Germany

Fuel Pool 35 Miles from Boston – which Is Highly Vulnerable to Earthquakes – Contains More Radioactive Cesium than Released In BOTH Major Nuclear Accidents and ALL Nuclear Bomb Tests

The European debt struggle may have just entered a new phase. Don’t blink. Like any classy magician’s trick the idea is to get you looking one place while the real action is going on somewhere else. And that has been the recipe over the past week or so. While everyone has been watching the Spanish and Portuguese debt auctions, the real damage was done in Germany where the German government’s bid-cover ratio on a ten-year bund auction came in less than ‘one.’  

What makes this time different? Several items:

1. The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
2. The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
3. The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.

The Fed's currency swap with the ECB is nothing more than a covert bailout for European banks. Philipp Bagus of Mises.com explains how the USD-funding crisis occurred among European banks inevitably leading to the Fed assuming the role of international lender of last resort - for which US taxpayers are told to be lucky happy since this free-lunch from printing USD and sending them overseas provides an almost risk-free benefit in the form of interest on the swap. Furthermore, the M.A.D. defense was also initiated that if this was not done, it would be far worse for US markets (and we assume implicitly the economy). The Fed's assurances on ending the bailout policy should it become imprudent or cost-benefits get misaligned seems like wishful thinking and as the EUR-USD basis swap starts to deteriorate once again, we wonder just how long before the Fed's assumed role of bailing out the financial industry and governments of the world by debasing the dollar will come home to roost. As Bagus concludes: "Fed officials claim to know that the bailout-swaps are basically a free lunch for US taxpayers and a prudent thing to do. Thank God the world is in such good hands." and perhaps more worryingly "The highest cost of the Fed policy, therefore, may be liberty in Europe" as the Euro project is enabled to play out to its increasingly centralized full fiscal union endgame.

Since the 1980s, the U.S. Has Secretly Helped Japan Build Up Its Nuclear Weapons Program ... Pretending It Was "Nuclear Energy" and "Space Exploration" ...

As North America comes to market, there is a lot to digest. European equity markets are trading higher, with the FTSE MIB in particular outperforming after a volatile morning’s session, with bargain-hunting the active theme among investors. The first major risk event came and went with the Italian T-Bill auction. Participants were looking for a poor auction due to the ongoing Eurozone woes, and although bid/covers fell short and yields did increase, the auction was not as poorly received as many had feared.  As such, Italian and Spanish 10-yr spreads have tightened with the German Bund, with the Spanish spread closing in on 400BPS, with talk of domestic buying in the periphery and profit-taking from the last few sessions adding to the tightening effect.  A flashpoint of the day was the German Bund auction; results came in showing the auction to be technically uncovered, failing to sell the expected EUR 5bln. Analysts have pinned the poor auction on the Bund having record low yields providing a disincentive to buy the German security. Following the minutes after the auction, around 25,000 contracts went through on the Bund, spiking lower around 20ticks.

• Subprime bubble is back: Lenders Again Dealing Credit to Risky Clients (NYT)
• Housing bubble is also back: AIG Is Planning a Return to U.S. Property Investing (WSJ)
• Spain and EU Reject Talk of Bailout (FT)
• Coeure Suggests ECB Could Restart Bond Purchases for Spain (Bloomberg)
• IMF Set to Recognise Shrinking Chinese Surplus (FT)
• Government to Propose New Mortgage Servicing Rules (AP)
• Japan Currency Chief Warns Against Delay Over Finances (Bloomberg)
• The 'Michael Corleone' of Libya (Reuters)
• North Korea Says Fuel Being Injected Into Rocket (Reuters)
• SNB Reaffirms Vow to Cap Swiss Franc (FT)

If yesterday was risk off on concerns Europe is sinking following last week's disastrous Spanish long-term auction, today is risk on after Italy managed to successfully place 91 and 361-Day bills, in line with expected amounts, if at much higher yields, and lower Bid To Covers. Specifically, Italy sold €3 billion in 91 day bills. The yield soared from 0.492% on March 13 to 1.249%, while the Bid to Cover plunged from 2.23 to 1.81. Same for the 361-Day Bill auction, where €8 billion in Bills (in line with target) were sold at 2.840%, double the yield of 1.405% from a month ago, and a Bid To Cover just modestly better: from 1.38 to 1.52. As usual the market continues to blatantly ignore the thin white line of bond issuance: every Bill and Bond auction that matures within the maturity (3 Years) of the LTRO will succeed: period. It is the ones maturity longer than 3 years - such as Spain's last week - that are the test. Comparing one to another is apples and oranges. But risk on don't care, and as a result futures are surging disproportionately, even as Spanish and Italian bonds are just modestly tighter following the bond results. But we will once again meander whack-a-mole style from auction to auction until the market is reminded of this little nuance. In other news, Iran just announced it is following its cut in Greek and Spanish exports, by halting exports to Germany next, while continuing the theme of 2011 Deja Vu, Indonesia's Aceh was struck two hours ago with a massive 8.7 Earthquake, with an 8.8 aftershock off Sumatra, coupled with a tsunami warning. Luckily, there are no initial reports of casualties or major damage.

Imagine the world economy as an armada of ships passing through a narrow and dangerous strait leading to the sea of prosperity. Navigating the channel is treacherous for to err too far to one side and your ship plunges off the waterfall of deflation but too close to the other and it burns in the hellfire of inflation. The global fleet is tethered by chains of trade and investment so if one ship veers perilously off course it pulls the others with it. Our only salvation is to hoist our economic sails and harness the winds of innovation and productivity. It is said that de-leveraging is a perilous journey and beneath these dark waters are many a sunken economy of lore. Print too little money and we cascade off the waterfall like the Great Depression of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds and we sink like Japan in the 1990s. On cold nights when the moon is full you can watch these ghost ships making their journey back to hell... they appear to warn us that our resolution to avoid one fate may damn us to the other.

Simply great piece on Volatility and more.

Those hoping for a quick and painless resolution to the Iranian question may have just seen their hopes dashed, following the breaking news from Iranian Press TV, according to which not only is Iran not seeking to appease its Western counterparts, but is, in fact escalating. From Press TV: "Tehran has cut oil supply to Spain after stopping crude export to Greece as part of its countersanctions, unnamed sources confirmed on Tuesday. Tehran also mulls cutting oil supply to Germany and Italy." "Countersactions" - lovely: another Swiss watch plan by the insolvent developed world. Said otherwise, one can hardly threaten to do something to a country, which is already doing so voluntarily, in the process hurting Europe's already crippled economies even more by removing the cheapest source of energy for both. Which however begs the question: just how much more Iranian crude are China and India importing despite promises to the contrary, and open warnings from the US not to do so?

UK and EU markets played catch up at the open this morning following Friday’s miss in the US non-farm payroll report. This coupled with on-going concerns over Spain has resulted in further aggressive widening in the 10yr government bond yield spreads in Europe with the Spanish 10yr yield edging ever closer to the 6% level. As a result the USD has strengthened in the FX market in a moderate flight to quality with EUR/USD trading back firmly below the 1.3100 and cable falling toward the 1.5800 mark. There was some unconfirmed market talk this morning about an imminent press conference from the SNB which raised a few eyebrows given the recent move in EUR/CHF below the well publicised floor at 1.2000, however, further colour suggested an announcement would be linked to the naming of Jordan as the full-time head of the central bank when they hold their regular weekly meeting this Wednesday. Elsewhere it’s worth noting that the BoJ refrained from any additional monetary easing overnight voting unanimously to keep rates on hold as widely expected. Meanwhile, over in China the latest trade balance data recorded a USD 5.35bln surplus in March as import growth eased back from a 13-month peak.

• With a 2 Year delay, both FT and WSJ start covering the shadow banking system. For our ongoing coverage for the past 2.5 years see here.
• Trouble in shipping turns ocean into scrapheap (Telegraph)
• First-Quarter Home Prices Down 20.7% in Capital (China Daily)
• Bernanke Says Banks Need Bigger Capital Buffer (Reuters)
• Monti’s Overhaul Can’t Stop Pain From Spain: Euro Credit (Bloomberg)
• Spain Confronts Crisis Threat as Rajoy Seeks Deficit Cuts (Bloomberg)
• Japan’s Noda Announces Anti-Deflation Talks as BOJ Sets Policy (Bloomberg)
• White House makes case for Buffett Rule (CNN)
• Cameron to Make Historic Myanmar Trip (FT)
• 'Time for Closer Ties' With India (China Daily)

So far futures are broadly unchanged, following the release of a Chinese trade report which while showing a resumption in the trade surplus, on expectations of further trade deficit in March, showed it was primarily due to a slide in imports, not so much a rise up in exports, a fact which impacted the Aussie dollar subsequently. We already noted that in conjunction with the BOJ, this means that Asia's central banks will likely hold off on further easing, and defer to the Chairman, especially with food inflation in China still prevalent. Aside from that the traditional European weakness is back, where April Sentic Investors Confidence slid to -14.7 on expectations of -9.1: to be expected from a meaningless market-coincident indicator. Keep a close eye on PIIGS bonds where whack a mole is now firmly back as the LTRO benefit is long forgotten, 3 month half life and all that.

The black swan is probably the most widely misunderstood philosophical term of this century. I tend to find it being thrown around to refer to anything surprising and negative. But that’s not how Taleb defined it. Taleb defined it very simply as any high impact surprise event. Of course, the definition of surprise is relative to the observer. To the lunatics at the NYT who push bilge about continuing American primacy, a meteoric decline in America’s standing (probably emerging from some of the fragilities I have identified in the global economic fabric) would be a black swan. It would also be a black swan to the sorry swathes of individuals who believe what they hear in the mainstream media, and from the lips of politicians (both Romney and Obama have recently paid lip service to the idea that America is far from decline). Such an event would not really be a black swan to me; I believe America and her allies will at best be a solid second in the global pecking order — behind the ASEAN group — by 2025, simply because ASEAN make a giant swathe of what we consume (and not vice verse), and producers have a historical tendency to assert authority over consumers. But black swans are not just events. They can also be non-events. To Harold Camping and his messianic followers who confidently predicted the apocalypse on the 21st of May 2011 (and every other true-believing false prophet) the non-event was a black swan. Surprising (to them at least) and high impact, because it surely changed the entire trajectory of their lives. (Camping still lives on Earth, rather than in Heaven as he supposedly expected). To true-believing environmentalists who warn of Malthusian catastrophe (i.e. crises triggered by overpopulation or resource depletion), history is studded with these black swan non-events.