Sovereign Debt

2013 was a good year for Goldman Sachs investments in Emerging Markets, most notably Venezuelan bonds (as they bet on socialism and won). A year later and Goldman's EM debt portfolio is still loaded with Venezuelan bonds... and the arrears are mounting. As Bloomberg reports, at a time when Venezuela’s record $25 billion in arrears to importers has its citizens waiting hours in line to buy drinking water and crossing borders in search of medicine, President Nicolas Maduro is using the nation’s dwindling supply of dollars to enrich bondholders.

Bail-ins or deposit confiscation can now be used in the UK, EU, U.S. and G20 countries. Investors and savers best get prepared for the coming bail-in era. After Cyprus, which country will be the next to suffer bail-ins?

Draghi & Co have embarked on the futile task of forcing more debt onto balance sheets that are saturated and more inflation into an economy that is shrinking in real terms. All of this silly kidstuff, in fact, is the work of Keynesian desperados in Frankfurt who embrace two propositions that are unequivocally and provably wrong. Namely, that the Euro area economy is floundering due to a tiny decline in non-financial credit and that “low-flation” is the great roadblock that prevents the wheels of credit and commerce from turning at a more satisfactory pace. In the end, however, perhaps the Keynesians in Frankfurt will do something useful. That is, elicit another crisis that will finally put the euro out of its misery.

This past week has been all about "anticipation." The markets made little headway during the first half of the week as traders waited in an almost breathless anticipation of the announcement from the European Central Bank. When the news was finally received, investors were initially disappointed but David Tepper stepped into the fray with his ever bullish optimism. The more we read, the clearer it becomes that the world's Central Banks have become caught in a "liquidity trap" which is entirely based on circular logic... Central banks must create asset bubbles in the hopes of stimulating economic activity. When the bubble eventually pops the economic activity evaporates which requires the creation of another asset bubble.

Since Mario Draghi is merely a frontman for (and former employee of) Goldman Sachs in yet another central bank, and since his policy mandate is implemented only after extensive drafting and pre-clearance with 200 West, the best "most-mortem" of what happened today comes from the firm that was responsible for today's announcement in the first place: Goldman Sachs itself.

"There is a debt problem in America..." warns Lynette Khalfani-Coz (askthemoneycoach.com) in this brief CNBC interview, expanding in the huge debt loads from mortgaging cars to student debt that Americans soak up every day in ever greater amounts. And then Steve Liesman rolls in "debt is always pointed out as a negative thing, when in fact debt is the great bridge between working hard and playing hard in this country." Then Liesman really hangs himself, "this country has been built on consumer debt," he proudly states (as if it was some badge of honor) adding carefully that "too much of it is negative thing." - well Mr Liesman... one look at the current debt load might suggest that American consumers built that 'bridge to playing-hard' just a little too far. As Khalfani-Cox admirably retorts, "excessive debt levels are simply unsustainable... It is not the job of the consumer to play the role of financial hercules... why should we have to prop up the US economy?"

Today you can’t go 10 minutes without tripping over an investment manager using the phrase “Minsky Moment” as shorthand for some Emperor’s New Clothes event, where all of a sudden we come to our senses and realize that the Emperor is naked, central bankers don’t rule the world, and financial assets have been artificially inflated by monetary policy largesse. Please. That’s not how it works. That’s not how any of this works.

This week's busy calendar starts off with today’s global PMIs and ISMs. On Tuesday, President Obama begins a four day European trip ahead of the G7 meeting which starts on Wednesday. This G7 meeting is replacing the G8 meeting that was originally scheduled in Sochi but was cancelled after Russia’s annexation of Crimea. Tuesday’s data docket is important with Euroarea data releases including inflation and unemployment expected to further cement the ECB’s resolve in easing policy come Thursday. Wednesday features the global services ISMs and PMIs. Other data releases scheduled for that day includes the ADP employment report, which will provide an important preview to Friday’s NFP, and US trade. The Fed releases its Beige Book on Wednesday too and the second estimates of Euroarea GDP will be published on Wednesday as well. Apart from the ECB on Thursday, we also have the BoE policy meeting.

You can smell this one coming a mile away... the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) - the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again - thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. What they are really up to, however, is money-printing and snookering the German sound money camp.

Prof. Ken Rogoff’s book ‘This Time is Different: Eight Centuries of Financial Folly'; is one of the best researched public works on the subject of sovereign debt. And Rogoff’s conclusions (though hotly contested due to an ‘Excel error’) were that, sensibly, governments which accumulate too much debt get into serious trouble. Duh. Not exactly a radical idea. But in an article published yesterday afternoon on the Financial Times website (based on a recently published academic paper), Rogoff did propose a new idea that is radical: ban cash. All of it.

• The Fed can't print trade? World Trade Flows Fall in First Quarter (WSJ)
• PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (BBG)
• ECB's Weidmann - Reviving ABS market not task for central bank (Reuters)
• LOL: Fitch upgrades Greece by a notch to 'B'; outlook stable (Reuters)
• LOL x2: Spain Sovereign Debt Rating Upgraded by S&P (BBG)
• China Will Vet Tech Firms After Threatening U.S. Retaliation (BBG)
• US to claim victory over China in WTO car dispute (BBG)
• Obama urges Democrats to vote in midterms, attacks Republicans (Reuters)
• U.S. Military Pushes for More Disclosure on Drone Strikes (WSJ)

Despite proclamations that markets would open 'normally', Thai SET50 (stock market) futures are indicated to open -4.2% - its biggest drop since January's collapse. Thai CDS are modestly wider (+5 to 130bps) but early Bhat weakness has been rescued back by a mysterious bidder (rumored to be the central bank by several traders). The last 2 times martial law was invoked - in an entirely non-coupy-coup-like manner - general market weakness was less than we  have seen so far. Of course, the army has decided that in the interests of avoiding the "provocation of unrest and triggering fear" it will "ban the broadcast and distribution of news." Nothing like a military-coup, that is not a coup, with total media censorship to encourage capital flows and maintain peace in the nation.

With the world (or mostly the Japanese) front-running Draghi's ever-increasing threat of QE in Europe, Spanish and Italian government bond yields have reached levels commensurate with insanity compared to their risk (event and macro). Lower rates are great news right? They encourage growth... as the cost of borrowing drops across the nation's capital assets and the phoenix rises from the flames. Well - as the following 2 charts show - no! The lower rates are not 'trickling down' to real loans and loan creation continues to contract. So, aside from direct lending to SMEs, what exactly will Draghi's direct monetization of peripheral European bonds do aside from provide the leveraged speculators with their willing buyer to take profits (just as it did the last time he decided the time was right to buy bonds).