Here's the Guardian's Cartoon explaining the European Bailout Plan
5 years ago
Saturday, October 29, 2011
Weekend News
It was just last night and about a dozen times the last month that I reminded you of the Political Reality, "If you have news that must be released, but don't want it scrutinized, Friday night is the time to release it". Ever since the 24 hour news cycle started, this has been a VERY WELL KNOWN FACT. When I was a Political Junky and followed every bit of domestic politics, Friday night was my fishing time-all the best bits were released Friday night if you could find them.
So, it's interesting that Germany decided to release this news which has been known for weeks, not only Friday night, but in German time about 11:45 p.m.
Here's the headline from the TeleGraph UK:
Here are the key points:
So, it's interesting that Germany decided to release this news which has been known for weeks, not only Friday night, but in German time about 11:45 p.m.
Here's the headline from the TeleGraph UK:
Germany is €55bn richer than it previously thought because of an accounting error at state-owned bank Hypo Real Estate Holding.
Wow! That's damn good news. That means Germany just found $55 billion Euros under the couch cushion which also means that they are 25% of the way to fulfilling their $211 billion Euro EFSF obligation and all with found money!
Why found money? There was an accounting error at state-owned Hypo Real Estate Holding in which collateral for derivatives wasn't netted between the asset and liability side. It isn't found money so much as a reduction of debt-$31 billion Euros for 2011 and $24 billion Euros for 2010, all money that was previously thought to be debt can now be used to fund the EFSF!
That's great news, so why release it when no one is watching the news, after all it was discovered earlier this month. HRE was nationalized after the failure of Lehman brothers and Germany injected capital and provided guarantees and took it over. Again, why so quiet about "Found Money" that will go toward 25% of Germany's commitment to the EFSF?
Since I thought it was good news at first read and I'm not an accountant, I'm probably not the right person to explain this, but I was smart enough to know that a substantial amount like this seemed like very good news for the EFSF, heck, it even lowered German debt to GDP by a full percentage point! Releasing it at the time they did, when it could have been released during market hours any time this week, had a fishy smell to it.
Not Good News for the German Banking System
"That they’ve just found €55 billion down the back of the couch is nice but I still wouldn’t regard it as good news. For Hypo Real Estate is government owned and has been since it was bailed out as a result of the financial crash. And when you’ve got a government owned bank you do really rather hope that they’re managing to do the sums right. Which doesn’t seem to be the case"
"And that’s a horrible and childish error they’ve made in the accounts there too. Of course you net off collateral, you’re supposed to be measuring what you have, what you’re owed and what you owe when you do the accounts.
The real reason that it’s bad news is this. OK, sure, the error here was to the bad, showing that they had less money than everyone thought they did. But this simple error was large enough to change the public debt figures of the whole nation by 1% of GDP.
Now, who feels confident enough about the standards of accountancy, heck the standards of arithmetic, in the German banking system to be absolutely certain that there aren’t other errors out there, errors which might be running the other way? Are you really sure that the standards of auditing are up to having caught them all?"
Oh... I get it now, it's a state run bank and the mistake went on for well over a year and was so large that is created a 1% correction in German debt to GDP. I guess that could be a little embarrassing. Ever since last Sunday, it was pretty clear that no one in the EU had given this "plan" a moment's consideration. In fact the first summit on Sunday night was used almost exclusively to yell, point the finger, say, "I told you so" and was otherwise quite embarrassing to the whole of EU Finance Ministers. The Plan released on Wednesday wasn't as I pointed out, "An Action", but rather a "Plan for action", so they didn't fix anything, they proposed a plan that had no details about how they would get there and still they don't know how they will get there. There's an assumption that China will add $50-$100 billion to the fund, so long as other BRICS nations contribute, but Brazil, the "B" in "BRICS" already said "No". Furthermore the Chinese are asking for a lot, basically they are asking the EU to reverse all trade policies that have been put in place to China's dismay and they want to drive a wedge between the U.S. and the E.U. over currency manipulation. Really they want the E.U. to reverse course on everything they have been steadfast about over the last decade or to sell out their principles for the money. Furthermore China is taking their sweet time in making the decision, saying it won't be on the next G20 agenda. Then there's the unintended consequences of all fiscal decisions, such as the "FADS" QE programs-they drove commodity inflation through the roof-remember $5 a gallon gasoline and companies struggling with material costs. The UI of the EU program has already started with the other PIIGS starting to sabotage their GDP in hopes of getting similar treatment as Greece!
In other news
Norway, considered to be one of the best fiscally run countries in Europe has done what France and probably all other European banks and sovereign wealth funds have been doing-DUMPNG INVESTMENTS to raise cash in a banking sector already in a liquidity freeze and expected to raise capital ratios to the tune of more then double their current market capitalization. However, Norway's Sovereign Wealth Fund did make one boo-boo, they bought Greek bonds last year with the intention of holding them through maturity as they believed Greece would never default. Now that they are facing a 50% loss on those Greek bonds, it's time to raise capital and REALLY FAST!
Norway's Sovereign Wealth Fund Sold All U.S. Mortgage Bonds
The fund holds no mortgage bonds issued by Fannie Mae and Freddie Mac, the U.S.-controlled mortgage financiers, and an "insignificant" amount of private home loan-backed bonds, said Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, today in an interview in Oslo.
In total, the fund held $6.6 billion $USD in Fannie Mae at the end of Q2 2011 and about $2.11 Billion in Freddie Mac as of the start of the year, they're all sold. So at some point over the last 3 months or so, they have all been liquidated, which further confirms the EURO Rally as $USD denominated assets have been sold over the same time period, the $USD that were raised were sold and Euros were bought and repatriated to Norway.
Further proof was offered a few days ago when I posted about the second largest weekly drop EVER in the "FAD'S" Custodial Account for Foreign Accounts, selling of bonds and agency paper hit $20 Billion dollars for the week, bringing the amount for the last 8 weeks alone to a staggering drop of $93 Billion dollars! As I said when first explaining this phenomenon several weekends ago, EU banks and governments are selling "EVERYTHING THAT ISN'T NAILED DOWN!" As you can see by the 2 month average of $11.625 billion dollars a week over the last 8 weeks, the pace is picking up as the last week was nearly double that amount!
It's simple supply and demand, you flood the market with $USD sales and demand as well as prices move down, you then flood the market with EUR. purchases and supply is tightened and prices move up. The HFT algorithms that are based on legacy arbitrages chase what the computer perceives as "Cheap equities" and drives the rally that much harder. However, it MUST be pointed out, that the purchases of stock that have sent this rally higher and higher are based on a false assumption, the notion of value when in fact as pointed out, y.o.y. EPS are falling by 8.5%. In essence, the HFTs have been loading up on assets in which the computer reads as a bullish environment, when in fact not only are EPS estimates falling moving forward, making the stocks worth less fundamentally, but the entire reason for the Euro rally is based on a negative event of frozen European bank liquidity (just like we saw in the US in 2008 that caused Bear Sterns and Lehman Brothers to crash) which the banks are desperately trying to stave off by selling every asset class, especially dollar denominated.
When looking at 3C and seeing one of the worst negative divergences I have seen in a long time, it also suggests that the E.U. banks have sold another $USD denominated asset, stocks; only the rally in the Euro due to repatriated funds masks the bearishness of what is really happening. Breadth readings (as boring as they are) also show something worth noting, fewer and fewer stocks are participating in the rally. Instead of having a solid rally that is like a solid mountain, breadth readings are showing something more akin to a thin stalagmite rising from the ground straight up while the further up t grows, the thinner it gets.
Stocks fall when there is no demand for them and the price is no longer supported. It is likely we have witnessed over the last month or so, one of the biggest exoduses in equities that we have seen in years. To further drive the point home (besides 3C and breadth readings), while the market has moved parabolically higher (which would usually tend to draw investors back in to the market), the week ending October 19th (which saw the S&P-500 gain 12+% since early October) saw domestic equity funds lose $3.5 Billion dollars in redemptions, making this the 10th consecutive week of equity (stocks) fund outflows totaling $100,000,000,000 (that's right, $100 Billion dollars). Two things I'd like to point out, the timeframe of the 10 consecutively weekly outflows is similar to the "Fad's" Foreign Custodial Account losses (meaning Europe not only seems to be abandoning Treasuries, Agency Debt, PrimeX markets, but also US stocks) and secondly, this amount in the last 10 weeks is equivalent to what was redeemed through the entire year of 2009, except it only took 10 weeks!
It is important to understand that these funds don't just redeem the money from their saving's account, unless money starts magically flowing back in to the funds-THEY MUST SELL STOCKS to meet the redemptions, putting further downward pressure on the markets and further reducing breadth.
While this is a rather recent development, Hedge funds reported for Q3 2011 an outflow of $19.3 billion representing the first quarterly loss of net redemptions since March 2009.
Sonner, rather then later, this all catches up and unlike past outflows where money was, "Sitting on the sidelines", it's unlikely this money is coming back.
As for the short squeeze rally, which was no doubt a large reason for the rally, NYSE Short Interest has now fallen to a 2 month low as weak hands have been squeezed out.
Onto Portugal:
It was perfectly preddctable that the "me first" attititude would arise throughout the EU PIIGS (Portugal, Ireland, Italy, Greece and Spain" the minute that Grecce got the gift of debt relief. Unbelievable as it is, Greece is being "saved" AGAIN by allowing them to essentially default on their debt, by a margin of 50%. Why wouldn't other PIIGS demand the same treatment? It was less then 24 hours before Ireland started making noises and now Portugal is starting down its own path. While Ireland is going the route of manipulating their data and possibly sabotaging their own economy to get concessions, Portugal is showing real signs of distress.
I'm not going to spend much time on the Reuters Story just out today in which Portugal asks G20 member Mexico to go to bat for them in pleading their case to the US and asking for assistance-it sounds like a dead end to me. The "Fad" will likely be more concerned with the surge of US treasury selling and trying to find replacement buyers or step in to fill the void then worry about Portugal and if the US decides to help, it will be to spite China and their demands which seek to put a wedge between the EU and the US when it comes to Chinese issues like a market economy distinction and the issue of being labelled a currency manipulator.
So lets take this straight to where it will end up, in EU hands and why should the EU start paying attention to one of 4 other PIIGS all crying, "Wolf"? Because of real, tangible evidence that Portugal is on the same dirt paved road as the Greeks were.
Ambrose-Evans-Pritchard already rang the alarm bells in the Telegraph last week and if the Finance Ministers were smart when crafting their plan, they would have addd Portugal to their list instead of focussing so much on Greece.
Here's a tidy little headline that captures the spirit of the article,
Europe's rescue euphoria threatened as Portugal enters 'Grecian vortex'
Monetary contraction in Portugal has intensified at an alarming pace and is mimicking the pattern seen in Greece before its economy spiralled out of control, raising concerns that the EU summit deal may soon washed over by fast-moving events.
Here's a chart released by the ECB of M1 data
-The M1 data - cash and current accounts - is watched by experts as a leading indicator for the economy six months to a year ahead. It has been an accurate warning signal for each stage of the crisis since 2007.
-Data released by the European Central Bank show that real M1 deposits in Portugal have fallen at an annualised rate of 21pc over the past six months, buckling violently in September
-A mix of fiscal austerity and monetary tightening by the ECB earlier this year appear to have tipped the Iberian region into a downward slide. "The trends are less awful in Ireland and Italy, suggesting that both are rescuable if the ECB acts aggressively," said Mr Ward (Unintended Fiscal Consequences)
-A shrinking money supply is dangerous for countries with a high debt stock. Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.
That seems like the most succinct bullet point presentation that essentially says, Portugal is the next Greece and maybe worse. The ECB can't pretend they didn't know about this in advance.
Thats the news and review so far...
I can't help but ask myself, as the weeks and months ahead of us see the EU try to put flesh on the bones of its "Grand Plan", conceived in about 4 days to resolve a continent's problems:
Where will the Trillion plus Euros come from?
Who is willing to put their country at risk (when it's already at risk) by giving billions of dollars to a Europe who is now trying to save their single currency for the 14th time in 20 months?
Who trusts that their plan is enough for what they know right now?
And like any good boxer or politician, who trusts that the EU is robust enough to change the plan as both know that every fighter or politician has a fight plan until the first punch is landed?
Who trusts that the ultimate backstop, Germany, won't through the main cheerleader, Merkel, under the bus and choose to save itself rather then countries that share little in common with them other then a continent and single currency? We've already seen the "other backstop-France" fall target to the bond vigilantes and rating's agencies and less then 48 hours after announcing the grand plan, Germany's borrowing costs are already rising.
Who will trust the EU after they made legitimate lenders (bondholders) take a 50% loss for daring to lend to a country that few others would lend to. Furthermore, the insurance that the bondholders took out in case of such a betrayal at significant cost was declared by the EU, "Null and Void".
Who trusts that the rest of the PIIGS won't collapse and that the core itself won't be infected as France already is seeing over the last few weeks?
Who trusts that the EU and Troika are competent enough to deal with the unintended consequences that this plan will surely bring about and after the US's downgrade by the S&P because they couldn't work together fast enough to raise the debt ceiling, why should 17 nations with different constitutions and laws, different cultures and economic problems be trusted to work together any more effectively then the US?
There are so many questions, I could ask all night, but assume someone does step up and clearly the plan has been enough for now to keep banks from shutting down and the bond market somewhat pacified, but that won't last long unless the bones of the plan are fleshed out. So, when/if some creditors step up and the EU must accept, it is not likely to be the US, nor the G20, the few that are left are going to demand significant political and financial concessions for the risk. CAN EUROPE AFFORD EITHER?
