It has been long in coming but finally the credit market is noticeably refocusing its attention to the two countries that are supposed to carry the burden of bailing out the world on their shoulders: Germany, and, that perpetual placeholder for global rescues, China. As noted yesterday, while following today's anticipated ISDA decision to effectively make price discovery in CDS null and void, and in the process also put the whole premise of sovereign debt insurance into doubt, CDS still provides a very useful metric courtesy of the DTCC, namely open interest, or said otherwise, gross and net notional outstanding in the CDS. And while we will reserve the observation that not only did ISDA kill sovereign CDS, but in the process it also ended bilateral netting effectively pushing up net CDS to the level of gross, we will highlight that as of the last week, net notional in both German and China CDS has hit a record, of $19.6 billion and $9.3 billion, respectively. This is occuring as notionals in the two most active countries to date, France and Italy, have been declining. In essence, what the CDS market is telling us is that while the easy money in French and Italian default risk has been made, it is now finally the turn of China and Germany to defend their credit risk and sovereign spreads. We expect that if China is indeed confirmed to be the backstopper of Europe through funding the EFSF in whole or in part, that while its CDS may or may not surge, net notionals will continue to increase as it means that ever more are laying insurance, as hobbled as it may be, on the country which recently was forced to bail out its own banking system, let alone Europe. Keep a close eye on China, which while the bulk of the market is taking for granted as the global rescuer of last resort with hard money, the smart money is already positioning itself for the next big disappointment.
When we witness the clash between the Austerity and Stimulus camps, on the surface there is the appearance that a true debate is taking place between diametrically opposed economists. For example, Austerity folks correctly note that our economy has been badly weighted towards consumption for some decades. They want to clear out the excesses, let the malinvestments fail, and elect an overall path of acute economic pain in order to reset the system. Stimulus advocates find such plans completely unnecessary, if not downright masochistic. Armed with a more humanistic approach, Keynesians want the government to run large deficits to help the private sector deleverage, which of course could take years....A rather serious problem in the ability of Developed Economies to coherently allocate resources started showing up well before the 2008 crisis. This status quo, made in part by policy mistakes, credit creation, and the energy limit, still remains today. Crucially, neither stimulus nor austerity will dislodge this status quo. Unless, of course, by austerity we mean to intentionally collapse the system, or if by stimulus we mean to engender a runaway inflation that will eventually yield the same result.
Jed Rakoff is well known to frequent readers of Zero Hedge: he is the judge who nearly brought down the SEC settlement with Bank of America over the whole bonus non-disclosure issue two years ago, and where Bank of America effectively acted under the duress of Hank Paulson and Ben Bernanke. Granted at the end of the day he sided with the status quo., but this may be his chance to redeem himself. Just out from Bloomberg:
- CITIGROUP'S $285 MILLION SEC SETTLEMENT QUESTIONED BY JUDGE
- CITIGROUP JUDGE ASKS PARTIES TO JUSTIFY FAIRNESS OF SETTLEMENT
- SEC CLAIMED CITIGROUP MISLED INVESTORS IN $1 BILLION CDO
Dominant Social Theme: Finally, has a bailout that is necessary to combat the problem. Why couldn't they just get it done earlier? Politicians are always dragging their feet until the last minute ...
Free-Market Analysis: Of course, by now you know the EU has announced another "miraculous" bailout. But this article, written by one of our favorite mainstream journos, Ambrose Evans-Pritchard, shows why it won't work, can't work and NEVER WILL work. Hats off to Ambrose. Such clarity is not usually the bailiwick of the mainstream press, not even the Telegraph.
... Alone among EU leaders, Chancellor Angela Merkel goes to tonight's summit in with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord. Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany. Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. – Telegraph/Ambrose Evans-PritchardRead More
Stocks set to pop on Europe debt deal ... U.S. stocks were set to rally at the open Thursday, after European Union leaders agreed to expand Europe's bailout fund and take major losses on Greek bonds – the latest step in an ongoing effort to curb the region's debt crisis. The Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were about 2% higher. – CNNMoney
Dominant Social Theme: The stock market is impersonal and precise. It tells the REAL story about the economy.
Free-Market Analysis: We do believe that the stock market provides all the available price information on a given security. In fact, this is a power elite dominant social theme, that the stock market is "efficient" and gives one an accurate snapshot of where the economy is – and is headed.
But what is never mentioned is that the efficiency of the markets involves more than industrial influencers. The world (to us) seems either in a great depression or headed toward one. The term "Great Recession" may soon not be accurate.
The European sovereign debt markets are dominated by the haves and the have-nots today as risk transfer is the key phrase of the day. Away from the technicals of the CDS markets and the liquidity of the CDS indices, the critical yields on sovereign bonds are not exactly exuberant in most cases. Obviously GGBs are improving but still not dramatically and while we would expect the PIIGS to all be benefiting greatly, we note that from the exuberant opening levels, BTPs (for instance) have leaked lower in price (higher in yield) all day long. As 10Y BTPs inch back up towards 6% and EFSF bonds slide lower in price, it seems, as Peter Tchir points out below, that "it's like throwing a surprise birthday party and not inviting the person whose birthday it is".
We have previously presented the correlation of US consumer confidence and spending in the form of retail sales, leading us to wonder how it is possible that "The More Depressed And Broke US Consumers Are, The More Worthless Trinkets They Buy." Following today's GDP data it is not difficult to see where this post is headed. As we noted earlier, the biggest contributor to the 2.5% annualized GDP spike (the biggest sequential surge since Q4 2009), was Personal Consumption, i.e. consumer spending. This is for the quarter ended September 30, when the market plunged to 2011 lows. It is also the quarter when consumer confidence collapsed completely. And that is what we are showing. Courtesy of John Lohman, we present the correlation between US consumer confidence and the main driver of US GDP growth. Of course, if one assumes that consumer confidence is the true (and leading) data series here, it means US GDP would have declined at a roughly 3% annualized rate. Credible? Realistic? China-inspired? We leave it up to our readers.
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