Mish's Global Economic Trend Analysis

G-20 Summit in Flames Already as EC President Blames US For Financial Crisis in Europe
"Germany is a Credit Risk" Says Bill Gross; Germany Exiting Eurozone is One of Very Few Scenarios in Which German Bonds Do Well
Another "We are Saved" Euphoria Lasts Only Moments; European Bond Market Revolts Already as Spain 10-Year Yield Hits Record High 7.28%
Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?

G-20 Summit in Flames Already as EC President Blames US For Financial Crisis in Europe

Posted: 18 Jun 2012 06:08 PM PDT

The G-20 summit is off to a great start if you like fireworks, endless bickering, and finger-pointing. Otherwise these summits are totally useless.

When asked by a Canadian journalist "Why should North Americans risk their assets to help Europe?" EC President José Barroso replied "Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy.

The Guardian has further details in Barroso blames eurozone crisis on US banks.

The opening day of the G20 summit was threatening to deteriorate into a fractious row between eurozone countries and other non-European members of the G20, notably the US, as EU commission president José Manuel Barroso insisted the origins of the eurozone crisis lay in the unorthodox policies of American capitalism.

As Europe's leaders came under intense pressure to act decisively to cure the euro's ills, and a campaign gathered pace to relax some of the austerity programmes laying waste to countries with unsustainable debt levels, Barroso said Europe had not come to the G20 summit in Mexico to receive lessons on how to handle the economy. Asked by a Canadian journalist: "Why should North Americans risk their assets to help Europe?" he replied: "Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy.

"This crisis was not originated in Europe … seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market."

The European council's president Herman Van Rompuy, speaking alongside Barroso, said a draft G20 communique showed "support and encouragement for the euro area countries and leaders and for the European Union as a whole to overcome this crisis".

"We are not the only ones that are so-called responsible for the current economic problems all over the world," he said.

A Few Questions Nannycrats Might Consider

Might I point out to nannycrats Barroso and Van Rompuy that leverage in European banks exceeded leverage in US banks?
How about the fact the property bubbles in Spain and Ireland were bigger than the property bubbles in the US?
Is the US responsible for putting together a structurally unsound euro, or is Europe?
Did the EU fail to do its homework in letting Greece into the EU?
Did nannycrats in Brussels praise property development in Spain before everything blew sky high?

I am quite certain I can ask dozens of such questions.

Let's be honest here. Yes the US caused lots of problems. So did the ECB, and so did the nannycrats. China played a part as well.

Thus, those comments by Barroso are strictly from Fantasyland if not Idiotland. Europe created the euro, not the US. Europe foolishly pledged more and more money to Greece, not the US. And eurozone rules are at the heart of Europe's mess, not anything the US did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

"Germany is a Credit Risk" Says Bill Gross; Germany Exiting Eurozone is One of Very Few Scenarios in Which German Bonds Do Well

Posted: 18 Jun 2012 11:01 AM PDT

Bill Gross echoes my statements that Germany is poised for a big hit either by a piecemeal breakup of the eurozone, by Germany indefinitely ponying up more money to keep the eurozone intact, or by Germany saying it has had enough and goes back to the deutsche mark.

On Bloomberg TV's "Market Makers" Bill Gross of PIMCO spoke to Erik Schatzker and Stephanie Ruhle today and said, "I would be leery of German bunds simply because there are only a few scenarios in which they can do well…Germany for me is a credit risk. It's not an attractive market."

Partial Transcript

Gross on what he sees happening in Europe:

"I would be leery of German bunds simply because there are a few scenarios in which they can do well. If they will do well, if Germany leaves the zone and some way or another move back to the deutsche mark opposed to the euro and pay off obligations in euros and benefit because of it. Otherwise, increasingly, as we have seen over the weekend in terms of Greece, this kick the can environment adds liabilities to the German balance sheet day after day. They have what they call it a target 2 type of liability where they assume constant liabilities from Spain, Italy, and others as they move to the German Bundesbank. Increasingly, as the months move on, Germany becomes more and more liable for the euro balance sheet despite the possibility that Greece departs. Germany to me is a credit risk and certainly in terms of its tight shirt and shrinking shirt at the sleeves, is not an attractive market."

On countries like Germany and Japan:

"We were making a point in internal discussions that these clean dirty shirts have to fit. To the extent that these have been shrunk at the dry cleaners and the sleeves are up to the elbows in terms of low yields then perhaps you do not want to wear that shirt either. That is the case in Germany, not necessarily the case in Japan. In Germany, we have seen a bubble of some proportions as money is moving from Greece and other peripherals into the heart and the core of euro land. Would I buy a two-year German Schatz at close to 0% yield? Probably not. It is not only the dirt on the shirt, but the fit in terms of the yield that is important as well."

On Subprime and Distressed Credit:

"We want yield, but we want what we call safe yield. We want to invest in the cleanest dirty shirts, which appear to be the United States and perhaps the United Kingdom. To that extent, we're looking at mortgages, non-agency mortgages, not subprimes, but agency mortgages which provide a 1.5%-2% yield. These are instruments which because they prepay so rapidly at 25-30% a year, really present a two to three year maturity like the portfolio that Jamie Dimon was mentioning and they yield 1.5%-2%. These are not the heydays of bond investing, those were back in 1981, but to the extent you can beat a two-year treasury at 27 basis points with a mortgage that resembles that at 1.5 to 2 is what we are doing."

On whether Germany has the ability to rescue Spain:

"I think the ECB as representative of euro land as a core has the ability. The question is do they have the will. Any central bank has the potential to increase their money supply to buy obligations and to write checks if they are willing to suffer the currency depreciation that comes from that. Up until this point, the euro has gone down in value. Will the ECB be willing to permit a 10-15-20% decline from this point forward? It's not very German-alike in terms of their attitude. It's not very Austrian in terms of their monetary policy, but increasingly the market expects them to at least move closer to the margin in that regard."

On whether Spanish bonds will ever become attractive to PIMCO:

"Of course. If a bond manager says there is no price, then he is not thinking straight. I think at these levels with these types of market technicals, probably not. What euro land, the EU, and the ECB want, they want the PIMCOs of the world, the Chinese and their associated agencies to come back in the water. PIMCO and others basically sense a lot of sharks in the surface. A lot of fins protruding from the surface. It's not a safe environment as long as the EU and the global economy is delevering, which it continues to do."

On whether there's a point where intervention has to happen in Spain because they won't be able to rescue themselves:

"They say 7%, but that is a fictional number. No one really knows. What's important to me and to PIMCO going forward is to look at the entire zone and not the falling dominoes in Greece, Ireland, Portugal, and perhaps Spain, but to look at the core. Imagine a financing rate for the core if you used Italy and France together, not Germany because they are a little on the too-high quality side and too low yield, but together Italy and France yield about 4% of the total. That's still too high a rate relative to nominal growth. What the EU wants is nominal GDP growth. They want to reflate. They want some inflation as well. 4%-types of financing is still above that 1%-2% nominal GDP growth that they are experiencing. Rates in Spain, Ireland and Greece another matter, but rates at the core are still too high and they need the private market to come back in."

Leery of German Bonds

I concur with Bill Gross. I suppose yields could go negative in a capital flight scenario, but otherwise where are German bonds headed?

Are Germany Two-Year Bonds attractive at .025%?

I do not think .025% is an attractive rate for 2-year bonds. Nor is 1.41% an attractive rate for 10-year bonds.

A bet on long-term German bonds is a bet that Germany is not affected by eurozone fallout and/or returns to the deutsche mark.

One reader commented this is not about return-on-investment but rather return-of-investment. Perhaps so. However, return-of-investment may not hold up if German bonds yields soar due to credit risk.

While I think Germany should exit the eurozone, a piecemeal breakup that has a nasty spillover into Germany is as likely. For a discussion why, please see "Multi-Stage" Nannycrat Proposals; Devaluation - The Last Option? Focus on the Obtanium not the Unobtanium

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Another "We are Saved" Euphoria Lasts Only Moments; European Bond Market Revolts Already as Spain 10-Year Yield Hits Record High 7.28%

Posted: 18 Jun 2012 09:44 AM PDT

Following news of the victory of the "pro-bailout the French and German banks party" known in Greece as "New Democracy", the euro sailed to 1.2760 and a lovefest in the Asian equity markets began.

However, the rally in the euro did not last long. There was no rally in the European bond markets to begin with. The US stock market opened in the red.

Euro 15-Minute Chart

click on chart for sharper image

Chart from Barchart

The rally in the euro lasted about 39 candles, 585 minutes, or roughly 9.75 hours. It was essentially straight downhill once the European markets opened.

European Bond Market Revolts Already

The far more important European bond market never got going in the first place as the following charts from Bloomberg show.

Spain 10-Year Yield Hits Record High 7.28%

Chart from Bloomberg.

Italy 10-Year Yield Hits 6.17%

Chart from Bloomberg.

Greece wants to stay on the euro.
Lovely.
How long will Spain and Italy? What about France?

For further discussion, please see Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?

Posted: 18 Jun 2012 01:18 AM PDT

New Democracy won the Greek election. However, party leader Antonis Samaras still needs to form a coalition.

If this seems like Déjà Vu, it's because it is. We were in the same place following the May election.

Does the Outcome Matter?

This go around, I expect Pasok will reluctantly cave in and form a coalition with New Democracy. The price might be high, such as demanding the much despised Antonis Samaras to step aside.

Regardless, does the outcome matter?

The answer is "not really", except in the very short term, because of what I said in Europe Will Splinter Regardless of Greek Election Outcome; "France Has At Most Three Months Before Markets Make Their Mark" says German Official

All eyes are focused on the Greek election on Sunday.

However, a fundamentally far more important election (for the long term) will take place in France on Sunday.

If socialists take control of both houses in French parliament as expected, president François Hollande would have free rein to carry out his stated policies such as hire more public workers, raise taxes on the rich, and Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

Tensions Between France and Germany Mount

If Hollande is serious, and I think he is, France is going down the tubes fast. Moreover, the already strained relations between Hollande and German chancellor Angela Merkel mount as Merkel attacks French economy.

Major Differences

Hollande wants Eurobonds, Merkel says no

Merkel wants a tighter political union, Hollande says no

Hollande wants bank recapitalizations by the ECB and Merkel says no

Hollande wants more stimulus, more government workers, increased difficulty to fire workers and Merkel disagrees on all counts

Hollande is more willing than Merkel to make concessions to Greece

Hollande wants bigger "firewalls", Merkel does not.

Do they agree on anything other than the desire to keep the eurozone intact?

Socialists win absolute parliament majority in French election

The results are in: Hollande's Socialists win absolute parliament majority in French election

French President François Hollande's Socialists won an absolute parliamentary majority on Sunday, strengthening his hand as he presses Germany to support debt-laden euro zone states hit by austerity cuts and ailing banks.

The Socialist bloc secured between 296 and 321 seats in the parliamentary election runoff, according to reliable projections from a partial vote count, comfortably more than the 289 needed for a majority in the 577-seat National Assembly.

The left-wing triumph means Hollande, elected in May, won't need to rely on the environmentalist Greens, projected to win 20 seats, or the Communist-dominated Left Front, set for just 10 deputies, to pass laws. The centre-left already controls the upper house of parliament, the Senate.

Greek Sideshow

Hollande now has free rein to do whatever he wants. I believe he will do just that, and if so the bond markets will not take too kindly to it, nor will Merkel, and nor will the average citizen in Germany, Finland, the Netherlands, or Austria.

An amazing amount of attention has been focused on the election in Greece when a far more important election was just held in France. The French election received scant media coverage.

Moreover, Spain has not been fully reckoned with, nor has Italy.

France Has At Most Three Months

If Hollande carries out his stated programs, it won't take three months before the bond market revolts, Germany revolts, or both revolt.

Step back for a moment and look at the enormous fundamental rift between France and Germany. Regardless of the outcome of the Greek election, that rift is not going away.

Hollande already threatened to renegotiate the so-called Merkozy treaty (which by the way France has not yet ratified).

Also note that last Thursday, the Bundesbank (Germany's central bank) came flat out and stated Policymakers Should Refrain From "Wild Goose Chase" of Higher Firewalls and Merkel Warned "Limited German Resources"

Assume France does ratify the treaty. Major revisions down the road are virtually impossible.

Dead Before Arrival

Thus, I was highly amused when a group of eurozone Nannycrats agreed to meet later this month to devise a master plan for a eurozone fiscal and banking union. (see Details of the Secret "Nannyplan" Emerge; Proposed Nannygroup Uniforms)

My response was "Dead Before Arrival": Bundesbank Shoots Down EU Banking-Union Proposal; Eight Lessons the EU Needs to Learn

Another Glorious Can-Kicking Event

For now the market is celebrating another glorious can-kicking event. The celebration will last until the bond market has had enough. I expect days at most, and perhaps hours.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Monday, June 18, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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