Rosenberg Explains What (If Anything) Has Changed

Tyler Durden's picture

Still confused by the 500 DJIA point rally in 48 hours? You are not alone. Here is David Rosenberg guaranteeing that your confusion will be even greater when you realize that nothing has really changed, suffice to say that the record confusion has provided the best smokescreen for nothing short of a collusive global window dressing session for massively underwater hedge and mutual funds.

So What Changed?

Well, yesterday afternoon there seemed to be a leak to CNBC's economics reporter that something bold was being cooked up to deal with the debt crisis in Euroland without having to resort to 17 different parliaments for approval, using the European Investment Bank (EIB) as the conduit — establishing a Pan-European TARP plan, if you will.


Nothing has been officially announced, but according to a news article published by CNBC here is what this new structure could look like (there are lots of moving parts):

  1. It would involve money from the European Financial Stability Facility (EFSF), a bailout vehicle created in 2010 to alleviate the sovereign debt crisis in Europe, to capitalize a special purpose vehicle that would be created by the EIB, a bank owned by the member states of the European Union.
  2. The special purpose vehicle would issue bonds to investors and use the proceeds to purchase sovereign debt of distressed European states.
  3. This could potentially alleviate the pressure on the distressed states and on the European banks that hold a lot of the distressed sovereign debt. The bonds issued by the special purpose vehicle could then be used as collateral for borrowing from the European Central Bank (ECB), allowing the central bank to make loans to banks faced with liquidity shortages.
  4. They would buy bonds of the special purpose vehicle, and those bonds could be used to access liquidity facilities from the ECB.

Although the structure is complex, the underlying result is relatively simple. Banks would essentially be allowed to exchange their sovereign debt for debt issued by a special purpose vehicle created by the EIB capitalized with funds from the EFSF.


In some ways, this resembles the original plan for the Troubled Asset Relief Program (TARP). As originally conceived, the TARP would have purchased "toxic securities" from banks. (This plan was abandoned when U.S. regulators concluded that it was too difficult to price the securities and that the plan would take too long to implement.) In this case, the "toxic securities" would be sovereign debt rather than mortgage bonds.


One question is whether this will require an expansion of the EFSF. The fund has already committed to providing emergency loans to Ireland, Portugal and Greece. It is expected to provide over 100 million euros ($134.9 million) in additional funding for a Greek bailout.


After those loans, the fund will be down to about 298 billion euros ($402 billion), according to some estimates. German Finance Minister Wolfgang Schaeuble on Monday said that there is no plan to expand the EFSF.


This is likely why the plan appears to make the new vehicle a levered fund, which borrows far more than it has in equity capital provided by European governments.


Now to reiterate — no official plans have been released. Details may change as European officials work on the structure. Based on the limited details available, George Young, who runs our global macro fund, and Michael Isenberg, our resident financials expert who works on our hedge funds, have boiled it down to the conclusion that the banks would get EIB bonds in exchange for PIIGS debt. That would remove the PIIGS debt from their balance sheets. The EIB SPV would be capitalized with the equity injected by EFSF, and debt issued in the market by EIB.


Germany and France are the main guarantors of both the EFSF and the EIB. Therefore, the SPV would be taking on PIIGS debt and the banks would get EIB paper (effectively German/French bonds) in exchange. The PIIGS debt purchased could be up to 1.8 trillion euros — if they take 200 billion in equity from the EFSF and lever it up 9:1 — and would then be owned by the EIB, whose entire capital structure is guaranteed/backstopped by France and Germany. In effect, this is a stealth Euro bond. The weaker European countries' liabilities are being put into a securitized structure, which has a credit guarantee wrap from the stronger European credits. So the new paper issued to the market is a combination of weak credits (via the assets backing the lending) and stronger credit (via the capital structure guarantee). Thereby creating a blending of credit — voila a Eurobond in sheep's clothing. One might think this could impact France and Germany's credit rating.


No doubt the market wants a solution. And it wants massive amounts of money thrown at the problem, regardless of who pays (so long as it's not the banks holding the debt!). But a proposal, as we have seen, is one thing — getting it in place and approved is another. How big is it? How flexible is it? What will it buy? What are the dilution risks for the recipient banks? Is it legal, specifically under the German Constitution? These are all important questions.


Not only that, but it is surreal actually that the markets could rally on a leak to a CNBC economics reporter on a plan that is still bereft of details (classic shoot first, ask questions later ... like the ballyhooed rumour of China stepping into the fray with a bailout package for Europe). So if this leak is true, Europe is going all in with leveraged bets that will water down the credit quality of both France and Germany. So what this means is that there will be no strong fiscal credits left (the euro has to be a gigantic short here) in the region.


If my reading of history is accurate, the experience with SPVs hasn't been so successful. The blown opportunity to let Greece default, ring fence it, and have individual countries support their banks I think would yield much more desirable results, even if painful over the near-term. And there are more complications. So the EIB will take the beaten-up PIIGS bonds off the banks' balance sheets? But at what price? Par? Market? Somewhere in between? The banks don't take a haircut at all on this? And if this is all an attempt to prevent banks from taking a hit, I just can't see how German taxpayers are ever going to be willing to bailout Spanish banks. This all smacks of desperation to me and I think there would be a taxpayer revolt in both Germany and France over it.


Then again, there is always the risk of being too pessimistic. Let's hope this is a game changer for Europe. Then we can at least go back and concentrate on the data and recall that the peak in the S&P 500 took place right after the market digested that weak Q1 GDP report and all the revisions to the downside. The data yesterday were ignored but the trio of Chicago Fed index, new home sales and Dallas Fed index was very worrying. I sense that the downward revisions to EPS are going to accelerate. I also believe we are staring a recession in the face and one that will be very difficult to emerge from seeing as what little policy bullets are left in the chamber, both monetary and fiscal, after so much was expended to deliver the weakest recovery of all time. Just contemplate that 295k new home sales number for August — not that the latest data-point has sagged to a six-month low as much as it is 25% lower now than it was in June 2009, at the very lowest point of that massive recession. If that is not cause for pause, I'm not sure what is.


As for the whippy rally we saw yesterday (and the follow-through today), let's not forget other facts on the ground:

  • The Fed just told us that downside risks to the macro outlook are "significant". Since we are coming off roughly flat economic growth in the first half of the year, it would seem as though contraction at some point soon cannot be ruled out. Very few asset classes are priced for that prospect, though credit and raw materials stocks along with financials have come a very long way.
  • Volume actually dropped on the NYSE yesterday, despite the price gain.
  • New 52-week lows still outnumbered fresh highs.
  • The 50-day and 100-day trendlines are in confirmed correction patterns.
  • The market had a chance to break out through the upside of the recent range and failed; stocks that looked set to lead the advance have faltered badly. Only "policy pronouncements" as the S&P 500 trades down to the low end has prevented a more serious correction from taking hold, at least for now.
  • The number of leading stocks that saw higher volume in yesterday's action was few and far between.

From a macro standpoint, what is undermining the U.S. outlook much more than what is happening in Europe is the increasingly uncertain and complicated policy outlook, whether it pertains to health care, financial reform, and of course, fiscal policy. Nobody knows just how austerity in the near future is going to affect them in the pocketbook, and remember all of the Bush tax cuts also terminate in 2013. That alone will drain GDP by roughly two percentage points.


Basic economic theory posits that as households and businesses become more uncertain about the future, the more they save from their after-tax incomes — and a rising savings rate in the private sector at a time of belt-tightening in the public sector is not the prescription for growth, unless somehow exports emerge as a critical safety valve. For sure, if there is one development that does seem encouraging, it is that there is something of a manufacturing renaissance taking hold, but the effects on the overall economy are going to pale next to the round of consumer retrenchment we are likely to see in coming quarters and years.


Let's hope China's 5-year plan to swing its economy away from export dependency to consumerism happens quickly and orderly, because producers in the U.S. are going to need that impetus (and we would have to add that Beijing's strategy of allowing the yuan to strengthen even with all these global jitters is an encouraging sign in this regard).

Source: David Rosenberg of Gluskin Sheff

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james85306's picture

really?  they ran the stops and it's dead walled at 1188 where real buyers would need to show up

sqz's picture

There's a fairly huge problem with this plan.

Not only does the leverage come from the EFSF, so increasing French and German exposure. But in addition the UK is joint equal largest shareholder in the EIB (*). Which means if it were to begin issuing effectively "Eurobonds" from this SPV, its AAA-rating would come directly into question!

There's no way this plan can take off in this form, especially when the UK, which is wholly outside the Eurozone, is involved...


UK debt marsh's picture

Excellent point!

No way the UK signs up for this.


1.  Sweden and Denmark (non-Eurozone memebers are shareholders)

2.  EIB have flatly denied story.


depression's picture

In other words the shell game continues... DDSS

crazyjsmith's picture

Same game, different continent.

Just like the dirty Mortgage CDO - a basket of trash, with a tiny bit of A paper (the good trash) sitting at the top, and the rest is total crap. 

We all know how that story ended. 

Ever buy a bag of oranges from a street vendor?  The top of the bag may have one or two good oranges, the rest of the bag is rotten?  Shell games, deception, fraud, all wrapped up in one nice little package for some sucker to buy and left with "the bag" 

Fish Gone Bad's picture

The stock market is a merchandising game.  This phase of it involves not letting the little guy make any money shorting the market.  EVERYBODY knows that there is going to be a great big sovereign default and a whole bunch of CDS screaming.  The trick here is not to be so heavily leveraged that a person can survive the short squeeze(s).  The little guy always gets flushed/flushed out, then the bottom falls out.  Just wait for it.

TruthInSunshine's picture

All this ESFS and SPV talk, and almost no one is focused on this (the equivalent of a U.S. Supreme Court Ruling, essentially stating that no ESFS expansion, and certainly no leveraging of it, is possible without AN ENTIRE AMENDMENT TO THE GERMAN CONSTITUTION AS VOTED ON BY A POPULAR REFERENDUM!):

German turmoil over EU bail-outs as top judge calls for referendum


Germany's top judge has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new [German] constitution and a popular referendum, vastly complicating plans to boost the EU's rescue machinery to €2 trillion (£1.7 trillion).


The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution). There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit — which might be politically legitimate and desirable  — then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people.

--Andreas Vosskuhle, Chief Justice of the German Federal Constititional Court


DonnieD's picture

Steve Liesman said it. Quit borrowing trouble.

GeneMarchbanks's picture

The ESFS has been a great distraction from the underlying issue, which, as we've been following since 2008, is insolvent banks and countries. Soon to be continents...

OrdellRobbie's picture

German parliament September 29 vote on EFSF will put this to rest.

espirit's picture

...and it remarkedly resembles 10 pounds of manue in a one pound bag. Plenty to go around, so no empty bagholders.

Good debt for bad debt?  rotflmao!

oogs66's picture

they are voting a version that isn't even what the market is pricing in...this is truly insanity

crazyjsmith's picture

That market is totally irrational.  It wants an idea, ANY idea, at ANY cost. 

As the lyric goes..."Lie to me, I promise, I'll believe.  Lie to me, just don't leave"

Pathetic isn't it?

TruthInSunshine's picture




OrdellRobbie:   German parliament September 29 vote on EFSF will put this to rest.

Again, if you read the link, article, and excerpt of the COURT OPINION of Germany's highest court that I posted above, you will find that said highest court has ruled that Parliament can NOT approve the EFSF or any variation thereof, without a referendum vote (by the public at large) to change the German Constitution.

Will the German People cast enough votes to do so? I do not know. I do know that according to Germany's higest court, nothing less would be required.

Joy on Maui's picture

Don't think so.   They may approve the current rescue package on the table but have made it quite clear they will not approve anything beyond that, which is what the CNBC story is suggesting.  It really is TARP all over again, European style.

Ned Zeppelin's picture

Problem is that this is his personal opinion, not a ruling from the court on the issue before them. while it has some persuasive authority, it is hardly enough to stop the banksters from stomping a path to this way to get the sovereign debt off their books.  Tim Geithner has already told them to socialize the losses, privatize the profits, and to do so right away.

bonddude's picture

The misunderstanding by Rosenberg of what you so correctly explain has caused him to be wrong wrong wrong about the stock market for quite a while now. He is now hoping the broken clock theory kicks in. Meanwhile he missed a historic run in stock and gold. True???

reading's picture

Not on gold, he's been a advocate of gold for a long time.

MarkTwain00's picture

Lets hope the Germans aren't too drunk from the Oktoberfest celebration to stand up for what is right! .....or stumble hunched over to nearest representative and put Das Boot in his/her Arse

Bring the Gold's picture

I hope the Germans take you literally and shove actual U-Boats right up the ass of those who vote for the globalist plan.

scatterbrains's picture

--Andreas Vosskuhle, Chief Justice of the German Federal Constititional Court--

Yea but wouldn't they just do it and worry about the ramification later ?  I mean dude above can always drown in a sauna and a preferable replacement found before it reaches back to their Constitutional Court no ?

disabledvet's picture

It better work then since it's illegal now as well. If it fails these folks might even do something to the perpetrators...or is it perpetraitors?

Bring the Gold's picture

Question: Does Germany have Diebold-esque electronic voting systems in place?

Shocker's picture

It is great to see, how everything is acting totally messed up. The Market should be down but they are up, Gold should be up but its down. Time are definitely mess, if you try to use logic.



baby_BLYTHE's picture

huh? The spot price of gold has rallied over 60 dollars today.

X.inf.capt's picture

i have no clue, blythe, what is going on with this market

last weds, i posted that i heard and saw people were dumping phyiscal at $39. you saw what hapened, 25% 2 days!

this market isnt making sense at all to me, but i still backed up the truck at a little under $30.

i thought i would feel great, but the last time i was this scared is when i had to see my C.G. as a 2 lt for minor infraction.

playing 'YOU BET YOUR BARS' is no fun....

oh well, back to lurkin'....

TruthInSunshine's picture

Unless there's some extraordinary method that Merkel or any German politician has of circumventing this massive legal obstacle (having the German People at large vote on amending their Constitution to allow the EU to grab more German sovereignty), I don't see how this is anything but a death sentence for the ESFS, even as it is now proposed in its most modest form.

redpill's picture

Never underestimate the ability of shitbag politicans to violate their respective countries' Constitutions without asking for permission.

piceridu's picture

So what kind of fear, threat of Armageddon, meteor strike, shit storm can they come up with to make Germans vote against their own sovereignty?

Ned Zeppelin's picture

This EFSF is a red herring, to juice up the markets just prior to the announcement of a Greek default. The entire plan is so Rube Goldberg as to be completely preposterous.

"Ned: think if it this way: if you know the plane is going in, but you might be able to do something drastic to halt it before crashing, but you'd need the passengers to go along with it, you make the plane climb first, the start the descent from a higher altitude, and you have a better chance of regaining control before the plane hits the ground. 

"Yes, it might work, Ben, after all that, the passengers will be screaming for you to do something, ANYTHING to get the plane under control.

"Precisely, Ned, precisely."

Kitler's picture

Absolutely top notch psy-ops work. Conditioning the Europeans in 'cause and effect' before the sacrificial lamb is to be led to the altar in a co-ordinated 'Lehman' moment designed to save all European banks.

So, will it be a French Bank to play the role of Jesus and die for the sins of the many? Or will operation "la twiste" be aimed at convincing those reluctant German savers to goosestep into abyss?

LongSoupLine's picture

but, but Bob PissOnYou on CNBS just said it's 25% rebalancing and 75% real rally.

Total Full Fuctard!

reading's picture

well, if nothing else, he definitely has his numbers flip flopped.

ZeroPower's picture

Where the hell is the 9x leverage # from? Who ever said the EIB wants to/agreed to take on bad debt?

Honestly this seems like the most rapid half-assed poor excuse of a rumor to ever be constructed. If this kind of effort was put on a tear sheet for a pitch, this person's balls would get ripped off and hed never work in finance again.

redpill's picture

The longer no one adamantly denies it, the longer financial markets will assume it is going to happen.  Which bureacrat wants to be the asshole to stand up and end the stock party?

trampstamp's picture

I thought this leak was already debunked this morning. TD?

Zero Govt's picture

Dead Cat Bounce ...back to 'Bear Business' next week, if not sooner... next

Oh regional Indian's picture

How come the UK continues to hold this peculier place in the EU? That has to be a gigantic clue towards what might be coming down the pipe shortly. Why was the GBP so damned important to keep alive as a currency?

And that is clearly the Iraq/Afghanistan/Libya troika along with Uncle "No Boots on the Ground" Sam.

And they have been some of th eheaviest buyers of US paper from the EU zone in general.

Something stinks and it' snot HtwoEssoFer.


Mauled and Gandhian Tales

maverick91919's picture

Don't forget there are 27 EU countries and only 17 use the euro currency so it is not especially peculiar to the UK. We kept the pound in the UK because at no stage was there any public opinion to change to the euro and the politicians knew that. The country was promised a referendum should the conditions be met where it could be argued in favour of joining but the polls have always shown the British people would reject it.

reload's picture

I think the UK kept the Pound Sterling for simple reasons. No political party could have won an election on a`join the euro` platform, and we have such a long & strong tradition of currency debasement, that ceding controll of that process would have been too much of a wrench.

As far as the heavy paper buying goes, its hard to tell where it ends up, but the Fed has more than one proxy to do its `bidding`.



Oh regional Indian's picture

Thanks reload and above. And that is surely the generally accepted opinion. Rather easily manufacturable opinion too.

I see something wicked. The other countries not in the Euro system don't matter as much. City of London is in the UK.

Maybe we'll know soon enough?



buzzsaw99's picture

The 2y auction was well bid. People who care about their money are still buying Ts.

buzzsaw99's picture

i prefer: no risk, no risk.


besides, some have collateral backed debts to satisfy.

Ando's picture

I remember coming to zero hedge in mid 2009 and all we read here was that nothing was getting better BLAH BLAH BLAH.  Meanwhile the market ripped in your face and then things did get better.  Now Europe is ripping higher.  You can say nothing has changed all you want but the market is rallying.  I love coming back to zero hedge to see all the angry traders that piss and moan as the market rips in their face.  THE MARKET DOESNT CARE WHAT U THINK. MUAHAHAHA

fuu's picture

<points and laughs>

"Meanwhile the market ripped in your face and then things did get better.  Now Europe is ripping higher."

mayhem_korner's picture

What'd you do with the pistol-wielding chimp, ye bludgeoned of the 3rd Reich?

fuu's picture

The chimp will be back. This was jsut a special gift for Redneck Repugnicant/Libertarians for Prosperity from yesterday.