9th November 2011: Italy is a PIIG the Python Can’t Swallow

Quote of the Day:

Come senators, congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
There’s a battle outside
And it is ragin’
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’.

Bob Dylan – Poet

Macro Overview

Read My Lips: Greece is not a political black swan

• If Italy falls, France Falls, Europe falls, China falls … the whole World falls.
• Today I wrote two pieces, in my macro blog I wrote a piece entitled: Read my lips: Greece is not a political “black swan”. You can read this yourself so I won’t bore you any more than I need to but here are the headlines:

1. Italy is a PIIG the Python Can’t Swallow
2. Read my lips: Greece is not a political “black swan”
3. The Leaning Tower of Euro
4. Excerpts from Pettis’ piece
5. Excerpts from STRATFOR
6. Europe’s Sub Prime Crisis

China is not immune and, just like last time, will not decouple

• That’s an understatement. There is a level of complacency among investors in Asia that Europe is far away physically and economically not to hinder them. Also China’s bilateral relationship was with America, not Europe. What folly! China is about as insulated from lashing tentacles of a European crisis as The Black Pearl was from the jaws of the Kraken.

• Investors in Asia who think they sail on a calm tide favoritism will succumb to the same fate as dear Captn Jack Sparrow.
• In the macro piece Read my lips: Greece is not a political “black swan” I drew attention to how two very different commentaries seemed to agree on one thing: blame for the breakdown of the Eurozone could not be put squarely at the feet of peripheral nations. But that was not the only point STRATFOR made:

SRATFOR – Europe, the International System and a Generational Shift [emphasis mine]

Third, China— which has linked its economic, political and military future to a global system it does not control — had to face a readjustment. This has yet to happen, but likely will be triggered by the fourth event: Europe’s institutions — which were created to function under the rules of the previous epoch — must be rationalized with a world in which the Americans no longer are suppressing European nationalism.

. . .       . . .       . . .

Collectively, Europe’s economy was slightly larger than the U.S. economy. If mobilized, that inherent power made Europe a match for the United States. In the foreign policy arena, the Europeans prided themselves on a different approach to international affairs than the Americans used. This was based on a concept known as “soft power” — which relied on political and economic, as opposed to military, tools — an analog to the manner in which it saw itself managing the European Union. And Europe was a major consumer of goods, particularly Chinese goods. (It imported more of the latter than the United States did.) Taken together, Europe’s strengths and successes would allow it to redefine the international system — and the assumption for the past generation was that it was successful.

 

One more thing to keep us awake at night

• This was one of the factors in a piece I published years ago called 10 Things That Keep Me Awake At Night. I’ll cut to the chase, just one word: Iran. To make matters worse, Russia is wading in on the debate… and it appears to be sympathetic towards Iran. But Israel’s recent threats may be more to do with the closing window that is a US exit from Iraq (see excerpt from that piece below)…

Only to say that there will be little impact/change on stance irrespective of the US election. It does not matter who wins the election there will be no troop withdrawal from Afghanistan. It does not matter who wins the election there will be troop withdrawal from Iraq. Tension between Israeland Iran pose a probabilistically low (but never-the-less significant enough not to be ignored) threat of a military action and, in this case, there are implications from the election result. Israelrecently stated that is has never felt so threatened (by developments in Iran) in 60 years – given the history of threats against Israelin the past 60 years this is not to be taken lightly. There is only one direct, safe route for an Israeli air-strike on Iran and that is to fly directly over Iraq– such an action would receive more support from a McCain Administration than either a Clinton or Obama Administration.

Market Overview

• It’s all about Italy… well it isn’t actually. But that’s the front page. Chart of the Day shows how the credit curve for Italy is now inverted (as well as being front loaded with debt and now yielding 7%)!
• The European CDS market is not the only example of curve-flattening – check out also the British yield curve steepness – that’s vicious.
• Asian investors better be prepared not just from general contagion in the morning but also the banana-skin of HSBC (still suffering from US debt write-downs)
• GM got nuked.

Chart of the Day

Italian CDS Steepness 2s-10s (Source: Bloomberg)

UK Yield Curve Steepness (Source: Bloomberg)

HSBC Slips on the same banana skin – US housing debt exposure (Source: Bloomberg)

Events

Macro Events:

Update:

• Chinese CPI – in-line as expected

Alerts:

• Japan Machine Orders
  
• French CPI
• German CPI
• Swedish CPI
• UK BoE Rates
• US Jobs

 

Corporate Events:

Results:

• Blackstone [BX], Deutsche Telekom [DTE GR], KBC [KBC BB], RWE [ RWE GR], Siemens [SIE GR], Tata Steel [TATA IN]

Dividends:

• Nothing Significant

 

Reading, Links:

Changin’ Times in Europe:

• Changin’ Times #1
• Changin’ Times #2
• Changin’ Times #3
• Changin’ Times #4