Mr Bernanke, if you don’t mind, would you tell me whether or not you do your own shopping at the Grocery store?
Senator Ron Paul
Macro Overview
Ron Paul Goes To Town On Bernanke
After my last few commentaries, right on cue… here’s Ron Paul on the debasement of fiat currencies right in the face of Ben Bernanke during today’s testimony before the Committee on Financial Services. This does not come as a surprise to anyone, Ron Paul has long been a thorn in Bernanke’s side. Perhaps the only surprising thing was that Barney Frank (a Democrat) praised him. See this article in Forbes.
For the record I don’t agree with everything Ron Paul says and I’m not a Gold bug. But I do find many things Ron Paul says interesting, if not entertaining.
I’m going to keep this short and sweet – here is Sen Ron Paul (running for President!) ploughing into Ben Bernanke. My favorite bit is when he asks Bernanke if he does his own shopping – heh heh!
Market Overview
LTRO #2 Results Fails To Excite The Market
Was the half a Trillion Euro take up on LTRO #2 a good thing or a bad thing for the economy. I’ll be honest, I don’t know. Nobody knows. We’ve all been bamboozled by so many creative measures and screwed up by so many coercive political tactics that I’m not even sure what reality is any more. I think we’ll just call it “policy fatigue”… I’ve had enough – haven’t you?
While all this was going on a little something caught my eye. Did you see the Greek CDS levels? In fact just the steepness of the CDS 2s-10s is not at … wait for it… -21,000 basis points.
Chart of the Day –Greece2 yr CDS and 2s-10s CDS steepness.
A uniting or cementing force or influence by which a union of any kind is maintained.
Oxford English Dictionary – definition of the noun “bond”.
Macro Overview
Capital Structure Explained
Equity holders demand higher returns for their investment than bond holders. The reason is intuitive and simple: equity holders are subordinated to bond holders. Meaning; when a company goes bankrupt the assets are divvied up between the investors, but the bondholders are paid out first – before the equity holders even see a dime. This is why stocks tend to go to zero pretty quickly when a bankruptcy is imminent!
Even within the bond markets there are tiers of capital structure. For example, senior bond holders rank higher than subordinated bond holders. Now, because subordinated bond holders take higher risk, they demand higher returns. That is, their credit spreads are wider, which is the same as saying that the bonds trade lower than their senior equivalents. I apologize if I insult your intelligence, dear reader, but there are people even at the upper echelons of finance who appear to think that this simple relationship can be glossed over. Where am I going with this?
Let’s start at the beginning. When we read the dictionary definition for the noun “bond” we see some remarkably strong language in addition to the succinct definition I wrote above. Words like “pledge”, ”obligation”, “duty”, “covenant”, “an agreement or engage binding on him who makes it”. In finance, a bond is a clear obligation a borrower has to a lender, cemented in a contractual agreement (notice I’m simply using the same words the Oxford English Dictionary uses).
Not so in Europe apparently, well, not any more anyway. If you buy this “bond”, this contractual obligation between a European sovereign state borrower, as an investor, the conventional rules of risk and return do not apply. The Feds in Europe dictate that they reserve the right to change the terms of that bond retrospectively. Remember, this is the same institutional framework which Europeans rely on to preserve the value of their fiat currency. A currency which, unlike Gold, Oil or Silver has intrinsic worth of ZERO, its worth is determined only by the credibility of the promises upon which it is founded.
Capital Structure Arbitrage – ECB style
But I digress; we’ll come back to the credibility implications another day… back to European sovereign “bonds”. The ECB has subordinated all “bondholders” by entering into a debt swap where the central bank exchanges old “bad bonds” for new “good bonds”. The good bonds are designed so as not to be susceptible to any collective action clause (CAC) on Greek debt. Nobody else is allowed this privilege. But this naturally means that all the other holders of the “bonds” have suddenly become structurally subordinated to the ECB and are powerless to even dispute this.
This throws a massive spanner into the works. Previously “bond” holders have had the comfort of a pretty simple risk-return dynamic, but now there are a multitude of qualitative factors to consider – and bond holders generally do not like unquantifiable, qualitative factors.
How much of an issue does the ECB hold or intend to hold in the future in any European sovereign – not just Greece?
Where is the limit beyond which the ECB will retroactively subordinate ordinary “bond” holders of any given debt without warning?
And, as ZeroHedge cheekily imply: why stop act CACs? Why not retrospectively change other terms, like the coupon, or maturity, or add any other clause to the so-called “bonds” according to who holds them?
Why not make pension funds subordinate to municipalities, and hedge funds subordinated to pension funds?
The European CDO Market
There are political meddlers crawling all over the European markets infecting the zone. Like putrid, disease-ridden vermin, they leave only the pungent discharge political recklessness over anything their slimy manipulative paws finger. Only Friday I commented on the politicization of ISDA terminology:
Note, if politicians throw enough real and political capital and succeed cheating CDS holders out of a default trigger, then there is a good chance the credibility of the entire credit insurance market inEuropewill suffer. Would you invest in European credit risk, knowing that one of your main investment exits was now effectively a rigged market? Perhaps you would, but you’d be a fool not to demand a higher premium for this additional risk. Borrowing costs in Europe could surge.
It is impossible to calculate just how much wealth has been thrown at this imbecilic objective and indeed how much will be lost if indeed the EU-Feds succeed in destroying the credibility of the market place in credit insurance. But I’d rather that wealth was in my pocket and I’d rather the Merkozy meddlers and political peddlers kept their dirty fingers out of the specialized nuances of the credit derivative markets.
The ECB “is exempting themselves from collective-action clauses, and not giving any other bondholder the same rights,” Grant argues. That could complicate Greece’s current negotiations with bondholders, and also means that a potential Portuguese, Irish or Italian debt restructuring could yield similar results.
The ultimate euro-bear said he spoke with two “of the biggest names in the bond world” this morning, which he declined to name. Sufficeth to say, neither of them were happy with the ECB’s Greek debt exchange. With a push underway in Europe to curtail the influence of ratings agencies, Grant added that the ECB’s swap “is a real shot across the bow. They’ve abrogated the rule of law and replaced it with the rule of politics.”
Whether it likes it or not, with the debt swap deal the ECB is setting a precedent of making the rules of the “bond” market up as it goes along. In this respect the ECB is playing with fire – a potentially huge fire.
You will notice I facetiously put the word “bond” in quotation marks because, of course, we do not have a European bond market any more – certainly not in peripheral sovereign debt.
What we now have in Europe is a retrospectively mutated Sovereign CDO market. A CDO market where the tranches are determined not by the construct of the instrument, but by the character of the holders. Welcome to European politics dear bond investors!
The Senior tranche is of course the ECB holdings
The Mezzanine tranche is the bank holdings (as they are subordinated to the ECB but also simultaneously supported by the ECB – e.g. LTRO)
The Equity tranche is subordinated to everyone. It is the bottom of the cesspit in terms of capital arbitrage. Who holds this? Why the private investors, of course.
European Sovereign Bonds have mutated into CDOs
The ECB May Be Spawning The Perfect Sucker-Rally
So, just like subordinated bond holders demand higher return than senior bond holders – in a normal, unrigged market. Holders of peripheral debt, indeed all European sovereign debt, may demand higher returns for their investments in future. This means that the credit spreads will widen and bond yields will rise – i.e. the bond prices will fall.
In doing this debt swap the ECB has not only damaged its credibility and the credibility of the entire European bond market, it has potentially painted itself into an expansionary corner. As less and less private investors show up to bond auctions, the ECB and its zombie banks will be “coerced” into filling the funding gap and buying more themselves. This effective monetization will be inflationary and may be good for risk assets like commodities or even stocks.
But we know that rising costs are recession-makers. Especially rising oil prices. If you’re a clever momentum trader by all means ride the wave, equities may go up 30% from here for all I know – it certainly would not surprise me. But be careful, the mother of all sucker rallies could be in play here… and I have no idea when this sucka is gonna finally blow.
Market Overview
Silver
I’m not going to comment on the markets really today. I’m only going to show a Chart of the Day – Silver. This is not so much a rise in popularity of the metal per se, it is a representation of the lack of faith in paper promises.
Some of you will note, that comment above was exactly the same as yesterday’s and the day before – it’s just I substituted the word “Gold” and “Oil” for “Silver”.
Chart of the Day
Silver (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
India GDP
Sweden GDP
US GDP
Corporate Events:
Results:
Holcim [HOLN VX], HK Exchanges [388 HK],TaiwanSemiconductor [2330 TT],
Dividends:
Bank of America [BAC], BHP Billiton [BLT LN], Pepsico [PEP], RioTinto [RIO LN],
The Fed is embarking on something new and, I think, highly questionable.
Which is: to enforce the symptoms of prosperity, rather than sound money.
Jim Grant [emphasis mine]
Macro Overview
The New Interest Rate
Forget Central Bank Base Rates, they are rendered impotent in a balance sheet recession, Oil prices are the new economic accelerant and right now Mr. Oil seems hell-bent on tightening and decelerating economic activity.
In a piece last week, I casually commented on oil… perhaps too casually.
I read yesterday somewhere that “Oil was the new interest rates”… rates are irrelevant now and oil plays a bigger part in dictating economic activity. I don’t know why but it was an interesting comment and I thought I should share it with you. Any of you that peek at Google Trends will know that “gas prices” is one of the fastest growing searches at the moment.
Ironically, by trying to boost consumption with monetary easing, the Fed must be careful that it does not stifle consumption by boosting the cost of energy.
Now Oil is a big red flashing beacon on everyone’s radar. Indeed, the FT today frets: Oil price rise sparks profit concerns in Asia. Ahhh… you see? The Chinese weren’t so crazy to stockpile oil in the midst of a slow down when the price was $50-$70 – nearly half what it is now.
Bloomberg quoted a Tom Keene interview with legendary bear David Rosenberg in an article which came out on Friday:
The price of oil rose above $109 for the first time in nine months today and is in the midst of its longest streak of advances in more than two years. Rosenberg said that for each additional penny at the gas pump, $1.5 billion is strained out of household cash flow.
“By May we’re going to be talking about gasoline prices breaking a new high, between $4 and $5,” he said.
The Strait of Hormuz is only half the story, dear reader, the reality is we are in a brave new world where ALL the major central banks are simultaneously debasing their currencies. All business need a form of money to live, it is to the economy what blood is to the human body.
But, by definition a money-form must not only be an exchange medium but a store of wealth and capital… it must be something for which the supply can be understood, even predicted. This is why investors (and China) seek oil… and gold. All the major paper promises (aka fiat currencies) are wearing thin – so much so that even the Swiss Franc is beginning to rise again.
Here is what I wrote in a piece last summer and the attached video of a Bloomberg interview with the legendary Jim Grant:
I leave you, once again, with something I put in my piece (The Feral Reserve), Jim Grant’s wonderfully eloquent quote in this Bloomberg interview, after 11min 30 seconds:
“… the clarifying insight into Quantitative Easing came in the form of a letter to the editor of the financial times about a year ago. The writer says:
‘Ah! Finally I think I get it. I get what Quantitative Easing means. I understand now… what I no longer understand is the meaning of the word money.’
That is the definitive insight into what the enterprise of QE is all about…. Debasement.”
I’m not going to comment on the markets really today. I’m only going to show a Chart of the Day – Brent Crude Oil (of course). This is not so much a rise in popularity of the metal per se, it is a representation of the lack of faith in paper promises.
Some of you will note, that comment above was exactly the same as yesterday’s – it’s just I substituted the word “Gold” for “Oil”.
Chart of the Day
Brent Crude Priced In Dollars (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
Germany CPI
Japan Industrial Production
South Korea Industrial Production
Corporate Events:
Results:
Nothing Significant
Dividends:
Nothing Significant
Reading, Links:
For article on the history of monetary debasement read:
Oh I’ve chosen my words carefully, Persian, perhaps you should have done the same…
THIS IS SPARTA!
King Leonidas – in the Film 300
Macro Overview
The New Old Currencies Of Choice
When Sen Ron Paul quizzed Ben Bernanke about the monetary properties of Gold as a currency, Bernanke flatly refused to accept that Gold was a currency – see my comment last summer. In his mind, the only reason we talk about Gold as money today was tradition. Bernanke was wrong, Gold is a form of money, it always has been, in fact I’d go as far to say that almost everything is a form of money, but Gold has particularly good attributes.
A few days ago, I wrote a piece called The Emerging Gold Standard which made references to how Iran was trying to circumnavigate trade sanctions by settling oil trades in Gold. The article also referenced my piece on The Marco Polo Connection, where I speculated that China’s interest in “bailing out” Italy was largely gold related (China has a huge desire for the yellow metal and Italy has the largest Gold-to-GDP ratio).
Today we hear rumors of the EU having Greece by the Golden Balls in the latest bailout deal – see Zerohedge piece on this. It appears as scavenging eyes sniff at the carcass of another failing state they no longer salivate over paper promises. They want something tangible… “give me oil …or gold” they hiss through snarling canines. The World of Finance welcomes new old currencies.
Spartans Will Be Slaves
Well 2.5 millenia is a long time in the scheme of politics I suppose. There was a time when Greek leaders refused to let their people be slaves. Today things are different; their Gold is seized, their Government is subordinate to higher authorities, their economic prosperity is deemed expendable by leaders in other countries. To add insult to injury, sticking with ZeroHedge – they run an article with the title: The Colonization Begins: Germany May Send 160 Tax Collectors To Greece.
Welcome to the Currency Wars of the 21st century. When a nation feels aggrieved it no longer sends soldiers to burn rape and pillage the region, it sends tax collectors and demands Gold in return. So I suppose 2.5 millenia is a long time in the scheme of politics – things can change in that time.
Finally, a really cool video on ZeroHedge explaining Greece’s debt enslavement to Europe with reference to the LTRO “cash for trash” scheme. Something which I wrote about in my comment: LTRO = Lying To Restore Order. You have to watch this vid…
Market Overview
Gold
I’m not going to comment on the markets really today. I’m only going to show a Chart of the Day – GOLD (of course). In my view this is not so much a euphoric rise in popularity of the metal per se, it is a representation of the lack of faith in paper promises.
EU Politicians Release This Picture Of A Well-Known Hedge Fund Manager
Quote of the Day:
The republic needs a president who can dedicate himself unhindered to these and other national challenges and enormous international challenges, a president who is supported by the confidence of not only a majority but a wide majority of citizens.
The last few weeks have shown that this trust and therefore my ability to be effective have suffered sustained damage.
Christian Wulff – the EX German President
Macro Overview
The Corruption Of Credibility
A few days ago, I don’t know if you noticed, but German President and close ally to Merkel, Christian Wulff, resigned over what was effectively a collapse in his credibility after he was rumored to be “on the take” prior to his tenure as German President.
What has this to do with economics? Nothing really. I only point it out to show that European politicians do actually understand the consequences of what I will call a “corruption of credibility”. Because his reputation had been unequivocally tarnished, no matter how much his aids waxed and glossed… it was virtually impossible for anyone to trust him. There is simply nowhere to hide from an unequivocal and public corruption of credibility.
Troika’s Disdain For The CDS Market And The Holders Of CDS Contracts
Fast forward to the latest news out of Europe regarding the Greek crisis and we find that it looks likely that the haircut imposed on even a relatively small proportion of holders may slouch from “voluntary” to “coercive”. I love all these slimy adjectives sliding out of Europe- when was the last time you heard someone say: when I pulled the trigger on this gun the bullet was “coerced” out of the barrel? Anyway, if a “coercive” default happens (perhaps as the result of a collective action clause – CAC) it may be likely that the CDS (finally!) will be triggered.
But seriously, how much time and money have the European politicians thrown at the problem, either directly or indirectly via inducing inflationary policies at the ECB, to avoid the stigma of, the rather petty technicality, of an ISDA default trigger.
Pretty much the entire market knows Greece has defaulted, the Germans know they have defaulted, the Greeks know they have defaulted, the bond holders sure as hell know they’ve defaulted… heck, even the ratings agencies know they have defaulted and they’re normally about 24 months behind everyone else! So why are the Feds throwing so much of taxpayers wealth at fighting the nuances of an ISDA clause – or is it just me?
The common argument is that if Greece defaults then it will never recover, it will have difficulty raising money in the markets again. Oh…. Right. So if the ISDA default is circumvented all Private Investors will fill their boots on Greek debt knowing it’s A-OKAY, yeah? The credibility of the Greek government has been tarnished no matter how much lipstick you put on this pig. Why do European politicians understand “corruption of credibility” when it concerns their own kind but not when it concerns the, rather specific, ISDA definitions in the credit derivative markets.
Perhaps I shouldn’t say this but, could it be they have a rather vindictive attitude towards the holders of CDS contracts – namely the Hedge Funds? We’ve heard the rhetoric from both Sarkozy and Merkel towards this segment of the investment community.
Note, if politicians throw enough real and political capital and succeed cheating CDS holders out of a default trigger, then there is a good chance the credibility of the entire credit insurance market in Europe will suffer. Would you invest in European credit risk, knowing that one of your main investment exits was now effectively a rigged market? Perhaps you would, but you’d be a fool not to demand a higher premium for this additional risk. Borrowing costs in Europe could surge.
It is impossible to calculate just how much wealth has been thrown at this imbecilic objective and indeed how much will be lost if indeed the EU-Feds succeed in destroying the credibility of the market place in credit insurance. But I’d rather that wealth was in my pocket and I’d rather the Merkozy meddlers and political peddlers kept their dirty fingers out of the specialized nuances of the credit derivative markets.
Market Overview
The Fragility Of Consumption
Well Dell, Hewlett-Packard, Wal-Mart didn’t do so well but Target did. While the jobs numbers are still coming out strong, I’m not yet convinced that this consumption growth (over two-thirds of the US economy) is here to stay.
I read yesterday somewhere that “Oil was the new interest rates”… rates are irrelevant now and oil plays a bigger part in dictating economic activity. I don’t know why but it was an interesting comment and I thought I should share it with you. Any of you that peek at Google Trends will know that “gas prices” is one of the fastest growing searches at the moment.
Ironically, by trying to boost consumption with monetary easing, the Fed must be careful that it does not stifle consumption by boosting the cost of energy.
Chart of the Day (obviously) is NYMEX sweet light crude.
Fitch considers that the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.
Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile.
Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.
The BoE were split today on their decision to leave QE unchanged. Can you believe it? We’ve stopped talking about base rates … I can’t remember the time we did. The only thing we talk about is monetization of debt, printing paper promises up the wazoo. Nobody pauses to question the validity of the underlying promise. Except perhaps the holder of Gold – who took the hard currency to a new 3 month high of $1780 today.
The game is getting tighter for the Brits. Only a few months ago we were lamenting the CPI at over 5%! But we’re already talking about increasing the current rate of asset purchases. It’s a currency war out there… bring out the heavy artillery.
Default Semantics – It’s All Greek To Me
I’ll try to keep my comments on Greece brief. To be honest I have Greece-writing-fatigue. The politicians have bought themselves some more time. But it appears that the Feds are inflating everything… even the cost of time!
Already the doubts are creeping in and we have not even got to the implementation + riots on the streets stage yet. The Independent writes in an article today:
That pessimistic view was reinforced by a confidential document on Greece, compiled by European and IMF analysts, that was leaked on Monday night. The secret report showed that Greece’s debt burden could easily still stagnate at an unsustainable 160 per cent of GDP at the end of the decade if the economy does not return to growth quickly.
Analysts also expressed doubts over whether the Greek government would be capable of delivering the austerity measures that have been demanded by Greece’s European creditors in exchange for the new bailout funds.
The article also details the leakage of a secret Troika report which showed that the bailout may not even make a dent in the Greek debt to GDP ratio. You can’t make this up.
Already the mob is reforming, they are restless, they may have little power individually right now and some of them may have “riot-fatigue” … but they also have numbers on their side.
Fitch is the latest agency to shut the door on Greeceafter the horse had bolted and long galloped gaily over the horizon. As Forbes implied in their article, it’s not really enough to save them from default – it’s like giving a bankrupt man a new limit on his credit card… it means you can live a little longer, but it doesn’t help, it only hurts.
I’ve stopped using ISDA terminology as it no longer has any meaning. So I think Fitch downgraded Greece to official rating “stick-a –fork-in-me-I’m-done”. After stopping time to ponder whether a 70% gun-to-the-head haircut on the NPV of a bond constitutes a default… errmmm… let me think about that for a minute… one day we’re gonna look back on all this and laugh… but first let us join hands and weep.
The Greek 5 yr CDS (if indeed it makes any sense anymore to call it Credit “Default” Security) is back trading above 10,000 bps … if indeed that number even makes any sense anymore…I don’t know anymore.
Here is an interesting question though; if you were a hedge fund with a shed load of CDS protection on Greece would you have considered buying the distressed bonds off the banks (perhaps in concert) in order to have enough sway among the bond holder committee to put a spanner in the CAC-enforced bond swap and force a CDS default trigger? I guess we’re about to find out. Something tells me this is all going to get very litigious.
Market Overview
What’s Happening To The Consumption Revival?
I dunno about you but if consumption was on the up and up I’d kinda expect a better day from WMT and DELL. Both stocks seem to be having difficulty putting out optimistic vibes about consumption patterns.
Chinese Flash Manufacturing disappointed too, but this is not a number I give huge credence to. We’ll see later on when inflation numbers are published how things are fairing. If inflation is too high then this is a worrying sign for the Central Bank as it will have little room to stimulate consumption in China. If inflation is too low it may be a sign of a genuine slowdown taking course.
Tomorrow look out, more consumption plays reporting including Gap and Target.
Land Of The Rising Dollar
I say this because factors which determine the backdrop for Japanese stocks originate largely from outside the country.
Japan’s growth comes from its export engine. It’s main trade partners being the US and China. So the Japanese economy is highly dependent on consumption patterns outside its borders and across its seas.
The Yen is falling, but for no other reason than it has simply lost its luster as a safe haven currency. The fact that we have been talking about the Yen as a safe haven currency speaks volumes in itself. Chart of the Day today is the Yen-Dollar.
Chart of the Day
Yen/Dollar (Source: Bloomberg)
Events
Macro Events:
Update:
China HSBC Flash Manufacturing 49.7
Alerts:
Mexico GDP – I don’t know why but I’m actually really anticipating this number… perhaps it’s the fact that Mexico has been growing so rapidly (even faster than Chinaover the last couple of years) … and the fact it’s so close to America.
Taiwan– Industrial Production
US Jobs
Corporate Events:
Results:
AIG [AIG], Commerzbank [CBK GR], Credit Agricole [ACA FP], Deutsche Tel [DTE GR], The Gap, Honeywell [HON], [GPS], Target [TGT],
Margaret Thatcher – British Prime Minister (1975 – 1990)
Macro Overview
The Iron Lady Of Europe
Angela Merkel has resisted all comparisons with Britain’s Iron Lady of the 1980’s, Margaret Thatcher. For one thing, she stands for something different ideologically speaking – Merkel is staunchly pro-European integration. Thatcher, by comparison, made her opinions quite clear on the matter, as you see above!
But there are striking similarities between these two political female powerhouses. Perhaps it is something that comes with being a woman who has fought tooth and nail through the ranks to the pinnacle of European politics. Merkel, like Thatcher, sticks to her guns. She sometimes initially appears quite methodic and patient at the negotiating table but when she makes her demands, she normally gets what she wants. You don’t have to agree with the policies of either Thatcher or Merkel to have a degree of admiration for their aggressive ability to get what they want done and get it done with authority.
There is plenty of talk about “union” and “helping” or even “bailing out” other European nations, but let’s make no mistake this is nationalistic politics at its most ferocious. Merkel’s obligation is, first and foremost, to the German electorate – not the Greeks or the Portuguese or the French or the “Union”. Her actions so far have not dissuaded me from this in any way. And judging her on this alone, she is indeed an exceptional politician.
Domestically, Merkel has quenched the anti-Europe swell while overseas she has pressed for treaty change while venting about the inflationary consequences of ECB participation – a shrewd tactic to shield intentions and lever into political negotiations. While holding the Greeks et al over an austerity barrel, she has France right where she wants it – begging at the end of a very short dog-lead. She has Britain right were she wants it – exiled, insulated and in splendid isolation. And the rest of Europe potentially chastised to an iron-fist treaty of curiously Germanic design.
What is perhaps more poignant about The Iron Lady of Europe is what she does not do. When there is political sensitivity in Europe, she remains practically silent, allowing other political voices to vent the heat before taking a line which is true and unequivocally assertive. Which reminds me of one of Thatcher’s quotes:
Being powerful is like being a lady. If you have to tell people you are, you aren’t.
Market Overview
Gold Rising On European Doubts
Seems strange doesn’t it? We have “momentous” news out of Europe on the latest Greek bailout and Gold hits a new high? Something does not add up in Europe… I imagine it’s the Mathematics!
Wait… so all this turmoil in the markets, hundreds of billions of Euros thrown over The Med and we still cannot draw a line under the problem? Hmpft! You know the score, dear reader; like a NINJA (No Income, No Job or Assets) with a huge mortgage, Greece is insolvent, she doesn’t need a loan… she needs a fresh start.
Europe will not move forward while the Greek people are beholden (or even feel they are beholden) to German politicians, no matter how deftly the European Elite try pull the puppet strings of the “Greek Government” and the Wool over the ordinary Greek person’s eyes. In fact I should not really call them the Greek Government I should call them “The Unelected Representatives In The Eurozone of Greek Descent” – because that’s what they are.
Europe will not move forward while private investors feel cheated either by indirect subordination by the ECB or CDS trigger-gaming by the politicians.
Europe will move backwards if growth in the Eurozone stalls further and Europe will move backwards faster than you can say “what’s that horrific sucking sound?” if investors begin to doubt the credibility of the ECB.
Chart of the Day shows Gold and Greek CDS Steepness – which hit a new low (or a new INVERTED steepness) as the 2 year spiked.
Chart of the Day
Gold (Source: Bloomberg)
Greek CDS Steepness (Source: Bloomberg)
Events
Macro Events:
Update:
Eurozone Consumer Confidence in line (-20.2) … not really very good.
I love that movie. It pretty much single-handedly propelled Ben Affleck and Matthew McConaughey into stardom overnight. The kids lining up for the ritualistic beating must have felt like Eurozone countries. It’s like Mr Payne said… 17 of them are leaving on a mission and not everyone is coming back.
Eurozone investors must be dazed and confused themselves now. Judging investment conditions these days you need a mole in Brussels, a spy in Berlin and a PhD in Political Sociology.
But anything can be simplified, I suppose. For example, Harvard Professor Ken Rogoff agrees with Mr Payne’s analogy, as ZeroHedge points out in an excerpt from German journal Der Spiegel today… the Eurozone only really has two options: reverse and dismantle the Euro or foot-on-the-gas and full speed ahead for political union. I’m more of an optimist than some people think. I actually believe the latter will happen (for example, TIPSTER’s treaty idea was all about ratcheting up political integration in Europe)… but we will not get there without some rather raw buttocks along the way.
The noises out of Schaeuble and Venizelos are very positive. But remember, the political conflict zone is not between the members of the Eurozone administration. It is between the peripheral public (in this case Greek public) and the political elite of the Eurozone core. Whoever bends (and, politically speaking, Venizelos is looking like limbo-dancing rubbery Mr Fantastic) will have to turn around and face the public onslaught of their own people.
Market Overview
Onwards And Upwards For Risk Assets
Nymex Sweet Light Crude hit $105 today. It has not traded that high in 10 months and to be honest that pretty much signifies the tone out there. Global Monetary policy still supports risk assets and it still supports hard currencies over soft currencies. In this respect, I always feel that there is too much focus on Gold and Silver, but other commodities, like oil and even food, can also be considered currency alternatives. See my old comment on Neanderthal Economics.
Today the Chart of the Day is NYMEX Sweet Light Crude and Soy Beans. Both of which are near their highs.
Consumer In The Dock Tomorrow
With Eurozone Consumer Confidence and Dell, Home Depot, Kraft, Macy’s and Wal-Mart all reporting tomorrow we should have some good insight into Western consumer patterns. Eurozone consumer confidence projection is so low that I think it may even exceed expectations, but I’m particularly interested in WMT and DELL’s report/projection on revenue growth.
Chart of the Day
NYMEX Sweet Light Crude (Source: Bloomberg)
Soy Beans (Source: Bloomberg)
Events
Macro Events:
Update:
Nothing Significant
Alerts:
EU Finance Minister Meeting – It’s Coming Soon To A Blogsite Near You … honest!
Readers will be familiar with the Vadar, a small island state with its own “independent” central bank. This is an interesting story which occurred a while back in the prison-system of the small, isolated nation. There was only one prison on Vadar, but it was getting over-crowded and more costly to police. That is until the Vodor prison guards, aptly nick-named, “Storm-Troopers” devised and interesting little plan.
The prison guards would regularly hold sporting fixtures against inmates. The most popular of which was (American) Football. It was popular because it allowed highly-charged, full-physical contact between inmates and guards, sometimes with gruesome consequences. It was a fantastic gladiatorial spectator sport and soon it was drawing huge crowds from the paying public. All proceeds would go towards upkeep of the prison and new prison facilities – everyone was a winner.
The rivalry got more intense and the games got fiercer. The prison guards realized that the inmates were taking things very seriously and began to restrict their training times to gain the upper hand. While the prisoners felt slightly cheated, they accepted. Consequently, the guards would win almost every game, but the rivalry remained strong and a huge drop in inmate crime was observed, as it was a welcome distraction and new focus for the convicts.
The games were officiated by a qualified referee with the dubious name of Ramio Repus. He also administrated all the funds and match-proceeds for games and ensured that they were fairly allocated to prison facilities for both guards and prisoners alike.
Of course, the prisoners were initially wary of him, but as more and more games were played their confidence grew that he was indeed a fair and sporting man who stuck strictly to “the rules of the game”. Indeed, he would become an essential part of the Vadarian judicial system, for he was the one and only man highly respected by both the prison guards and the prisoners: he was practically criminological priesthood.
There was chatter on the streets and alleyways of Vadar that Ramio Repus had unfathomable political clout and even of him becoming the next Mayor of Vadar…
The Game-Changer
But, as the final game of the winter approached, there were mutterings in the canteen and whispers in the courtyard… a few rumors were circling. Something was afoot. You see there was more than just pride as stake; both prisoners and guards had been placing bets on their respective teams to win – the prisoners by “gangster proxy”, of course – and the stakes were the highest they’d every been, some prison guards putting their future earnings for the remainder of the entire year down. Of course, there was only one major bookmaker who could be trusted: Ramio Repus. To ensure complete security and confidence, he held all bets in an escrow account.
What is important to understand is how much of this system was based on Trust. In fact, the beauty of the system was that it was a trust based-harmony.
However… against form and all the odds, the inmates won the game convincingly… that’s where things started to fall apart.
The gangsters and prisoners who had bet on the game were, by their right, due a huge windfall in winnings. But it emerged that some of the prison guards would go broke in the process – in fact, a lot of them would. The officiator, Raimo Repus adjudicated that: “for the survival of the system as a whole”, it would be impossible for a mass-bankruptcy of prison guards, there would have to be some form of settlement agreed.
The prisoners didn’t want to lend the guards any more money, they just wanted to settle for what cash they could. But there was a complication. It became apparent that the, supposedly neutral, officiator Raimo Repus had invested in the game too… he’d bet on the Prison Guards to win. In fact… he was by far and away the biggest gambler in the game.
The guards told prisoners and gangsters that they would only given them only a fraction of their winnings and, even then, they would have to sign a disclaimer protecting the prison guards from a class-action law-suit. The prisoners were repulsed by this… “aren’t we supposed to be the f***ing criminals, not you?” Hissed one of the furious inmates at national television camera. The following week, prison management informed the prisoners that they “set prison rules”, not the prisoners. This did not go down well – prisoners revolted, burning down the entire East Wing of the prison. Crime rates inside and outside of the prison spiked horrifically.
Ramio Repus’ star was falling too, but still had some credibility left and he used that to decree that the money he personally owed would be conveniently written off by the escrow account because his bets were all null and void. To add insult to injury, he vowed to help the indebted prison-guards honor as much of their obligations as they could, but he would do this by selling the assets for the prison bought with game-revenues…
The stand-off prisoners and guards has never been under more tension. Guards are frequently called in for aggressive zero tolerance action against prison gangs, who now appear to be united against the authority of the guards. The very fabric of trust in the entire judicial system is now under much more strain than it ever was.
Outside the prison, hit-squads and criminal cells of livid gangsters are running riot – prison is no longer a deterrent it is a call to join their suffering comrades-in-arms. Off-duty guards have received death threats against themselves and their families. One guard was executed in a nightclub while out with his colleagues, another guard, who did not even participate in any betting syndicates for religious reasons, was beaten to a pulp in broad daylight… the streets are a war-zone.
There is chatter on the streets and alleyways of Vadar that Ramio Repus had unfathomable clout in the criminal underworld and even of him actually being the biggest gangster in Vadar …
Exercising Trust
I won’t insult your intelligence any more, dear reader. This is not a true story, nor is it even accurate. It is just an exercise in the power and fragility of trust. Vadar does not really exist and the characters are made up.
But they do have representation in our world. The prisoners are the Greek bondholders, for example – “prisoners of debt”. The prison guards are the Greek Government… As for Ramio Repus? Why, an anagram of “Super Mario”, of course.
Friend or Foe?
Market Overview
VIX
I’m not going to make a market comment today. I’m just going to introduce my Chart of the Day - The VIX. Trading nice and low… for now, at least.
Chart of the Day
VIX (Source: Bloomberg)
Events
Macro Events:
Update:
US Inflation – in line with expectations
Alerts:
EU Finance Minister Meeting – This Time It’s For Real … honest!
The quote above comes from an article in Reuters: Greece battles mistrust to target bailout deal. The headline says it all really. This will be a nervy weekend for the markets, Monday EU finance ministers decide the fate of small Mediterranean country. There are so many internal dynamics at play within the Eurozone other than peripheral profligacy, such as German political motives, French elections, French banking system (heavily exposed to Greek debt), it is almost impossible to predict what the outcome of this meeting will be.
As I pointed out yesterday, I’ve been writing about Greece for over 2 years now. I don’t particularly enjoy writing about it, it’s depressingly repetitive and I can completely understand how international investors have “Euro-fatigue”. Perhaps this is why the Euro-Dollar is down 10% since September. But, every time I turn my back to look at the next big macro thing Greece sucks me back in.
According to his latest newsletter Jim O’Neill cannot understand why Greece is such a big deal. He reckons that China creates the economic equivalent of half a Greece every 6 weeks. So what is there to be worried about? Well, he’s in the minority on this one, this was never a mathematical problem, I think it’s more an issue of precedent, politics and the psychology of contagion.
Accordingly, Germany wants to do everything in its power to help Greece and Greece has done everything it can to appease German concerns… so Monday’s meeting should be a walk in the park… (ahem!)
Market Overview
Mixed Markets
European stocks did not really make any headway today as Greece once again off-set any positive data out of the US.
What is more interesting is the Yen’s slide to 78.90 as people sought to buy Dollars in the build up to the big EU meeting over Greece.
I look at the steepness of the CDS curves for clues and the Greek curve has just imploded (see Chart of the Day – note, the scale is negative basis points). The Greek CDS 10s-2s is now -9844bps. That’s right; effectively there is a 10,000 basis point difference between insuring short term Greek debt vs long term. That implies the market thinks a CDS default trigger is imminent.
Interesting that the currency markets and credit markets are not really telling the same sanguine tale as equity and commodity markets (did you see the $120 print on Brent Crude today?)
Stock of the day is Nestle, sales growth looking healthy. Hey, we all need food, right? Check out the chart below.
Chart of the Day
Greek CDS Steepness, 10s-2s (Source: Bloomberg)
Nestle (Source: Bloomberg)
Events
Macro Events:
Update:
EU Finance Minister Meeting CANCELLED !
Spain GDP -0.3% QoQ – bad, but it was expected.
Alerts:
Brazil CPI
Canada CPI
US CPI
Corporate Events:
Results:
Anglo American [AAL LN], Heinz [HNZ], Lafarge [LG FP],
