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What is the bottom line?  The stark decline in the BDI today should be taken very seriously.  Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval.  All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving.  They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest.  They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely.  Is it any wonder that the Baltic Dry Index is in such steep deterioration? Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities.  Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities.  Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation).  Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus.  Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us.  It must be watched with care and vigilance...

For better or worse, all of last year had Merkel and Sarkozy on the same page.  Saying whatever it took to calm markets.  They didn’t really spend a whole lot of time worrying about their own citizens.  With the elections coming up, expect more negative and potentially confusing headlines to come out of Europe. Does Germany really want to control the Greek budget process? Sarkozy wants to “unilaterally” impose a financial transaction tax in France by August. That is the problem, what the politicians have to say to appease the voters is not always what the financial markets want to hear. The EU continues to try and perpetrate the myth that Greece is unique and that Portugal is different. Portugal has the benefit of being smaller, but they are next in line for principal write-downs (or whatever they are calling haircuts now).

The week has started with a general risk averse tone as market participants remain somewhat disappointed in the progression of the Greek bond swap talks in spite of Venizelos, the Greek finance minister, suggesting that a compromise can be struck this week. The latest article writes that Troika believes Greece will need EUR 145bln of public money from the Eurozone bailout rather than the EUR 130bln originally planned. This however, has been swiftly dismissed by German lawmakers. In terms of the European equity market it is the banking stocks which have taken the brunt of the selling pressure which in turn has remained a supporting factor for higher prices in European fixed income futures. Meanwhile in the short end, Euribor, is trading higher following the release of the daily fixes which resumed a trend of sizeable declines in the 3-month fix. In other news, Italy came to market and raised EUR 7.5bln across four different BTP lines with decent demand and a fall in average yields paid. As such the Italian10yr spread over bunds has tightened from the morning’s highs with unconfirmed market talk suggesting that the ECB were also checking rates being noted by several desks. Looking ahead the main focus will likely remain on any updates regarding Greece as various European officials meet once again in Brussels. Aside from that, highlights come in the form of US personal income and spending for December with PCE data released at the same time.

In addition to telling everyone to short the euro and go long the dollar (wink) Goldman Sachs is kind enough to summarize what the recurring Eurocentric rumor-based headlines of the coming week will be: "The week ahead starts with the EU Heads of State Summit, where discussions will be focused on finalizing negotiations around the fiscal compact, where we think important progress has been made, not least by allowing individual countries to police each other's budget policies. Attention will also be squarely focused on Greece, where negotiations over PSI continue, in addition to negotiations between the Troika and the government. The IMF mission is scheduled to remain in Athens at least through Friday. The week also brings important bond auctions, starting with Italy on Monday (at 5- and 10-year tenors), followed by France and Spain on Thursday. Outside of Europe, key data include the slew of global PMI's on Wednesday. Consensus sees China's PMI slipping below the 50 threshold in January. We are slightly more cautious than consensus on the ISM, expecting an essentially unchanged reading. The week ends with the all-important nonfarm payroll release. We think nonfarm payroll growth probably slowed somewhat in January given less of a boost from favorable weather and seasonal factors. However, we think the pace of employment growth, combined with weak labor force participation, may still be enough to pull the unemployment rate down a touch."

Update 2: the first local headlines are coming in now, from Spiegel: Griechenland soll Kontrolle über Haushalt abgeben (loosely Greece must give up domestic control)

Update: Formal Greek annexation order attached.

It was tried previously (several times) under "slightly different" circumstances, and failed. Yet when it comes to taking over a country without spilling even one drop of blood, and converting its citizens into debt slaves, Germany's Merkel may have just succeeded where so many of her predecessors failed. According to a Reuters exclusive, "Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday." Reuters add: "There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said.' So while the great distraction that is the Charles Dallara "negotiation" with Hedge Funds continues (as its outcome is irrelevant: a Greece default is assured at this point), the real development once again was behind the scenes where Germany was cleanly and clinically taking over Greece. Because while today it is the fiscal apparatus, tomorrow it is the legislative. As for the executive: who cares. At that point Goldman will merely appoint one of its retired partners as Greek president and Greece will become the first 21st century German, pardon, European colony. But at least it will have its precious euro. We can't wait until Greek citizens find out about this quiet coup.

EU stock futures have come off the initial lows at the open today following news that EU’s Rehn expects a PSI conclusion to be reached over the weekend, however this news comes amid the IIF’s offer to private bondholders of a 70% haircut. Further Greek PSI talks are expected later in the session following a meeting between IIF’s Dallara and Greek PM Papademos in Athens at 1630GMT. Euribor 3-month rate fixing continues to decline, however the pace at which the rates are falling is slowing, showing a fall of 0.005% compared with a 0.013% fall at this time last week. The slowing speed of decline has prompted hesitancy in financial markets, pushing the Euribor strip downwards. Further evidence of this impact comes from Portuguese bond yields, which today hit record Euro area highs. Spanish and Italian spreads have tightened this morning following market talk that the ECB were buying Spanish debt through the SMP in the belly of the curve. The Italian BOT auction this morning came in well-received following strong domestic demand, with 6-month yields falling from previous auctions.

Let’s cut the BS here. The Fed has maintained a more than highly accommodative stance for three years now and U-16 unemployment, food stamp usage, home prices, and virtually every other economic metric indicate that they’ve done little to boost the US economy in any meaningful way. QE has and always will be about boosting asset prices in the hope that the Fed can stimulate a recovery by getting the S&P 500 to some level.

The headlines are crowing of the magnificent CAT earnings (channel stuffing?) which in turn is helping the Dow reach its highest point since May 2008 (CAT is responsible for 27 of the Dow's 30 point gain today alone). This must be the signal that we-the-consuming-people need to borrow-and-spend again right? Well, no. Unfortunately, as many already know, the process of indexing is implicitly flawed in many ways - most importantly survivorship bias. If we compare the performance of the components of the Dow at the start of 2008 to the actual Dow index performance, there is a very significant divergence of around 7% (or around 900 points). This is actually understating the difference (as it is an average) as we note that 5 of the 30 names from 2008 have lost more than 70% of their value (GM, AIG, C, BAC, and AA) since January 2008 (averaging -88% among those). Three names have risen by more than 70% (MCD, HD, and IBM - thank you Warren) as 18 of the 2008 Dow 30 names are lower (on average -36.5%) with the remaining 12 Dow 2008 names up on average 33%. What is worse is the realization of the dramatic loss in real purchasing power as Gold has risen by more than 100% since the start of January 2008 as the Fed continues to realize it can abuse the lemming-like focus on nominal returns.

Riskier assets advanced today, as market participants reacted to yesterday’s FOMC statement, as well as reports that Greece is making progress in talks for a debt-swap deal. However despite a solid performance by EU stocks, German Bunds remain in positive territory on the back of reports that the ECB has ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit according to sources. As such, should talks between private creditors and other governing bodies stall again, there is a risk that Greece may not be able to meet its looming financial obligations. Of note, Portuguese/German government bond yield spreads continued to widen today, especially in the shorter end of the curve.

Little of note in the statement: no QE3 explicitly in the form of LSAP, which an S&P over 1300 and crude at $100 made prohibitive. Instead the Fed is extending ZIRP through 2014, from 2013, which as commentarors, primarily Goldman had expected, and which means sub-3 year rates will never be above zero again. Our prediction for a €100 trillion 1 week MRO is not looking quite as insane anymore. Since this is incremental easing, the reaction in gold says it all.

Summary:

• FED EXPECTS TO MAINTAIN `HIGHLY ACCOMMODATIVE' MONETARY POLICY
• FED SEES `EXCEPTIONALLY LOW' RATES THROUGH AT LEAST LATE 2014
• FED TO KEEP REINVESTING HOUSING DEBT INTO MORTGAGE SECURITIES
• FED SAYS INFLATION `SUBDUED'
• FED SAYS HOUSING `REMAINS DEPRESSED'
• FED REITERATES `SIGNIFICANT DOWNSIDE RISKS'

Lacker objects as he "preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate." Complete redline comparison attached.

The advance reading of Q4 UK GDP released today came in at -0.2%, slightly below expectations, however many market participants had feared a worse outcome for the indicator, allowing the GBP to pare the losses made in the lead-up to the GDP announcement. The Bank of England minutes released today have shown that the MPC unanimously agreed to keep the UK rate at 0.5%, and maintain the volume of the APF, however they also revealed that some MPC members saw the need for further QE in the future. Despite higher than expected German IFO Business Climate data this morning, European indices are trading in negative territory, with technology and financial stocks suffering the highest losses. This has seen asset reallocations into safe havens, which has seen Bunds outperform for the morning.

I warned on Greece 2 years ago, and it seems to have come to fruition. This is who's next....

Despite German and French Manufacturing and Services PMI data outperforming expectations, European equity indices are trading down at the mid-point of the European session on extended concerns over the still-not-settled Greek PSI agreement.  Further downward pressure on German markets came from Siemens’ earnings report earlier this morning, with the company missing their revenue targets and foreseeing a difficult economic environment for them in Q2 of this year. In UK news, despite an unexpected fall in government spending, UK debt has topped the GBP 1tln mark for the first time.

There are consequences to this policy.

Amid the lowest NYSE volume of the year (-24% from Friday - OPEX) and pretty much the lowest non-holiday-period volume in 9 years based on Bloomberg's NYSEVOL data, ES (the e-mini S&P 500 futures contract) ended the day almost perfectly unchanged underperforming 5Y investment grade and high-yield credit indices on the day as both moved to contract tights (their best levels since early August last year) even as their curves flattened. There has been lots of chatter about how the steepening of the short-end of the European sovereign bond markets (Italian 2s10s for instance) is a sign that all-is-well in the world again, well unfortunately the flattening of the short-end of US IG and HY credit markets sends a rather less positive signal than headlines might care to admit (as jump risk in the short-term remains 'high' relative to bullish momentum in the medium-term). At the same time, vol markets are showing extreme levels of short-term complacency as 1m VIX is almost at record low levels relative to 3m VIX (and diverging today from implied correlation). Broadly speaking , risk assets rallied into the US day session open only to sell off into the European close (with Sovereigns leaking back the most). The afternoon saw risk rallying as the path of least resistance appears to be up all the time there is no news. Stocks ended well off their highs of the day, in line with broad risk assets, as TSY yields rose 3-4bps higher, Oil and Copper 1.5-1.75% higher (outperformed) while Silver and Gold hugged USD weakness at around a 0.5% gain from Friday's close.