Stocks Rise As The World Stands On The Precipice Of Sovereign Armageddon
Financial Market Report for October 14, 2011
1) ...The rally in world stocks, ACWI, and world small cap stocks, VSS, continued today, foregoing Sovereign Armageddon, that is a credit bust and global financial breakdown.
A trust deficit in Banks has formed as investors turned away from financials, XLF, Banks, and Banks, KRE, when JP Morgan, JPM, and Morgan Stanley, MS, announced their quarterly performance this week. Credit is seen evaporating as Bloomberg reports Libor Diverges Most Since 2009 As Europe Struggles. And Reuters reports Issuance Rumours Fuel China Bank Funding Concerns. The chart of China Financial, CHIX, shows they turned lower today as Bloomberg reports Chanos Says China Banks Deteriorating. Jim Chanos, the hedge-fund manager who’s been betting that Chinese bank stocks will tumble, said a rally spurred by government purchases of the shares hasn’t changed his bearish outlook.
Investors ignored The Bank of International Settlement, BIS, report Caruana Says Crisis Has Entered Dangerous New Phase, and stocks rallied again today. Bespoke Investment Blog writes The S&P, SPY, had another big week this week and extended the rally off the 10/4 intraday lows to just under 14%. Even after this rally, though, the index has yet to break out of the upper end of its recent range (1,230). So for now the index is still range-bound.
We have the Tyler Durden reports ECB Tells Belgium Not To Backstop Dexia Interbank Deposits, Says Bailout Plan May Be Against The Euro Charter juxtaposed against the Tyler Durden report Short Interest Slides as Market Squeeze Takes Victims.
Risk appetite was on today in everything except for financials, as the currency yield curve, RZV:RZG, traded higher. and the Optimized Carry ETN, ICI, traded up. Yen carry trade lending was ongoing as DBV:FXY, and CEW:FXY, rose, and the ratio of EWJ:JSC, rose. All currencies rose over the Yen, FXY. This was especially the case with the Australian Dollar, FXA, which caused the Australian Small Caps, KROO, to rise strongly. Currency carry trade driven Russia, RSX, Sweden, EWD, Peru, EPU, and Thailand, THD, traded higher.
The U.S. Dollar, $USD, traded by UUP dropped 2.7% this week to 76.62. For the week on the upside, the Australian dollar, FXA, increased 5.9%, the Norwegian krone 4.8%, the New Zealand dollar, BNZ, 4.6%, the Russian Ruble, FXRU, 4.2%, the Swiss franc, FXF, 4.0%, the euro, FXA, 3.8%, the Danish krone 3.8%, the Swedish Krona, 3.2%, the Canadian dollar, FXC, 2.9%, the Singapore dollar 2.5%, the Brazilian real, BZF, 2.2%, the South African rand, SZR, 2.2%, the South Korean won 1.9%, the emerging market currencies, CEW, 1.8%, the British pound, FXB, 1.7%, the Mexican peso , FXM,1.6%, the South Africa Rand, SZR, 1.0%, the Taiwanese dollar 0.7%, the Indian Rupe, 0.5%. On the downside, the Japanese yen declined 0.6%.
World stocks, ACWI, began to turn lower in May 2011, then in July investors began to sell out as they became aware a debt union had formed in the Eurozone. The Milton Friedman Free to Choose floating currency regime failed in July 2011, when major world currencies, DBV, emerging market currencies, CEW, and commodity currencies, CEW, turned lower, and the US Dollar, $USD, traded by UUP, began to rise from a multiple bottom.
The Finviz portfolio of large and carry traded banks BSBR, ITUB, BBD, BMA, BBVA, BFR, FBP, IBN, HDB, WF, UBS, NBG, RBS, STD, DB, LYG, traded higher, as Tyler Durden reports S&P Downgrades BNP From AA To AA-, Lower Hybrid Capital Instrument Rating On All Top Five French Banks.
The risk trade moved commodity currencies, CCX, higher which popped Commodities, DBC and USCI, Oil, USO, Natural Gas, UNG, Biofuels, FUE, Food, FUD, Agricultural Commodities, JJA, Gasoline, UGA, Grains, GRU, Livestock, COW, Base Metals, DBB, especially Copper, JJC, higher.
Today’s global carry trade rally sent gold mining shares, GDX, rising more than Gold, GLD. But silver mining shares, SIL, traded the same as silver, SLV.
The Finviz portfolio of hot stocks and ETFs traded higher; it shows the risk-on trade sent copper miners, COPX, wildcaters, WCAT, energy service, OIH, and IEZ higher. And The Finviz portfolio of Leveraged ETFs, URTY, EET, UYM, EDC, TNA, MATL (the first three seen here; the second three seen here) traded higher. And the Morgan Stanley Cyclicals Index, $CYC, rose strongly.
Bespoke Investment Group reports Breadth Explodes Higher. One might consider short selling into the market rise as in a bull market one buys on dips; but in a bear market one sells on rise. For short selling, one might consider short selling The Finviz portfolio of hot stocks and ETFs and consider short selling the The Finviz portfolio of Leveraged ETFs, URTY, EET, UYM, EDC, TNA, MATL Personally I still recommend investment in gold bullion.
China Stocks CHIX, CHII, CHIM, succumbed to inflation destruction as well as credit destruction stemming from the failure of China’s shadow bank lending system. Bloomberg reports China Lending Shrinks as Wen Wrestles With Inflation Over 6%. China’s bank lending last month was the least since 2009 as inflation stayed above the government’s target, highlighting the risk that efforts to tame prices will trigger a slowdown. New loans were 470 billion yuan ($73.7 billion), central bank data showed today. Consumer prices rose 6.1 percent compared with a 4 percent goal, the statistics bureau said. M2, the broadest measure of money supply, rose 13 percent from a year earlier, the least in almost a decade, and data for foreign-exchange reserves pointed to capital outflows.
Despite the downward trend in the use of credit, China is still in a credit bubble; China is in credit mania.
In many areas in China, there is the shadow banking system, which is a criminal cartel in operation; this is the case in Wenzhou lending. Bloomberg reports China announced a package of measures to help small companies, including tax breaks and easier access to bank loans, after the collapse of manufacturers in Wenzhou city highlighted growing risks to the economy. The government will provide financial support and preferential tax policies for small companies, the State Council said. The government will be more tolerant of bad loan ratios for small company loans, the Cabinet said. Small companies play an irreplaceable role in job creation, technical innovation and social stability, and the funding difficulties and tax burdens facing some of them ‘deserve high attention,’ according to the statement. The support comes after Wen visited Wenzhou in Zhejiang province during a public holiday this month, urging greater support for small and medium sized companies. Media ‘hype’ surrounding reports of Wenzhou factory owners fleeing after failing to pay debts unnerved investors concerned about Chinese banks’ asset quality and a slowdown in the property market, UBS AG said in an Oct. 11 report. The city is known for a ‘vibrant private sector,’ non-bank lending, and speculative investment in property, the brokerage said.”
Doug Noland in India Watch relates that price inflation is continuing to be an ongoing problem at a time when industrial production is shrinking. Bloomberg reporters provide the details Unni Krishnan “India’s inflation exceeded 9% for a 10th straight month in September, maintaining pressure on the central bank to extend its record interest-rate increases. The benchmark wholesale-price index rose 9.72% from a year earlier.” … Tushar Dhara “India’s food inflation rate exceeded 9% for a third straight week, sustaining pressure on the central bank to maintain its tight monetary policy stance.” … Kartik Goyas “India’s industrial production rose less than expected following record interest-rate increases by the central bank and as the global recovery weakens. Output at factories, utilities and mines increased 4.1% in August from a year earlier.”
There is the peculiar case of credit in Argentina, which is traded by ARGT, Camila Russo and Ye Xie of Bloomberg report “Argentina’s benchmark deposit rate is rising the most in almost three years as banks seek to attract funds and dissuade investors and companies from dumping pesos and sending money out of the country. The rate banks pay…soared 1.63 percentage points, or 163 bps, to 15.625% last week. Deposit rates have risen for five straight weeks as banks seek funding to keep up with an annual lending growth of 35%.” Argentina credit, that is Argentina lending, causes volatility in BFR and BMA.
GE has a boondoggle in the making, as few will be buying solar panels in the soon coming downturn. The Denver Post reports GE Set to Build $300 Million Solar Panel Plant in Colorado. General Electric is set to announce plans to build one of the country's largest thin film solar panel plants in Aurora creating an estimated 350 jobs, according to sources. The $300 million plant will be located in a 200,000 square foot former L'Oreal Worldwide warehouse in the Majestic Commerce Center northeast of I-70 and Tower Road. One source said this morning that the plant will go to Aurora and the city will provide about $20 million in incentives with the state providing roughly $2 million.
Unpayable levels of municipal debt was one of the causes of the Great Depression. Now, Jefferson County Alabama may file for bankruptcy, as Bloomberg reports Jefferson County Democratic Lawmakers May Derail Debt Deal. Kenneth Klee, the county’s bankruptcy lawyer, told the lawmakers that a Jefferson County filing “would be like Chernobyl” for bond ratings in Alabama.
Business Insider reports Obama Is Sending 100 American Troops To Central Africa. President Obama has authorized 12 troops for immediate deployment to Uganda to help in the fight against the Lord's resistance Army. The 12 will leave with "appropriate combat equipment" to be followed by 88 other troops, including a second combat team and HQ, a communications team, and logistics personnel.
The global government finance bubble has come via the internationalization of debt. The US Federal Reserve has used Dollar Hegemony and ZIRP to internationalize private debt. BTW relates, China Daily reports The US has skillfully shifted the cost of its domestic financial crisis to other countries, first nationalizing private debt, and then using the dollar's positions as the global reserve currency to internationalize that debt, China's State Information Center, writes in a commentary.
2) … The world is now passing through peak credit as Total Bonds has turned lower.
Total Bonds, BND, has now turned lower, and is trading at the edge of a head and shoulders pattern at 82.91, documenting that the world has passed through Peak Credit. Tyler Durden reports In six consecutive weeks, foreigners have sold $74 billion, or more government bonds in a sequential period of time than ever before.
Between The Hedges relates El Pais reports New stress tests for European banks are set to examine all their debt holdings at market price, citing a European Union official. I doubt the banks will ever make presentation of holding book assets and trading book assets at mark-to-market.
Tyler Durden relates that Bloomberg reports "The European Central Bank advised Belgium not to backstop Dexia SA’s interbank deposits and to avoid providing guarantees on debt maturing within three months because it risks interfering with the central bank’s monetary policy." Reading between the lines here, it means that the ECB is effectively telling national governments to not try and become their own central banks under the ECB's umbrella, which would likely result in not only in various sovereign downgrades (that is guaranteed) but in loss of conviction in the European Central Bank, something which the insolvent European continent and the insolvent hedge fund in its core, aka Jean-Claude Trichet Capital et Cie. which holdings hundreds of billions of Greek bonds at par, can certainly not avoid. It gets better: "The ECB also said the planned debt guarantees for Dexia may last as long as 20 years, which is inconsistent with European Union guidelines for national support measures to be temporary in nature, according to a statement published on the Frankfurt based central bank’s website and dated Oc. 13. 2011.
Reuters provides the article, Q+A: Europe's Banks On Verge Of Big Recapitalisation, but the details on any recapitalization are sorely lacking. I anticipate that immediately before or after the Nov. 3-4 meeting of the G20 countries, the European sovereign debt crisis will go viral, at which time, leaders will meet in summit and waive national sovereignty, and announce regional economic government, and appoint a President of the EU, one I call the Sovereign, as well as a banker, The Seignior, and they will nationalize all banks, grant banking powers to the ECB, announce a Fiscal Union, as well as a common EU Trsesury
Between The Hedges relates Kathimerini reports More Greek banks will need to use the Hellenic Financial Stability Fund if the loss on their Greek government bond holdings is more than 35%, citing fund officials. A cut in the value of the banks' government bond holdings of 50% would result in almost all Greek lenders resorting to the fund, following the example of Proton Bank, which was restructured on Oct. 10 with the Financial Stability Fund as the sole shareholder. I comment that such an action would constitutes nationalization of banks.
Operation Twist has benefited holders of longer duration bonds; but now, with investors are selling US Treasuries. The Federal Reserve Policy will only be destructive to the Fed. Under Operation Twist, the Fed intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years, and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. The Flattner ETF, FLAT, is now trading lower, and the Steepner ETF, STPP, is now trading higher reflecting a steepening of yield curves. The Zeroes, ZROZ, the 30 Year US Government Bond, EDV, and the 10 Year US Government Note, TLT, are now trading lower as investors are fading QE1, QE2, and Operation Twist. The 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, is on the way up, which opens the door for bond vigilantes to call interest rates higher, further destroying bond values. Now bonds, BND, will be joining stocks, ACWI, in going lower.
Michael B. Marois of Bloomberg reports California, facing mandatory spending cuts with revenue below forecast, may have to pay almost 15% more to borrow $2 billion this month than it did in September as municipal yields climb to a 10-week high. Top-rated 10-year tax-exempt yields exceeded 2.57% yesterday, the highest since Aug. 3. They’ve jumped from 2 percent on Sept. 2. California, the most-indebted U.S. state, issued $2.4 billion of general-obligation bonds last month” California Municipal Bond, CMF, is now in its third week of trading lower.
Bloomberg reports Spain Credit Rating Cut by S&P on Weak Outlook. And reports Portugal Plans Deeper Cuts in Moment of 'National Emergency,' Coelho Says. And reports French Bond Yields Jump Most Since 2008 on Bank Concern. Ten-year French yields climbed 38 basis points this week, the most since the euro was introduced in 1999. The extra yield investors demand to hold 10-year French bonds instead of German bunds also expanded to the most since the euro started. Spain’s 10-year bonds fell for a fifth day after Standard & Poor’s cut the nation’s credit rating. Yields climbed across the euro area after European Central Bank President Jean-Claude Trichet said the ECB will not act as a “lender of last resort.”
The eight largest U.S. money-market funds reduced their lending to French banks by 44 percent last month, according to Bloomberg Risk newsletter.
Spanish 10-year yields climbed four basis points to 5.24 percent, even after the ECB was said by people with knowledge of the deals to have bought the nation’s securities. S&P cut Spain’s ranking by one level to AA-, with the outlook remaining negative, the company said yesterday.
Portugal 10-year yield increased five basis points to 11.64 percent. The nation is planning to deepen budget cuts next year as it faces a moment of “national emergency,” and has to do more to meet its budget goals, Prime Minister Pedro Passos Coelho said.
Mr Trichet consistently engages is Doublespeak and any exposure to French funding of money market funds, MMFs, develops systemic risk. Unlike China, Europe is in a credit black hole, a credit desert.
Earlier in the week on October 11 Jana Randow and James G. Neuger of Bloomberg reported European Central Bank President Jean Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis. ‘The crisis has reached a systemic dimension,’ Trichet told European lawmakers ‘Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.’
And then on October 13 Johan Carlstrom of Bloomberg reports “Risks to Europe’s bank industry are ‘rapidly’ mounting as the fallout of Greece’s debt crisis engulfs the whole region, said Martin Andersson, director- general of Sweden’s Financial Supervisory Authority. ‘We don’t see any positive signs,’ Andersson said. ‘Things are getting worse and, of course, then you’re more concerned about liquidity and solvency.’”
In today’s social news, CBS Detroit reports that nearly half of all the people living in Detroit can't read. And The Economic Collapse Blog reports that in Detroit today, there are over 33,000 abandoned houses, 70 schools are being permanently closed down, the mayor wants to bulldoze one-fourth of the city and you can literally buy a house for one dollar in the worst areas.
Blogger Prophecy Proof writes European governments, particularly the German government, will be confronted with the decision to either break-up the Eurozone or to pursue the next step of integration in Europe (fiscal union, which is a step towards political union and is a step seen by some as the only answer to Europe’s problems) because the costs of maintaining European unity in its current form are unsustainable.
European countries have already committed hundreds of billions of Euros in the rescue of Greece, Portugal, and Ireland in the past 18 months. Despite the hundreds of billions of Euros that Europe has committed in the past 18 months, Greece now requires a second bailout and Portugal may soon need a second bailout.
In addition, European leaders like German Chancellor Angela Merkel further jeopardize their chances of political survival each time they support the bailout of another European country. In other words, each bailout comes with a political cost for the European leaders involved.
The gigantic costs associated with the potential rescue of Italy, Spain, and/or other larger European economies may be enough to push European governments to point where they finally make a decision about the future course of European integration.
If the past comments of Germany’s Finance Minister Wolfgang Schäuble are any indication, Germany’s leadership may decide to pursue further European integration. Schäuble told the media late last year that Germany would do whatever it takes to defend the Euro-even if it meant accepting the creation of a fiscal union in Europe. Interestingly, a few months later Schäuble stated in Brussels that the motivation behind the work to integrate the economies of Europe remains the creation of political union in Europe:
“There is one basic principle which directed – and still directs - European integration: The principle that economic unity precedes political unity, but is intended to lead to political unity”.
3) … Neoliberalism was characterized by the Spirit of The Cat In The Hat. Neoauthoritarianism is characterized by the Spirit of Wilding.
The former age, featured wildcat finance, a Doug Noland term, where bankers created investment bubbles. In the current age, features wildcat governance, where leaders rip bit and tear one another.
Christine Harper of Bloomberg reports “Wall Street’s fixed-income desks could suffer a 25% decline in revenue under a Volcker rule proposal that may outlaw so-called flow trading, according to brokerage analyst Brad Hintz. The draft proposal, written by regulators including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp., forbids market-makers who trade debt securities for customers from amassing positions ‘in expectation of future price appreciation,’ Hintz, of Sanford C. Bernstein & Co., wrote. ‘Thus flow trading may be prohibited.’ Such a move would cut fixed-income revenue by 25% and reduce profit margins by 18%, Hintz estimated.”
Chiara Vasarri and Andrew Davis of Bloomberg report Prime Minister Silvio Berlusconi’s delay in appointing a new Bank of Italy governor highlights the political paralysis that’s hampered his response to the debt crisis and helped prompt three rating cuts in as many weeks. Less than a month before Mario Draghi leaves to head the European Central Bank, Berlusconi remains at odds with Finance Minister Giulio Tremonti over the Bank of Italy governor’s successor. With the premier facing four criminal trials and his economic-growth plan delayed by Cabinet wrangling, the Northern League party that ensures his parliamentary majority said last week that the government is unlikely to see out the end of its term in 2013. ‘Italy’s political situation remains extremely fragile,’ said Vladimir Pillonca, an economist at Societe Generale. ‘There’s a material risk that internal rifts, divisions and other vicissitudes will continue to distract the government and undermine the quality and progress of its economic policymaking. The timing is unfortunate, given the climate of acute uncertainty.’”
Tyler Durden reports Rome Is Burning. Rome is literally burning, as expected yesterday when we covered the most recent events in Milan. From the Telegraph: "Demonstrators in Rome set fire to two cars and broke shop windows during a protest in the Italian capital, as activists organised a series of rallies in 82 countries. Inspired by the Occupy Wall St movement and Spain's "Indignants", demonstrators from Asia to Europe took to the streets. Riot police in Rome charged hundreds of protesters and fired water cannons, while a group of activists set alight a defence ministry annex nearby. Flames could be seen coming out of the roof and windows of the building on Via Labicana as firefighters struggled to tame the blaze. Dozens of masked protesters could be seen in the area, which had not been cordoned off. The violence was said to be caused by hooded militants known as "black blocks," who have infiltrated demonstrations in the past. There were no immediate reports of injuries.
4) … Doug Noland of Prudent Bear provides his thoughts of the week.
Doug Noland writes in Ring Fencing. Move over “risk off,” and let “risk on” again take over.
It is important to appreciate that as bad as things were looking 10 days ago, it had yet to move decisively toward a worst-case scenario. Indeed, the markets have been content to continue accommodating the U.S.’s extreme fiscal and monetary policies, with massive federal borrowing and spending for now lowering the odds of the “falling off a cliff” scenario for the frail U.S. economy. And while there are some important fissures in view, the historic Chinese Credit Bubble is not in an implosion phase. So, in my nomenclature, Global Credit is not without some rather robust “inflationary biases” – at least when the markets are cooperating.
Of late, and for good reason, markets have been increasingly petrified by the prospect of a spiraling out of control European debt crisis on the brink of puncturing myriad vulnerable global Bubbles. However, with the entire global financial system succumbing to Credit Crisis contagion, the near universal policy maker response signaled to the markets that, at least for now, the uncontrolled contagion scenario was being taken off the table. Risk markets reversed course, inciting a stampede of buying to reverse hedges and bearish short positions, unleashing powerful short-squeeze dynamics. Rather quickly, illiquid markets turned liquefied, and animal spirits again incited intense buying rather than the selling that has been overwhelming markets the past month or so.
When the markets succumb to de-risking and de-leveraging dynamics, the marketplace rather quickly dismisses inflation risk. The $100 plunge to below $40 crude during the ’08 crisis is, for now, forever etched upon the markets’ mindset. But crude closed today near $87, and it is not beyond the realm of possibilities that inflationary pressures prove more resilient this time around. This morning’s report on September U.S. Import Prices showed an undeflationary 13.4% y-o-y increase. This follows September’s 6.5% y-o-y increase in U.S. Producer Prices and 3.8% y-o-y increase in the U.S. Consumer Price Index (reports this week, including from Safeway and Campbell Soup, confirm that food price inflation has become well-entrenched). Euro zone inflation is running at 3.0% y-o-y, the high since October ’08. And it is worth noting today’s report on Chinese inflation. At 6.1% y-o-y, consumer price inflation remains stubbornly above the government’s 4.0% goal, led by a problematic 13.4% y-o-y increase in food prices. India’s rate of inflation remains above 9%, also stoked by surging food costs.
I raise the inflation issue this week because it just might prove relevant one of these days. After having afflicted even sovereign debt on a global scale, stemming the unfolding global Credit crisis will require a scope of policy response even beyond that of 2008. And let’s assume that attentive policymakers bring out the big guns early – desperate these days to ensure “policy” gets ahead of the crisis. In China, in particular, there is potential for an easing of policy to bolster already robust food and consumer price inflation. And if my “developing” Credit systems and economies thesis is correct, the general global inflation backdrop might depend significantly on whether these Bubbles are at the brink of bursting or whether the global policy backdrop provides these Bubbles an extended lease on life.
Chinese policymaking has turned complex (one might say “dangerous”). There is a real determination to rein in real estate excesses, while there is no indication of any retreat from the objective of raising consumption and purchasing power for an underclass that has enjoyed limited benefits from the nation’s protracted boom. It’s been my view that Chinese authorities, when confronted with heightened risk of a bursting Bubble, would err on the side of loose policies. Especially with respect to the Chinese economy, the highly unstable global Credit and market backdrop can be expected to engender a manic/depressive view of growth prospects (with resulting wild commodity price vacillations). Global bond prices certainly have not factored in inflation risk. Indeed, the global bond market has positioned for ongoing “risk off.”
(I comment, this is seen in world government bonds, BWX, rising on rising world currencies, DBV, and rising emerging market currencies CEW)
After having reversed course and repositioned away from “risk on,” many players now face difficult decisions.
And an important part of my thesis remains that aggressive policymaking and highly speculative global markets make for a volatile and de-stabilizing mix. If the global risk market rally moves much beyond a reversal of bearish bets, U.S. and global bonds could be vulnerable. It would only be fitting that, after a historic squeeze and melt-up in prices, bonds would now run abruptly in the opposite direction.
It is worth noting that France’s 10-yr bond yields jumped 58 bps in eight sessions to 3.12% (high since August 9th). The spread between French and German yields widened a notable 17 bps this week to 93 bps, up from about 40 bps at the end of June and to the highest level in years. Belgium yields were up 77 bps in nine sessions. Meanwhile, and despite ongoing ECB support, Italian yields rose 27 bps this week to 5.78%, the high since early August. And it’s more than inflation and “risk on” that increasingly spooks European bond investors
(I comment, Bank reorganization will result in nationalization of banks, and the creation of Federal Union, a Fiscal Union, the ECB empowered as the EU Bank, and the development of a Common Eurozone Treasury, all overseen by a President of the EU, most likely Herman van Rompuy, who will provide seigniorage, that is a new moneyness, based upon diktat, structural reforms and austerity measures, with stakeholders from industry and commerce will oversee and disburse credit to those firms central to the Eurozone’s security and prosperity. The word, will, and way of ruling sovereigns will be the basis of everything, and the people will be amazed and follow after it giving it their full allegiance.).
And (with hyper-volatile markets closed for the weekend) let’s try to look somewhat beyond the immediate and attempt to stay focused on key fundamentals. The Europeans appear determined to keep Greece in the euro zone. This will require a big “haircut” on Greek debt, which means big losses for the European banks (and the ECB).
And there’s the festering issue of Italy. Sigh. The Italians have a huge debt load (120%+ of GDP) and a major refunding effort ahead of them. Italian yields jumped above 5.80% this week for the first time since early August (when the ECB restarted its bond support operations). In the case of Italian bonds, market fears quickly become self-reinforcing. When yields jump on the market contemplating prospective refunding problems, surging funding costs quickly transform Italy’s fiscal position from dismal to unmanageable.
(I comment that Italy is about to loose its debt sovereignty, and as a result its sovereign authority as well, with the result that sovereign authority will go to the President of the EU, the Sovereign, and his banking partner, The Seignior. The sovereign crisis requires a sovereign resolution).
ECB buying has somewhat stabilized the situation, although the markets appreciate that further expanding the ECB’s bloated balance sheet with Italian sovereign debt provides only a temporary (and problematic) stopgap.
(I comment that Italy lacking fiscal spending power will come to rely on the seigniorage of dictatorship, rather than the seigniorage of formerly sovereign debt).
So throughout Europe, great energy is being expended to try to come up with some comprehensive plan to allay the markets’ fear of Italian funding problems. Everyone understands that Italy is too big to bail. So, the problem in Italy, and Spain and elsewhere, must be “ring-fenced.” If policymakers can only craft a strategy to reduce Italy’s (and others’) sovereign risk premium, then the hope is that lower yields coupled with additional austerity measures will work towards a return to a semblance of debt sustainability.
And this notion of establishing a “ring-fence” is the impetus for turning the EFSF into a European bond insurance operation. Regular readers are familiar with my view of Credit insurance; how it distorts markets, supports over-issuance and virtually ensures systemic fragility. But who cares about my views. The Europeans see hope (and political expediency) in a mechanisms to “leverage” the EFSF through the guarantee of sovereign debt – possibly creating up to $2 Trillion of firepower. Italy, for example, would be able to issue bonds partially backed by the EFSF – that is backed by the all the euro countries (almost as good as a common Eurobond!). And my guess is that those contemplating such a program are hoping that it would never really see the light of day – that just the availability of such a backing mechanism would suffice to allay market fears, reduce market risk premiums (bond yields) and nurture debt sustainability.
And, again pondering beyond the immediate-term, what is the likelihood that such a structure would gain credibility in the marketplace? Count me skeptical. It’s my view that markets have really moved up the Credit Bubble Dynamic learning curve. Having witnessed happenings at Fannie Mae, Freddie Mac, MBIA, Dexia and others, I expect little more than fleeting enthusiasm for a European sovereign insurance scheme. I’m not convinced the marketplace will have sufficient confidence in the long-term viability of such a structure for it to meaningfully reduce long-term Italian, Spanish and other borrowing costs. In the meantime, as is highlighted by the recent ratcheting up of French yields, “periphery” European Credit problems are rather methodically ring-fencing the “core.” To what extent will the market question the creditworthiness of the EFSF? And to what degree will EFSF risk-taking impact the markets’ view of “core” sovereign creditworthiness?
It’s also worth contemplating the probability that further “austerity” measures will prove successful. On the one hand, I see no possibility for European stabilization without additional austerity. Again using the example of Italy: with the backdrop having changed so profoundly, the markets will simply no longer inexpensively finance large Italian deficits. The issue then becomes how Italy’s economy (and society) will respond to more painful government cost-cutting. Credit Bubble and Bubble Economy analysis has me quite pessimistic in this regard. Throughout most of the “developed” world, I expect badly maladjusted economic structures to ensure that market-induced “austerity” programs become destabilizing (economically, politically and socially) and protracted affairs. Austerity is absolutely essential – but it will prove incredibly arduous and market unfriendly. Fixated on finance, policy essentially disregards structural economic issues.
From my perspective, the analysis seems to boil down to a few key questions: Did the incredible global policy response to the 2008 crisis only buy a couple years respite from crisis conditions? Did this “respite” come at the high price of severe impairment to sovereign debt markets – impairment now largely impervious to previous policy measures (more government debt, guarantees and central bank monetization)? Have de-risking and de-leveraging dynamics at this point gained unstoppable momentum, especially with respect to the European banking system and the global leveraged speculating community? Are policymakers misdiagnosing the problem, in the process unwittingly funneling the crisis from “peripheries” to system “cores”? And if another round of extraordinary reflationary policy measures actually takes hold (which at this point seems a big “if”), might “core” bond markets now find themselves in harm’s way?
“Risk On” or “Risk Off”? Place your bets. And if you don’t like the game, go protest at the door of your nearest friendly central banker.
5) … In summary, the world stands on the precipice of sovereign armageddon, that is a credit bust and global financial breakdown.
The soon coming sovereign armageddon, that is a credit bust and global financial breakdown, is accompanied by a contraction of credit in China, as reflected in the fall of the commodity copper, JJC, which has caused debt deflation, that is currency deflation, across the globe, turning the basic material stocks, XLB, and IYM, particularly, the copper miners, COPX, lower.
Gary Dorsch in 321 Gold gives explanation of the price decline in copper. On July 27 Xia Bin, an influential member of the PBoC, told the People’s Daily newspaper that monetary policy should stay relatively tight in the foreseeable future to help tackle inflation. “China should gradually make real bank deposit rates positive and continue to use open market operations and bank reserve requirements to slow money supply,” he said. Bin’s remarks spooked traders in both the Shanghai copper and red-chip markets. Another reason cited for the surprising -35% drop in copper prices to its lowest in 14-months, is the rebound in the value of the US-dollar, against a basket of six currencies. A strong US dollar makes copper and other commodities more expensive for holders.
I comment that the price of copper declined, as credit tightened. as China Financials, CHIX, declined. Copper is collateral in both the recognized banking system and in the shadow banking system: the fall in the price of copper is partially attributable to the fall in China bank stocks. Other words for credit are trust and faith; these have broken down.
And the rise of the dollar, $USD, traded by UUP, reflects competitive currency deflation in the world’s currencies, and the world emerging market currencies, CEW. Unwinding yen carry trade investing, deleverages commodities, and causes disinvestment from stocks. The fall down, is more dramatic than the rise up, as it is vigorous to the point of being catastrophic.
Sovereign armageddon will come out of Gotterdammerung, the clash of the gods, that is the conflict between world leaders and investors.
Sovereign crisis requires a sovereign solution. One Leader, the Sovereign, and his banker, the Seignior, will arise to speak for and to the Eurozone, which will be transformed into a Federal Europe, as leaders meet in summits and wiave national sovereignty, and implement a Fiscal Union, empower the ECB as a bank, and develop a common European Treasury. Seigniorage, that is moneyness, will no longer be based upon debt, but rather will be based upon the diktat of austerity measures and debt servitude; people will be amazed by this, and place their faith in it, and give their full allegiance to it.
Fate is destroying nations and national sovereignty, and all current forms of economic life, such as Capitalism, and Greek Socialism, so as to reveal the sovereignty of his Son, by providing a European superstate, as part of a ten toed kingdom of regional economic government, where eventually ten kings will rule in each of the ten toes, that is the world’s ten regions.
Under Neoliberalism, fiscal sovereignty came from sovereign nations issuing sovereign debt. But under Neoauthoritarianism, where nations have lost their sovereign debt authority, the Sovereign and the Seignior will have fiscal sovereignty. Credit will not come from the securitization of debt; but rather from the word, will and way of sovereigns and stakeholders appointed from industry and government. Lending will only go firms that are key to the region’s security and prosperity.
Some make the case for breakup of the Eurozone. Edward Harrison wrote in early September in Credit Writedowns stating breakup of the euro zone is likely. Mike Mish Shedlock in June, wrote “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. Nouriel Roubini wrote the Eurozone could break up over a five-year horizon. And Mr. Shedlock writes: “We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states. But the German Constitutional Court decision makes this nearly impossible.” Ambrose Evans Pritchard relates German court curbs future bail-outs, bans EU fiscal union.
Libertarians and Austrian Economists have a hero in Ron Paul, whose philosophy is fathered by Murray Rothbard, Ludwig von Mises, and Friedrich Hayek, and continued today by Lew Rockwell of the Mises Institute. As a group, those of the Austrian School of Economics envision a world with sovereign individuals and sovereign nations each with its own currency.
Liberty, freedom and choice are mirages on the Neoauthoritarian desert of the real. Fate is driving the beast regime, which has come from the 1974 Clarion Call of the Club of Rome, with its seven heads, symbolizing mankind’s seven institutions, and ten horns symbolizing the world’s ten region, to rise from the sea of humanity to rule globally. Neoauthoritarianism will manifest as statism and totalitarian collectivism.
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