B+

The always pragmatic Art Cashin summarizes today's 12:30pm FOMC announcement. In summary: "look for the Fed to dangle a big carrot - some semi-specific course of action that would be put in place if the labor markets continue to worsen. Net/net, he needs to keep the door wide open and maybe outline certain milestone “triggers” that will allow the Fed to act later in an election year without being accused of being overtly political." Said otherwise, the happy ending will likely be deferred one more time. The market may not be very happy.

Recently, there has been an intense debate in Europe on the TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2), which is the joint gross clearing system of the eurozone the interpretation of this system and its balances has provoked divergent opinions. Some economists, most prominently Hans-Werner Sinn, have argued that TARGET2 amounts to a bailout system. Others have vehemently denied that. Philipp Bagus adresses the question of whether this 'mysterious' system, that we have been so vociferously discussing, simply amounts to an undercover bailout system for unsustainable living standards in the periphery? Concluding by comparing TARGET2, Eurobonds, and the ESM, he notes that all three 'devices' serve as a bailout system and form a tranfer union but governments prefer to hide the losses on taxpayers as long as possible and prefer the ECB to aliment deficits in the meantime.

Some interesting food for thought.

Treasury yields disconnected (lower) late last week from the ebullience of stocks and while EURUSD managed to spike on the Greek hope (in a perfect reflection of last week's Spanish bailout market reaction), it is now also disconnecting (lower) from equity exuberance in the US (having totally round-tripped from its opening spike lows on the 1st exit polls last night). European stocks are ending near their lows, credit markets notably underperforming (in another almost perfect echo of last week's early market reaction), and while Spanish sovereign bonds are performing the worst, the rest of Europe is also pulling wider in spread and higher in yield. Swiss 2Y rates are down 3bps more at 34bps (and 5Y rates are down 2bps to -3bps - lowest ever on record!). Italian and Spanish stock indices are down over 3% led by financials (which leaves them both lower from pre-Spanish bailout), with only the Swiss and German indices managing modest gains on the day.

"Private Debt Doesn't Matter" Because "Banks Can't Create Money Out of Thin Air"

What's more tiresome than a hastily rehearsed soap opera that replays the same boring plots again and again? Re-Runs of that soap opera. The Eurozone "drama" is now in re-runs and I for one am switching channels. Nothing will change until some critical part of the worm-eaten, corrupt construct of artifice and denial collapses in a heap. Until then, all we have is replays of the same boring plot lines:

Put-upon Greece: We were just minding our business here in the sunny south, living happily on borrowed billions in a thoroughly corrupt Status Quo, and suddenly we're debt-serfs squeezed by rapacious Eurozone enforcers of the banking cartel. What did we do to deserve this? It's not fair.

Put-upon Germany: We were just minding the store here, racking up 40% of our GDP in exports and raking in bank profits loaning money to our Eurozone compatriots, when suddenly everyone who's lived beyond their means demands that we refinance their debts because we're rich. Excuse us, but did anyone look at how we got rich? Hard work, cuts in spending, high taxes and a tight lid on wages. What did we do to deserve this? It's not fair.

Married couple in counseling: France and Germany: It's all his/her fault. They never bothered to understand me, etc.

Four months before the election. And yet, a horrendous migration across the Pacific

So the Greek elections come and go and someone takes over or there is no government and new elections are called. In the meantime either Europe hands Greece more money or Greece defaults. It is at the point of default where consequences require central bank action and where even the best made plans may careen out of control because so much information has been hidden and not accounted for so that their consequences were not considered. Dealing with incorrect facts leads to incorrect conclusions and this is my greatest fear at present for all of the financial markets; that the pending default, it will most likely come, will not have been assessed in the manner that was needed because Europe did not allow all of the necessary data to be correctly appreciated.

When it comes to the future of Europe, one simply has to look at the foundations or the so called "euro-architecture" which as the past two years have shown us, are in dire need of strengthening lest everything topples over. Mere talk will no longer cut it. Simplifying things further, one can distribute the potential outcomes facing Europe along two axes: Impact, or an event's likelihood of actually doing something to change the current "sinking ship" status quo, and Probability, i.e., how much resistance, mostly political, will a given plan face, primarily from Germany which over the past year has fallen into its rightful place - that of Europe's fiscal, and monetary - because even the ECB will not move without German approval - paymaster. Obviously the two are inversely correlated. Whether or not the European crises ends, will depend on precisely which of the 9 listed outcomes below Europe decides upon (or all). However, as is well-noted on the chart, There are "No obvious game changers." Which is why anyone hoping for a Deus Ex, before much more pain is first experienced, as Deutsche Bank explained earlier, will be bitterly disappointed.

All you can read.

Earlier in the week, UBS' Art Cashin noted that some traders were re-reading Bernanke’s speech of November 21, 2002 on countering inflation. Prior re-readings had given clues on things like QE1 and even Operation Twist. The primary theme of the speech was - what can the Fed do to fight deflation (and stimulate the economy) if the Fed Funds rate fell to zero (aah, those simple golden years). Cashin points out that most of the operations, however, tend to be means to make money available or easy. With nearly $2 trillion in excess free reserves that doesn’t seem to be the problem. Inducing spending is the problem. Of all the suggestions, the wider inflation tolerance may be the only one that may do that.

• Greek Banks Under Pressure (WSJ)
• France Seeks Eurozone Stability Package (FT)
• Germany Dashes Eurozone Expectations (FT)
• Geithner Says European Leaders Know They Must Do More (Bloomberg)
• In Athens, Party Aims to Delay Austerity (WSJ)
• Rajoy Battles ECB for Loans; Monti Appeals for EU Action (Bloomberg)
• Nokia Slashes 10,000 Jobs, Cuts Outlook (WSJ)
• H-1B Visas Hit the Cap, Sending Companies to Plan B (Businessweek)
• Swiss National Bank Vows to Defend Currency Floor (WSJ)
• Euro Crisis Deeper With Moody’s Downgrading Spain, Cyprus (Bloomberg)
• When all else fails... Truckers As Leading Indicator Show Stable U.S. Economic Growth (Bloomberg)

There was a time in 2011 when every European auction, particularly those in Spain and Italy, was followed with great interest due to a morbid fascination that it may well be their last. In 2012 this time has come much faster than last year. Earlier Italy sold a total of €4.5 billion in 3, 7and 8 year bonds which was at the top end of the range of expected issuance. The problem was in the unsustainable yields this debt sold for:

• €3 billion in 2015 bonds, B/C 1.59 vs 1.52 in May 14, yield soared to 5.30% vs 3.91% a month ago
• €627 million in 2019 bonds, B/C dropped from 2.27 on April 27 to 1.99; yield soared from 5.21% to 6.10%
• €873 million in 2020 bonds, B/C dropped from 2.08% on May 14 to 1.66%, yield soared from 5.33% to 6.13%

As is well-known in the ratings world, sovereign downgrades never come alone: first the sovereign is cut, then sovereign-supported domestic banks (the sovereign is the threshold rating), then general financial companies like insurance firms and specialty fins. Such downgrades are particularly painful when they go through a major threshold such from A to B as they spring various collateral and margin calls into action. One thing we do know is that the last thing undercapitalized Spanish banks can afford now is even more margin calls, and even greater collateral haircuts. However, this is precisely what will happen for the following 3 banks tomorrow: Banco Popular Espanol, Banco Santander and BBVA, all of which are currently at the old sovereign rating of A3 and tomorrow will see their rating cut to Baa3, and we fully expect the other three Moody's rated banks: Caixa, Banco Financiero y de Ahorros and Sabadell to be cut anywhere between 1 and 3 more notches, sending them into junk territory. We can only hope that the ESM or whatever Spanish bank bailout scheme is operational tomorrow as suddenly all of the banks below will find themselves without any willing counterparties around the world.

And so, the little rating agency that could, just gave Spain the triple hooks, downgrading the country from B to CCC+, negative outlook. As a reminder, the Uganda credit rating is B: it sure is no Spain.