Financial Market report for November 15, 2011
1) … Inverted interest rates and spreads rose in the EU causing the European Financials and currencies to fall globally. Are the EU nations closed out of sovereign debt financing? Can The EU remain a union?
The question of sovereign insolvency rises today. Inverted spreads, and rising spreads at today’s level define national insolvency. Italy is insolvent at 7%, and other European nations, with the exception of Germany, are now insolvent nation states due to the spread between their rates and that of Germany. SF Gate relates Italy Investors Give Junk Rating To Monti's Debt. An inquiring mind asks, are the EU nations closed out of sovereign debt financing? Are the EU nations insolvent? Can the EU remain a union?
World Government Bonds, BWX, and emerging market government bonds, EMB, turned lower on falling currencies. The Euro, FXE, world currencies, DBV, and the emerging market currencies, CEW, traded down today as is seen in this Finviz Screener. FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, FXRU, FXY, all fell lower. Competitive currency devaluation, that is competitive currency devaluation, is underway again.
The European Stocks, FEU, and VGK, did not fall with the Euro, and are hugely overpriced from their relationship with today’s sovereign spreads.
The Epoch Times reports Chinese TV Host Says Regime Nearly Bankrupt. I comment that the global financial system, IXG, consisting of the banks seen in this Finviz Screener are insolvent.
Today’s news reports herald the development of a revived Roman empire; it will have a New Charlemagne ruling with sovereign authority over all the EU.
A revived Roman Empire consisting of a unified Europe is very much part of the developments we are seeing in the EU: more central control and power, as Bloomberg reports Angela Merkel spoke saying The EU Must Move Toward Closer Union.
The New Europe that Angela Merkel calls for will be one of ten regional powers; it will be one of ten for each of the world's ten regions, making for a Ten Toed Kingdom. This global regime is the Beast Regime of Neoauthoritarianism. Ten kings will rule in each of the ten toes. These sovereigns were called as sovereign authority by the 300 elite of the Club of Rome in 1974, as a means of dealing with the destructionism coming from disinvesting, derisking, and deleveraging out of the inflationism of the Milton Friedman Free To Choose floating currency regime.
Two former sovereign nations are now insolvent. First, Greece has lost their sovereign debt authority, and now relies on seigniorage aid from the EU ECB and IMF Troika; this body is the rising sovereign authority in the EU. Second, Italy is now an insolvent nation as its interest rate has soared above 7%, all real buyers will not purchase its debt, perhaps only the ECB acting through a proxy buyer might purchase the debt.
Soon out of Sovereign Armageddon, that is a credit bust and global financial collapse , a New Charlemagne, that is a Sovereign. and a Seignior, meaning top dog banker who takes a cut, will have both sovereign authority and fiscal sovereignty, and will provide seigniorage dole to those living in the Eurozone, and the people will be amazed by this, and place their trust in it, yes they will give their allegiance to it.
Freedom and human action characterized the Milton Friedman floating currency free to choose regime, where wildcat finance, a Doug Noland term, and the seigniorage of freedom, provided prosperity.
But now, constraint and fate characterize the Beast sinking currency diktat regime, where wildcat governance, and the seigniorage of diktat, will overhaul pension system, and enforce austerity measure, structural reforms, as well as mandate debt servitude.
I have consistently recommended that one buy and take possession of gold bullion, as it being sovereign wealth, will be the only “money good.” The Wall Street Journal reports Purgatory for MF Global Customers. About 33,000 Account-Holders Can't Get to Their Cash: 'My Entire Business Has Come to a Halt. The Examiner reports Investment Advisor Gerald Calente Loses Gold Futures Account In MF Global Debacle
2) … News Of The Day
Euro Intelligence in its for fee newsletter, provides the following, of which I share just a portion. There is a responsibility on the part of those seeking the best of news reporting to pay the required subscription fees. Sovereign debt spreads balloon out. Spanish spreads are now back over 4.3%, and perhaps, most seriously, French spreads are now at 1.65%, a level that is no longer consistent with the country’s AAA-rating. The number for Italy are inconsistent with Italy’s membership of the eurozone, no matter what Mario Monti can achieve. There exists no attainable growth rate at which could remain a member of the eurozone under those interest rates. It is clear by now that the ECB’s security markets programme does not achieve a stabilisation of bond prices. After Jens Weidmann’s public statement that the ECB must not act as a lender of last resort, Yves Mersch yesterday reiterated that position. He said the SMP was limited in volume and in time, and the ECB had no duty to act as a lender of last resort to states. (We believe that a lender of last resort states is probably necessary, but we find it hard to believe that the ECB would be in a position to do so without a stronger political commitment to a fiscal union.)
Greek conservatives reject further austerity measures. Reuters reports Greece's Greece's Right LAOS Party Rejects More Austerity. Eurozone leaders and the European Commission are waiting for the conservative New Democracy and its two coalition partners, the Socialists and the right-wing LAOS party, to sign pledges that they will do what is necessary to make a new €130bn rescue loan package work. New Democracy leader Antonis Samaras said he would not sign any pledge for new belt-tightening. His support for the three-day old government has been lukewarm. The LAOS party has also objected to any new wage or pension cuts. Opening a parliamentary debate that will culminate in a confidence vote on Wednesday, incoming premier Lucas Papademos urged the parties to commit to implementing the bailout's terms as agreed last month. Papademos said Greece had no choice but to remain inside the eurozone, telling lawmakers reforms were the only way to mitigate painful austerity measures.
Bild’s Ralf Schuler says Merkel now has as much authority as Kohl. Commenting on her Leipzig speech, Ralf Schuler claims that after six years of chancellorship Angela Merkel has reached a level of undisputed authority in her party that only Helmut Kohl enjoyed in recent times. “Minimum wage, more money for Europe, six minutes of applause after a rather boring speech – Angela Merkel can ask of her party whatever she wants”, Schuler writes. “Next to her there is nobody any more in the CDU who could compete with her. No Länder prime ministers, no party wings, no ambitious would be successors”. And the columnist concludes: “Since Helmut Kohl the party has never been as dependent as now on its Number One.”
Roland Berger thinks that Germany is the loser of the euro. Roland Berger, founder of the economic consultancy and one of Germany most trusted economic experts, see Germany as a looser of the euro. “The truth is that Germany was among the losers fo the euro in the first decade”, he told Süddeutsche Zeitung. “Since its introduction and until after the world financial crisis we were among the last in terms of economic growth in Europe – together with Italy. In terms of GDP per capita Germany has dropped from the 4th to the 10th place in the EU. The real income has shrunk by 7.4% in Germany since 2000 – so Germans are able to afford less for their work. The export quota into the euro area has gone back from 46% to 41%.” Also Berger thinks the euro is not the reason for the strong position of German companies. The reason for their competitiveness is that their product mix is tailor-made to the needs of emerging countries and that in real terms the German euro has devalued by 21% towards non euro countries and by 18% in relationship with the euro area. “German products and services have become better and nevertheless cheaper”, Berger argues.
Mike Mish Shedlock reports Sovereign Debt Yields and Spreads Soar Everywhere: Belgium, France, Italy, Spain, Ireland; Major Problem List is Every Country but Germany; Belgium Spread Inverts Significantly. Commenting on the Reuters report "We will not vote for any new measures," Samaras told a meeting of his own MPs, Mr. Shedlock says Good luck with that. And good luck with Spanish unemployment at 22% with new austerity measures coming. In Italy, there are more people on retirement than there are workers. Good luck with a program to make it easier to fire people. It will be impossible to fire workers and maintain pension benefits. And what happens to spending and GDP when benefits are reduced and people are fired? What happens to the bond market if that does not happen? These are the questions and scenarios analysts should be asking and discussing instead of making wooden forecasts of slight recessions.
Christoph Dreier of WSWS writes Newly Installed Greek Government Pledges Continued Cuts. Samaras also said ND would not vote for any new austerity plans required by international lenders in exchange for further loans to Athens. He said, “Some say that to unblock the [€8 billion] installment, we need to sign a joint statement with all the parties that support this new transitional government. But I will not sign such statements.” ND apparently hopes that PASOK will continue to take full responsibility for imposing social cuts on the working class, thus shielding ND from popular discontent with right-wing, anti-worker policies. ND has taken over the ministries of defense and foreign affairs, which are less directly targeted for budget cuts.
Hat Tip to Between The Hedges for the following news items
Bloomberg reports Italian Yields Reach 7%, French Debt Slides. Italian bonds led a slump in euro- area government debt as investors abandoned all but the safest assets amid rising borrowing costs at auctions and concern the region’s financial woes are deepening. “It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.” German two-year rates dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10- year bonds from France, Belgium, Spain and Austria instead of bunds all climbed to euro-era records. Italy’s 10-year yield rose above 7 percent as prime minister-in-waiting Mario Monti wrapped up talks on forming a new government. Spain and Belgium sold less than the maximum target of bills at auctions today as financing costs increased. Italy’s 10-year yield climbed 37 basis points, or 0.37 percentage point, to 7.07 percent at 5 p.m. in London. It rose to a euro-era record 7.48 percent on Nov. 9. The 4.75 percent bond due September 2021 slid 2.285, or 22.85 euros per 1,000- euro face amount ($1,351), to 84.57. The spread investors demand to hold 10-year French debt instead of German bunds widened 26 basis points, the most since the euro started in 1999, based on closing-market rates, to 190 basis points. It touched 191 basis points, also the most since the common currency was introduced. The yield on the 10-year bund fell one basis point to 1.77 percent, less than half France’s 3.67 percent rate.
Bloomberg reports Euro Declines to Lowest in Five Weeks Before Spanish, French Debt Auctions. The euro declined to a five-week low against the dollar and the yen as Spain and France prepare to sell securities tomorrow after Italy led a slump in euro-area debt, signaling Europe’s debt crisis is spreading. The 17-nation currency weakened for a third day after the extra yield investors demand to hold bonds from France, Belgium, Spain and Austria instead of German bunds climbed to euro-era records. The dollar rose against 15 of its 16 most-traded peers as investors sought safer assets. China’s yuan declined after the People’s Bank of China set its daily reference rate weaker for a second day, suggesting the nation won’t bow to a U.S. call for faster currency appreciation. “France, Spain, they’re all seeing yields move out, so you get the impression that we’re at some sort of juncture where banks, investors and corporations are starting to prepare for the worst-case outcome,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro will remain under pressure.” The euro fell 0.6 percent to $1.3456 as of 1:21 p.m. Tokyo time from the close in New York yesterday, after touching $1.3437, the weakest level since Oct. 10. The shared currency declined 0.6 percent to 103.69 yen after dropping to as low as 103.59 yen, also the least since Oct. 10. Japan’s currency was little changed from yesterday at 77.06 versus the dollar. Spain is scheduled to sell as much as 4 billion euros ($5.4 billion) of bonds due 2022, while France will auction notes maturing from 2013 to 2016 tomorrow. Spain and Belgium sold less than the maximum target of bills at auctions yesterday as financing costs increased. Ten-year Spanish yields jumped 23 basis points to 6.34 percent. The extra yield over similar-tenor bunds surged to 455 basis points. The spread investors demand to hold 10-year French debt instead of bunds was 190 basis points. The euro extended declines on speculation so-called stop- loss orders around the $1.35 level were activated, according to Satoshi Okagawa, a senior global markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second largest banking group by market value. “There seems to be risk-off sentiment, given worries over France, Italy and Spain,” said Okagawa. “Selling of the euro looks strong, and stop-losses in euro-dollar were probably triggered.”
Bloomberg reports No Stopping Technocrats Rule as Debt Crisis Brings Down Europe Governments. The European debt crisis has toppled four elected governments with the last two, in Greece and Italy, falling last week without a shove from voters. The appointment of prime ministers in Athens and Rome to push through unpopular austerity measures echoes efforts in the past five decades by European leaders to control policy-making when democratic means fall short. “The euro zone would never have been created if voters had been given a say,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “It’s an elite project but that doesn’t mean it’s a bad project.” Greek Prime Minister Lucas Papademos, a former central banker, and Italian Prime Minister-designate Mario Monti, an academic and former European commissioner, were chosen by each nation’s president after their elected predecessors were abandoned by political allies, making them unable to pass legislation demanded by the other members of the euro region. “They’re there not just because they’re technocrats, but because it was easier to ask independent personalities to construct political consensus,” European Commission President Jose Barroso said Nov. 14 in Paris. “The level of hostility between different political forces is enormous.” Progress toward building -- and now saving -- the 27-nation union has rested largely with the ruling elites. Decisions are taken at meetings of ministers from national governments, and the commission, its executive arm, is appointed by those governments.
Bloomberg reports Feldstein Poised to Secure Victory Over Euro as Trichet Departs a Crisis. Harvard University Professor Martin Feldstein, who predicted in 1998 that the euro would prove an “economic liability,” said the single currency will survive for now, even as he bets Greece quits within a year. “With the exception of Greece leaving, I don’t think the whole thing is going to fall apart anytime soon,” Feldstein said in a Nov. 14 telephone interview. “The Greek situation is impossible.” Feldstein’s views on Europe carry increased weight as the region’s two-year debt crisis validates his warnings in the 1990s that uniting so many disparate nations under the same exchange and interest rates could backfire. While he said he doesn’t like to “use the word vindicate,” Feldstein, who turns 72 next week, said he recently reviewed his euro-skeptic articles and “thought they were pretty much on target, even though they were written 20 years ago.” His conclusions often left him at odds with now-former European Central Bank President Jean-Claude Trichet, who consistently rejected as “absurd” any speculation the euro area would shrink and warned that a member shouldn’t be allowed to default.
Bloomberg reports Hong Kong Credit Growth Risks Bad Loans Amid EU Crisis, IMF Says. Hong Kong's "rapid" credit growth has increased the risk that bank made bad loans as the city faces a potential recession if the European crisis deepens, the IMF said. "Credit has been growing at an extraordinary pace, particularly for loans in foreign currency," the IMF said in a report. Such growth may "lead to a worsening of average credit quality" and create "strains on bank funding," it said.
FT reports Financial Times Sovereign CDS Soar For Bid Eurozone Countries. The cost to insure eurozone debt against default soared to record highs for most of the leading economies amid growing fears over the single currency. The jump in credit default swap prices on Tuesday came as the extra cost to swap euros for dollars jumped to highs last seen in December 2008 when many markets had seized up in the wake of the collapse of Lehman Brothers. The cost to insure the debt of Italy, Spain, France, Belgium, Austria and the Netherlands hit all-time highs since the sovereign CDS markets saw their first trades around 2002, according to Bloomberg.
The Telegraph reports Paul Krugman is Rewriting History on Eurzone Decline. There is only one path Europe can take if it is to avoid economic meltdown: dramatic cuts in public spending, the dismantling of its welfare states, the removal of crippling taxes and business regulations, the downsizing of the public sector, and a return to self determination for EU member states. It is Europe’s lack of fiscal responsibility, economic freedom, and national sovereignty, that are at the heart of the current economic crisis, and the United States must do all it can to avoid European-style decline.
The Telegraph reports Italian Unity Fails to Stem Market Fears Over Eurozone. Economists at Schroders warned that Rome's borrowing costs were "unsustainable" even with the help of the European Central Bank (ECB). "With no solution to Italy's problems in sight... we are heading for an almighty crash," they said in a note.
Economist Shaun Richards writes Greece Has Regressed Six Years Or More ... Can The EU Remain A Union? We are left with a Greek recession that has been revised deeper again and let me give it a proper title as it is clearly no longer a recession it is a depression. It was back on August 22nd that I first pointed out that Greece had moved into an economic depression. Back on August 12th I pointed out this. At constant prices so in real terms Greece’s economic output has gone back to the levels of the spring of 2006. In essence she has gone back five years. Sadly she has now gone back six years or more.
A Consequence of this: missed fiscal deficit targets. I took a look at the Greek medium term financial strategy from the summer and spotted that it was forecasting economic growth of -3.5% in 2011 and a fiscal deficit of 7.5% of GDP. So it was no surprise when I read that the Greek Prime Minister Lucas Papademos said that it would now be 9% last night and regular readers will be aware that I have said that this was likely for some time. And as the Greek economy continues to contract rapidly we have to question the forecasts for 2012 (6.5%) and 2013 (4.8%) too.
The current Greek government bond yields have exploded higher. The story here is one that shows economic collapse. Greece’s one year government bond yield has gone above 260% today and her two year yield has risen to 114%. The benchmark ten-year is now at 28.8% which is another high in this crisis. Apart from the effect of all this on Greece I have two main thoughts for you.
1. How can you possibly have a currency union when one has a benchmark bond yield of 28.8% and another has one of 1.83% making a gap or spread of 27%! Hands up those who think that this is sustainable?
2. We see here that the template for European Central Bank intervention has failed utterly in its objectives. Rather than raising bond prices and reducing bond yields the effect after a year and a half has been the reverse. And a reverse on the scale of General Custer at Little Big Horn in my opinion.
If we look at the Greek bond market the amount of official intervention has been enormous. It is often forgotten that Greek (and other) banks were encouraged to pile into the market by the terms available for getting liquidity from the European Central Bank so that there has been indirect as well as direct purchases. Also some of the market will be in what you might call core holdings at insurance and pension funds where they are matched against liabilities such as annuities. So if you are left with the impression that there may not be a lot more left to buy there is a little exaggeration but the principle holds, but the market has still collapsed.
Now project this onto Italy with her 1.9 trillion Euros of government debt and I hope that you get why I do not feel that ECB intervention in this market can ever be the panacea that I see many are claiming. You might buy a trillion Euros worth and if the Greek experience is any guide you would still fail to achieve your objectives and you would be losing hundreds of billions of Euros. Or rather you would be losing hundreds of billions of Euro zone taxpayers money. Oh and you may have to pay for the reconstruction of the German Bundesbank which I suspect might enact in reality what Charles Dickens suggested in fiction, spontaneous combustion! If we look at the Greek experience we see the following, indirect purchases of government debt by banks (check) and direct purchases by a central bank (check).
Agence France-Presse reports Peugeot Citroen To Cut 4,000 French Jobs
Wall Street Journal reports Citi May Slash 3.000 Jobs. Citigroup Inc. is preparing to eliminate 900 jobs in its securities and banking division, or about 5% of the unit's world-wide staff, as turmoil in the equity and debt markets erodes revenue, people familiar with the situation said.