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Greece: Next Steps

The Greek elections culminated with the worst possible outcome: 2 votes short of a majority for the pro-bailout New Democracy and Pasok parties. So what happens next? Well - two things: expect to see random stop hunting ramps in the EURUSD and ES on false rumors that despite the math, a pro-bailout coalition government is being formed. It isn't, but it will take out all FX and ES stops to the upside first as skittish shorts get burned as usual on planted fake headlines. More importantly, and as predicted last week, we will likely see yet another Greek election as the political vacuum in Athens is likely too big to be circumvented in a few days. Below we present a summary of immediate next steps as summarized by the WSJ. Yet one thing we want to bring attention to is that as we pointed out first on Saturday, a key even over the next two weeks, during a time when Greece will most likely not have an active government in place is the May 15th maturity of €430 million in international-law bonds whose holders have not agreed to the terms of the PSI and thus demand full payment... of money that Greece does not have. Finally we already know that Norway is the biggest non-PSI compliant entity out there. So will we finally see the first Greek PSI-related lawsuit on May 16 if and when Greece fails to make a payment? We will know in 9 days whether the European soap opera gets even more exciting than usual as various European countries start suing each other in international court, especially when one of the countries will have no government for the foreseeable future.

Status Quo Catastrophe Is Served

Now that France has a Socialist President the story is not over, not even close to over as the next French elections, for Parliament, will roust the nation once more into the spotlight as Ms. Le Pen and her allies assume a new role, a higher ground, and as the financial situation in France deteriorates they may get an even bigger slice of the pie than thought at present. It is not just that Europe is going to be governed in a different fashion but that France will be run differently and with more difficulties I predict than currently thought. The recession and the anger directed at Germany are rousing the spirits once thought dead; France for the French, the Netherlands for the Dutch, Greece for the Greeks and soon we may find the same dreaded tale in Germany as Nationalism rings in the death knell for European unity and for the political parties that flaunted it. It is a rolling thunder all across Europe, that much is known, and the implications of it all will be felt by the people of each separate country. The dream is fading into the reality of a different sun and daylight will mask that which was dared to be dreamed years before.

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By the look of things, French youth are celebrating Hollande’s victory by picking up all of their friends and then driving up and down the streets honking their horns incessantly. Most cars were packed to the brim with passengers hanging out of every window and even the sunroof waving French flags, singing, or simply yelling pro-Hollande slogans.

 

Strategic Investment Conference: David Rosenberg

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Stocks are currently priced for a 10% growth rate which makes bonds a safer investment in the current environment which cannot deliver 10% rates of returns. We are no longer in the era of capital appreciation and growth. The “baby boomers” are driving the demand for income which will keep pressure on finding yield which in turn reduces buying pressure on stocks. This is why even with the current stock market rally since the 2009 lows - equity funds have seen continual outflows. The “Capital Preservation” crowd will continue to grow relative to the “Capital Appreciation” crowd.... According to the recent McKinsey study the debt deleveraging cycles, in normal historical recessionary cycles, lasted on average six to seven years, with total debt as a percentage of GDP declining by roughly 25 percent. More importantly, while GDP contracted in the initial years of the deleveraging cycle it rebounded in the later years.

Guest Post: Dr. Lacy Hunt On Debt Disequilibrium, Deleveraging, And Depression

If you want to know how weak the economy really is all you need to do is look at the 30-year bond. It is one of the best economic indicators available today. If economic conditions are robust then the yield will be rising and vice versa. What the current low levels of yield on 30 year bonds is telling you is that the underlying economy is weak. "The 30-year yield is not at these low levels DUE to the Federal Reserve; but in SPITE OF the Fed," Hunt said. The actions of the Federal Reserve have continued to undermine the economy which is reflected by the low yield of the 30 year bond. The "cancerous" side effects of nonproductive debt are being reflected in real disposable incomes. Just over the last two years real disposable incomes slid from 5% in 2010 and -0.5% in 2012 on a 3-month percentage change at an annual rate basis. This is critically important to understand. While the media remains focused on GDP it is the wrong measure by which to measure the economy. A truly growing economy leads to rises in prosperity. GDP does NOT measure prosperity — it measures spending. It is the measure of real personal incomes that measures prosperity. Prosperity MUST come from rising incomes.

Norway Sovereign Wealth Fund Purges All Insolvent Eurozone Debt Holdings, US Hedge Funds Buying

One month later the purge is over: "Norway’s sovereign wealth fund sold all its Irish and Portuguese government bonds after rejecting the Greek debt swap and warned that Europe faces considerable challenges." Wait, what's that? The Eurozone's political strongarming (think Steve Rattner and GM) was unable to force the world's most powerful sovereign wealth fund into agreeing to what was essentially extortion when bank after bank noted how delighted they are to be bent over and take an 80% writedown on their Greek holdings. Stunning. But at least we now know who will be suing Greece shortly in an attempt to recoup par value of their strong law bonds: grab the popcorn - Norway vs Greece will be quite a spectacle. As for their dump of Irish and Portuguese bonds, no surprise there: fool me once (in perpetuity) shame on me, fool me twice, shame on Dan Loeb... who was buying everything Norway was selling. We wonder who ends up right.

The Mightiest Of Weapons

Sunday marks the day in Greece, France, parts of Italy and Spain. May 6 will stand out perhaps as the day when the fortunes of Europe were reversed and if not reversed; re-programmed. There has been a lot of talk about this of course and a lot of speculation in the Press and, one would think, that it had all been discounted by the markets but not so fast. The discount will only go as far as the political implications are generally understood and we would submit that the particularities of the European elections are not well understood at all. We think the markets’ reaction is a first blush notion which does not get close to the more pressing questions of what some of the potential changes in power will mean past the revelry of the election night parties. Mr. Hollande, in fact, represents the wave that is sweeping all across Europe which is a return to Nationalism, to tribal pride, to economic self-protection as the European Recession, as driven by the “austerity measures” and fiscal restrictions imposed by Berlin deepen both the economic travails and the reaction to finding your nation under the economic jack boots of Berlin. All of the changes of guard in Europe are going to have a profound effect upon the marketplace in my view. There will be a widening of credit/risk spreads, a decline in the equity markets, a decline of the Euro against the Dollar as Fear climbs back in the driver’s seat and as uncertainty is the prevalent theme of each day.
 

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Remember, the core driving force in European policy-making is politics. Angela Merkel faces re-election in 2013. If inflation is already becoming a political issue in Germany now (though data shows that inflation actually slowed in April) Merkel is going to be highly incentivized to get it under control by appearing even more pro-austerity/ anti-monetization (more on this later). And if things get truly ugly she could even publicly threaten to pull out the Euro.

 

 

David Einhorn Explains Why Only Gold Is An Antidote To The Fed's Destructive "Jelly Donut Policy"

David Einhorn who crushed it this week with huge profits on his short positions in both Herbalife and Green Mountain, finally takes on the ultimate competitor: the Federal Reserve, likening its "strategy" to a Jelly Donut policy, and explains what everyone who has been reading Zero Hedge for the past 3 years knows too well: "I will keep a substantial long exposure to gold -- which serves as a Jelly Donut antidote for my portfolio. While I'd love for our leaders to adopt sensible policies that would reduce the tail risks so that I could sell our gold, one nice thing about gold is that it doesn't even have quarterly conference calls." Or, as Kyle Bass said last year, "Buying Gold Is Just Buying A Put Against The Idiocy Of The Political Cycle. It's That Simple!" Not surprisingly, it is only the idiots out there who still don't get what these two investing luminaries are warning about.

A Tide In The Affairs Of Man

There are two forthcoming dates which will set the direction and strength of the tide and certainly have a marked affect upon the ventures. They are this Sunday, May 6, when both the French and Greek populace will decide on who is running their government and then on May 31 when the Irish have their refrendum. At the least one must be thankful that there are Democracies that are working and that no group of Generals or some thug is making the decisions. Forthcoming we visualize many Socialist demands such as Eurobonds being made and Germany standing alone in the corner and refusing to fund which will make for all kinds of volatile markets. The bigger crisis though, we fear, will be when Germany says no to funding some grand Socialist idea. The problem is the size of the economy. The German economy is 25% of the American economy and it is going to get down to a matter of capital and what Germany can afford without being downgraded and a European Union without a AAA rated Germany is a very different affair both for the EU’s debt structure and for the Euro. In June the Fed’s Operation Twist comes to an end. There is no new stimulus plan on the table in either America or in Europe now. This means that the last four years of monetary easing and living off of that which has been printed is coming to an end. The consequences of this, historically, have been declines in the equity markets.

Guest Post: 3 Likely Triggers Of The Next Recession

sta-eoci-recessionindicator-050212There is really no argument whether there will be a recession in our future — the only question is the timing and cause of it. The latter point is the most important. Recessions do not just happen — they need a push. In 2011 the economy was just a breath away from a recession due to the dual impact of the Japanese earthquake and tsunami and the European debt crisis. Had it not been for the combined efforts of the Fed through "Operation Twist" and the Long Term Refinancing Operations via the ECB, a drop in oil prices and a plunge in utility costs due to the warmest winter in 65 years, it is entirely likely that that we may have already been discussing a "recession." The ECRI launched a debate that was literally heard around the world with their recessionary call in 2011. The weight of evidence as shown by our composite economic output indicator index shows that the ECRI call was most likely correct. However, the restart of manufacturing, primarily automotive, after the crisis in Japan combined with an effective $90 billion tax credit due to lower oil and utility costs, turned the previously slowing growth rate of the economy around over the last couple of quarters. Sustainability is becoming the question now as weather patterns return to a more normal cycle and the effects of the lower energy costs began to dissipate. In a more normal post recessionary recovery the third year should be closer to a 6-8% economic growth rate versus 2%. While 2% growth is much better than zero — the current sub-par pace of growth leaves the economy standing on the edge of the pool with very little stability to offset any unexpected "push" into the cold waters of recession. The problem is identifying what that "push" could likely be.

Hugh Hendry On Europe "You Can't Make Up How Bad It Is"

At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that "All of Europe has defaulted", the canny-wee-fella (translation: shrewd and cautious young chap) explained that "The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected." Between France's election of Mr. Hollande and Luxembourg's 'when times get tough you have to lie' Juncker, Hendry says the only inspiration for Europe is fiction as "you just can't make up how bad it is" as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Wiemar happened, why the transfer union will never happen, Ayn Rand's reality, and fear politicians are feeling - ending with his view that "we are single-digit years away from the most profound market clearing moment".

Draghi Straits - Money For Nothing

The question for investors is how likely Draghi unleashes some new money and gives the market another brief relief rally? I’m not sure he is able to do anything meaningful and right now I believe the market will fade over the course of the day as realization sets in that not much can be done. I’m not quite ready to put this trade on, but am looking closely at going long Spanish stocks versus short German stocks. The belief that Germany will be fine while Spain is a disaster seems too common and priced in. I’m not quite there on that trade, but it is only that am looking at very closely.