Portugal

Margaret Thatcher might have been the perfect housewife that got Britain off to a good start or at least that’s what she would have liked us all to have believed when she was in power. The prefect Grantham housewife, so simple: never spend more than you earn, the defender of good management of budgetary finances. But that was all part of the ruse, wasn’t it?

A reversal will come. The odds on this are 100%. You cannot have every asset class on the planet in a bubble forever. The world does not operate this way. The disconnect between economic fundamentals and the markets continues but the odds on it continuing forever is Zero. The creation of all of this money also has another effect. It causes stupidity. It is quite true that we do not know the "what and the when" of it but a prediction that lacks any "If" will prove to be true. There is no longer an "If." The disparity now is just too great. Play the game as long as you can. It has gone on to date right in line with the increase in the money and in the lies. Play the game. However if you are smart you will have an exit strategy and a defense lined up well in advance before the man with the scythe shows up and takes a swipe at you. We stand on a precipice. There is an avalanche of lies, distortions and currency that has been created and is tumbling all around us. It cannot be dodged forever.

It will come as no surprise to ZH readers that the topic of youth unemployment is critical in Europe but as Der Speigel reports, while the German government's efforts remain largely symbolic, Southern European leaders pander to older voters by defending the status quo and are failing in their fight against the potential for social unrest. One graduate noted, "None of my friends believes that we have a future or will be able to live a normal life," as a lost generation is taking shape in Europe. And European governments seem clueless; instead of launching effective education and training programs to prepare Southern European youth for a professional life after the crisis, the Continent's political elites preferred to wage old ideological battles. In this way, Europe wasted valuable time, at least until governments were shaken early this month by news of a very worrisome record: Unemployment among 15- to 24-year-olds has climbed above 60 percent in Greece. Suddenly Europe is scrambling to address the problem making it an 'obseesion'. There are strong words coming out of Europe's capitals today, but they have not been followed by any action to date.

While we are told day after day that not only is Europe 'fixed' but that Cyprus was not a template, it seems the bankers in the peripheral nations are a little less confident (never mind their record amount of reach-around-based domestic bond buying). European "leaders need to moderate their language," warned one bank CEO, and as the FT reports, another feared a "Cyprus virus," adding that "you can't keep playing with fire." The comments come in the wake of the depositor haircuts in Cyprus as a rush of clients wanted to move cash from deposit accounts to vaults: "most clients in Portugal don't trust deposit guarantees... they choose vaults instead." Fixed indeed... and why would these bankers worry about the 'precedent' if it were not a 'template' for future bail-ins?

"Preservation of Capital," has reached epic seriousness in a world with interest rates at unsustainable lows and underlying economic fundamentals that cannot support today's yields. The irrational game goes on based upon one thing and one thing only which is the creation of capital by all of the world's central banks. The money must go somewhere and so it does but the disconnect between the equity markets and bond yields from the real world is frightening. Nowhere on the planet is it scarier than in Europe.

With unemployment rates running at all-time record highs across the peripheral European nations and the rise of nationalist (some might say extremist) parties, it remains somewhat surprising that there has not been greater social unrest (yet). The people of Europe are caught in a hinterland of knowing what is best in the long-run but fearing the short-term band-aid ripping pain of exiting the political farce known as the European Union. But some have found a way... There is another way to 'exit' on personal terms from the austerity and pain induced by a centrally planned overlord. Immigration to Germany from Italy, Spain, Greece, and Portugal has 'never' been higher... leaving us wondering - at what point does the free and open exchange of everything in the union gets its share of 'protectionism' from an over-stuffed Germany freezing the import of labor? So it seems that not only is the money (deposits) finding a new home but the people too are moving to where the money is..

Europe's non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain's bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year). With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut 'non-template' may indeed become the key template.

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.

When is the economic collapse going to happen?  Just open up your eyes and take a look around the globe.  The next wave of the economic collapse may not have reached Wall Street yet, but it is already deeply affecting billions of lives all over the planet.  Much of Europe has already descended into a deep economic depression, very disturbing economic data is coming out of the second and third largest economies on the globe (China and Japan), and in most of the world economic inequality is growing even though 80 percent of the global population already lives on less than $10 a day.  Just because the Dow has been setting brand new all-time records lately does not mean that everything is okay.  Remember, a bubble is always the biggest right before it bursts.  The next major wave of the economic collapse is already sweeping across Europe and Asia and it is going to devastate the United States as well.

In some surprising news, and quite contrary to what its record low bond yields would indicate (for a key reason for said artificial demand for French, see The Greater Fool) today the Pew Research center released results from a poll of 7646 EU citizens in March 2013, showing that the new sick man of Europe is Europe itself, or rather the great unification project itself: the European Union. Perhaps most surprisingly, nowehere is this more evident than in France itself - the country where the idea of a European Union germinated in the first place - and where the decline in support for the EU has been the greatest in the past year, with just 22% responding affirmatively to the question whether 'economic integration strenghtened the economy', down from 36% a year ago, and the biggest drop of all surveyed EU member states.

There is no plan, no scheme that the Fed can concoct for exiting their support for the U.S. economy that will not negatively affect both the bond and equity markets and have a positive effect on the Dollar. The markets have relied upon the manna from Heaven to rise and virtually nothing else. The American economy cannot justify either the absolute levels of yield or the compression that has taken place or the lofty levels of our stock markets. All of this has had a single driver which is the Fed. The Fed has spent four years providing gifts for those that borrow and for the banks while penalizing those who save and invest. What one group gained the other lost. Now the Fed faces the dilemma of its own making; how to gradually exit their current strategy without setting the financial markets on their rear ends.

The main story overnight is without doubt the dramatic plunge in the Yen, which following the breach and trigger of USDJPY 100 stops has been a straight diagonal line to the upper right (or lower for the Yen across all currency crosses) and at last check was approaching 101.50, in turn sending the USD higher in virtually all jurisdictions. However it is not so much the Yen weakness that was surprising - a nation hell bent on doubling its monetary base in two years will do that - but the accelerating response in neighboring countries all of which are seeing Japan as the biggest economic threat suddenly and all are scrambling to respond. Sure enough, midway through the evening session, Sri Lanka cut its reverse repo and repurchase rate to 9% and 7% respectively, promptly followed by Vietnam cutting its own refinancing rate from 8% to 7%, then moving to Thailand where the finance chief Kittiratt called for a rate cut exceeding 25 bps, and more jawboning from South Korea suggesting even more rate cuts from the export-driven country are set to come as it loses trade competitiveness to Japan. Asian financial crisis 2.0 any minute now?

Currently, central banks around the world are walking in lock step down a dangerous path of money creation. Led by the Federal Reserve and the Bank of Japan, economic policy is driven by the idea that printed money can be the true basis of growth. The result is an unprecedented global orgy of currency creation. The only holdout to this open ended commitment has been the hard money bias of the German-dominated European Central Bank (ECB). However, growing political pressure from around the world, and growing dissatisfaction among domestic voters have shaken, and perhaps cracked, the German resolve. While German capitulations in the past have been welcome occurrences, in this instance the world would be better served if the Germans could stick to their guns. However, it seems presciently, that the ECB is looking for ways around Germany's oppostion to outright monetization by securitizing SME loans and buying ABS directly on to their own balance sheet.

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The overnight economic data dump started in China, where both exports and imports rose more than expected, at 14.7% and 16.8% respectively, on expectations of a 9.2% and 13% rise. The result was a trade surplus of $18.16 billion versus expectations of $16.15 billion. The only problem with the data is that as always, but especially in the past few months, it continued to be completely made up as SocGen analysts, and others, pointed out. The good data continued into the European trading session, where moments ago German Industrial Production rose 1.2% despite expectations of a -0.1% drop, up from 0.6% and the best print since March 2012. The followed yesterday's better than expected factory orders data, which also came at the best level since October. Whether this data too was made up, remains unknown, but it is clear that Germany will do everything it can to telegraph its economic contraction is not accelerating. It also means that any concerns of an imminent ECB rate cut, or a negative deposit rate, are likely overblown for the time being, as reflected in the kneejerk jump in the EURUSD higher.