Germany

What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.

It was a bad week for freedom loving people, but I believe there are enough patriots left in this country to change our course. We are being buried under a blizzard of lies on a daily basis. We have a choice. We can support the existing corrupt crony capitalist establishment (Obama & Romney) or we can declare war on lies, deceit and misinformation by rallying behind the only person who would truly attempt to reverse decades of corruption, sleaze, incompetence, bloat, debt accumulation, and a warped version of free market capitalism – Ron Paul. He is the only public figure willing to level with the American people and tell them the truth. Will we let the concept of truth fade out of the world? The choice is ours. 

“In our age there is no such thing as ‘keeping out of politics.’ All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia. The very concept of objective truth is fading out of the world. Lies will pass into history.” –   George Orwell

The complacency of the markets is amazing given the risks at hand. I don't think I'm that smart, so is it that so many others are that stupid? It can't be, can it?

S&P futures have moved more than 20 points since 3:30.  The first big move was on the back of a story that Greece really will commit to the whatever the EU demands.  The second move was after China re-pledged to invest in Europe.  IG17 is about 1.5 bps tighter than the wides of the day and is unchanged this morning.  In Europe, Main is unchanged while stocks are up about 1% across the board.  Even the 10 year bond which saw yields drop from 1.98% to a low of 1.92% are only back to 1.94%. Why? Sentiment seems overly bullish, overly complacent, and the credit markets are sending a warning sign to stocks about irrational exuberance.

And the hits from the broken gramophone just keep on coming... on coming.... on coming:

SCHAUBLE: SO FAR THE NECESSARY DOCUMENTS FROM GREECE ARE NOT PRESENT

Wait, Germany wants.... Greece to fail? Shocker. But, but, but at least China is still bailing out the world. Right? We are now taking bets on what today's idiotic 3:45pm rumor will be.

• Europe ushers in the recession: Euro-Area Economy Contracts for the First Time Since 2009 (Bloomberg)
• Greek conservative takes bailout pledge to the wire (Reuters)
• China Pledges to Invest in Europe Bailouts (Bloomberg) - as noted last night, the half life of this nonsense has come and gone
• Japan's Central Bank Joins Peers in Opening the Taps (WSJ)
• EU Moves on Greek Debt Swap (EU)
• EU Divisions Threaten Aid For Greece (FT)
• Athens Woman facing sacking threatening suicide (Athens News)
  
• King Says Euro Area Poses Biggest Risk to UK’s Slow Recovery (Bloomberg)
• Sarkozy to Seek Second Term, Banking on Debt Crisis to Boost Bid (Bloomberg)

In case one is wondering what lit a fire under the EURUSD and the ES' ass in the past 30 minutes, why it is the trusty old fall back - China, to which all algos respond every single time like stung donkeys as if on command. Because just as the EURUSD was about to retrace the lows as the realization that the EOD rumor was nothing but an infrared herring, something else had to step in an continue to rumor-based levitation. Sure enough, that something was the Chinese central bank.

• CHINA PBOC'S ZHOU SAYS HE'S CONFIDENT EU WILL SOLVE CRISIS: MNI
• CHINA PBOC'S ZHOU SAYS HE SUPPORTS EU, ECB MEASURES: MNI
• PBOC'S ZHOU: CHINA WILL PARTICIPATE IN RESOLVING EU DEBT CRISIS
• CHINA PBOC GOVERNOR ZHOU SAYS HE HAS CONFIDENCE IN EURO: MNI

And that's all it took to life the ES by over 10 points in minutes.

We noted the particular shift in Europe's sentiment toward Greece back in January, observing that ever since the "favorable" uptake of the LTRO (all of which has since been recycled and parked at the ECB's deposit facility which was at €510 billion as of today), Europe has become convinced that letting Greece fail is not a bad idea (an idea which is so ludicrous, and so Lehman deja vuish it makes us shudder, and which CS' William Porter wrote his entire February 10 piece "The Flaw" on, an excerpt of which can be found here). This culminated with the following observations by UBS. Ever since then everything Europe has done has been in preparation of an "orderly" Greek default (odd - try as we might we fail to find that section in the MiniCode MiniRules) and all the posturing about Greece saving itself has been beyond a farce. Yet as has been beaten to death, the final outcome won't be certain until March 20, at which point the market may finally grasp the new reality. In the meantime, here is Peter Tchir explaining how Germany just broke up with Greece... via a text message.

James Grant, of Grant's Interest Rate Observer makes some thought-provoking statements in his must-listen Bloomberg Radio interview with Tom Keene today. While noting America's exceptionalism (h/t Clint Eastwood?), he perhaps doesn't mean all Americans as he takes the Fed and Treasury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and follow generational cycles raises concerns for him that government intervention is in fact 'prolonging the symptoms' of the recession. In considering Tom Keene's well-thought-out question of why the US does not take advantage of low rates and issue exceptionally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy. "Why not issue bonds backed by gold bullion? Gold is a better money and is grounded in something besides the power of the people that print the dollar bills." The interview goes on to discuss population growth as a more potent 'fix' for housing in the US than QE, that the US is a preferable investment environment (given valuations) than Germany or Japan, the drastic drop in NYSE volumes, and the "leeching out of excitement, hope, and expectation of improvement (particularly for the young)." His compare and contrast of the 1920-21 depression to the current Great Recession (which seems not to end), focused on the fiscal and monetary actions, is an eye opener that its just possible the present-day orthodoxy is wrong. Urging that we maintain our sense of shock at the size of our 'peacetime' deficits, Grant worries that we are in a secular stagnation.

The bearish sentiment following Moody’s overnight catch-up move to S&P failed to have a long-lasting effect on sentiment today. Instead, better than expected German ZEW, together with another well bid Italian debt auction saw equities stage an impressive rally which in turn lifted indices into positive territory. As a result, Bund futures are trading back below the 138.00 level, while peripheral bond yield spread are generally tighter on the session. The risk on sentiment also boosted the energy complex which saw WTI crude futures climb back above 101.00 level (note: Brent March future expiry). Looking elsewhere, EUR/USD advanced above 1.3200 level after triggering stops. Of note, intraday option expiries are seen at 1.3220 and then at 1.3300 (large). USD/JPY is up after the BoJ announced that it will undertake additional monetary easing action and expand its asset-purchase fund by JPY 10trl, while touted buying by Russian names also supported the pair this morning.

There had been some hopes for Greece following the Q3 GDP number which slowed the decline in the country's economy when it dropped by just 5%, following drops of 8% and 7.3% in Q1 and Q2. These may have to be doused following a report that Q4 GDP came in at a disappointing -7%. As Athensnews reports: "The country's economic slump is headed towards a record annual plunge close to 7 percent in 2011, the fourth consecutive year of a deepening recession.  After an official confirmation by the Hellenic Statistical Authority (Elstat) on Tuesday that GDP dropped 7 percent year-on-year in the fourth quarter of 2011, the economy has shrunk by an average of 6.8 percent.  The latest quarterly contraction followed a slight slowdown of the depression in the preceding quarter, with GDP shrinking 5 percent due to the customary seasonal surge of tourist revenues in the summer." The full year drop was a record 6.8%, compared to the expected 6% projected in the 2012 budget. No comment there.

Earlier today we got another indication that Europe's recession will hardly be a "technical" or "transitory" or whatever it is that local spin doctors call it, after the European December Industrial Output declined by 1.1% led by a whopping 2.7% drop by European growth dynamo Germany, which slid by 2.7% compared to November (which in turn was a 0.3% decline). This was worse than the Greek number which saw a 2.4% drop, however starting at zero somewhat limits one's downside. Yet even as the German economic decline accelerated, German ZEW investor expectations, which just like all of America's own consumer "CONfidence" metrics are driven primarily off the stock market, which in turn is a function of investor myopia to focus only on nominal numbers and not purchasing power loss - a fact well known to central bankers everywhere - do not indicate much if anything about the economy, and all about how people view the DAX stock index, which courtesy of the ECB's massive balance sheet expansion, has been going up. And if there has been any light at all in an otherwise dreary European tunnel, it has been the dropping EURUSD, which however has since resumed climbing, and with it making German industrial exports once again problematic. Which in turn brings us back to the primary these of this whole charade: that Germany needs controlled chaos to keep the EURUSD low - the last thing Merkel needs is a fixed Europe. It is surprising how few comprehend this.

• BOJ Adds to Monetary Easing After Contraction (Bloomberg)
• EU to punish Spain for deficits, inaction (Reuters)
• Obama, China's Xi to tread cautiously in White House talks (Reuters)
• Global suicide 2020: We can’t feed 10 billion (MarketWatch)
• Greece rushes to meet lender demands (Reuters)
• Obama Budget Sets Up Election-Year Tax Fight (Reuters)
• Foreign Outcry Over ‘Volcker Rule’ Plans (FT)
• Moody’s Shifts Outlook for UK and France (FT)
• France to Push On With Trading Tax (FT)

You know there is a reason why Europe just came crawling with an advance handout looking for US assistance: Moody's just went apeshit on Europe.

• Austria: outlook on Aaa rating changed to negative
• France: outlook on Aaa rating changed to negative
• Italy: downgraded to A3 from A2, negative outlook
• Malta: downgraded to A3 from A2, negative outlook
• Portugal: downgraded to Ba3 from Ba2, negative outlook
• Slovakia: downgraded to A2 from A1, negative outlook
• Slovenia: downgraded to A2 from A1, negative outlook
• Spain: downgraded to A3 from A1, negative outlook
• United Kingdom: outlook on Aaa rating changed to negative

In other news, we wouldn't want to be the company that insured Moody's Milan offices.

Europe's now painfully transparent policy of demanding that Greece decide to default on its own is becoming so glaringly obvious, we truly fear for the intellectual capacity of everyone who ramps the EURUSD on any incremental "europe is saved" rumor. As a reminder, yesterday we said, in parallel with the Greek irrelevant MoU vote: "The only real questions are i) what the Greek population may do in response to this latest selling out of a population "led" by an unelected banker, which if history is any precedent, the answer is not much, and ii) how Germany will subvert this latest event, and put the bail [sic] back in Greece's court once again." We documented on i) earlier today - a couple of burned down buildings, a few vandalized store fronts, lots of tear gas and that's about it, as people still either don't believe or can't grasp the seriousness of the situation. As for ii) we now get the first indication that not all may be well on Wednesday. From the FT: "European officials rushed to finalise details of a €130bn Greek bail-out on Monday amid signs Germany and its eurozone allies may not be prepared to approve the deal at a finance minsters’ meeting on Wednesday, despite Athens backing new austerity measures." And so the bail [sic] is once again back in Greece's court, where however since the last such occurrence, the parliament has 43 MPs less. Quite soon, the only person left in "charge" of the country will be the ECB apparatchick and unelected banker Lucas Papademos.