Germany

Solyndra was just the appetizer. Earlier today, in what will come as a surprise only to members of the administration, the company which proudly held the rights to the world's largest solar power project, the hilariously named Solar Trust of America ("STA"), filed for bankruptcy. And while one could say that the company's epic collapse is more a function of alternative energy politics in Germany, where its 70% parent Solar Millennium AG filed for bankruptcy last December, what is relevant is that last April STA was the proud recipient of a $2.1 billion conditional loan from the Department of Energy, incidentally the second largest loan ever handed out by the DOE's Stephen Chu. That amount was supposed to fund the expansion of the company's 1000 MW Blythe Solar Power Project in Riverside, California. From the funding press release, "This project construction is expected to create over 1,000 direct jobs in Southern California, 7,500 indirect jobs in related industries throughout the United States, and more than 200 long-term operational jobs at the facility itself. It will play a key role in stimulating the American economy,” said Uwe T. Schmidt, Chairman and CEO of Solar Trust of America and Executive Chairman of project development subsidiary Solar Millennium, LLC." Instead, what Solar Trust will do is create lots of billable hours for bankruptcy attorneys (at $1,000/hour), and a good old equity extraction for the $22 million DIP lender, which just happens to be NextEra Energy Resources, LLC, another "alternative energy" company which last year received a $935 million loan courtesy of the very same (and now $2.1 billion poorer) Department of Energy, which is also a subsidiary of public NextEra Energy (NEE), in the process ultimately resulting in yet another transfer of taxpayer cash to NEE's private shareholders.

Greece was the beta test. Now Germany, whose plan to enact a European fiscal pact in exchange for soaring Bundesbank and economic support of the PIIGS has so far delayed the inevitable, is seeking wider powers to "supervise" European budget compliance with the terms of Merkel and Schauble's fiscal pact. Spiegel writes that "Schäuble plans to propose creating independent panels of experts at both the national and EU level, who would monitor fiscal policies in the member states, the euro zone and the EU as a whole. They would be responsible for sounding a warning if they see governments' budgetary policies straying off course." Those in charge of the panels? Academics - the same people who are in charge of the Federal Reserve (with stunning success we forgot to mention). Because having a Ph.D. is sufficient and necessary to be a central planner. As for the role of the uber-commissioner? He would be able to implement EU regulations (proposed by Germany) "without the other commissioners or the Commission president having the right to object." And there goes sovereignty, without even one shot fired.

In the initial stages of nearly every recorded tyranny, the saucer eyed dumbstruck masses exhibit astonishing and masterful skill when denying reality.  The facts behind their dire circumstances and of their antagonistic government become a source of cynical psychological gameplay rather than a source of legitimate concern.  Their desperate need to maintain their normalcy bias creates a memory and observation vacuum in which all that runs counter to their false assumptions and preconceptions disappears forever.  It is as if they truly cannot see the color of the sky, or the boot on their face.  The concrete world of truth becomes a dream, an illusion that can be heeded or completely ignored depending on one’s mood.  For them, life is a constant struggle of dissociation, where the tangible is NOT welcome… This is the problem that we in the Liberty Movement deal with most often in our writings and films.  Our confrontation with willful ignorance has been epic, even by far reaching historical standards.  The gains in social awareness have been substantial, and yet the obstacles are incredible.  Unprecedented.  As an activist trend, we have an almost obsessive drive to draw back the curtain so that the public has at least the opportunity to see what is on the other side.  Unfortunately, there is another danger that must be taken into account…

In my continuing attempt to debunk what the European Union presents as facts; I turn my attention to France. I have already given you the correct debt to GDP ratios for Spain, Italy, Portugal and Germany which follows the exact principles of what any corporation in America or Europe would be mandated to report or suffer the slings and arrows of being held accountable for Fraud. I include contingent liabilities, derivatives, promises to pay, various guarantees and all of the normal accounting practices to be considered on any balance sheet except the sovereign nations of Europe. In the end, of course, it is your decision but at least we can begin any consideration based upon the facts and not based upon a fictitious account. Again, I divide up the liabilities into two categories, their national obligations and their European obligations; the European Union, the European Central Bank and finally for the other European institutions for which they bear some burden. Then I add it all up, divide by their GDP and we arrive at a factual accounting. Nothing complicated here except sleuthing about to get the data which is no easy task as it is hidden in various nooks and crannies.

European cash equities are seen mixed as the market heads into the US session, with the DAX index the only bourse to trade higher at the midpoint of the European session. European markets were seeing some gains following the open after the weekend release of better than expected Chinese manufacturing data, however the main price action of the day occurred after some European press reports that the Bundesbank had stopped accepting sovereign bonds as collateral from Portugal, Ireland and Greece garnered attention, however the Bundesbank were quick to deny reports and state that it continues to accept all Eurozone sovereign bonds. Following the denial, participants witnessed a slight bounceback, but failed to push most markets into the green.  Data releases from Europe so far have been varied, with outperformance seen in the UK Manufacturing PMI, beating expectations and recording its highest reading since May of 2011. However, the French manufacturing PMI came in below expectations, weighing on the CAC index as the session progresses. A further release from the Eurozone has shown February unemployment coming in alongside expectations recording a slight increase from January to 10.8%.

The week ahead will offer significant inputs to our views. ISM and payrolls will likely set the market tone for the next few weeks. Despite the softer signals from regional surveys, Goldman expects the ISM to improve at the margin relative to last month’s print. In contrast, it expects payrolls to grow by 175k, down from last month’s 227k jobs gain. FOMC minutes will likely show that Fed officials had a discussion on further easing but are unlikely to offer strong hints about the likelihood and possible timing of a third round of Quantitative Easing.

The nine bankster propagated myths about gold (and silver) that everyone needs to know.

It appears that these days a EUR1 trillion hot liquidity injection (such as that from the ECB's LTRO 1+2) will buy you about 3 months of breathing room. Then the ostriches have no choice but to pull their head out of the sand, especially in Europe, where after three months of spread tightening, and hence the belief that "all is fixed", things are starting to turn ugly again: sovereign government spreads are beginning to widen, Europe is demanding more money from the IMF (i.e. America, even as the BRIC countries are starting to consider a world without the USD as a reserve currency, and are now forming their own bank) to boost its firewall, strikes are promptly converting to riots, Italian bank stocks are being halted due to rapid moves lower, the LTRO stigma trade is at 2012 wides, in short everything we grew to know and love in Q3 and Q4 of 2011. Ironically, having papered over the symptoms courtesy of fresh new money, the underlying causes were never addressed, and only got worse as the deteriorating European economic data suggests. What is scary, as UBS shows, is that this is just the delayed carryover from 2011! Just like the US which had the benefit of abnormally warm weather to mask a "bounce" in the economy which was never structural, so Europe had a relatively quiet quarter in terms of newsflow. Things are about to change: read the following for why the eye of the hurricane is about to pass over Europe and why this time around there is $1.3 trillion less in firepower to delay the onset of reality.

The real story of Germany, to be blunt, is that it is a parasite economy. Its domestic demand lags. It has a labor force with different values than most. It will live with low wage increases and low inflation. It has lured other EMU members into a currency bloc and let them run such persistently higher rates of inflation (with no criticism of it!) that Germany now OWNS any domestic demand that other EMU countries can generate. Germany is like the vampire squid economy of Europe. Now it’s kind of caught in its own huge blinding squirt of ink, since its banks have lent to these other EMU countries to finance their excessive consumption and Germany is entangled. But on the real-economy side of things, the German economy is eating their lunch, however, meager.

A core piece of last week's European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European "firewall" in the form of a combined EFSF and ESM rescue mechanisms, to bring the total "firepower" to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB's agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the 'firewall" does not represent new money, nor is a "firewall" to begin with - it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that "Even a 1-Trillion Euro Firewall wouldn't be enough." And they are correct, because the size of the firewall is completely irrelevant, as explained later. All the "firewall" does is shift even more backstop responsibility on the only true AAA-country left in the Eurozone, Germany. However, the main cause of problems in Europe - a massive debt overhang which can at best be rolled over but never paid down due to the increasingly lower cash flow generation of Europe's (and America's) assets, still remains, and will do so until the debt is finally written down. However, it can't because one bank's liability is another bank's asset. And so we go back to square one, which is that the system is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damning conclusion is finally being understood by most.

The last hour has spewed forth more disingenuous clap-trap from European finance ministers. From 'sufficiency of the firewall' to the 'absurdity of Spain needing a bailout', it beggars belief that these humans can look at themselves in the mirror every morning (as they feel the 'need' to lie' - or are simply ignorant of the reality). At some point in the near future there will be about €40 billion of money sitting in the ESM and a bunch of promises from countries failing to live up to existing debt obligations, and that is the big firewall? The correlation between who is providing the guarantees and who will need them cannot be ignored. This new €500 billion number doesn’t exist, it’s not just meaningless, it’s non-existent if Italy or Spain needs money. People can take away whatever they want, but unlike LTRO which had real injections of liquidity, this is just like the July plans from last year and the November “grand” plans. It sounds great, especially when too many people are willing to blindly follow what the politicians want them to, but it doesn’t work in practice.

Back in early February, the ECB's Margio Draghi told a naive world when discussing the implication of taking LTRO bailout aid, that “There is no stigma whatsoever on these facilities." We accused him of lying. Additionally, we also suggested to put one's money where Draghi's lies are, and to go long non-LTRO banks, while shorting LTRO recipients. In two short months the spread on that trade has doubled (see below), which intuitively is not surprising: after all, as a former Goldmanite (and according to some - current), Draghi is merely treating Europe's taxpayers like the muppets they are. As such, fading anything he says should come as naturally as Stolpering each and every FX trade. Yet what that little incident shows is that despite all their attempts otherwise, the central planners can not contain every single natural consequences of their artificial and destructive actions. Today, we see learn that the same Stigma we warned about, and that Draghi said does not exist, is starting to spread away from just the bailed out banks (becuase we now know that the LTRO was merely a QE-like bailout of several insolvent Italian and Spanish banks), and to sovereigns. From Bloomberg: "Germany’s Bundesbank is the first of the 17 euro-area central banks to refuse to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund, Frankfurter Allgemeine Zeitung reported." And where Buba goes, everyone else is soon to follow. And what happens then? Since it is inevitable that Spain and Italy will be next on the bailout wagon, what happens when over $2 trillion in bonds suddenly become ineligible for cash collateral from the only solvent central bank in the world (aside for that modest, little TARGET2 issue of course). Will it force the ECB to be ever more lenient with collateral, and how long until the plebs finally realize that the ECB has been doing nothing but outright printing in the past 5 months? What happens to inflationary expectations then?

Our feeling is that Germany is establishing a "Plan B" in place in case it needs to leave the Euro at some point. The catalyst(s) that might provoke this are the upcoming French, Irish, and Greek elections, which could see a resurgence in leftist, anti-austerity measures in these countries. Moreover, inflation is kicking up in Germany which will exacerbate tensions between it and the ECB.

The last month has seen a considerable amount of the post-LTRO gains in Italian and Spanish Sovereign and Financial credit markets (and stocks for the latter) given back. The stigma priced into LTRO-encumbered banks has also surged to post LTRO record wides - more than double its best levels now. This is hardly surprising - while the LTRO was nothing but a thinly-veiled QE printfest, it is the action that was taken with that newly printed money that has created dramatially more contagion risk and sovereign-financial dependence as an unintended consequence. The collosal (relative and absolute) size of the reach-around Sarkozy carry-trade buying in local sovereign debt for Italy and even more so Spain is highlighted dramatically in these 3 charts for BNP, most notably the increase in banks' holdings of sovereign debt compared to their share of Eurozone sovereign debt - i.e. the banks in Italy, and more so Spain, are hugely more exposed to their sovereign's performance and with Spain's massive budget cuts - a vicious cycle of austerity to growth-compression to credit-contraction to Greece (firewall or not) is leaking into their bond markets, even with an active ECB doing SMP although inflation-constrained from LTRO3 perhaps.

European markets got off to a bad start following early reports that the Greek PM has not ruled out a further aid package for the country, however European cash equities are now trading higher as US participants come to market. Markets have been reacting to the announcement from EU’s Juncker that the Eurogroup has agreed upon Eurozone bailout funds of EUR 800bln. Elsewhere in the session, FPC member Clark commented that the FPC should not aim to stimulate credit growth in the UK, adding that direct intervention in the mortgage market is too politically volatile, but may be considered in the coming years. Following the reports, GBP/USD spiked lower around 15 pips, however it remains in positive territory, moving above the 1.6000 level in recent trade. In terms of data, the Eurozone CPI estimate for March came in just above expectations at 2.6%, 0.1% above the 2.5% consensus. The market reaction to this data, however, was relatively muted as participants await Eurogroup commentary. Looking ahead in the session, participants await commentary on the Spanish budget, US Personal Spending and Canadian GDP.