Behold The New Anschluss: ECB's Paramo - "Prepare To Give Up Significant Sovereignty"

The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: "We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies." In other words, in order to protect people from the "stupidity" of rating agencies which after years of lying have finally started telling the truth, and the market which does what it always does, and punishes those who fail, Europe must be prepared to give up "significant sovereignty" (sounds better than Anschluss) to Europe's "betters" which is another way of saying 'he who pays the piper calls the tune." And "he" in this case is, of course, Germany. In other words, courtesy of one failed monetary experiment Germany will succeed, without sheeding one drop of blood, where it failed rather historically some 70 years ago.

"This Is The Problem" - Charting The Cash Supply-Demand Crunch In Europe

As Europe prepares to set off on a historic, if very divisive round of Treaty changes in an attempt to set the framework to be followed by all countries in advance of the controversial European federalist experiment and even more divisive issuance of "stability" bonds, we thought we would once again remind readers just what the very simple math behind the entire spectacle is, which Europe tries so hard to ignore with each passing day. Because at the end of the day it is a very simple tension: there is massive demand for fresh cash in the form of 1.7 EUR trillion in maturing debt (ignoring interest payments). Of this Morgan Stanley says, "Policy makers and investors have consistently underestimated the bank funding roll as a transmission mechanism of sovereign fears into the banks and real economy." This is 100% correct: courtesy of 30 years of great moderation everyone assumed that the funding markets would operate for ever and that interim rollovers would never be an issues. Incidentally this is precisely what we warned about back in April 2010 when we said that "Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter." As it turns out, we were 100% right on the core problem, but 100% wrong on the location - the rollover funding crunch is not in the US, it is in Europe. And this is precisely what Europe is now fighting each and every day with, coming up with crazier and crazier plans to mask the fact that no matter what, there simply is not enough cash. Because while the first chart shows cash demand needs, the second one shows that when it comes to cash 'supply', or said otherwise issuance of unsecured debt, the market is now completely and totally dead. Indeed, November issuance is just laughable as the red-boxed region so vividly demonstrates. And that, in two charts is that - everything else is hype, rhetoric, smoke and mirrors.

Walk Thru For The Upcoming European Treaty Changes - Is A Redemption Fund The "Transitory" Hail Mary?

Once again today was marked by ongoing disagreements over the form of any and every solution (or non-solution) to the 'problem' that is the Euro-Zone. At every corner, the EU Treaties are dragged up as impediments to the free-and-easy save-us-with-your-printing-press arguments (among others). Credit Suisse provides an excellent summary of the relevant sections and while their perspective is that the Treaties do provide some flexibility for the ECB to extend its operations (and the incumbent introduction of much stronger fiscal watchdog measures), Euro-bonds will (no matter what and certainly noty a slam dunk for success) require a full Treaty change - a process that could take years. There are currently three options being discussed for the Stabilittee bonds - all of which have more than short-term time horizons for any potential implementation and so we suspect, as CS mentions, that the talk of the Redemption Fund from the German Council of Economic Experts will grow louder as an interim step.

Guest Post: The Best Thing Ever Written On Europe

If a ballistics expert were so poor at his job that his artillery routinely fired missiles into the sea or, worse still, at his own men, he would soon be removed from office. He might perhaps be purged more dramatically, pour encourager les autres. No such logic would seem to apply, however, in either politics or economics in the west, where discredited practitioners of failed theories are allowed to pontificate and spend into absurdity. We cannot say with certainty what was spooking European investors prior to last week’s make-or-break summit (the 14th such “crisis summit” in 21 months), but it seems plausible to argue that they were concerned about an unsustainable build-up of credit, credit risk and leverage. Happily, those concerns have now been put to rest, because the Euro Zone’s leaders have pledged more credit, more credit risk, and more leverage. To put it another way, President Sarkozy and Chancellor Merkel have bought more time, albeit time paid for with yet more borrowed money. A three ring circus of blind, incontinent clowns would have more class.

Bill Ackman's Q3 Investor Letter

The focus of the recently released quarterly investor letter by Bill Ackman's Pershing Square seeks not so much to explain why the fund has a negative return YTD, but to justify why the Fund's approach to "intrinsic value" is right, and the market, well, not so much, as well as the show why even if he continues to be wrong he won't have to dump losers. Supposedly this is the kind of the thing that LPs like hearing these days. The one line that sticks out like a sort thumb in this valiant effort to explain the lack of alpha is the following: "It is largely a function of Pershing Square’s growing influence in the capital markets, our experience with previous investments, and specific circumstances with each of our holdings." That's great, and a false belief in one's market moving "economy of scale" works great, until it doesn't. Just ask Bill Milller. Also we wonder: where have all those "HF hotel" idea dinners that used to generate so much faux alpha for the Ackman-Einhorn-Loeb trio, gone? In fact, the hubris of mistaking beta participation for alpha creation is often the ast mistake many hedge funds make just before they can't make any more mistakes. That aside, in the letter Ackman explains away his thesis (again) on JCP, Fortune Brands, Family Dollar, GGP (no longer the sterling poster child of the REIT renaissance), Citi and lastly his recent(ly leaked) investment in the Canadian Pacific Railway. All we can say is that we hope Ackman is better hedged for the coming retail downturn than he was back in 2008.

EURUSD And European Sovereign Risk In Perfect Harmony

We have extensively discussed the extremes to which European Sovereign spread risk has moved over the past few months. Furthermore, if we normalize by looking at a GDP-weighted credit spread across all of the members of the euro-zone, we are at all-time record wides on this measure. One question that has come up again and again is 'given the market's credit perceptions, why isn't the EUR lower?'. It appears that this is mainly due to regime shifts in the relationship as the correlation between EURUSD and European sovereign risk is extremely high when government intervention (specifically QE uncertainties and fed swap lines) is not rife. The point is that for the last four months, EURUSD and European sovereign risk have been almost perfectly correlated suggesting that as long as there is no ring-fence on risk, the EUR will continue to weaken significantly and at a minimum the EURUSD is an effective hedge against sovereign credit deterioration. Watching this relationship may provide insight into repatriation effects or government intervention as well as offer insight into how EURUSD will move given specific bond moves - a 100bps rise in Italian bond spreads alone infers a 140pip drop in EURUSD for example.

In The News Today

November 24, 2011, at 12:59 pm
by Jim Sinclair 

Jim Sinclair’s Commentary

The revelation of Germany’s lack of omnipotence economically brings QE even closer.

Germany Buys Itself First-Class Ticket on Titanic: Euro Credit 2011-11-24 09:34:44.563 GMT
By Mark Gilbert, Lukanyo Mnyanda and Emma Charlton
When the Titanic sank in 1912, even its first-class passengers ended up in the sea. Germany’s failure to attract bids for all the bonds it wanted to sell yesterday suggests investors are growing wary of lending to even the euro region’s most creditworthy nation.
Germany’s 10-year borrowing cost dropped to a record 1.64 percent on Sept. 23 as bunds offered a refuge from the debt crisis. The rate now exceeds 2 percent, driving the gap with U.S. Treasuries to a 30-month high, after bids at the sale of securities repayable in January 2022 fell 35 percent short of the 6 billion euros ($8 billion) offered yesterday.
Bunds are losing the haven status they share with Treasuries as Germany rules out common bond sales to solve the debt crisis, and argues against the European Central Bank becoming the lender of last resort. As recently as Nov. 10, bunds yielded 28 basis points less than the American debt. Ten- year yields advanced to a four-week high of 2.26 percent today in London.
“The Titanic and the single currency cannot continue in its current form,” said Stuart Thomson, who helps oversee about $121 billion at Ignis Asset Management in Glasgow. “Safety lies in another ship, RMS Political Union, which is just over the horizon. It remains to be seen whether the third-class passengers of the peripheral economies and the second-class passengers of the semi-core will be willing to decamp from their current luxury liner to this cramped tramp steamer.”
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Jim Sinclair’s Commentary

As the myth disappears, QE approaches.

Flawed Role Model
Germany’s Finances Not as Sound as Believed By Ralf Neukirch and Christian Reiermann
The German government likes to pride itself on its solid finances and claim the country is a safe haven for investors. But Germany’s budget management is not nearly as exemplary as it would have people believe, and the national debt is way over the EU’s limit. In some respects, Italy’s finances are in much better shape.
When it comes to fiscal stability, frugality and responsible economic management, German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have only one role model: themselves.
The chancellor praises herself and her team for having "a clear compass for reducing debt," and insists: "Getting our finances in order is good for our country."
Her finance minister, a member of Merkel’s conservative Christian Democrats, is no less effusive. Germany, says Schäuble, is a "safe haven" for capital from around the world, because "the entire world has great confidence in both the performance and soundness of the fiscal policies of the Federal Republic of Germany."
Developments in the financial markets seem to bear him out. Last week, the suspicions of international investors reached the stable core of the euro zone. Investors embarked on a massive selloff of securities issued by supposedly model countries like Finland and Austria and sought refuge in German government bonds.
More…

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