Portugal

Broad European stocks plunged into the red for 2014 today as a rattled Mario Draghi disappointed a hungry-for-more risk market. Bloomberg's BE500 index dropped its most since June 2013 to 2-month lows led by weakness in Italian banks. UK stocks underperformed (-3.6%) but Spain, Italy, and Portugal all tumbled 2-3%. The selling pressure interestingly stayed in stocks as bond spreads rose only modestly and EURUSD roundtripped to only a small rise from pre-ECB. Notably, US equities are cratering as they are so used to the pre-EU-close pump that did not happen.

Can market forces prevail in the Eurozone? With another round of central bank intervention coming four plus years after the start of the Eurozone debt crisis, this is a question worth considering, at a time when the Southern Eurozone members - Italy, Spain, Greece and Portugal, which collectively account for over 30% of the GDP of the early adopters of the Euro as a whole – continue to struggle. This is a complex topic for sure, but a simple economic indicator can be used to help frame the situation.

For the longest time anyone suggesting that Europe's economic collapse was nothing short of a deflationary collapse (which would only be remedied with the kind of a money paradopping response that Japan is currently experiment with and where, for example, prices of TVs are rising at a 10% clip courtesy of the BOJ before prices rise even more) aka a "Japan 2.0" event, was widely mocked by the very serious economist establishment, and every uptick in the EuroSTOXX was heralded by the drama majors posing as financial analysts as the incontrovertible sign the European recovery has finally arrived. Well, they were wrong, and Europe is now facing if not already deep in a triple-dip recession. Which also explains why now it is up to the ECB to do all those failed things that the BOJ did before the Fed convinced it it needs to do even more of those things that failed the first time around, just so the super rich can get even richer in the shortest time possible. So we were a little surprised when none other than Goldman Sachs today diverged with the ranks of the very serious economists and the drama major pundits, and declared that "recent trends in some European economies already qualify as a Japanese-style stagnation."

Oops.

* Where is Venezuela's 366 tonnes of gold?
* Does Venezuela still control and own unencumbered it’s own gold reserves?
* Is any of the country's gold encumbered, loaned or leased to Goldman Sachs or other banks?
 

Moments ago, the Goldmanite in charge of the European Central Bank delivered yet another speech, this time seeking to offset some of the hawkish comments over the weekend from his comrades, all of which suggested that no more easing, or public QE, was coming any time soon. It was, as usual, full of the same lies that have pushed European stocks to highs not seen since Lehman even as Europe's economy is now slumping into a triple-dip recession. Here is a choice selection of his comments, properly annotated.

Maybe what we want and what we need has been confused. Maybe the thin veneer of ebullient hollow markets has been confused for the real activity of real companies. Maybe the theatre of a Wise Man with an Answer has been confused for intellectually honest leadership. Maybe theoretical certainty has been confused for practical humility. The problem with sparking renewed economic growth in the West is that domestic politics in the West do not depend on economic growth. What we have in the US today, and even more so in Europe (ex-Germany), are not the politics of growth but rather the politics of identity.

The present global financial ‘crisis’ began in 2007-8. It is not nearly over. And that simple fact is a problem. Not because of the life-choking misery it inflicts on the lives of millions who had no part in its creation, but because the chances of another crisis beginning before this one ends, is increasing. What ‘tools’ - those famous tools the central bankers are always telling us they have – will our dear leaders use to tackle a new crisis when all those tools are already being used to little or no positive effect on this one?

The idea that the Obama administration has the budget deficit under control is a complete and total lie.  The U.S. national debt has actually grown by more than a trillion dollars in less than 12 months.  We continue to wildly run up debt as if there is no tomorrow, and by doing so we are destroying the future of this nation.

As always, the bottom line is about leverage and bargaining power. It is here that, miraculously, things once again devolve back to, drumroll, oil, and the fact that an independent Scotland would keep 90% of the oil revenues! As we showed several days ago, Scotland's oil may be the single biggest wildcard in the entire Independence movement. It is this oil that as SocGen's Albert Edwards shows earlier this morning, is what gives Scotland all the leverage.

Desperate governments call for desperate measures. Unfortunately for us, citizens often end up paying for the mistakes of their governments. That’s not how it should be but, sometimes, that’s how it is. If and a when a government is no longer able to meet its obligations, capital controls, broad wealth confiscation measures, and other extreme burdens are often considered. Spanish bond yields just fell to their lowest levels in history but does that mean that your money is safe there? Absolutely not. It means that investors are complacent, not that Spain’s political risk has diminished. Portugal is in the same boat. While its borrowing costs continue to fall, its prospects for economic growth and its financial position continue to worsen. If you’ve got assets in Portugal then now would be a good time to contemplate how safe they really are. Unless you like bail-ins, that is.

As reported ealier this morning, here, courtesy of Bloomberg, are the nominees for the next European Commission under the presidency of Jean-Claude "If Serioues Then lie" Juncker, with one from each of the European Union’s 28 countries. Job assignments were announced today by the incoming president, Jean-Claude Juncker of Luxembourg. What do these appointments mean for the European Union? The attached flash analysis from Open Europe should answer most initial questions.

As I have said for at least a year now, until and unless we see a weekly close (ideally consecutive weekly closes) in the VIX index below 10, then I judge risk-on has more to go. We got close in June/early July, but we did not get there. I would expect that, if I am right about the next quarter or two, then VIX should hit this target during this timeframe. At that point, positioning for the big turn and reversal of large chunks of the nominal wealth/asset price gains since early 2009 would take over as my key investment strategy.

While NATO is contemplating its existential purpose in a world where the Cold War has suddenly come back with a vengeance, and the military alliance has found itself woefully unprepared to deal with a Russia which no longer accepts the supremacy of the west (appropriately enough NATO is doing this on a golf course) Russia is also strategizing, only instead of issuing "sharply-worded catchphrases" and hashtags, a Russian general has called for Russia to revamp its military doctrine, last updated in 2010, to clearly identify the U.S. and its NATO allies as Moscow's enemy number one. That in itself is not disturbing: we reported as much yesterday and is merely more rhetorical posturing. Where things, however, get very problematic is that the general demands that Russia spell out the conditions under which the country would launch a preemptive nuclear strike against the 28-member military alliance.

In today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end.  You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines. In fact, at the zero bound the only place that today’s microscopic rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps—-which are now presumably fundable on repo at 10 bps less.

Having promised "whatever it takes" and now doing what many thought was un-possible, Mario Draghi has managed to smash EURUSD back to 14-month lows below 1.30 (without actually buying one bond - just promising) and has sent yields on most European bonds negative to 2Y (and Germany near negative in 4Y).