, which by definition will not happen when the US is now suffering not from a structural unemployment "part-time new normal" problem, was not sufficient to send gold and other hard assets higher, today we get the double whammy announcement that the situation in South Africa, already very bad, is about to get much worse. Earlier today, South Africa's striking miners, already set on belligerent courtesy with their employers and authorities, prepare to go on general strike on Sunday, in effect shutting down all precious metal production in a world that is about to demand hard asset more than ever. "On Sunday, we are starting with a general strike here in Rustenburg," demonstration leader Mametlwe Sebei told several thousand workers at a soccer stadium in the heart of the platinum belt near Rustenburg, 100 km (60 miles) northwest of Johannesburg. The action was designed to "bring the mining companies to their knees", he said, to mild applause from the crowd, which was armed with sticks and machetes."
While hardly a factor in the Fed's thinking which is due to present its announcement in 4 hours, today's Initial claims report came at 382K, the biggest miss to expectations (370K) in 2 months, and up from last week's naturally upward revised claims of 367K. The 15K jump is the biggest weekly spike in 2 months and 4th largest this year. Just as relevantly, as we warned months ago, those on extended claims continue to run out at a fast pace, with 41K people losing their extended benefits, down by nearly 1.8 million from a year ago, and are forced to seek disability benefits to keep the government dole running. More importantly, and just as Bernanke is doing his best to stoke inflation, producer prices soared by 1.7% in August, up from July's 0.3%, and well above expectations of 1.2%. This was the biggest M/M spike since the 1.9% surge in June of 2009, and was driven primarily by soaring food prices, which however as everyone knows, is not really a factor in the Fed's thinking. "On an unadjusted basis, prices for finished goods climbed 2.0 percent for the 12 months ended August 2012, the largest advance since a 2.8-percent increase for the 12 months ended March 2012." Then again, who out there needs food or energy - inflation is precisely what Bernanke wants, the FOMC will welcome this news with open arms. But at least the Fed will create jobs and get people to give up on renting which is the New Normal buying, and scramble right back into the housing re-bubble.
In the last 30 days (since August 13th), platinum has risen by 18.9%, silver by 18.7%, palladium by 18.4% and gold by 7.6%. All remain well below their nominal record highs (see charts) and more importantly well below their inflation adjusted highs. All will most likely continue to rally especially if the Fed announces QE3 today as investors turn to precious metals to hedge substantial money printing by governments and the real risk of future inflation. "The Euro bailout measures and the opening of the monetary policy floodgates by the central banks are likely to result in higher inflation in the medium to long term," says today's Commerzbank commodities note. The strikes and violence in South Africa's gold and platinum industries are supporting and may contribute to higher prices. Machete-wielding strikers forced Anglo American Platinum, the world's No.1 platinum producer, to shut down some of its operations in South Africa, sending spot platinum to a five month high of $1,654.49.
Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.
Fortescue Implodes As Company Requests Debt Waiver: 2007 Deja Vu Liquidity Fears Send Stock PlungingSubmitted by Tyler Durden on 09/13/2012 07:52 -0400
Two weeks ago when we posted "The Kangaroo In The Metals Mine: Fortescue Trying To Raise $1.5 Billion From 20 Banks As Iron Prices Implode" we observed several developments in the bond prices of Australian mega iron miner, and fourth largest in the world, Fortescue, which suddenly found itself in dire need of cash which is always a first step to insolvency, which made us comment that just "like that we are back to those days of 2008 when the Chinese demand collapse meant any day could be FMG's last. Happy days are back again." Not really. We added that "as usual, the bond market is the first to get the memo that the landing is going to be a hard one. We give the farce that is known as equities about 4-6 weeks before they too get the memo." We were actually wrong: it took just two weeks for equities to finally figure out what we were warning about. From Reuters: "The world's no.4 iron ore miner Fortescue Metals Group Ltd has asked lenders to waive debt covenants if iron ore prices remain under pressure, the firm said on Thursday, after its shares suffered their worst loss in almost four years. Like other Australian miners, Fortescue's earnings have come under pressure from a plunge in commodity prices caused by weak demand in top consumer China. This has squeezed its ability to service its long-term debt, which stands at $11.3 billion." Of course, those who read our August 31 report, and were positioned accordingly and ahead of the market, made 20% in two weeks.
- Italy Says It Won't Seek Aid (WSJ)... and neither will Spain, so no OMT activation, ever. So why buy bonds again?
- European Lenders Keep Ties to Iran (WSJ)
- Fink Belies Being Boring Telling Customers to Buy Stocks (Bloomberg)
- Dutch Voters Buck Euro Debt Crisis to Re-Elect Rutte as Premier (Bloomberg)
- China's Xi cited in state media as health rumors fly (Reuters)
- China vs Japan: Tokyo must come back 'from the brink' (China Daily)
- Manhattan Apartment Vacancy Rate Climbs After Rents Reach Record (Bloomberg)
- Well-to-do get mortgage help from Uncle Sam (Reuters)
- Princeton Endowment Expected to Rise Less Than 5% in Year (Bloomberg)
- Protesters Encircle U.S. Embassy in Yemen (WSJ)
- US groups step up sales of non-core units (FT)
While this and that may have happened overnight, the only thing that matters today is what the FOMC presents to a market which has now priced in well over 100% of a new easing round. Except little movement until Bernanke speaks, and with that removes any doubt that i) the Fed, like the ECB, are both political creations comprised of unelected academics, and ii) the entire modern capitalist world is nothing but a Pavlovian creation that responds only to promises of liquidity injections. Luckily, if nothing else, this will once and for all shut up anyone who claims that the market reflects the economy, it doesn't; that a "virtuous economic cycle" is possible under the new centrally planned normal, it isn't, and that the US economy is recovering 4 years after Lehman collapsed. It never did, and without $14 trillion in central bank liquidity injections over the same period, the world, as represented by the S&P, would be in a mindblowing depression, which it will still get back to once the surge in hard asset inflation offsets any incremental liquidity provided by the central planning academics as Citi warned yesterday.
Anti-American violence and hatred is spreading: first Egypt, then Libya, with very tragic consequences, now Yemen. From Reuters: "Hundreds of Yemeni demonstrators stormed the U.S. embassy in Sanaa on Thursday in protest at a film they consider blasphemous to Islam, and security guards tried to hold them off by firing into the air. The attack followed Tuesday night's storming of the United States Consulate in Benghazi, where the ambassador and three other staff were killed. President Barack Obama said the perpetrators would be tracked down and ordered two destroyers to the Libyan coast, but there were fears protests would spread to other countries in the Muslim world." And since the US will not retaliate against any of these attacks on what is technically US territory except with "strong condemnation", expect many more retaliations against America in the middle east in the days ahead as blowback finally blows up. Also, will the US warships headed to Libya now be redirected to Yemen or the next country that decided to burn down its US mission?