TMM announce the late running of The End of The World

Monday, December 12, 2011

TMM have lost track of which particular version of the Europlan this is, but would guess it is probably something like Plan K (plus or minus a letter or three). Having now digested the events of last week, TMM will attempt below to decipher what it all means.

But first, we cannot resist commenting upon the UK veto and the press reaction in the UK to it. As we have often noted before, the UK press are prone to covering geopolitical events in a self-doubting way, as if the country were losing influence, power and prestige. Well, tell us something new - it is not 1904. However, the uniform broadsheet reaction was one of UK isolation within Europe given that supposedly the other 26 nations are likely to sign up to the new agreement. Well, maybe they will, maybe they won't - there are plenty of reasons to suggest the Finns, Irish & Swedes will not. But does it really matter? This was a treaty that was, essentially, a power grab by the Germans. Clearly, it is not in the interests of the UK to sign up to something that goes further with transferring financial regulation to Brussels & imposes a financial transaction tax EU wide. Let's be honest, and call it the "UK Tax" and before you label us as Tea Party-ers, TMM are not against taxes full stop. If France & Germany were not willing to remove the FTT and provide assurances on financial regulation, then in TMM's view, it was quite right to use the veto. The reality of the situation is that, despite annoying a few civil service types & journos (who will have less jaunts to Brussels) and some disgruntled Eurocrats in Brussels, the EU still needs the very large contribution the UK provides to its budget. Rumours of the UK's demise have been greatly exaggerated for at least the twentieth time in TMM's careers.

But what TMM found exceptionally amusing was that the left-wing press in the UK (the BBC, Guardian & Independent etc), along with the Labour Party - a function of having to argue against the Tories - have been forced into arguing for more European integration (not a position an opposition party in the UK ever wants to be in, seeing the post-veto polls painting broad-based support for the use of the veto). But not only that. They have also found themselves arguing in favour of a treaty that would have capped the structural deficit at 0.5% of GDP and also triggered automatic sanctions for breaching a 3% budget deficit and a debt brake requiring fiscal consolidation. In essence, they have found themselves arguing for a fiscal policy going forward that is far tighter than the current government's and one that would tie Labour's hands permanently going forward. If that is not irony, TMM do not know what is.

But we digress. Back to Europlan K...

Over the weekend the press, blogosphere and emails that TMM received were uniformly critical of last week's summit and the ECB's actions, with the word "failure" bandied about in many places. And certainly, relative to even the lowered expectations it seems to be something of a disappointment given the ECB dugs its heels in further with respect to government bond purchases. TMM were also disappointed, but must admit that this has been somewhat an emotional response. After digesting both the ECB's actions and the result of the EU summit they cast their minds back to February 2009, and it all seems very familiar... in recession, markets and policymakers searching for "the bazooka", and the frequent refrain that TARP was not big enough etc...

And that got us thinking. Because it wasn't a single silver bullet that led to the rebound in the US and final acceptance that the policy response had been enough. It was a combination of a multitude of policy actions, ranging from TARP to the TALF, to ARRA, to liquidity guarantees for bank funding and eventually to Ben Bernanke's "Greenshoots" fireside chat. Note that these all occurred and the stock market had bottomed well before the FOMC began buying USTs under QE1. Readers may recall TMM have thought along these lines before, but it turned out that the numbers were not big enough.

So, in place of the standard "Mickey Mouse" analysis TMM found in their mail boxes from most places, we are actually going to have a go at seeing if the measures in place are big enough to cover the conditions necessary to end the crisis, which TMM believe are:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,

(ii) Incentives to longer term investors to buy Eurozone government bonds,

(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,

(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

First let's get the bad news about growth [condition (iv)] out of the way. While the Composite Eurozone PMI has bounced from its November low and economic surprises have turned less-negative, it is too late to avoid a recession in Europe. Should financial conditions stabilise, TMM's view is that the current US reacceleration should result in a new global inventory cycle which will aid Europe's stabilisation. Q1 thus seems a reasonable expectation for the cycle low though, of course, this is a difficult view to have any confidence in but should the next batch of PMIs confirm last month's base, TMM would be encouraged.

Now, onto the other three conditions.

(i) The funding of Spain & Italy. This has been, in particular, the problem that has to be fixed "Now" in the view of markets, not unreasonably. But in demanding a bazooka - similar to early-2009 - TMM reckon both commentators & markets have missed the wood for the trees. To see this, consider the following European battalions:

- EFSF: About EUR 250bn left in its unleveraged form (and call it 750bn if they can leverage it 3x).

- ESM: Now to be operational from July 2012, size EUR 500bn.

- ECB: Currently purchasing around EUR 5bn/week which adds up to about 250bn/year.- EU/IMF Bilateral loans: The Summit-announced EUR 200bn of bilateral loans to the IMF to increase its firepower.

- IMF: Current space capacity sits at about EUR 300bn.

Totalling that up gives EUR 1.75trn over the next two years. Include the EFSF leveraging and that number starts with a EUR 2trn-handle. Even stripping out the ECB and not leveraging the EFSF in this case would proved EUR 1.25trn, an amount TMM believe sufficient to finance Spain & Italy and more. And even if the IMF is not able to lend its full capacity to Europe for political reasons, there is still well over EUR 1trn of firepower.

Now before anyone starts pointing out that core Europe is about to lose its AAA rating, and thus the lending capacity of the EFSF etc is diminished, TMM would say that this is not new news. What is important to medium/long term investors is a clear institutional framework, not necessarily the presence of a AAA-rating (after all, there aren't many places sporting such a rating these days...). In short, TMM do not think that it really matters that much.

(ii) Incentives to purchase Eurozone bonds. One of the most difficult problems to balance in any crisis is moral hazard - something discussed at length in many places. With respect to the Eurozone, the Greek PSI undoubtedly spooked many long term holders of Eurozone government bonds, with the subordination to the ECB resulting in larger losses upon banks than would otherwise have been necessary to return Greek to solvency. Additionally, the way Eurocrats went out of their way in order to avoid triggering Sovereign CDS (and one of the key reasons TMM reckon it is an ex-product), further reduced confidence both in policymakers and the rights of bondholders within Europe. TMM thus think it is particularly interesting the lengths the A-Team have now gone to in order to reverse from the PSI stance in ESM to that more of the IMF. Now, cynics would obviously point out that the IMF has often been in favour of PSI in the past, but the softening of the position to being on a "case by case" basis, is certainly one that will lessen the view from the bondholder perspective that they are subordinated. This is key to restoring long term confidence in Spain & Italy, nations that appear to TMM to be illiquid but still solvent.

Related to incentives to purchase Eurozone bonds, TMM move to the ECB's exceptionally generous liquidity facilities that were dramatically loosened on Thursday. Banks can now post collateral on LTRO for 3yrs, and hedge their duration risk vs. EONIA for just 0.73%. As Sarko pointed out:

"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."

Given the ECB cut its reserve ratio, freeing up capital, posting short-medium term BTPs yielding 6-7% to the LTRO (with just a 1.5% haircut) with funding locked up for the entirety looks like a particularly good trade for Italian banks that are essentially screwed if Italy goes bust anyway. This not only takes a good chunk of Italian funding, but also results in building capital at Italian banks (reducing the need for the State to inject equity). This is the Bank/Sovereign feedback loop working in a positive way.

Note also that EU banks in general are now likely a large buyer of EFSF paper which can be used as collateral at the ECB. TMM would also note that banks can help achieve their new capital targets by purchasing these types of assets and taking the RWA improvement. TMM note that insolvent but liquid banks do not go "bang".

(iii) Structural measures. The EU Summit clearly went a long way to addressing the problems with EMU in terms of aligning fiscal policy, implementing national debt brakes and structural deficit constraints. Additionally, Italy is enacting more broad-based structural reforms. These types of things take years to have an effect, but eventually they will. And it seems that Super Mario is pretty happy with them. That doesn't necessarily mean the ECB will step up, but it is certainly a necessary condition to preventing these problems from arising in the future. The agreement is now like a pre-nuptial, and it is certainly vulnerable to difficulties in being passed. But TMM would view the only countries that matter here as Germany, France & Italy. Monti's package that is being voted upon on Wednesday already contains the debt brake legislation, leaving only France to pass it. No doubt this will be difficult, given that the Socialists are against the package and an election is shortly coming. But there is now a convenient guy to give the blame to - David Cameron & the UK. TMM are optimistic on this front as it also furthers Sarko's wish for Eurozone-17 integration at the (supposed) expense of the UK.

To sum up, TMM reckon markets have misread the events of the past week. Sufficient firepower does actually appear to exist, with many of the other perquisites for the end of the crisis. TMM reckon looking for a bazooka is the wrong approach, and have just noticed the infantry columns marching from several directions. The above is probably just about sufficient to remove the systemic effects of the crisis globally, making TMM more optimistic broadly on global growth. But at the end of the day, it will be clarity on Europe's growth outlook that finally puts the issue in Europe to bed.

Simply said, the World isn't ending just yet, friends.

Posted by cpmppi at 12:55 PM  

39 comments:

NO cans of food & guns yet...but geez, these currencies are going to fun.

Amplitudeinthehouse said...
2:35 PM  

Sorry TMM, but I think you have missed the wood for the trees. What you say might indicate that the symptoms but be alleviated, but it still misses the main problem - that wages in southern Europe (Greece and Italy to name two countries) are fifty percent too high (therefore their economies are not competitive).

My two points:

1. I don't see ANY way this gets resolved inside the monetary union (and no solution other than a departure from the Euro zone even pretends to solve this).

2. Even if Greece defaulted completely (ie. one hundred percent loss for the bondholders), they would be back in the exact same place they are today within a decade. Their economy simply can not compete inside of the Euro zone.

Sure, the remedies proposed by the politicians can string things along for months (maybe even years), but they won't fix anything.

Anonymous said...
2:46 PM  

@ A2:46, Greece is, was, and will continue to be a poor country (they voted themselves rich, but it turned out not to be so easy...if only...). That will continue to hold inside or outside EMU, except outside they will be significantly poorer, with gains from devaluation frittered away by wage indexation, and no EU benefactor.

What they desperately need is institutional change, rather than monetary silver bullets. And I suspect they'll get a lot further down that path with the Germans giving them tough love than if they embarked on a solo run.

My two drachmas...

(...and Italian wages 50% too high...that must be one of the 57% of statistics that are made up..)

..and while I'm at it, what's with this 'anonymous' lark'; can't people even be arsed to add a tagline to keep the flow of the discussion going?!

VandalsStoleMyHandle said...
3:16 PM  

I think the 2 trln number is way too big and wildly off the mark and anyway currently EFSF is not even able to fund itself.

I will quote from excellent piece by Hussman:

"As for the knee-jerk enthusiasm of some analysts over the prospect of not just one European bailout fund, but two, it is helpful to recognize that the European Stability Mechanism (ESM) is simply the permanent, Treaty-blessed version of the European Financial Stability Facility (EFSF). These are not two separate pools of money, but are instead the presently operating facility and its eventual permanent home, as the EFSF expires in 2013. There is a 1-year overlap in the life of these two vehicles in order to facilitate that transfer of responsibility. The guarantee commitment of European member states to the EFSF is 440 billion euros (about one-third of that from Italy and Spain, which is ironic), which increases to 500 billion euros in guarantee commitments once the ESM is established. Again, these facilities are really one in the same."

Anonymous said...
3:44 PM  

This debate will continue into EoY, while we execute a series of oscillations between 50 and 200 DMA to trace out one of those wedge patterns in SPX that appear when nobody knows what's going on, or few can be bothered, and eventually we will notice that EURUSD has slithered into the 1.20s, where it will continue to flounder. A weaker euro is actually beneficial for many countries, so don't look for too much more intervention until things get a lot worse again.

The New Year may be a bit rough, with a lot of fast money sitting out, along the lines of 2009, perhaps for a couple of months, until the Liquidity Express finally pulls into the station, and QE3 can set sail. So you would have to say that the wedge will break downwards on the absence of liquidity.

If you were Bernanke, would you do QE3 now and watch crude go to $125, or wait until March, when demand will be falling and $wtic will be in the $70s? If you buy into this analysis, then you wouldn't have any short dollar trades on for a while.

Will there be rallies, and squeezes on silly rumours, mes amis? Mais oui, bien sur...!

Leftback said...
4:04 PM  

Fewer jaunts. Couldn't help it. Queens English if you please. Lol

RiverTrader said...
4:31 PM  

C says'
Well I'm not afraid to change my mind and LB's tank in $ at any rate looks the better place to be.
Even if we accept some floor for Eurodebt as a market moving issue we're still fcaed with the future drag from them on global growth.Given pressure on Euro yields appears to a more risky proposition it appears to me the pressure will now move to FX to a greater degree.Stronger $ though as previously equated to weaker equity and comms.More bearish outlook than what I was considering immediately ,but early week weakness retesting last weeks prices leaves me no choice ,but to nudge LB aside in the bunker.

If attention is transferring to growth then we need to see lower input costs on materials and weaker currencies for those entities who are running wth policy too tight.Definitely mean Europe on that score.

Anonymous said...
5:06 PM  

Vandals, I don't think anyone is saying it's all roses and sunshine outside Euro for Greece. But it still is probably the lesser evil. Default on debt, bail on Euro and then devalue like a motherf.. Wham, competitiveness back, and the economy starts growing again.

Anonymous said...
5:10 PM  

We call that going ICELANDIC. First you default, then you devalue, then you go BOLIVIAN (strictly speaking ARGENTINIAN).

Or you can go SWEDISH, and nationalize the banks. Going DUTCH means you just agree with the Germans and then go back to smoking weed.

At the moment going GREEK means doing nothing, or protesting and getting a police baton over the head.

Leftback said...
6:09 PM  

Just looking between the line of your title ,the thought of "ring in" come to mind...EZ + summits ?..oops..Freudian slip.

Amplitudeinthehouse said...
7:10 PM  

"And I suspect they'll get a lot further down that path with the Germans giving them tough love than if they embarked on a solo run."

No argument there (hey, I think Greece should just go bankrupt, and cede the economic management of the country over to Germany - which knows a thing or two about turning around economies that have been poorly run for decades). I just don't think they will accept any tough love. Very few democracies would put up with the amount of "internal devaluation" necessary to return the Greek economy to competitiveness, and judging from the amount of civil unrest occurring in Greece after relatively insignificant austerity actions, Greece does not belong to that set (my math background coming through there).

Of course, accepting the inevitable (or even the obvious, especially when politicians are involved) has never been a strong point of humanity.

Anonymous said...
7:28 PM  

"Euro area and other Member States will consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion)"

From the press release. If they couldn't agree at the summit, I am not otpmistic that anything will happen in the next 6 days. Pair that with the EFSF/ESM confusion, and the size of funds available for financing Italian/Spanish govts drops preciptiously (at least for the time being)..

WellRed said...
7:29 PM  

And where is growth? Without growth this is all for nothing because France will be next. And noone will be able to stop this train with current policies.

7:41 PM  

Anyone looking at divies? Other than NLY which I'am already long. Even gold's not even a hedge.

Anonymous said...
7:57 PM  

Just look at the deposits in the landesbanks, not promising

Anonymous said...
8:10 PM  

TMM's analysis is suprisingly niave and indicative of much of what we see in the market - everyone thinks everyone is fearful but no one is afraid of the fear anymore. There are three problems here:
-The eurozone is facing the mother of all recessions
-China is slowing down rapidly and is highly likely to overshoot to the downside due to final end of the credit boom there
-Every country is fiscally constrained. The US, despite recent data, is still facing a recession and is likely to see fiscal cuts not stimulus, as will various other countries
-The lack of the ability to restimulate along with the burying of BRIC eurphoria will knock the markets to 09 lows especially

2009 saw a mix of forced liquidations and a rapid inventory destocking/restocking cycle that people mistakenly thought was a structural shift in global demand but wasnt because governments maintained demand through stimulus/deficits. The structural shift is here and now. We are in the game changer, welcome to your doom. 2009 lows here we come.

Anonymous said...
8:17 PM  

Doom call ! Doom call ! 666, the Sign of the Beast....ah, yes, those were the days, down the back garden in the bomb shelter, hoarding tins of soup. TEOTWAWKI, indeed.

Well, thanks for rounding out the MM opinion sphere. It's been a while since we had a retest call. But surely, squire, not possible at these low rates, eh? I mean, negative real rates. Surely 880, in the worst of all possible nightmarish 2012 scenarios?

Seriously, notwithstanding the European slowdown and China deceleration scenarios (which I do believe are occurring), the central banks have learned much from 2008/9 about the value of HUGE liquidity injections and the power of synchronizing their efforts. There may well be a grim opening to 2012 that will surprise many, but eventually there will be bazookas.... believe me, there will be co-ordinated bazookas.

Lots of comments today, so no turn yet, TMM...? Bernanke will threaten to pee dollars out of his helicopter tomorrow, and even that may not stop the free fall in the Euro. We will all be better off when we get down to 1.20, anyway.

Leftback said...
8:46 PM  

Neel Kashkari, late of TARP fame and ex-Goldman Sachs, of course, was on American TV (CNBC) begging the ECB to monetize. He claimed the the Fed would back them up with "competitive devaluation".

Anonymous said...
8:46 PM  

The central banks can deal with liquidity issues, they can act in synchronicity to goose the markets, they could print unlimited quantities of money if the situation demanded, but we can still retest the lows. Remember:
-central bank credibility has been on the decline since 2006. They didnt forsee the crisis, their stimulus effects have had little effect on the real economy, and enrichened wall street. Deflation never happened. The Fed are humstrung by republican hawks. The BoE have no credibility and risk (another) sterling crisis - they are most likely to print, but also the least relevent. The ECB, well, need i start?
-Every central bank intervention has had a smaller and smaller effect. Often I think "central banks" are just a lazy excuse by market practioners to explain what happened in the market, when really the underlying economics justified it.
-The ECB recent provision of liqudity is just that. They have provided nearly unlimited liquidity to all banks throughout the past two years, and their new programs are meerly an extension of this because the existing programs could no longer satiate the banks. The fundamental problems of distressed government bond markets and undercapitalised banks have not been fixed.
-I dont think central banks will be able to rescue this situation. Liquidity will not help valuations that much if profit margins collapse, and some currencies fracture. We are in for a maelstrom, and all I see is complacency and uninteresting valuations. IG credit in the US 125bps? 300bp last crisis. Latin america cds spreads 150bp? 750bps last crisis. Equity multiples in the US aint that cheap. Risk is only cheap in the places with the real problems. This isnt a stupid cheap market, and the risks are snowballing into an avalanche

Anonymous said...
9:36 PM  

It is not a stupid cheap market, that's true. We will all have to pick our spots in 2012 to make money. But there will be money to be made, and CBs will be a part of the picture, for sure. RO-RO markets are essentially a two-way bet on levels of liquidity, no more, no less.

If TMM are right, and TEOTWAWKI fails to materialize, then we might even be able to get through this and hold a few divis....

BTW, we would under-estimate the effectiveness of CB liquidity fire hoses at our peril.... a few scars from 2009....

Leftback said...
10:14 PM  

Well I like naive (even if I'm buggered if I know how to get 2 dots out of my pc).

Thanks cpmppi. Agree with the opening sentiments and grateful for the dissemination. I'm picky about the stuff I absorb from elsewhere (and not because I'm looking to find approbation of my own disassembled thoughts) and I'm inclined to err on the side of TLROTEOFW too.

Oh and à propos my pickiness - I like a man who reckons that when negotiating, if you’re never willing to walk away from the table, you don’t have any power.

ntwsc said...
10:34 PM  

Re 2 dots on the i: Alt-0239, if you have a PC (or Accessories/System Tools/Character Map). Nerd signing off.

Vasastan said...
8:38 AM  

Oh and thanks for the informative post btw. I have learnt that it is perilous to ignore a turn call from TMM, especially when the commentariat pushback is negative. "Muddle along" has after all been the keyword of this crisis - it could be the new EU motto. Anyone have a Latin translation?

Vasastan said...
8:49 AM  

C says'
ah doom is back.

Actually here is why I am not a bear just for a bit of balance.
Property.In the US and UK residential property has had the kind of back to back monthly activity this Autumn that indicates when primes season starts next Spring they will become and increasing economic activity with all that that implies.No boom ,just will go from being a drag to being a contributor.One more step in transtioning of banks as they get back to core lending for revenue.
Will increase mobility and confidence for joe public.Against that we still have the European drag but if this has transmitted into lower input costs on mats/comms both consumer and business will benefit. If growth pressure has weakened the Euro the ground should also be set for widespread action from most major central banks.I for one do not believe either the Fed of China will sit idly by and watch their growth be dragged down by Euro issues.They will act first and worry about the consequences later.
I also think by then we will have had downside earnings for Q1 and the pressures of Q1 debt rollover will ahve largely been felt.
I dothink that the first part of the year could be difficult ,but not to the extent of being uber bear and then we can move on into a market that is getting support from the usual bust to recovery issues with further monetary support.There is nothing predetermined that globally we have to go through some huge depression to emerge from this enviroment.That's nonsense for the doommongers to lap up.Policy direction will steer this ship and if you fight it it will be expensive.

Anonymous said...
8:56 AM  

If the EU leaders/voters have to choose between
- the Japan scenario:
Years of austerity, zero nominal GDP growth and an ever appreciating currency giving you modest real GDP growth
- the Argentina scenario: Shambolic defaults, capital flight by well-connected insiders, blocked deposits, pension fund raidings, price controls, capital controls and populism, followed by maybe a return to growth on the back of some convenient Deus Ex Machina (in the case of ARG, a commodities boom)

I have little doubt what they will choose, whatever pundits from financial centers abroad are telling them what is best.

Anonymous said...
11:18 AM  

C says'
oh Anon you make it sound so straightforward,but really you are naive.
The EU reminds me of the NHS and other public sector institutions.Instead of a clear hierarchy moving towards one goal with one purpose you have multi layers of chiefs talking acrioss each other more oft than not pushing theirown agenda and the end result is inefficiency through duplication,waste,and outright conflict of self interest.This is the EU and just as I don't see the NHS 'curing' itself neither do i see the EU progressing along the simplistic lines you envisage.
Rather they will tottre and stumble all over the pace shedding bits as they go as one group triumphs over another and others decide their interests are no longer achievable within the structure that exists.The outlier is that all of these myriad entities somehow manages to hold together with a common purpose over what is at least a medium term obstacle course with very serious difficulties.I'd like to believe in fairytale endings ,but in the real world they rarely occur.

Anonymous said...
11:41 AM  

Thank you for the calm analysis. It's good to see the "optimistic" side as well, when we guys like Krugman basically throwing in the towel.

I'd like to believe you're right. However, the cure that is being consistently prescribed/applied is poison when the problem is mainly balance of payments. There's little sign of Germany backing away from this quackery. The whole austerity/discipline ideology is embedded deep within their collective psyche. Any attempt to suggest they're wrong is an attack against their very being.

That's why if the Italians, Spanish can't just "muddle through", the Germans might not reconsider their policies. In their mind the failure would only strengthen their view of the Southern Europeans as undisciplined lot that needs beating "until morale improves."

For all your dispassionate analysis, it seems to me that TMM argument boils down to this:

They couldn't POSSIBLY be that stupid.

And that is where I disagree.

Anonymous said...
11:59 AM  

Did someone suggest the efsf couldn't fund itself?

This morning they issued nearly 2bln of 3mth bills at 0.2222% with 3.2x bid/ cover. Clearing a bp or so through France.

Polemic said...
12:06 PM  

re: Eurozone carry trade courtesy of ECB.

Sadly the TMM ignored capital rules. Trading book under Basel 3 is punitive, thanks to SVAR and soon to applied to sovereigns IRC charge. Banking book will sit under Basel 2 where the risk charge increases from 20% to 50% and then to 100% when credit rating drops from A to BBB to BB under standard rules. Given where CDS , IRB charges are hard.

Add EBA stress tests , leverage ratio caps etc and you will find that expanding Eurozone bank balance sheets to carry trade on ITL/SPA is not an option.

Tradebot said...
12:56 PM  

Yes, lets see how EFSF issues 200bn of this stuff and not for 3 months since it is going be lending for much longer maturities. Moreover, it's particularly strange to see Greece issue 6 month bills at 4.95%. This can only mean one thing - credit risk in the ECB system is accumulating massively through Greek and other banks buying this stuff and swapping. Given that Greece default is a complete inevitability at this point, I am not sure how this is good news.

Anonymous said...
12:56 PM  

Apocalyptic big picture thinking has it's place, however: prices are set at the margin...the 3yr LTROs are a significant marginal development...that's it; no need to overcomplicate. ITA steepening suggests this innovation is getting traction.

VandalsStoleMyHandle said...
1:24 PM  

wow great post and comments.

I'm kinda floating right now, like most equity markets, not really sure. Any momo to the downside in EUR (and gold) likely to scare some ppl. Add in a china, and risks still look high but fully dependent on a self feeding fear cycle.

But I am with TMM, Euro death woes are already in the market and BANKS (the most important piece to the puzzle in my mind) are doing a bit better, with ECB help.

For all the gloom and doom, Italy at 6.5% for 10 years is that really so bad. Sure against bund it is, but really just shows how addicted gov't are to low interest rates.

I still worry about inflation more than anything else. If we do get another QE3, I think the flood gates may finally open (along with ECB, and Chinese stimulus)

abee crombie said...
2:58 PM  

oh btw Latin American spreads arent going back to 750bps anytime soon. Facts change.

stupid cheap markets are a thing of the past with the world printing money

abee crombie said...
3:10 PM  

Concur with much of the above, except to point out that the deflationary bucket has a hole in it so it doesn't matter how much you piss in it, you can't generate much inflation.

Questions remaining for 2011 (ahead of TMM's 2012 Non-Predictions), will we get the usual Santa Claus rally (Dec 26-Jan 3 in this case), or will we get a sneaky one in early after the Wizard?

For my money, we are in a declining wedge, as more and more punters go home to wrap prezzies. We have half an eye on the dollar today, as a break out towards and beyond 80 would definitely be RISK OFF, even in these quiet markets. Triple top forming in DXY, and we don't generally believe in those..... that's a bullish chart.

Leftback said...
3:12 PM  

EURUSD breaks 1.31 on Mangler comments.

5 Minute Macro, innit?

Saul Bollox said...
4:01 PM  

Concur,Santa seems to be delivering to the fx traders.

Amplitudeinthehouse said...
8:11 PM  

I am really feeling my oats today after that surge.

Surely another commodity/energy stock massacre cannot be far away. Submerging markups will probably be flogged mercilessly, and miners too.

After that is out of the way, then risk assets should have another high energy bounce.

Bucky the Talking Currency said...
9:17 PM  

But what TMM found exceptionally amusing was that the left-wing press in the UK (the BBC

This blog is an intelligent and informative read but this comment is a] incorrect b] smacks of bitterness
it's not in the slightest left wing it's something that peter hitchens would say - from what i have read since you took over from MM you are cleverer than that

Anonymous said...
1:11 AM  

Last anon... interesting
First thanks for initial praise but sorry to have started to disappoint. Also I am sorry to have undermined your assumption in our perceived cleverness. Sounds we have left you in a humph over a nagging perceptual gripe we have, particularly with the bbc (the today/ PM programs being at its focus) . For you to be as correct as you briefly state, I am sure you have to be better connected than us so I would love to talk more on the issue off-line.. could u mail me on my address in contacts?

Thanks
Pol..
Ps, we really aren't that clever.. you remember the Wizard of Oz?

Polemic said...
8:23 AM  

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