Ireland

While we are told day-after-day just how 'fixed' Europe is; just how 'past the crisis' they are; and just how close to banking union; the reality is the nations of Europe are as disparate as they have ever been. We discussed the dismal unemployment picture last week, but one glance at the chart below will highlight the growing divergence between the haves and have-nots in Europe. As Bloomberg's Niraj Shah notes, unemployment rates are diverging at record levels in the euro area.

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Over three months ago in "South Korea Starts Currency War Rumblings; Has Japan In Its Sights" we showed that the one nation with the biggest sensitivity to Japan's currency-destructive and export-promoting Abenomics policy is its close neighbor, South Korea. With nearly 60% of SK's entire GDP deriving from net exports, every percent drop in its trade balance result in a more than 0.5% hit to GDP: more than any nation in the world. And since South Korea and Japan compete for the same export end markets, there would be no bigger loser in a zero trade sum world than Seoul. However now that Abenomics is in its sixth month, and South Korea's max export pain threshold has been reached, the country no longer will stay silent. As the FT reports, "South Korea has warned that G8 leaders need to do more to tackle the “unintended consequences” of Japan’s monetary easing when they gather for a summit later this month amid mounting concerns about the knock-on effects of a weaker yen. In an interview, Hyun Oh-seok, the South Korean finance minister and deputy prime minister, said that international co-ordinated action was needed to mitigate the impact of so-called “Abenomics” on currency markets."

While the world is awash in central banker created Potemkin village analogies, Ireland has gone one step further. In a little over two weeks, the self-important leaders of the Group of Eight (G8) will be meeting at the Lough Erne Golf Resort in Northern Ireland. There’s a slight problem, however. Ireland’s economy is in shambles and many of the neighboring towns are in horrible shape. So what’s the solution? Simple, just pretend nothing’s wrong by remodeling storefronts long since abandoned just as you would in a Hollywood set. What about those pesky abandoned buildings and other eyesores of blight and destitution? No problem, just place colorful murals in front of them. It makes sense. After all, the response by the G8 to the financial collapse since the beginning has been to cover it up and pretend nothing happened.

Ireland has seen its youth unemployment rate drop for 10 of the last 11 months and has dropped to a 'mere' 26.6% - the lowest since July 2010 - in what is truly the only possible silver lining in today's absolutely dreadful data release. All four of the other PIIGS nations now have broken the dismal Maginot Line of 40% youth unemployment with Italy finally joining the club (Italy 40.5%, Portugal 42.5%, Spain 58.2%, and Greece 62.5%). What is even more concerning is that not only are these rates extremely high but they are accelerating with all four of these dark nations seeing their rates rising faster than in recent months (this was the 2nd fastest rise in Greek youth unemployment ever). Overall, Europe's youth unemployment rate continues to march higher (to 24.4%) having not fallen for 24 months, but it is Spain that is the 'winner' with 41 consecutive months without a drop in youth unemployment. With welfare benefits running dry, and Sweden and Switzerland already running hot, we fear this summer may bring the much-feared unrest so many have been concerned about.

If the scramble to hit 100% unemployment was a race, then Europe is about to leap the rest of the world.

Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.

Jim Rogers was recently interviewed by GoldMoney and had plenty to say (as usual):

On Bernanke: "He doesn’t want to be around for the consequences of what he’s doing."

 

On Fiat: "Paper money doesn’t have a very glorious history, but again, nothing imposed by the government has a very long and glorious history."

 

On Europe's Crisis: "You can postpone it all you want, but the problems just mount."

 

On Capitalism: "You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work."

These are not easy times for the global bond market. We’re looking at US Treasuries market (more below), and reckon this morning’s 10-yr spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further. It’s only partly based on the better economic outlook and fears of the QE Taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”. Forget the stories Japan banks were buyers at the wides.. that’s wishful thinking from Treasury holders long and wrong on the US bond market. Unfortunately, each passing day sees the BoJ's credibility chipped away.

Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

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• Apple’s Tax Magic Leaves Irish Bondholders Unmoved (BBG)
• Asia Goes on a Debt Binge as Much of World Sobers Up (WSJ)
• All hail Gazpromia: UK gas supply six hours from running out in March (FT)
• Spain’s banks face €10bn more provisions (FT) ... and then more, and more, and more
• Truck strike may have caused Washington state bridge collapse, officials says (Reuters)
• P&G Says A.G. Lafley Rejoins as Chairman, CEO (BBG)
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Money doesn’t stop at borders or oceans; accounting does.

The UK Leader of the Opposition, Ed Miliband plans on running head long into Eric Schmidt today during a conference in which he will clearly point out that he doesn’t agree with Google Inc.’s lack of fair play. It’s just not cricket, Eric!

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.

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• Li Keqiang pledges China boost to India trade (FT)
• Europe's Recession Sparks Grass-Roots Political Push (WSJ)
• Obama and Xi to meet in effort to calm growing US-China rivalry (FT)
• Berlin plans to streamline EU but avoid wholesale treaty change (FT)
• France must reform or face punitive measures - EU's Oettinger (Reuters)