Monday, September 12, 2011

View of Hell

With the G7 having once again pulled off another spectacular impression of a wet sponge, the market is now feeling like Neville Chamberlain declaring "I have in my hand a piece of paper..."

But they are not as naive. So thanks G7, your commitment to solving a problem that unfortunately has time dependency attached to it has left today's markets looking like a work by Hieronymus Bosch.

Observe the French banks in the background of the work providing the back lighting for the rest of the scene as periphery debt holders jump from the cliff (top left) as the battle at the gates of Fortress Europe are fought. The rest of the symbolism is pretty obvious though TMM invite your own observations.

But through TMM's less medieval eyes we see the picture slightly differently and can sum it up as:

  1. Greece obviously wants to get away with doing as little as it can. Hence, fiscal slippage.
  2. Germans have foot on Greek neck, and whenever they loosen it, Greeks backslide.
  3. Germans push their foot down harder on Greece's neck, so Greeks come up with the goods.
  4. It doesn't make sense for Greece to default when it's running such a large primary deficit, so the Greeks acquiesce when pressure is applied.
  5. IMF/Germans send the cash.

But with the G7 sailing on by, it looks like the markets are going to be left alone to sort their own problems out rather than counting on any lifebelts being thrown in by the CBs or policy makers in the short term. TMM hope that the need for self help rather than spoon feeding will result in a little more introspection rather than the mad dash from bad headline to bad headline. This morning's news flow really hasn't been that bad as the Europeans do seem to be trying to show a little more unity than usual, and official expectations of the Troika outcome are being flagged as positive. TMM hope that it's worthy of Prokofiev's cheery "Troika" that they can't get out of their minds every time they hear the word. But for today we are back to "price" once again being the news...


Leftback said...

Another view of Hell. EURJPY at a 10 year low this morning, consistent with the prolonged absence of the Carry Monkey. It's high time the BoJ went Swiss or at least offered him a banana or two.

EURJPY at 10 Year Low

Anonymous said...

I need an econ101 course. Why is it bad to default when you have a primary deficit?

Anonymous said...

'C f C'says'
and I have been saving this one up even IF it isn't probably applicable past the next 5 minutes...
"You are looking at a significant bottom" !!

Skipping past some awful sentiment it's useful to consider that many of the Euro banks under pressure have given up circa 60% or more in the last quarter so we ask the question exactly how bad an event do the markets really want to price in here?
How many daily double digit bank pukes are left?
Who is holding bank equity that remains an emotional seller given the level of sentiment we have already seen?
Where are Gadaffi's billions when they are so badly needed?

Anonymous said...

It seems Friday's expectations of happy presents from G7 all around did not work out very well. Unfortunately the debt super-cycle is ending and there is no end in sight to the banks' misery. Flat yield curve, balance sheet contraction, expensive funding and rising NPLs...also don't forget the lawsuits. In the real economy of course some stocks might start looking cheap soon once we are past inevitable earnings downgrades, but the banks can take much more double-digit pain and then a recap to haircut these bank equity holders another 50-60%.

Skippy said...

Every time the EU have insisted on more 'austerity' and provided more 'bailouts' it has made matters worse, not better in the peripherial European countries. Austerity is not the answer, it is the antithesis (or the Antichrist, maintaining the theme of the morning/evening).

I don't know whether Greek reluctance to reform/deliver is the reason. Or simply that austerity has contributed to a monumental collapse in growth making it impossible to meet fiscal targets.

Does it really make sense for Italy or France to undertake austerity? I would argue it is probably madness. Particularly when it is not offset by easing in Germany or the other stronger nations.

It would also be helpful if the recent correction in the euro has finally taken the Asian central banks off the bid

cpmppi said...

Anon at 3:04pm,

If you're running a primary deficit, then you still need to borrow to fund yourself. So if Greece defaulted now, it would not be able to borrow the 7/8%-odd (I forget the exact number) required to fund its deficit before interest costs on debt. That means that an equivalent 7/8% of the economy would just stop the following day as the Government would not be able to pay for it out of current taxes. This is known as a "Sudden Stop".

Much better to toe the line and try and get away with what you can, while moving towards primary balance, at which point you can default without such negative consequences.


Leftback said...

C from C says: "You are looking at a significant bottom..."

Perhaps so, given this contra-indication from the geniuses at B of A's equity desk:

Sky Falling Say Useless Tools at Insolvent Bank

Anonymous said...

Anon 3.04 says
Well it doesnt make sense for Greece but implications for the germans are limited isnt it?

Anonymous said...

Any thoughts on the fact that ECB is purchasing PIGS debt at a faster rate than FED QE1/QE2 (100 bn eur last month) and still rates are climbing in these countries. Add to that the capacity problem with EFSF. Will it be the case that the mandate of EFSF is only small enough countries and for ECB to print out the larger ones? So many questions and so few answers...

Skippy said...

'C from C', LB, I am sympathetic to your view. However for what it is worth my sense is that the S&P is likely to break-down from that continuation pattern - it looks interesting to me at 1050 (or thereabouts), but perhaps that is being too cute..

LB it was great to see a Marsh back at the crease for Australia.

Anonymous said...

'C from C' says'
LB I would rather that contrarian view was a buy signal,but the reality here is sell the rally imo.

The politicians whatever their reasoning have left ,or created even a confidence vacuum ,or that is my take on it.

Leftback said...

Greece is definitely being sent a message:

Greek 1 Year Over 100%

The question is, now that we have all heard it, will the market stop going down on bad news?

Anonymous said...

Given that the moment Greece defaults, other countries like Italy and Spain will find themselves unable to tap markets below 6-7%-8%, I think we are looking at a Credit Anstalt moment here. Sure, they could push the default into December but is there any solution beyond the short-term? The German constitutional court has essentially closed the door for Eurobonds for any foreseeable future and made any bailout subject to supervision of one nation. As for European QE, even ECB will find itself unable to monetize debts in size like these - it will be challenged in court as it has reached the end of its mandate. Given the optimism and complacency displayed by asset managers, I find it hard to call a bottom here.

Amplitudeinthehouse said...

We've all heard where all the turds are hidden but, as usual seeing is believing.

Leftback said...

"Given that the moment Greece defaults, other countries like Italy and Spain will find themselves unable to tap markets below 6-7%-8%, I think we are looking at a Credit Anstalt moment here."

I am not sure this is correct. You have to think of the players and their motivations. Let's say that the parties responsible for pushing up Italian and Spanish yields are, for example, German, French and yes, Spanish and Italian banks (b/c it's not little green men from Mars!), there seems little to be gained from the precipitation of another crisis.

Banks are bullies, and they will prey only on the weak, in this case, Greece. They will also con the French and German taxpayers into TARPing them. After the Hank Paulson moment, they will then sell their german bunds and USTs and return to the higher yielding instruments at attractive prices.

Sanity will return to the markets and calm will prevail. Markets will rally and may even finish up for the year. At the end of 2011 they will all receive monster bonii. In 2012 they will start to look at Portugal. This is how it works.... if the parasites kill the host they can't continue to suck blood.

Charles Butler said...

No beef with what anyone says, but I'm going to give the Greeks a bit a credit for the new residential electricity tax. It's a nice combination of wealth and income imposition that is difficult to avoid whilst maintaining a lifestyle.

As you your cash-only vacation proved, PP, it's difficult to collect from a nation of small businesses if they don't want to pay.

Martin Ghoul said...
This comment has been removed by the author.
Martin Ghoul said...

Erm, LB, I'd have to disagree with your 5:49PM comment. Spanish/Italian yields are a simple result of selling/no buying by real money investors (including the Italian domestics), rather than of some evil speculators preying on the weak.

Charles Butler said...

--(b/c it's not little green men from Mars!)--

So it's not the invisible hand that does it then, LB? If the myth that market participants are the vessels through which God implements his greater plan is finding itself a little wanting lately, maybe there's some young folks that otta start thinking what they'll be doing for a living 10 years from now.

Leftback said...

Martin, that's sort of my point. There are no Evil Speculators from Mars. It is just banks being banks, and in this case, as you point out, short-term cessation of buying by the domestics alone is a sufficiently evil "speculative move" to allow them to be able to buy later at higher and more attractive rates. Once we get Greece out of the way, everyone closes their CDS, sells bunds and buys peripheral debt. Everyone goes back to making money. Lather, rinse, repeat...

Look, Krugman just woke up and his underwear is on fire. Now if ever there was a man with NO idea of the way that markets function it is PK (you should have read his analysis when crude was spiking to $145/bbl).

Krugman Announces TEOTWAWKI

Leftback said...

See, US can finish green. Our Paul always knows how to call the market... complete silliness out there today.

As usual, we await o/n reaction in Asia and the latest developments in the cellars of Château Eurobolleaux where another round of rémuage and dégorgement is taking place.

Hell wasn't half bad today. What's up for tomorrow, High Water?