Stocks in Europe traded lower throughout the session, as market participants were seen booking profits following last weeks gains after the Fed announce a radical open ended QE program. Equity indices were led lower by the telecommunications, as well as utility related stocks. It is also worth noting that peripheral stock indices underperformed their core-EU counterparts, with some noting fast money and system accounts selling equities and instead turning to fixed income. As a result, Bunds have edged higher, with yields touching on highest level since April. Also, this week’s supply from France and Spain, as well as Germany, lead to modest spread widening. In the FX space, flows were light so far this session, as such both EUR/USD and GBP/USD are seen little changed as we enter the EU session. Going forward, there are no major economic releases scheduled for the second half of the session and volumes are expected to be thin given the Rosh Hashanah holiday.
Yesterday it was US embassies in Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, and others that were besieged and/or attacked. Today, we finally add Afghanistan to the "and others" list. From the LA Times: "Rioters infuriated by an anti-Islam video clashed with police in the Afghan capital on Monday, setting cars and tires ablaze and chanting anti-American slogans. Police blocked off the traffic circle closest to the U.S. Embassy and other diplomatic missions, and most Westerners working in Kabul were ordered by their organizations to try to stay out of public view. Monday’s unrest broke out when about 1,000 people gathered near an American base on the capital’s eastern edge and began marching toward the city. Police fired shots into the air to try to disperse the crowd, but the protesters continued to surge forward." In other words, just another American appreciation day.
- Anti-Japan demonstrators protest in New York City (China Daily) ...and the propaganda: Younger generation feels wave of emotions (CD)
- And the retaliation: Obama to launch auto trade case against China (Reuters)
- Spanish Banks Bleeding Cash Cloud Bailout Debate (Bloomberg)
- Chicago teachers extend strike (Reuters); Emanuel Promises He’ll Sue to End Chicago Teacher Strike (Bloomberg)
- China hurts own credibility with Xi's vanishing act (Reuters)
- European Squabbling on Euro Crisis Solution May Test Rally (Bloomberg)
- Two South Africa mines reopen, most don't (Reuters)
- Finance Industry Warns of ‘Cliff Effect’ in ECB’s Bond Plan (Bloomberg)
- China struggles to cure the violent ills of health system (Reuters)
- QE3 is for Main Street, except... it isn't: QE3 hit by mortgage processing delays (FT)
- Probe focuses on JPMorgan's monitoring of suspect transactions (Reuters)
- As explained here before: Spanish Bonds Decline as EU Policy Makers Clash on Bank Plan (Bloomberg)
News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.
Over the past 48 hours we have written much, describing the perfectly expected surge in nationalist fervor and anti-Japanese sentiment, as the Senkaku Islands Snafu hits its boiling point (a Japan whose GDP is now declining in real terms, whose economy has been crippled by years of deflation, whose infrastructure is impaired due to anti-nuclear power sentiment, and one which generally can not afford an all out diplomatic, political and economic conflict with China, and may thus ask itself: why escalate and just who prompted it do so now?). Instead we'll let the pictures do the talking.
A week ago, after peripheral European bonds soared and yields plunged on more hype and more promises that the ECB may monetize debt on the one condition that insolvent countries hand over sovereignty to the Troika ala Greece, we were not all surprised to learn that "suddenly, nobody in Europe wants the ECB bailout." And why should they? After all, The whole point of the gambit was to lower bond rates, which happened, which would allow insolvent government to stack even more debt courtesy of lower rates on top of record debt, taking the insanity of the old saying "fixing an insolvency problem with liquidity" one step further, and revising it to "fixing an insolvency problem with more insolvency." Furthermore, if the mere threat of the ECB stepping in and crushing any shorts or supporting longs was enough, why even bother with actual intervention. Simple: even infinite monetary dilution has its limits. That limit is and always has been cash flow, because a central bank can only dilute wealth, never create it. And for Spain said limit is approaching fast.
While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do. The government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. In Koo's words: "the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).
Much has been written over the course of the last few days/weeks about what Bernanke could do, has done, and the efficacy of said actions. Inflation, unintended 'energy' consequences, debasement, financial repression, scarcity transmission mechanisms all come to mind but realistically they are all just symptoms of what is really going on. As the following chart from Barclays shows, the real effect of LSAPs is to suppress the signaling effect of macro data from the real economy. During periods of extreme monetary policy, the stock market's beta to macro-economic data surprises is dampened massively - and hence the forced mal-investment and mis-allocation of funds occurs. However, given the now open-ended nature of QE3, this may change with the 'good news/bad news' logic leading to a stronger market (higher beta) response (since all bad news is automatically attenuated by QEternity and thus all the good news is out there).
Here is a summary of where the world stands:
- Unable to reach a compromise over the weekend, South Africa is now in an all out labor strike, with the police again firing rubber bullets at miners with lethal escalation guaranteed
- Back from vacation, the once again penniless citizens of Spain, Greece, and Portugal have resumed protesting austerity
- US embassies attacked, in many cases with numerous casualties, in Egypt, Libya, Tunisia, Morocco, Sudan, Lebanon, India, Balgadesh, Indonesia, and others.
- Japan "appropriating" China-contested islands provoking a firestorm of retaliation including demands for "war with Japan"
- The Japanese ambassador to China dying mysteriously
- Netanyahu telling Meet the Press Iran will have a nuke in six-seven months and must be stopped beforehand
- Warships from more than 25 countries, including the United States, Britain, France, Saudi Arabia and the UAE, launching a military exercise in the Straits of Hormuz
- A third US aircraft - the CVN-74 Stennis - carrier is en route to Iran with an ETA of about 10 days
- And finally, a potential catalyst to light this whole mess on fire, Iran's Revolutionary Guard announcing that its troops are now on the ground in Syria.
UPDATE: Answers Provided
A century apart and a continent apart. With Bernanke's fingers now glued on CTRL-C, perhaps the reality of these two charts suggests it's really not different this time at all...
Since 2009, outside of the megabanks in Europe, the bulk of the rest of the financial system has been completely shut out of the unsecured financing markets. One of the workarounds to this liquidity problem was the reclamation or retention of covered bonds issued by the Eurozone banks themselves, but these are constrained by strict allocation rules. Once the bank reaches that defined upper bound, where it is already close to exhausting this route, the bank will be forced to find a further alternate means for funding its existing loan portfolio. We discussed the issuance of self-referential or ponzi bonds previously since - can you really “own” your own liabilities? Since circular logic pervades the current realm of central banking, this is wholly unquestioned. In reality, retained covered bonds are just the accounting gloss on direct monetization of past and existing mortgage loans. Covered bonds as collateral to the ECB is an extremely important bridge holding the shaky liquidity system together as it is now; as the shortage of 'good' collateral increases, banks that do not possess enough “good” collateral have self-selected themselves for extinction and resource re-allocation. There is no economic argument for maintaining self-selected bad banks. Free markets demand their extinction. Anything short of that will result in escalating and perpetual liquidity and solvency crises until the real economy is freed from the yolk of bad banks and their dis-intermediation. There is no real wonder as to why we have exactly that right now – the intrusion of politics done in the name of economics.
Japan's Ambassador To China Dies As Chinese Police Use Tear Gas, Water Cannon On Anti-Japan ProtestersSubmitted by Tyler Durden on 09/16/2012 10:12 -0400
Yesterday we described that anti-Japan sentiment across China was spreading like wildfire with some even suggesting it is time to declare war on Japan (see picture) in retaliation for the unprecedented shift in Japan's status quo vis-a-vis the Senkaku Islands. Today it has gotten even worse. From Reuters: "Chinese police used pepper spray, tear gas and water cannon to break up an anti-Japan protest in southern China on Sunday as demonstrators took to the streets in scores of cities across the country in a long-running row over a group of disputed islands. The protests erupted in Beijing and many other cities on Saturday, when demonstrators besieged the Japanese embassy, hurling rocks, eggs and bottles and testing police cordons, prompting the Japanese prime minister to call on Beijing to ensure protection of his country's people and property. In the biggest flare-up on Sunday, police fired about 20 rounds of tear gas and used water cannon and pepper spray to repel thousands occupying a street in the southern city of Shenzhen, near Hong Kong. Protesters attacked a Japanese department store, grabbed police shields and knocked off their helmets. One protester was seen with blood on his face. At least one policeman was hit with a flowerpot." And while the populist reaction was widely expected, the most surprising development came from Japan, where the designated ambassador to Beijing mysteriously died several hours ago after collapsing in the street without any obvious cause.
The chasm between official claims and reality is set to widen even further than it already has. The point will inexorably come when the long-suffering denizens of “Main Street” will rebel with the same combination of designed apathy and weary disgust with which the people of the East Bloc turned irrevocably away from their own rulers. The first “victim” of this abhorrence will be the Fed.
The new policy of unlimited quantitative easing is an experiment. If those theorists of insufficient aggregate demand are right, then the problem will soon be solved, and we will return to strong long-term organic growth, low unemployment and prosperity. I would be overjoyed at such a prospect, and would gladly admit that I was wrong in my claim that depressed aggregate demand has merely been a symptom and not a cause. On the other hand, if economies remain depressed, or quickly return to elevated unemployment and weak growth, or if the new policy has severe adverse side effects, it is a signal that those who proposed this experiment were wrong.