Wednesday, August 03, 2011
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.
SNB SAYS CONSIDERS THE SWISS FRANC TO BE MASSIVELY OVERVALUED AT PRESENT
SNB SAYS INTENDS TO EXPAND BANKS' SIGHT DEPOSITS AT THE SNB FROM CURRENTLY AROUND CHF30 BILLION TO CHF80 BILLION
SNB SAYS SNB WILL NO LONGER RENEW REPOS AND SNB BILLS THAT FALL DUE AND WILL REPURCHASE OUTSTANDING SNB BILLS
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 ..