Wednesday, August 03, 2011

Are they Alone?

As per yesterday's post we are trying to stand clear, but the SNB action today has been a shot of adrenalin into the arm of the patient.


And the response has been dramatic.

Not only has the CHF tanked, but BTPs have rallied, the MIB has shot from -ve to +ve territory, Spain has done likewise and Spooz have rallied up through the "do or die" 1250 level. Amazing. Who would have thought that the answer to periphery Europe's over-indebtedness would be solved by the non-European Swiss cutting rates. On this basis we recommend Brazil cut rates to solve the 14.2 trillion US debt overload and Laos increase vehicle duty to solve the Chinese trade imbalances.

Of course it isn't SNB action alone that has caused this general bounce, but more the debate about whether this is the precursor to something bigger and more coordinated (involving the ECB, Japan and even the Fed) falling upon a market where the panic is palpable and price has become the news (there really hasn't been any new news on Italy and Spain other than the prices keep falling). Whilst the market may be fixated by Trichet's mandate to control inflation it should not be forgotten that the ECB's other mandate is to maintain financial stability, in which they are clearly failing. They COULD cut rates on that basis alone.

Now stepping back a bit, If we say that the 2008 crisis was one of insolvency within the banks where the solution was to pass the debt on to the sovereigns via bailouts, then we could say that 2011 is a 2008 rerun at the next level up, where Bank = Sovereign. We could go further and even try and identify the players. Greece is obviously Bear Stearns, the first major casualty but rescued/bought at the last minute by Germany (obviously JP Morgan). Ireland is of course Northern Rock succumbing to massively geared property debt. Belgium? Probably WaMu - easily absorbed into the overall governing structure. The Italy/Spain lynchpin is the mighty Lehman; if they go then it's curtains and we need to find the bail-outer of last resort to pass the debt on to. So who will be the ECB? Well, China, of course. Just look at who is buying the EFSF bonds.

But there is one critical difference. Where the banks had to play to someone else's rules (once it was discovered that their own rules were a busted flush), the sovereigns can change the rules as they go along and the more that they see the "free market" causing chaos to their master plans, the more incentive they have to control the situation by rule change.

Since yesterday TMM see the biggest overall change in the Macro being the greater likelihood of a Louvre type of accord and a dramatic increase in central control of financial markets (or "financial repression" to borrow a more academic term).

Such action would also help the West in its struggle with China. So far this year, moves in the East to fix the current account deficit have been helpful (CNY appreciation, discussion of reducing luxury taxes to increase onshore consumption of imported goods, massive spending plans on renewables and water treatment), but clearly the market is just not buying it. China's current account may be getting closer to flat, but nothing is happening fast enough for the bond vigilantes.

So TMM think that the ultimate solution that policymakers will push towards is what Tim Geithner discussed at the last G20 - commitments by countries to sort out global imbalances cooperatively so that when bondholders in the periphery take a forward looking view of GDP they presume a less skewed world. With such coordinated action China might be able to stick to its own schedule and avoid the perception of being externally pressured. The other option being yield caps, monetization of debt and trade sanctions as per ultra-nationalist ideals peddled by the emergent right-wing parties.

But until we get to the ultimate day of reckoning, the Gordian Knot of European bailout plans will be further expanded. If you want to know how that European bailout mechanism is designed to work then watch this ..


abee crombie said...

in a world where HFT rules near term price action and correlations are everything ...maybe brazil should cut rates!

Anonymous said...

Given the price action of bonds the last few days amid the sovereign credit upheaval, I can see the day when TY1 and US1 rally after the Fed prints $100 billion of excess reserves as part of its open market operations...rallies because the market was expecting $150. Sadly, this is not dissimilar from the BoJ's decade-long Rinban operations. Any wonder why gold is making new highs? TLT priced in gold is -8% YTD...

Ambo said...

Don't forget 2011 TMM predictions?

NO they won't stop taking the piss!

Anonymous said...

Some market participants getting the Mubarak treatment this morning: horizontal on the stretcher, behind iron cell bars, harangued by an assortment of sundry characters.

Where is the PPT when you need them?!

Nemo Incognito said...

As predicted on the TMM chat, if the SNB couldn't push EURCHF to 1.15 then they weren't credibly insane enough.

Yours mr Hildebrandt. In other news, pain in corporates in Australia, Brazil and others with serious PPP misalignments is no joke.

Anonymous said...

Oh to be a fly on the wall at TMM chat... Is 1150-1250 the new 1350-1250?

Cheers on keeping your sense of humour TMM.

Leftback said...

"Bang a gong,
Get it on,
Bang a gong"

Someone in China was banging da Gong on the US credit rating last night. Not that it matters...

Is this a typical summer sell-off against the background of recession/ZIRP/QE(n) or might this be (drum roll) TEOTWAWKI?

Well, TMM have made an excellent case for running away and panicking, but as of this moment we haven't had a close below the 2011 intra-day low at 1249, and the VIX is falling. On the two prior occasions this year the VIX has formed a H&S or double top and then fallen sharply, the Spooz have promptly bounced off the quarterly low. So I suggest that today may well prove to be the Q3 low.

ADP and ISM were soggy but surely decidedly non-apolcalyptic, TMM. LB is staying with the Corporal Jones aphorism fro now.

Or to put it another way:

"When the Demon is at your door,
in the Morning it won't be there, no more.
Any major dude will tell you....."

Tyler said...

Not trying to rub salt in the wound TMM, but your piece titled 'Was that the Gong?' was incredibly timely and, in retrospect, dead on. Had you only stuck with it.

I see little to no signs of capitulation. Thus, higher risk of further downside?

Nemo Incognito said...

US data may suck royally but frankly, even for banks (yep, I said it) hard to see things getting much worse. I mean, really, there isn't that much leverage left out there. Robustness of NLY should be a tell on that count. Sure we can have grinding deflation..... but it is grinding, and lifting bids on 1200 strike stuff seems overdone. Selling calls seems smarter to be honest or back to my old fave - buy stuff you like, and overwrite to reduce your delta / brain damage.

Europe, however, is a bona fide terrifying shitshow with no obvious end just yet. I'm rather long of some Irish sov and despite being up a good 6-10 pts I don't feel safe just yet despite bank recaps and mooted asset sales to get the contingent liabilities taken care of.

Leftback said...

Ugh, we really didn't appreciate that puke to 1234. VIX didn't get much over 25. To say that this is going to be a very important close would seem to be the epitome of British understatement.

Now, while we are all sitting here "enjoying" the day (Anon is clearly having a belter, well done, Squire), let's reflect on some data on long losing streaks.

Aftermath of Long Losing Streaks

This is clearly a day that requires considerable sang froid and a great deal of intestinal fortitude. Not to mention a few drinks afterwards. What's yours, TMM?

Leftback said...

To cap off all the signs, Schiff is all over the media Chicken Littleing it again:

Flee to the Bunker with Gold Bars

CV said...

Right LB, it is all getting very deafening. Economic surprises can really only go one way here.


Anonymous said...

"(Anon is clearly having a belter, well done, Squire"

'Confused from Cheltenham' is feeling no pain,but let us note that there is now a great deal of damage done and even grredy people must think about when taking some profit may be wise.
Waiting for bearded men to appear would be a little late unless the fuinger was on the trigger at the time.

Charles Butler said...

--price has become the news--

Textbook bubble. One wonders if it could survive a couple of weeks with no eurobozo coming out and saying something stupid.

Silence is golden.

CV said...

Agreed Charles, very much indeed. Anyways, could it be that the nuclear holocaust March low maginot line is holding here?


Leftback said...

Indeed, Charles, all posters and commenters at MM seem to endorse a STFU approach to Eurobolleaux™.

Silvio, zip it and get back to the Bunga Bunga party, will you, old chap?

The Q3 LB Bottom™ call has been made, and stands for now. Clearly of less import than the legendary March 6, 2009 LB Bottom™, but it may prove to be profitable. A negative number Friday and we are all toast!

ntwsc said...

Thanks for the song LB.
Was listening to this just the other day
Time for a car CD swap p'raps, seein as it ain't the time to swap the car yet.

Charles Butler said...

Bottom calls?

abee crombie said...

damn PPO up 13% today... cant keep the momo down for long

Anonymous said...

The yield caps, they are coming! Anything with a risky coupon is gonna get grabbed pretty seriously. NLY and REM it is indeed.

CV said...

"Safe Haven Flows Hurts"

... starring the CHF and JPY with the SNB and the BOJ as guest stars.


Anonymous said...

bit of humor on the beard