The legitimacy of vulgar acts has been making headlines recently and so this morning's rumors of Mario Draghi's insistence to the European parliament that direct ECB buying three-year sovereign bonds is not 'monetary' state-financing got us thinking - just what is 'legitimate monetization' or perhaps "It's not monetization if..."
Since the best theater is that whose 100% assured outcome is not absolutely obvious, Reuters/Ipsos is happy to advise the 47% or so of American eligible voters who will actually participate in the upcoming presidential election that following the GOP convention, Hurricane Issac and the Invisible Obama, Romney has managed to cut Obama's 4 point lead and is now neck and neck with the incumbent. From Reuters: "President Barack Obama enters an important campaign week tied with Republican presidential nominee Mitt Romney, a Reuters/Ipsos poll found on Sunday, leaving the incumbent an opportunity to edge ahead of his opponent at the Democratic National Convention. With the Democrats set to nominate Obama for a second term this week in Charlotte, North Carolina, the race to the presidential election on November 6 is all knotted up at 45 percent for Obama and 45 percent for Romney among likely voters, the survey found." Of course, this being America, all that is needed is for the Democrats to invite Jason Biggs to deliver the Eastwood counter, and Obama's victory will be assured.
Europe took August off. Today, it is America's turn, as the country celebrates Labor day, although judging by recent trends in the new 'Part-time" normal, a phenomenon we have been writing about for years, and which even the NYT has finally latched on to, it would appear the holiday should really be Labor Half-Day. After today the time for doing nothing is over, and with less than one month left in the quarter, and trading volumes running 30% below normal which would guarantee bank earnings in Q3 are absolutely abysmal, the financial system is in dire need of volume, i.e. volatility. Luckily, things are finally heating up as the newsflow (sorry but rumors, insinuations, innuendo, and empty promises will no longer cut it) out of various central banks soars, coupled with key elections first in the Netherlands and then of course, in the US, not to mention the whole debt-ceiling/ fiscal cliff 'thing' to follow before 2012 is over. So for those who still care about events and news, here is the most comprehensive summary of the key catalysts over the next week and month, which are merely an appetizer for even more volatile newsflow in October and into the end of the year.
Both Mitt Romney and Barack Obama will give us happy talk about maintaining entitlement benefits (e.g., Medicare and Medicaid) that cannot possibly be sustained. They will talk about energy self-sufficiency. They will talk about creating jobs. They will tell us that we can somehow ‘grow’ our way out of our economic distress. But neither candidate will admit that technology now destroys more jobs than it creates, because to do so would be to commit political suicide. The fact is that none of the happy talk will ever come true. Instead, the Federal Government, with the tacit approval of both major political parties, continues to run trillion-dollar-plus deficits year after year in a futile attempt to spend our way out of our economic problems and to sustain an economic model that cannot be sustained. Those who believe that bringing manufacturing back to the US will also bring back jobs are trying to fight a war that has already been fought and lost. Why? The answer is technology. It’s actually a fairly simple process now to bring production of many items back to the US, simply because of automation and robotics. A factory filled with robots can operate 24 hours a day, 7 days a week, 52 weeks a year, so long as the raw material inputs keep flowing into the factory. Robots don’t take breaks, don’t make mistakes, don’t call in sick, don’t take vacations, don’t require expensive health insurance, and don’t receive paychecks. A fully automated robotic manufacturing facility might require only 100 workers, while a traditional assembly line facility might utilize 3,000 workers. That’s a huge difference in the number of jobs. The simple fact is that most of the lost manufacturing jobs are never coming back.
Once again it seems Japan has a lot to teach the Europeans and Americans of the unstoppable reality that bond markets again and again are "correct in the 'end'". As risky- and 'non'-risky-assets become more scarce (thanks to a central bank bid to monetize or collateralize any and all of it), so equity (and risk) markets become more and more distorted - temporarily suspending normal market relationships - until something triggers the reversion to reality. We discussed regime changes in detail regarding gold and bonds over the past 40 years in the past, but the US and European 'survival' tactics appear to be accelerated (and larger) versions of Japan's balance-sheet-recession-fighting game-plan. Their analog, therefore, provides defensible insight into the bond market's anticipation and equity market's inevitable confirmation that it's not different this time. The question we ask is this: "when TOPIX was at 1800, and JGBs implied it 'should' be 1000 (in 1999 and 2007) - how many people said it was 'different' then?"
If one needs a shining example of why the days of Europe's artificial currency are numbered, look no further than the EU's poorest country which moments ago said "Ne Mersi" to the Eurozone and the European currency. From the WSJ: "Bulgaria, the European Union's poorest member state and a rare fiscal bright spot for the bloc, has indefinitely frozen long-held plans to adopt the single currency, marking the latest fiscally prudent country to cool its enthusiasm for the embattled currency. Speaking in interviews in Sofia, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that the decision to shelve plans to join the currency area, a longtime strategic aim of successive governments in the former communist state, came in response to deteriorating economic conditions and rising uncertainty over the prospects of the bloc, alongside a decisive shift of public opinion in Bulgaria, which is entering its third year of an austerity program. "The momentum has shifted in our thinking and among the public…Right now, I don't see any benefits of entering the euro zone, only costs," Mr. Djankov said. "The public rightly wants to know who would we have to bailout when we join? It's too risky for us and it's also not certain what the rules are and what are they likely to be in one year or two."
Between the thinness of European bond markets during the summer doldrums and the hair-trigger momo-monkeys, it would appear that all the hopes and prayers of the Draghi "promise" have been more than priced into the Spanish bond curve already. Of course, short-dated yields could drop further on ECB buying; but where exactly 'should' that risk premia be? Of course, longer-dated yields could compress but does anyone really see a solution here, as opposed to short-term support to get through some debt maturities and avoid a catastrophic contagion? The critical point being - for all the anticipation of Draghi's bond-buying plan and its implicit conditionality, the Spanish yield curve has priced it all in and more - as the 2s10s curve is now at all-time (pre- and post- Euro-era) record steeps. We have seen this pattern before - into and during LTRO - that did not end well; and the crowd is getting larger and doors smaller in this one (and don't forget Corzine won't be your fall-guy this time)...
Despite a green showing in European equity indices this morning (aside from Spain that is) - as they shrug off the dismal China/Aussie data overnight in the incessant belief that bad is good and worse is better - there is a bid in a number of the major AAA safe-haven assets in Europe. Swiss 2Y rates are dropping notably this morning, German and Danish 2Y rates are stable to dropping, and Dutch and Finnish rates remain extremely low. It seems that between Merkel's comments this morning and the following big three unanswered questions - it's not all risk-on in Europe, and expectations for a squeeze in EURUSD - with net shorts at 2012 lows and USD longs basically neutral - seem exaggerated for now. Summing up on the euro area debt crisis, SocGen notes the issues remain the same; the periphery faces an uphill battle to meet targets that few private forecasters (including ourselves) expect can be reached, the EFSF/ESM is still too small with Spain and Italy combined facing around €800bn of funding needs over the coming three years and while the ECB can be helpful, it alone is not enough.
Last night we reported that the troubles for South Africa's metal mining industry, which accounts for 20% of the nation's GDP, have spread, when in the aftermath of the Lonmin Marikana Platinum mine bloodbath which saw 44 miners shot by police another mine - this time Gold Fields' KDC mine - went dark as the bulk of the firm's miners went on strike. Moments ago AP reported that violence has erupted at a third mine, this time the gold mine owned by the nephew of Nelson Mandela, where 4 workers have been shot. So much for an amicable resolution, or for gold production returning to historical levels.
Tomorrow the Battle of Frankfurt begins. Make no mistake in your thinking as America ends its holiday weekend; it will be a battle and there will be bodies littering the field of engagement. Spain and the rest have aims, plans, schemes if not hopes and ambitions in direct opposition to Germany and her side. The outcomes prayed for are a demand for money and a resistance to those demands. The pleas of Spain are about to be answered; first from the ECB and then from Germany’s acceptance or rejection of the Draghi plan. The “Game of Muddle” will be ended and real answers to real insistences will be given. It all comes down to this; money and how much of it and under what circumstances and whether the nations with capital are willing to hand it to their neighbors and watch their credit ratings, their own cost of funding, their standards of living decline to a mean for all of Europe.
Ahead of this week's 'critical' game-changing events - or not - it seems Europe's true overlord-ess is back, and now, tanned and relaxed, she is making clear that nothing about her (or her country's) view of the world has changed - no matter how much Draghi, Monti, Hollande, Rajoy or Samaras jawbone about it. It would seem by her words that expectations are being set and conditionality remains key - which means no matter what the ECB does - it is a can-kick no nearer an end-solution; and the market in its wisdom will price through that can-kick (after knee-jerking first of course): (via Bloomberg)
- *MERKEL SAYS `DEBT MEANS DEPENDENCY'
- *MERKEL SAYS EU MUST ENSURE THAT IT FIRST EARNS WHAT IT SPENDS
- *MERKEL SAYS `ECONOMY THERE FOR PEOPLE, NOT PEOPLE FOR ECONOMY'
- *MERKEL SAYS EUROPE HAS TO LEARN TO ONLY SPEND WHAT IT TAKES IN
- *MERKEL SAYS TOO MANY IN EUROPE HAVE LIVED BEYOND THEIR MEANS
- *MERKEL 'ABSOLUTELY CONFIDENCE' ECB TO WORK WITHIN ITS MANDATE
With the US closed today, the rest of the world is enjoying a moderate rise in risk for the same old irrational reason we have all grown to loathe in the New Normal: expectations of more easing, or "bad news if great news", this time from China, which over the weekend reported the first official sub-50 PMI print declining from the magical 50.1 to 49.2, as now even the official RAND() Chinese data has joined the HSBC PMI indicator in the contraction space for the first time since November. Sadly, following today's manufacturing PMI update, we find that the rest of the world is not doing any better, and in fact of the 22 countries we track, 80% are now in contraction territory. True, Europe did experience a modest bounce from multi-month lows of 44 in July to 45.1 in August (below expectations of 45.3), but this is merely a dead cat bounce, not the first, and certainly not the last, just like the US housing, and now that China is officially in the red, expect the next shoe to drop in Europe. Also expect global GDP to eventually succumb to the manufacturing challenges faced by virtually every country in the world, and to post a negative print in the coming months.
- Germans write off Greece, says poll (FT) - Only a quarter of Germans think Greece should stay in the eurozone
- As predicted here two months ago: ECB chief and Spanish PM on collision course (FT)
- Gold Wagers Jump To 5-Month High As Fed Spurs Rally (Bloomberg)
- Euro zone factories faltering as core crumbles (Reuters)
- Those who expected more China easing, beware: PBOC Has No Short Term Intention for Loose Money Policy (Financial Market News)
- French jobless tops three million, minister says (AFP)
- Spain Leads Europe’s $25 Billion Gamble Before ECB (Bloomberg)
- US investor is Ireland’s biggest creditor (FT)
- Draghi May See Silver Lining In Disappointing Investors (Bloomberg)
- China's steel traders expose banks' bad debts (Reuters)
- NY probes private equity tax strategy (FT)