Europe’s fiscal and debt crises have dominated the financial news for months, and with good reason: the fate of the European Union and its common currency, the euro, hang in the balance. As the world’s largest trading bloc, Europe holds sway over the global economy: if it sinks into recession or devolves, it will drag the rest of the world with it. As investors, we are not just observers, we are participants in the global economy, and what transpires in Europe will present risks and opportunities for investors around the world. The issue boils down to this: is the European Union and the euro salvageable, or is it doomed for structural reasons? The flaws are now painfully apparent, but not necessarily well-understood. The fear gripping Status Quo analysts and leaders is so strong that even discussing the euro’s demise is taboo, as if even acknowledging the possibility might spark a global loss of faith. As a result, few analysts are willing to acknowledge the fatal weaknesses built into the European Union and its single currency, the euro. In the first part of this series, we’ll examine the structural flaws built into the euro, and in the second part, we’ll consider the investment consequences of its demise.
It’s U.S. politicking season, a European financial crisis blossoms, Chinese domestic turmoil escalates, Japan is lapsing into catatonia, India is returning to torpidity – not an easy time to call on common sense. But nothing is more necessary when examining the roller coaster markets and, even more, the pronunciamiento of talking heads who have burned out their synapses.
If it walks, swims and quacks like a duck, it's probably a duck.
Goldman Calls For QE In Europe: "How Far Can The ECB Go In Using Its Balance Sheet. The Short Answer Is: A Lot Further"Submitted by Tyler Durden on 09/11/2011 11:01 -0500
Even as the eyes of the world are currently frozen in a spot in time from ten years ago, and Wikileaks is making doubly sure of this by releasing the entire record of Metrocall pager (remember those?) intercepts starting at 9:55 am on 9/11/01, the world itself continues onward, and especially those who determine its global policy of "Prevention of Harm to The Status QuoTM" are busier than ever this weekend. Chief among these is and always has been the one financial firm which has infiltrated "sovereign" decision-making more than anyone in history: Goldman Sachs, whose alumnus, incidentally, is about to replace Jean Claude Trichet at the helm of the world's largest and most undercapitalized central bank (yes, a central bank can be undercapitalized - read on). Which is why the following note just released by Goldman's Dirk Schumacher is of particular attention. Mere hours after Goldman economist Sven Jari Stehn said that FOMC "easing at the September meeting is very likely—around 75% according to our model", Goldman is now taking on European monetary policy, and specifically the question of further quantitative easing, across the pond, where printing money has always been a far more touchy subject than in the US, courtesy of the German experience with hyperinflation. As a result, the key line in the Schumacher note is the following: "How Far Can The ECB Go In Using Its Balance Sheet. The Short Answer Is: A Lot Further." To be sure, this is not surprising: after all Zero Hedge first predicted that following the latest market trouncing on Friday, in the aftermath of the ECB's admission of failure on Thursday (who can forget Ze Price Stabeeleetee), see "ECBCTRL+P: The Next Steps In The European Implosion", but we are nothing but a simple blog, which predicts what will happen but certainly does not set policy for a corrupt and failed regime. That's Goldman's job. And what is stunning is the brazenness with which it does it now. To sum up: to Goldman both the Fed and the ECB have to engage asap in yet another episode of bonus-preserving currency debasement, middle class be damned. And, we have very little doubt, they will.
While the move by the SNB to basically link its currency to the dying Euro was shocking and will send shockwaves throughout the global financial systems for months to come, in many ways it was inevitable. The central planners are still in control and they are getting increasingly desperate. Part of their desperation manifests itself in acts to prevent markets from sending out signals to investors and the general population. This is why Central Bankers print money and buy government bonds. This is why the ECB is buying worthless PIIGS debt. This is why the SNB decided to destroy its currency. After all, if they agree to destroy the value of the Franc at the same pace as the Euro then it will become less clear to the currency market just how quickly purchasing power is being destroyed. Of course, you can always tell in the commodities sector. What the Swiss did is unfathomably bullish for commodities, in particular energy, food and precious metals. Every rich person with a Swiss bank account in Swiss Francs will be scrambling to turn that into the one hard currency left: GOLD. That is what the Swiss said to us earlier this week. They told every investor on the planet “we don’t want to have a hard currency.” If you want a hard currency you have once option now. Gold. When people really figure this out it is going to be a mad scramble for physical metal the likes of which no one alive has ever seen.
The embargo has been lifted and here are the headlines, which are eeriely reminiscent of the Jackson Hole speech, courtesy of Bloomberg:
- BERNANKE: POLICY MAKERS SHOULDN'T DISREGARD ECONOMY'S FRAGILITY
- BERNANKE SAYS FED HAS `A RANGE OF TOOLS' FOR MORE STIMULUS
- BERNANKE SAYS SUBSTANTIAL FISCAL TIGHTENING COULD HURT RECOVERY
- BERNANKE SAYS FED PREPARED TO USE TOOLS `AS APPROPRIATE'
- BERNANKE SAYS INFLATION `EXPECTED TO MODERATE' IN COMING Q'S
- BERNANKE SAYS FED SEES `GREATER DOWNSIDE RISKS' TO OUTLOOK
- BERNANKE: POLICY MAKERS SHOULDN'T DISREGARD ECONOMY'S FRAGILITY
- BERNANKE: U.S. FINANCES COULD `SPIRAL OUT OF CONTROL'
While not considered in the same category as the UMichigan or the Conference Board confidence indices, the Bloomberg (formerly ABC) Consumer Comfort index, which is just as familiar with statistical sampling and using phones as the prior two (and does not share their penchant for calling Wall Street execs to break any market downward trend), just found that the week of September 4 saw consumer confidence drop from -49.1 to -49.3, the second lowest in 2011. Worse is that confidence in the state of the economy has now plunged to the lowest since 2009, or basically since the market generational lows, confirming that "confidence" is nothing but a way of saying popular perception of the S&P, pardon Russell 2000. Lastly, and worstly, while the the confidence of of $100K+ earners dropped to -18.2 from -15.1, the confidence, whatever that means, of those earning the least is now at a record low. Luckily, this is certainly not the social group most targeted by Obama in his reelection bid. Oh wait, nevermind.
I've been asked to comment on the work of a few noted deflationists who are calling for a top in commodity prices here. Their argument is pretty clear cut: Because inflation is a function of available money plus credit (their definition), and because credit has fallen, deflation is what comes next. When looking about for things to deflate in price, commodities are an obvious candidate for attention because they have risen so much over the past decade. In this view, three things have to be true: i) Demand for commodities has to fall below supply. After all, as long as demand exceeds supply, prices will typically rise. ii) Money, including credit that would normally be used to buy commodities, has to shrink. That's the definition of deflation that we're analyzing here. iii) People's preference for money has to be greater than their preference for 'things,' with commodities being very obvious 'things.' That is, faith in money has to be there or people will prefer to store their wealth elsewhere. These are all just versions of the old supply/demand argument for commodity prices, except that our consideration also includes the important element of the Austrian economic view of demand for money.
European reformist think tank, Open Europe, which has so far been spot on in its very skeptical assessment of the drunken, meandering rumble that various European authorities have engaged in over the past two years to mask that the EUR is predicated by a failed and discredited model, has released its comprehensive assessment of today's German Constitutional Court ruling. For anyone even remotely close to trading the EUR pairs, or their derivatives: stocks and bonds, this is a must read. In a nutshell: "Giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power. The calls for the whole Bundestag to have a greater say in the dispersion of financial aid are, therefore, likely to continue.... the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term. Controversially, the Court did not give an opinion on the legality of the ECB’s bond purchase programme – despite the potential implications this programme has on price stability and the ECB’s independence. This unsettling question is likely to resurface in future." Expect this court to feature far more prominently in the months to come.
Today's first Fed speech is out, this one by Chicago Fed dove, Chuck Evans who was recently interviewed by Russian speaking, guitar playing, arch-Keynesian Steve Liesman and dropped the first QE3 bomb a week ago, in which he basically says what he said before, namely that "very significant amounts" of added accommodation are needed. In other words: more of the same, and this time it will be different. After all 12 Fed presidents and 1 chairman can't all be insane all the time.
Forget The Twist, Here Comes Operation Torque: Presenting Morgan Stanley's Complete Moral Hazard Profit GuideSubmitted by Tyler Durden on 09/01/2011 10:57 -0500
While we often pick on Morgan Stanley's Jim Caron (the same guy who year after year after year keeps predicting the yield on the 10 year will soar, and not just soar, but soar for all the wrong reasons, such as bull steepening and what not), has just diametrically changed his tune, by bringing us, drumroll please, Operation Torque. To wit: "Policy makers in both the US and Europe get back to work in September, and this month will be rife with deliberations on stimulus and market support policies. In our view, a duration extension to the Fed's SOMA portfolio is an optimal policy tool to engender easing. This can initially be done through extending the duration of reinvestments from MBS and agency holdings but may ultimately culminate in selling shorter-duration USTs in its SOMA portfolio in exchange for buying longer duration assets (‘Operation Torque’, as we at Morgan Stanley have dubbed it)." Why 2 Years? Because as per the August 9 FOMC statement, we know that there will no rate hike for the next 2 Years, and hence no duration risk. Which means that the Fed can sell an infinite amount of paper into a mid-2013 horizon without worrying about demand destruction. And by doing so it will, as we have been predicting since May, expand the duration of its portfolio, in the process pushing investors into risky assets for the third time in as many years. But there is a twist...
As John Hussman correctly highlighted many moons ago, there is just one problem with the whole "cash on the sidelines" statement - it is completely and utterly wrong. Yet while we agree with it in principle, what is also true is that if you don't have cash, you can't buy stuff, period. Or in this case, equities. Yes, one can sell existing holdings to raise cash, but in an environment such as ours, in which underperforming the levered beta tsunami (or, unlike in 2010, the modest wakeboarding wave) means immediate termination, and where margin debt barely moved off its all time highs even as the general market (and especially fixed income) crashed in a repeat of late 2008, it seems nobody is willing to sell anything, come hell, high water or pink slip. Which is why, semantics aside, the fact that the mutual fund space just saw its total Liquid Assets drop to a new all time record low of 3.3% (down from 3.4%), or about $150 billion on $4.54 trillion in stock assets, is not good, no matter how one defines cash or sidelines. And with so little cash to bid up stocks even as they plunged (i.e., contrary to the expectation cash did not go up), the very troubling question arises yet again: just where will the purchasing power come from (and no, it's not retail: retail is long gone).
Belarus Hyperinflation Update: Food Runs Out As Friendly Foreigners Take Advantage Of The "Favorable" Exchange Rate ArbSubmitted by Tyler Durden on 08/31/2011 12:23 -0500
Yesterday we had the first case study of what happens in a hyperinflation, when we noted that the local central bank had just hiked interest rates from 22% to 27%. Net result for the economy? Zero. Today is case study #2 where we learn what happens to an imploding economy which happens to be surrounded by friendly neighbors who just happen to find themselves in a massive arbitrage courtesy of a currency that is losing multiples of its value on a monthly if not daily basis. Per Bloomberg: "Belarus’s supermarkets are running out of meat as Russians take advantage of a currency crisis that a devaluation and the world’s highest borrowing costs have failed to stem. “All meat has gone to Russia,” Alexander Andreyevich, an 82-year-old former tractor-plant worker, said Aug. 25 in Minsk, the capital. “My relatives near the Russian border called me a few days ago and said the shops are empty."..."Private stall owners simply go and buy meat from state- owned vendors and sell it a couple of steps away for a hefty profit,"Deputy Agriculture and Food Minister Vasily Pavlovsky told reporters in Minsk Aug. 24. The government banned individuals in June from taking basic consumer goods such as home appliances, food and gasoline out of the country. Russians, buoyed by the removal of border checkpoints July 1 as part of a customs union, have circumvented the restrictions." Funny- if the locals had preserved their purchasing power by holding their money in gold, they would not find themselves in a position where those who still have a stable fiat exchange rate (for the time being) can literally steal products from under their noses for a paltry sum as sellers scramble to converts products into some currency before it is devalued even more tomorrow.
Marx predicted a crisis of advanced Capitalism based on the rising imbalance of capital and labor in finance-dominated Capitalism. The basic Marxist context is history, not morality, and so the Marxist critique is light on blaming the rich for Capitalism's core ills and heavy on the inevitability of larger historic forces. In other words, what's wrong with advanced Capitalism cannot be fixed by taxing the super-wealthy at the same rate we self-employed pay (40% basic Federal rate), though that would certainly be a fair and just step in the right direction. Advanced Capitalism's ills run much deeper than superficial "class warfare" models in which the "solution" is to redistribute wealth from the top down the pyramid. This redistributive "socialist" flavor of advanced Capitalism has bought time--the crisis of the 1930s was staved off for 70 years--but now redistribution as a saving strategy has reached its limits... That gambit has run out of steam as the labor force is now shrinking for structural reasons. Though the system is eager to put Grandpa to work as a Wal-Mart greeter and Grandma to work as a retail clerk, the total number of jobs is declining, and so older workers are simply displacing younger workers. The gambit of expanding the workforce to keep finance-based Capitalism going has entered the final end-game. Moving the pawns of tax rates and fiscal stimulus around may be distracting, but neither will fix advanced finance-based Capitalism's basic ills.
Full Bernanke Speech: Nothing Now, But Wait For Sept 20 FOMC Meeting Which Has Been Extended To "Allow Fuller Discussion Of Tools"Submitted by Tyler Durden on 08/26/2011 09:01 -0500
Bottom line: nothing now, QE3 now expected to be delivered Sept. 20? or not...
- BERNANKE SAYS FED HAS LIMITED ABILITY TO ENSURE LONG-RUN GROWTH
- BERNANKE DOESN'T SIGNAL NEW STEPS FOR PROMOTING U.S. GROWTH
- BERNANKE SAYS EXTRA DAY TO ALLOW `FULLER DISCUSSION' OF TOOLS
- BERNANKE SAYS FED TO EXTEND SEPT. FOMC MEETING TO TWO DAYS
- BERNANKE SAYS FED HAS `RANGE OF TOOLS' FOR STIMULATING GROWTH
- BERNANKE SAYS `FINANCIAL STRESS' WILL BE A `DRAG' ON RECOVERY