The Consequences Of The Unthinkable: Here Is What Happens When The Euro Breaks Up
As the following image from Spiegel summarizes, three things will happen simultaneously when the unthinkable finally occurs: i) economic output plummets, ii) unemployment rate soars, and iii) consumer prices explode. Of
course, this is nothing but merely deferred consequences for Europe
partying for over a decade under an unsustainable regime that borrowed
from the future (sound familiar?). And now the inevitable hangover. In
other words: payback is a bitch.European Bloodbath As Merkel Won't Go Dutch
Equity, credit, and sovereigns all ugly. Merkel's
unequivocal comment on her nation's unwillingness to 'share' burdens
and slap the proverbial cheek of Monsieur Hollande, Italy's banking
union looking for more 'aid', Spain actually asking for their bailout,
Greece 'avoiding' reality, and Cyprus pulling the 'China rescue plan'
last ditch retort to market angst; but apart from that, things are dismal in Europe. Italy down over 4% and Spain almost as bad
on the day as every major equity index is well into the red. Italian
banks monkey-hammered down 6/7.5% and halted a number of times.
Investment grade credit outperformed (though was notably wider) as financials (subs and seniors), XOver, and stocks are plummeted to 11-day lows.
After breaking below the pre-Spanish bailout levels on Friday, Spain
and Italy 10Y are now 20-40bps wider with Italy and Spain 5Y CDS notably
wider and well over 500bps. Notably the short-end of the Italian and Spanish curves underperformed significantly (curves flattened):
2Y BTPs +57bps vs 10Y +21bps; 2Y SPG +37bps vs 10Y +17bps. Europe's VIX
snapped back above 27% (and we note that our EU-US Vol compression
trade is moving well in our favor). EURUSD has been smacked lower by
over 80pips ending under 1.25 once again.Secondary Market Purchases Are 'Not' The Answer For Europe
Spain
has finally made the “formal” request for aid (and Italy right behind
them it seems this morning). There is another summit. Expectations for anything positive seem incredibly low. There
seems to be a scramble to shoot down anything that is said out of
Europe. It really doesn’t matter what is said, the negatives and
potential negatives, and imagined negatives get the traction. Of all the
things people want Europe to do, buying bonds on the secondary market seems the least effective (which ECB's Novotny has now written off)
Any program that has a chance of working has to help both the
sovereigns and the banks. If an action only helps the sovereign or the
bank it is less likely to succeed. If it helps neither, than it is a total waste of limited capital.
So don’t waste the money on secondary market purchases. The money
barely helps the sovereign and does nothing for the banks. It may help
some speculators who will buy ahead of the activity, but will be quick
to get short again when the time comes.No Healthcare Ruling Today As SCOTUS Rejects Parts Of Arizona Immigration Law In Obama Defeat
Those hoping for supreme court to overturn socialism today will have to wait a few more days:- HEALTH-CARE CASE ISN’T AMONG TODAY’S U.S. SUPREME COURT RULINGS
- ARIZONA ILLEGAL-IMMIGRATION LAW GETS MIXED TOP COURT DECISION
- U.S. SUPREME COURT UPHOLDS KEY PART OF TOUGH ARIZONA IMMIGRATION LAW, IN DEFEAT FOR OBAMA - RTRS
New Home Sales "Beat" - What This Means In Context
Today, new home sales came in at 369K, a "big beat" to expectations of a 347K print and up from the 343K previously. What does this mean? The chart below sums it up.
Return of Gloom or Reality Check?
Eric De Groot at Eric De Groot - 21 minutes ago
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[[ This is a content summary only. Visit my website for full links, other
content, and more! ]]
Standard of Living Spread Widens A Little Each Day
Eric De Groot at Eric De Groot - 4 hours ago
The standard of living spread (differences in lifestyles) between the rich
and poor widens with each passing day. This setup has tested the moral,
social, and political fabric of America numerous times in the past. The
following speech by Grover Cleveland applies as much today as it did in
1893. At times like the present, when the evils of unsound finance threaten
us, the speculator...
[[ This is a content summary only. Visit my website for full links, other
content, and more! ]]Markets Tumble As Socialist Kool-Aid Fails To Materialize
S&P
500 e-mini futures are over 20pts below their day-session closing
highs on Friday as energy and financials lead the plunge. The major
financials appear to have finally woken up to the hypothecated reality
of huge collateral calls on the back of their downgrades, the lack of a
simple debt mutualization burden-sharing pile-on to Germany, and now
Italian banks asking for a bailout from the ECB; with Citi and BofA down almost 7% from pre-downgrades and JPM/MS/GS all down around 5%.
VIX has extended its after-hours spike in futures from Friday and
trades back above 21% (up almost 3 vols from day-session close). With
oil tumbling once again and Treasury yields giving all of Friday's rise
back, risk assets in general are leading stocks lower and as we opened
this morning, ES snapped down to converge with CONTEXT. Gold and Silver
are sideways as Copper and Oil fall while USD pushes higher still on
EUR weakness below 1.25 (and only JPY stronger among the majors as
carry gets unwound in a hurry). Not pretty. Spanish and Italian
bank stocks (and credit) are being crushed/halted and Spanish 10Y
yields are back over 6.50% (and spreads over 500bps).With RBS' ATMs Still Busted, Bank Generously Allows Customers To Withdraw Up To £100 Over Limit
6 days... and counting.The Conclusion Of Another Greek Tragedy
“Greece is like a Rice Crispies Square. She’s snapped, crackled and now I am waiting for the final pop.”The new Greek Prime Minister had an eye surgery and cannot attend the EU summit meeting. The new Greek Finance Minister became ill and cannot attend the EU summit meeting. Both a tragic turns of events; we are sure. Both coincidental you may think; but not us. Perhaps upon ascending to power and examining the books they have found that everything was not exactly, how shall we say this; Kosher comes to mind. Perhaps the records indicated a far more serious excursion from the facts than previously thought. The Germany Finance Minister came just about right out and said, “no more money.” Nothing of significance will happen in the European Union unless Germany approves it. (Please repeat this five times and write it on your whiteboard if necessary.)
Q&A On Today's Obamacare Supreme Court Decision
In about an hour, the US Supreme Court, three years after Chrysler, is about to have a profound impact on Wall Street one more time. As Goldman explains, the court is expected to release some of the final opinions of the current session, which ends this week. Rulings on the Affordable Care Act (ACA) as well as the Arizona immigration law are likely to capture the greatest amount of attention. With a number of opinions to get out, it is possible the court could wait until later this week (possibly Thursday, June 28) to release some of the remaining rulings for this term, though the court has not yet announced any additional dates for the release of opinions. Trading in the online prediction market intrade.com implies a 74% probability that the court will find the mandate unconstitutional; prior to the oral arguments in March, it implied only around a 35% probability the court would rule against the mandate. Goldman believes that the outcome is fairly unpredictable and that many market participants probably are relying too heavily on the oral arguments in trying to predict the outcome of the case.
Merkel Crushes Hopes For German-Funded Pan European
UPDATE: Nowotny just confirmed ECB's lack of confidence in the EU Summit and stomped on Greece's hopes for negotiation.
*NOWOTNY SAYS GREEK TALKS CAN'T START WITH WISH FOR MORE TIME
As we noted over the weekend, there really is only one voice on which to act in Europe (and plenty of noise that should be ignored) and that is Germany. This morning we already heard from Herr Schaeuble and Herr Siebert, but Frau Merkel has just come over the top with her hope-crushing reality all over again.
Scramble For Spanish 'Bail-In' Trade Sends Spanish Bank CDS Soaring
It
would appear that for once just talking about a potential solution and
throwing larger and larger completely unfounded and intangible numbers
around as evidence of a 'grand plan' is not going to work as Spain
officially requests its bailout. However, just as we noted last week
(and suggested as the next macro trade to watch), the bailout will come with strings attached; and perhaps, just perhaps, that is why Spanish bank subordinated credit spreads are deteriorating so rapidly this morning. Our call for a 'bail-in' type solution that crams sub and some senior debt is not only causing Spanish banks to blow wider but also spreading into the Subordinated debt of Italian banks
as traders scramble to protect those 'juicy' yields which now seem a
little more worrisome given their position on the capital structure. The
more liquid Senior and Subordinated credit indices have decompressed
around 6bps this morning to a 177bps spread differential (as Subs trade 15bps wider at 465bps on average)
and remains the 'easiest' way to position for a 'bail-in'. We also note
that the LTRO Stigma (the spread between LTRO-encumbered and
non-encumbered bank spreads) has blown back to near-record wides in the
last few days.Schäuble On German Endgame Plans: Can't Let A European Crisis Go To Waste
That
the most important man in Europe is actually a woman is now understood
by everyone. Yet behind even Merkel, sits another man: German finance
minister Wolfgang Schäuble, who is truly the devious mastermind behind
the European endspiel, in charge of playing it in a way that benefits
Germany uber alles. Which is why what Schäuble says, unlike anything
uttered by Europe's "beggar" states, is actually important. Today, he
speaks with Spiegel magazine and discusses, among many other things,
the topic that is the most sensitive for the rest of Europe, and which
must be overcome if a united Europe is to work: the abdication of national sovereignty,
and implicitly the accession of Germany to the head of the European
pyramid. That this will never happen is precisely why the European
experiment is ultimately doomed, but of course they can keep trying, and
in the process transfer as much wealth as possible to the only
beneficiary from an imploding EUR. Wild guess who that is... Because at
the end of the day, it appears that Schäuble is just as wily as
America's own Rahm Emanuel: "SPIEGEL: With all due respect to your vision, is there truly more willingness today among EU member states to give up sovereignty than there was in the 1990s? Schäuble:
The recognition that this is necessary, and the willingness to do so,
has certainly grown due to the crisis, and not just in Germany. I
would much prefer that we not have so many crises, and particularly
not such severe ones. But every crisis also includes the opportunity to
recognize what is necessary [regarding European sovereignty]. That's what led to the fiscal pact, in which 25 EU countries pledged to improve their fiscal discipline. And that's also how the new Europe will come about." Is it finally becoming clear to even the most inept financial journalists what the German endgame is?Moody's To Junk Spanish Banking System In Hours
Nearly two weeks ago we penned "These Three Spanish Banks Will Be Downgraded Tomorrow" which showed which banks had a rating higher than the sovereign following Moody's long overdue Spanish downgrade, and thus were about to be downgraded by many notches. Today, after a ridiculously long delay whose only purpose was to buy time, Moody's is about to junk virtually the entire Spanish banking sector, as was widely expected.The downgrade is expected to happen within hours.Overnight Summary: Euro Summit Burnout
Last week, Europe was the source of transitory euphoria on some inexplicable assumption that just because the continent has run out of assets, and the ECB has no choice but to expand "eligible" collateral to include, well, everything, things are fixed and it is safe to buy. Today, it is the opposite. Go figure. Call it pre-eurosummit burnout, call it profit taking on hope and prayer, call it Brian Sack packing up his trading desk (just 5 more days to go), and handing over proper capital markets functioning to a B-grade economist, or best just call it deja vu all over again.Spanish Bailout To Come With Strings Attached After All
Remember those promises about an unconditional Spanish bailout?- JUNCKER SAYS CONDITIONS OF AID FOR SPAIN WILL INCLUDE RESTRUCTURING PLANS
Frontrunning: June 25
- Merkel Backs Debt Sharing in Germany Amid Closer EU Push (Bloomberg)
- With a ruling as early as today, here are four health care questions the Supreme Court is asking (CBS)
- George Soros - Germany’s Reticence to Agree Threatens European Stability (FT)
- China Stocks Drop to Five-Month Low (Bloomberg)
- The New Republic of Porn (Bloomberg)
- That's a costly detached retina: Greek Lenders Postpone Mission to Athens (FT)
- Spain Asks for Aid as EU Fights Debt Crisis (FT)
- Wolfgang Münchau - Why Mario Monti Needs to Speak Truth to Power (FT)
- U.S. Banks Aren’t Nearly Ready for Coming European Crisis (Bloomberg)
- MPC Member Wants £50bn Easing (FT)
- India Boosts Foreign Debt Ceiling by $5 Billion to Defend Rupee (Bloomberg)
Key Events In The Coming Week And A Preview Of Yet Another European Summit
Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything: "The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries."Spain Formally Comes A Begging
While the world has known for over two weeks that the Spanish banking system is insolvent and locked out of global liquidity, the country was reticent about formally bowing down to Germany and announcing in proper protocol that it was broke. Until a few hours ago, when Spain's Economy Minister Luis de Guindos Monday sent a letter to Eurogroup President Jean-Claude Juncker, as expected, formally requesting aid to assist with the recapitalization of Spanish banks that need it, the ministry said in a statement. Sadly, at this point we can all just sit back and await for the next Spanish bailout letter demanding more cash, because, as we have explained on several occasions, the ultimate funding need of Spanish banks will be well over €100 billion, as further confirmed overnight by another analysis from Open Europe, which notes the patenly obvious: "Up to mid-2015 Spain faces funding needs of €547.5bn, over half its GDP and a large majority of its debt."Another European Summit, Another Beggars At The Feast Spectacle?
The European Union will hold yet another do-or-die summit this week. On this occasion, “growth” is the plat du jour; the allegedly missing recipe in the “plan” to save the euro. In addition, some suggest that this time is also “different” because Greece, France, Italy and Spain may now be ready to corner Germany to relax its sacrosanct fixation with austerity. This summit truly promises to be quite a gathering of beggars at a feast, no less.Bill Buckler On Keynesian Religion As World War... And The One "Good" Thing About It
Today,
we are in the midst of a financial debacle which is more truly global
than any world war. There are no lines of trenches, no shattered towns
and cities, no casualty lists in the papers and no “we regret to inform
you” telegrams being delivered. The carnage is real but it is
invisible. No lives have been lost. All that has happened is that the
living of life has become more difficult and the ability to rely on the
fruits of past efforts for future comfort and “security” has been all
but extinguished. The vast majority of the people are cannon fodder in
this financial debacle. Like the real thing in the trenches of the
Western Front, they have long since realised the futility of the efforts
of their “generals”. They know that the “recession” is not over. They
are starting to realise that it will never be over as long as the same
methods which produced it are being used to get out from under it. But
most see no escape, having become used to looking to those same
“generals” to tell them what to do.Today’s Items:
A growing number in China have been
getting wealthy under the loose control since Beijing has set up
economic sectors and now since the taste of freedom has emerged, there
is more trouble in China. In fact, the political climate, with the
increased corruption, is like the San Andreas fault waiting for someone
to trigger it. No one. in charge in China, wants to be the next
Gorbachev because that will mean the end of the Communist Party.
The use of electric power, a strong
indicator of economic activity, appears to have been overstated. It
would appear that the Chinese government is failing in their attempt to
convert from a strong manufacturing based economy with one that has a
strong in-debt consumer presence.
The Rasmussen Consumer Index, which
measures consumer confidence on a daily basis, dropped two more points
to 80.2. The Consumer Index is down ten points from a month ago, and
down 11 points from three months ago. This is a recovery?
Without realizing it, there is an
increased military presence on U.S. city streets by the U.S. military.
These so-called military exercises are appearing more frequently. While
some feel “Safer” with the military element, it is a set up for military
occupation.
57% of 56 former Supreme Court clerks find
that the individual mandate will be overturned. This is a 22 point jump
the last time the clerks were asked, which was before the disastrous
oral arguments. So, are these clerks right or is “Ole Bug Eyes” Pelosi
right? We will see this Thursday.
When it hits the fan, these are the five types of lookers to prepare for:
1. The family man that has seen all support collapse and has to provide for his now starving family.
2. Escaped prisoners taking advantage of the situation.
3. Gang bangers taking advantage of the situation building up their turf.
4. The military trained who want more.
5. Moms with kids tugging at heart strings.
1. The family man that has seen all support collapse and has to provide for his now starving family.
2. Escaped prisoners taking advantage of the situation.
3. Gang bangers taking advantage of the situation building up their turf.
4. The military trained who want more.
5. Moms with kids tugging at heart strings.
This is the pathetic state that the Office
of the President has come to. Got a birthday, anniversary, or wedding
coming up? Well, put that money to use and give it to the Obama
campaign. Maybe you will get a robo-signed picture of Obama and Michelle
if you send in a thousand dollars.
The developed world is flirting with, or
is in, a recession. The emerging market growth has been cut in half.
More calls for money printing on both sides of the pond will be made.
According to Michael Pento, gold and other precious metals will continue
to tread water until the full monetary assault begins from the ECB and
the Fed.
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