ratings

The last time we saw a bevy of regurgitated European rumors shortly refuted was last Friday. Today we get a redux, following a hard push by none other than Spiegel (precisely as we predicted a month ago: "And now, time for Spiegel to cite "unnamed sources" that the EFSF is going to use 3-4x leverage") to imagine a world in which the ESM can be leveraged 4x to €2 trillion. This is merely a replay of last fall when Europe's deus ex for 2 months was clutching at a cobbled up superficial plan of 3-4x EFSF leverage, which ultimately proved futile. Why? Because, just like in 2011, one would need China in on this strategy as there is simply not enough endogenous leverage in either the US or Europe which would make this plan feasible. And China, we are sad to say, has a whole lot of its own problems to worry about right about now, than bailing out the shattered dream of a failed monetary unions still held by a few lifelong European bureaucrats, which this thing is all about. As expected, moments ago Germany refuted everything. Via Reuters: "Germany's finance ministry said on Monday that talk of the euro zone's permanent bailout fund being leveraged to 2 trillion euros via private sector involvement was not realistic, adding that any discussion of precise figures was "purely abstract." This also explains why we devoted precisely zero space to this latest leverage incarnation rumor yesterday: we were merely waiting for the refutation.

The seemingly inexorable rise of corporate bond ETFs (most specifically HYG and JNK is the high-yield market, and LQD in investment grade) have been discussed at length here as both a 'new' factor in the underlying bond market's technicals (flow) as well as their correlated impact on equity and volatility markets. Goldman Sachs' credit team delve deep into the impact of these relatively new (and rapidly growing) structures with their greater transparency but considerably higher sensitivities and conclude that not only are they here to stay but the consequences of ETF-inclusion (dramatic outperformance bias relative to non-ETF bonds) are deepening the liquidity divide (and relative-value) of what is already a somewhat sparsely-traded market. Our concern is that, as the divide grows (and liquidity is concentrated in ETF bonds), given the crowding tendency we have witnessed, (even with call constraints at extremes thanks to low interest rates), this is yet another crowded 'hot potato' trade hanging like a sword of Damocles over our markets (courtesy of Bernanke's repression).

• Europe’s crisis will be followed by a more devastating one, likely beginning in Japan. (Simon Johnson)
• Porsche, Daimler Indicate Europe’s Car Crisis Spreading (Bloomberg)
• No progress in Catalonia-Madrid talks (FT)
• Hilsenrath speaks: Fed's Kocherlakota Shifts on Unemployment (WSJ) - luckily QEternity made both obsolete
• Lenders Reportedly Consider New Greek Haircut (Spiegel)
• Fed Officials Highlight Benefits of Bond-Buying (WSJ)
• ESM to Launch without Leverage Vehicle Options (WSJ)
• Japanese companies report China delays (FT)
• Borg Says Swedish Taxes Can’t Go Into Ill-Managed European Banks (Bloomberg)
• Greek Leaders Struggle With Spending Reductions (Bloomberg)
• Asian Stocks Rise as iPhone 5 Debut Boosts Tech Shares (Bloomberg)
• China government's hand seen in anti-Japan protests (LA Times)

The world is awash in liquidity. If you listen closely you can hear the giant slurping sound of it rushing the shores at home and continents away. The Fed is providing it and the ECB is providing it while China doesn’t need it but it is sloshing around anyway. The world’s problems, the financial mess in Europe, the global slowdown that is resplendent from sea to not-so-shining sea is all being addressed with liquidity. Liquidity provided must be paid back and if the banks and nations that receive it do not provide structural changes, reduce their deficits, decrease their borrowings then, ultimately, the gods of chaos are unleashed. The applause of today may become the tears of tomorrow if the current course continues.

From Egan-Jones, which downgraded the US for the first time ever last July, two weeks ahead of S&P: "Up, up, and away - the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US."

The acquisition of CRBC by FMER provides a stark illustration of the fundamental conflict between the Fed’s “dual mandate” and its legal responsibility to supervise the nation’s banks. 

"Yellow journalism" – which seems almost the only kind we have these days dominates our newsflow, but the truth is out there. As with everything else though, it's subject to Pareto's Law. So, 80% of what's out there is crap, and 80% of what's left is merely okay. But that remaining 4% of quality, uncensored, free information flow is extremely valuable. The terminal corruption of the major news corporations and the lack of interest in seeking the truth among the general population augurs very poorly for the prospects of the US and the current world order. This creates speculative opportunities, but prospects for mainstream investments are not good. Western civilization is truly in decline and far down the slippery slope.

• Germany Can Ratify ESM Fund With Conditions, Court Rules (Bloomberg)
• Obama Discusses Iran Nuclear Threat With Netanyahu (Bloomberg)
• Stocks, Euro Gain as Court Allows ESM; Irish Bonds Climb (Bloomberg)
• U.S. cautions Japan, China over escalating islands row (Reuters)
• Draghi alone cannot save the euro (FT)
• 'New York Post' Runs Boldest Anti-Obama Ad Yet (Bloomberg)
• Another urban legend: Fish Oil Pills Don’t Fix Heart Ills in 24-Year Data Review (Bloomberg)
• Troika Says Portugal’s Program is ‘On Track’ (Bloomberg)
• Russia Wants to Steer Clear of 'Gas War' (WSJ)
• U.S. Said Set to Target First Non-Bank Firms for Scrutiny (Bloomberg)
• Wen Says China’s Policy Strength Will Secure Growth Targets (Bloomberg)
• UK faces clash with Brussels on City (FT)

Looks like a loop bad US news, good EUR; good EUR must be good news.

Love boat, everywhere. Final Risk On, or so. And up 1%

We will mince no words: Mr. Draghi has opened the door to hyperinflation. There will probably not be hyperinflation because Germany would leave the Euro zone first, but the door is open and we will explain why. To avoid this outcome, assuming that in this context the Eurozone will continue to show fiscal deficits, we will also show that it is critical that the Fed does not raise interest rates. This can only be extremely bullish of precious metals and commodities in the long run. In the short-run, we will have to face the usual manipulations in the precious metals markets and everyone will seek to front run the European Central Bank, playing the sovereign yield curve and being long banks’ stocks. If in the short-run, the ECB is the lender of last resort, in the long run, it may become the borrower of first resort!

There is a Transfer Union underway in Europe. While Germany has tried to avoid this at all costs, Europe, has found a clever way of implementing such a program and keeping it under the radar from the German citizens. In Greece, Spain, Portugal and Italy the ECB has implemented a program where the sovereign guarantees some bank’s bonds. The bank then pledges them as collateral at the ECB and gets cash. The bank then turns around and lends the money back to the sovereign nation and provides liquidity and economic sustenance. The Transfer Union is completed as Germany guarantees 22% of the ECB and the European Central Bank is nothing more than a conduit to lend money to the various nations. This contrivance is also not sterilized so that the ECB is, in fact, printing money. In a very real sense the ECB is the only fully operational part of the European construct at present as the European Union does not have the “political will” to carry out its mandate.

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation. While everyone stares at Frankfurt and the last ditch effort of Mr. Draghi there have been other events which are part of this play and merit your attention. Austria has come out and stated quite succinctly that no more Austrian money will be used for other countries; any other countries. Yesterday the Netherlands stated in absolute terms that no more of their money will be used for Greece. If the condition of any ECB funding is to be the approval of the EU and the use of their Stabilization Funds then what Mario Draghi is proposing may never come to pass, may never happen and may just be a rhetorical exercise in wand waving. To us, the world seems askew at present. China is in serious decline, Europe is in a virtual recession as Eurostat releases the numbers today and points to a -0.2% contraction of the EU-17. The markets rally based upon the supposed three Saviors of the world, the central banks of the United States, Europe and China and so the worse that it gets the larger the rally as the central banks will ease and ease again until some kind of wall is hit.

Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative.

Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering  the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not  prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.

Interestingly they also note that a further cut could occur due to: changes to the EU's  fiscal framework that led to less conservative budget management...

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.

September has arrived which means for Europe reality can, mercifully, return. First on the agenda: moments ago the French government suddenly announced the nationalization of troubled mortgage lender Credit Immobilier de France, which is also the country's second lagrest mortgage specialist after an attempt to find a buyer for the company failed. "To allow the CIF group to respect its overall commitments, the state decided to respond favourably to its request to grant it a guarantee," Finance Minister Pierre Moscovici said according to Reuters. What he really meant was that in order to avoid a bank run following the realization that the housing crisis has finally come home, his boss, socialist Hollande, has decided to renege on his core campaign promise, and bail out an "evil, evil" bank. Sadly, while the nationalization was predicted by us long ago, the reality is that the French government waited too long with the sale, which prompted the Moody's downgrade of CIF by 3 notches earlier this week, which in turn was the catalyst that made any delay in the nationalization inevitable. The alternative: fears that one of the key players in the French mortgage house of cards was effectively insolvent would spread like wildfire, leading to disastrous consequences for the banking system. End result: congratulations France: your Fannie/Freddie-Dexia moment has finally arrived, and the score, naturally: bankers 1 - taxpayers 0.