In the 'I need to read that again to make sure I am not totally nuts' headline of the day, Reuters is reporting that 100 Sardinian miners have gone totally M.A.D. over the potential closure of the mine they work at. Barricading themselves 400 meters underground with 350 kilograms of explosives and threatening to "stay [there] indefinitely." While one certainly sympathizes with anyone who is unable to adapt to the New Abnormal Normal, one question does remain - is the 'blowing up the mine to protect their jobs' concept a Keynesian 'broken-window-fallacy' joke? or do they (like their forefathers who also occupied the mine in 1984, 1993, and 1995) hope the Italian politicians will simply back-down, collateralize the explosives with the ECB, and bail the whole mine out.
We advise you to take note of the political opposition that is coalescing in Europe. The cry across the Continent, in various languages, is “Enough.” All of the grand designs speculated about for the ECB rest upon the use of the EFSF and/or the ESM as stated specifically by Mr. Draghi. Over the weekend the Bundesbank was absolutely critical of any such plans and they were supported by several statements made by Ms. Merkel. It is now dubious, in my view, whether Austria, the Netherlands, Finland and perhaps Germany would support not pledges but more actual money to be used for Greece, Portugal and Spain. The rub is on and the size of these potential programs will, without doubt, affect the funding nations in Europe along with the nations that need the capital. Muddling is no longer possible, delay has run out of road, postponement is no longer an option as recession grips the Continent and as each solvent nation seeks to defend itself.
UPDATE: Isaac downgrade (from potential CAT 2 to CAT 1) is helping
In the immortal words of the movie 'Something about Mary', "we got a bleeder" in Crude oil. The front-month WTI contract just snapped over $2.50 lower as SPR-release rumors reassert on fears of Isaac's impact (and of course Jackson Hole).
Weidmann rejected suggestions that he was isolated on the ECB Governing Council in having such reservations. "I hardly believe that I am the only one to get a stomach ache over this," he said. Alexander Dobrindt, a senior German politician who has been the Executive Secretary of the Christian Social Union of Bavaria since 2009, was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe". A conservative ally of Merkel, Dobrindt echoed Bundesbank’s Weidmann that Greece should leave the currency bloc by next year. The comments show the huge divisions in Germany over the debt crisis now in its 3rd year and the understandable concerns of inflation and even hyperinflation. The Bundebank and senior politicians and allies of Merkel may thwart Mario Draghi’s big plans to do “whatever it takes” to solve Europe’s financial collapse. One way or another, the euro is certain to fall in value in the long term.
Forget the few hundred million dollars in wrist-slap fines the banks face from regulatory discipline over the Libor rate manipulation 'conspiracy fact'. As the WSJ reports this morning, the number of suits and potential liabilities are rising rapidly as cities, insurers, investors, and lenders all jump on the cabal-beating band-wagon. From individual investors claiming lost returns due to low rates to hedge funds squeezed in derivatives trades, liabilities could exceed $176bn as the blood-suckers lawyers note "this is just the beginning" as "scores of interested potential clients" have called. While, obviously, it won't be easy to win in court, the ongoing costs of litigation and potential liability (which will be largely ignored by Messrs. Bove et al. we are sure) range from Macquarie's $176bn estimate to Morgan Stanley's $7.8bn (quite a range) and it will likely take years for the lawsuits to see resolution. Notably though, floating-rate bond-holders are likely to have the most success (and easiest claim) as Darrell Duffie notes "assuming they can convince a jury Libor was too low, it's pretty easy to then show they were paid too little interest" but in the meantime, as CalPERS adds, "we await the regulatory investigations, which will drive the outcome" of litigation.
Yesterday, Jens Weidmann called it a "drug addiction"; for the past 4 years we have called it sheer insanity (and other less polite words). Whatever one calls it, it is obvious that using monetary policy to delay the need for real (not theatrical) fiscal policy involvement that sees to restore debt credibility (i.e., deleverage) does nothing to fix the underlying problems, and merely provides an ever briefer respite from the symptoms of insolvency without ever addressing the underlying cause. Today, even Bank of America has realized this fundamental Catch 22 that is now the paradox at the heart of what remains of capital markets: more easing serves to appease politicians, who see no need to change any of their broken policies, in the process requiring even more QE in the future, and so on, until this always ending in tears game of extend and pretend comes to a sudden and violent end.
While there are many answers to this rhetorical question, a key one is the schism that exists between the two media behemoths when it comes to the topic of the NEW QE, elsewhere incorrectly called QE3. While the now virtually daily missives from Fed mouthpiece Jon Hilsenrath, whom once has to wonder whether he is more of a part time worker at the WSJ or the New York Fed, are there to force markets ever higher each day, with promises that Bernanke will not sit idly by if the S&P were to ever close red (the S&P being a multi-year highs notwithstanding), and that as he stick saved the European close on Friday, the Fed has lots of additional capacity for more QE, Bloomberg actually has the temerity to ask: why do we need any more QE: after all so far all previous iterations have been a disaster. Sure enough, a few hours after Hilsenrath did his latest Fed planted piece in which he amusingly pretended to be objective about more QE and "sized up" costs of more QE, here comes Bloomberg in its daily Brief newsletter, with a far simpler question: why the hell do we keep doing the same idiocy over and over, hoping and praying to generate inflation, knowing full well if we do get inflation, with global central banks soon to hold half of the world's GDP on their books, it will promptly deteriorate to the "hyper" kind.
- UK is closed today
- Weidmann Says ECB Purchases Could Become ‘Addictive Like a Drug’ (Bloomberg)
- Dutch Premier Rutte Defends Austerity, Says No to More Greek Aid (Bloomberg)
- Storm Isaac forces Republicans to rework convention script (Reuters)
- Christie chose NJ over Mitt's VP role due to fears that they'd lose (NYPost)
- Ayrault warns EU fiscal pact rebels (FT)
- Is Canada's New $100 Bill Racist? (BusinessWeek)
- Will Fed Act Again? Sizing Up Potential Costs (WSJ)
- Samsung Slumps Most in 4 Years on U.S. Sales Ban Concerns (Bloomberg)
- States may require insurers to hold more capital (WSJ)
- Wen Says China Need Measures to Promote Export Growth (Bloomberg)
- Economist Appearing On Max Keiser Show Forced To Resign (Forbes)
As the European double, and in some cases triple, dip, continues to take its toll on the periphery (in some cases retroactively, with Spain realizing that 2010 and 2011 GDPs were mysteriously lower than expected, previously printing at -0.1% and 0.7%, revised to -0.3% and 0.4%), the core continues to be dragged ever more into the quicksand of insolvency. The latest confirmation came from Germany, where for the fourth month in a row the IFO survey showed that firms have grown more pessimistic for the 4th month in a row in August, declining from 103.3 to 102.3, on expectations of a 102.7 print, with the Current Assessment dropping from 111.6 to 111.2, while Expectations declining from 95.6 to 94.2. What is disturbing is that this is happening even as the EURUSD continues to be at multi-year lows, which is certainly beneficial to German exporters. The obvious implication is that the higher the EUR rises, the less confident German businesses will be, which also explains why to Germany the best Nash (dis)equilibrium in Europe is to keep the periphery on the edge as long as possible, and the EURUSD as low as possible.
Today the Chinese stock market did something unthinkable: it plunged to fresh post 2009 lows on news so bad they would have been enough to send the stock markets of such "developed" bizarro economies as the US and Europe limit up. The catalyst, as Bloomberg reports, was that Chinese industrial companies’ profits fell in July by the most this year, a government report showed today, adding to evidence the nation’s economic slowdown is deepening. Income dropped 5.4 percent last month from a year earlier to 366.8 billion yuan ($57.7 billion), the fourth straight decline, National Bureau of Statistics data today showed. That compares with a 1.7 percent slide in June and a 5.3 percent drop in May. What is disturbing is that the slide persisted even as revenue in the first seven months increased 10.6 percent to 50 trillion yuan, today’s report showed. Which means that cost and wage pressures are starting to truly bite Chinese corporations, that the US ability to export inflation to China is much more limited, and that one can forget the PBOC easing monetary conditions any time soon for many of the reasons discussed in the past week. It also means that China is now stuck hoping that Wen Jiabao will at least implement some fiscal stimulus. The reality however, judging by the SHCOMP's reaction, is that the benefit from fiscal programs in China, and everywhere else, is far more limited than monetary policy intervention. End result: SHCOMP down 1.74%,to 2,055, a three year low.
On the 'new' eve of the Republican Convention, it appears all is not well in the Romney-Ryan ranks. In what is quite a stunning admission, though not entirely surprising given his outspoken desire for a change to the status quo, the NY Times is reporting that Ron Paul does not fully endorse Romney for President. Mr. Paul, said convention planners had offered him an opportunity to speak under two conditions: that he deliver remarks vetted by the Romney campaign, and that he give a full-fledged endorsement of Mr. Romney. He declined. "It wouldn't be my speech," Mr. Paul said. "That would undo everything I’ve done in the last 30 years. I don’t fully endorse him for president." Whether this is Paul playing an admirable 'long-game' and/or standing by his libertarian roots (or angry at his apparent marginalization) is unclear but one thing is for sure; with the dominance of 'young' voters (seeking 'change'?) behind Ron Paul relative to 'old' voters with Romney, this rebuff will not help in the fight against TOTUS. As BigStory reports, Paul is telling his supporters to stand firm because "we will become the tent eventually!"
The lull in market activity over the past weeks is poised to give way to a multitude of events that could potentially determine the market direction for the remainder of the year. Policy responses from both sides of the Atlantic are awaited, though nuances rather than headlines may be more important. In the short run however, Deutsche Bank notes some indicators suggest that risky assets may be vulnerable. Specifically, relative to fundamentals they also find that the US equity rally over the past quarter has now been excessive relative to the US economic leading indicators. Looking at cross asset valuations by comparing the level of asset prices today vs. their peaks and troughs since Sep-2008 we also find that the S&P500 appears to be the richest relative to fundamentals.