Financial Report for July 26, 2011
1) … In today’s financial news
Open Europe questions Summit side effects: Beginning of the end for CDS? and Doug Noland relates More on sovereign debt crises
Open Europe reports on the catastrophe of Greek socialism In the FT, Gideon Rachman notes, “The EU has contributed to Greece’s something-for-nothing culture by pouring money into the country over the past 30 years. Greece has benefited from billions of euros of grants for agriculture and infrastructure. That money was channelled through government ministries, controlled by political parties that used European funds as a form of patronage. And yet, as part of an effort to restore growth to the Greek economy, the EU has just agreed to hand over another €17bn in new grants (not loans) to Greece. It is hardly surprising that northern European taxpayers feel upset about this.”
In Die Zeit Editor Josef Joffe argues that “what is most worrying is the legitimacy crisis of Europe. One can blame Merkel, as she does not live up to her role as the leader of the wealthiest and most powerful EU member state.” At the same time, Handelsblatt argues that Germany’s role in Europe has already gone too far: “While the Germans used to be the mild giant of the EU, they are now the ones who dictate harsh reforms on weaker countries. That cost them both sympathies and assertiveness…The constant progress of the EU, where every crisis was a step to further integration is out. People just don’t want more Europe.”
FT: Rachman FT: Jenkins IHT: Dempsey Le Monde: de Menthon El País: Carnero El País Publico.pt Zeit Handelsblatt BBC: Peston
Open Europe reports Italian and Spanish borrowing costs back on the rise. Market fears over the long term health of the eurozone returned yesterday, despite a brief respite following the second Greek bailout, reports the WSJ. Spanish ten year borrowing costs breached 6% again, while Italy’s topped 5.5%, levels seen as close to unsustainable for both economies in the long run. The FT reports that full details on private sector involvement in the second Greek bailout are not expected until the end of August.
Meanwhile, the WSJ Real Time Brussels blog notes that the Greek bailout package may actually increase Greek debt this year, since Greece must borrow the money to purchase collateral for the private sector involvement before it can reap any of the rewards from the bond swap or rollover. Belgium held a successful bond auction yesterday selling €2.5bn at only slightly higher interest rates than in May, quelling fears that it could be dragged into the eurozone crisis.
WSJ FT Les Echos CityAM EUobserver El Pais Jornal de Negocios El Pais 2 Telegraph WSJ 2 WSJ 3 WSJ 4 IHT WSJ: Real Time Brussels FTD Handelsblatt
Bloomberg reports FHA May Be Next in Line for Bailout. The nationwide decline in house prices has created a vacuum in the U.S. mortgage market. Private financing for home loans has all but dried up and the U.S. government is now guaranteeing almost every new mortgage. Fannie Mae and Freddie Mac have received most of the media’s attention, but policy makers need to focus on the third leg of the housing- support stool: the Federal Housing Administration. The FHA has some major accounting problems. Left unaddressed, they could spook the markets, lead the FHA to seek a federal cash infusion and further enrage taxpayers. These outcomes can be avoided — but only if policy makers are more transparent about the risks involved in guaranteeing mortgages. As private-financing options have disappeared, the role of the FHA has grown. Its market share has increased to about 30 percent today from 3-4 percent in 2007. That’s because the agency is now practically the only game in town, accepting borrowers with down payments of as low as 3.5 percent. As the last few years have made clear, sizable down payments — or “skin in the game” — are the key to avoiding defaults in the near term and to achieving a stable housing market in the long term (Hat Tip to Between The Hedges)
Bloomberg reports China’s Stocks May Extend Worst Drop in 6 Months, UBS Says. China’s benchmark stock index may extend the biggest drop in six months and sink below this year’s low as slowing economic growth spurs analysts to reduce their earnings estimates by as much as 46 percent, according to UBS AG. A high-speed train crash may hurt profit growth for the nation’s two biggest train makers, said Chen Li, Shanghai-based head of China equity strategy at UBS. Analysts may cut their 2011 earnings growth forecasts for non-financial companies to as low as 15 percent from the current 28 percent, he said. The Chinese central bank is unlikely to ease its tighter monetary policies and may keep on raising interest rates to tame inflation that reached a three-year high last month, Chen said. “Investors’ expectations that tightening policies will be relaxed have been completely dashed after the government reiterated that current policies will remain in place,” Chen said in a telephone interview yesterday. The direction of economic controls shouldn’t change in the second half and will focus on curbing rapid price gains, China Central Television reported July 22, citing Premier Wen Jiabao. (Hat Tip to Between The Hedges)
2) … In today’s sovereignty news:
Zoe Fraley of the Bellingham Herald reports that Governor Gregoire Washington’s governor addressed Bellingham City Club about the past legislative session and addressed a subject that has been the source of recent debate in Bellingham, that being the SSA Marine Gateway Pacific Coal Terminal in Whatcom County’s coastline. Club members packed the Hotel Bellwether ballroom to hear Gregoire speak at the group’s July meeting. She talked about how the state has made some painful cuts to its budget in the face of deficits, and the importance of small businesses and the education system. She also talked about the expansion of Washington state’s green-energy industry, with wind and solar power on the rise.
When she finished and allowed audience questions, the first was about the SSA Marine Gateway Pacific project, which would include a deep water cargo terminal at Cherry Point. “I’m shocked you have any questions on this subject,” she joked. The audience responded with laughter. The other audience questions also were about the terminal, a subject that has been the source of much debate in Bellingham. “Let there be no mistake, Wyoming and Montana are going to extract their coal and they’re going to export it,” she said. “The question is, does it go through Canada or does it go through Washington?” Gregoire said it’s going to take a lot of work and study before she forms an opinion on the project.
Open Europe reports Conservatives and Labour are both rethinking their stance on the EU. Rachael Sylvester In Times notes that, “The Prime Minister and the Chancellor have started to discuss the possibility of repatriating some powers from Brussels. A group of Conservative backbenchers, led by George Eustice, the Prime Minister’s former press secretary, has been given the nod, tacitly, by No 10, to draw up a list of areas that would be a priority for renegotiation.” She adds that, “The Labour Party under Ed Miliband is, meanwhile, taking an increasingly Eurosceptic stance…He recently had dinner in Westminster with Sigmar Gabriel, the leader of the SPD in Germany. According to one confidant, ‘they talked about the need for a new kind of mission for the EU’.”
Meanwhile, the FT argues, “Mr Osborne’s willingness to endorse closer fiscal union – and his tacit acceptance that this may mean a diminution of British influence, is a realistic response to a grave crisis. But the creation of a two-tier Europe is unlikely to make the UK’s relationship with Brussels any smoother.” FT Editorial Times: Sylvester Conservative Home John Redwood Diary
3) … Commentary:
The Age of Deleveraging and Neofeudalism will be characterised by government leaders and corporate leaders ruling in diktat via regional framework agreements, as national sovereignty is waived for regional interests to impose austerity and debt servitude on all, as nations loose their debt sovereignty to bond vigilantes and rating agencies, and in turn have to sacrifice their fiscal sovereignty to the rule of regional leaders, who exercise unified and federal fiscal authority. There will be no liberty and no sovereign individuals. The word, will and way of these regional sovereigns, will provide both regional economic governance and seigniorage, that is moneyness.
The growing spectre of the loss of debt sovereignty is seen in the Bloomberg report Italian, Spanish Yield Spreads to Bunds Widen After European Debt Auctions. Italian and Spanish 10-year bonds fell and benchmark German bunds advanced, widening the difference in yield between the securities, after debt sales by the Mediterranean nations. The Spanish 10-year bond yield increased four basis points to 6.07 percent as of 10:32 a.m. in London, widening the spread to bunds by six basis points to 333 basis points. The Italian 10-year bond yield climbed six basis points to 5.72 percent. The Italian-German spread rose to 298 basis points. Italy auctioned six month bills at the highest yield in almost three years, while Spain sold 2.89 billion euros ($4.2 billion) of three-month bills and six-month bills compared with a maximum target of 3 billion euros
There is coming a day when the European nations will be closed out of the global Treasury Bond market place, and buying interest from the ECB will wane. At that time they will have lost their debt sovereignty, and have no fiscal authority and the current debt crisis will be full blown.
And the growing spectre of the loss of debt sovereignty is seen in the Bloomberg report U.S. May Have Enough Cash to Delay Aug. 2 Deadline for Default. The U.S. Treasury Department may have enough cash to pay the government’s bills for days or even weeks if Congress fails to raise the debt limit before an Aug. 2 deadline, say analysts at UBS AG (UBSN) and Barclays Capital.
The date set by the Treasury is a projection for when the U.S. exhausts its authority to borrow, not when it runs out of money. Chris Ahrens at UBS and Ajay Rajadhyaksha at Barclays say the debt limit may not have to be raised next week, in part because tax revenue is coming in higher than forecast. “Having borrowing authority is like having a credit card,” Rajadhyaksha said in an e-mail yesterday. While the Treasury “will no longer be able to use its credit card” after Aug. 2, “it should still be able to pay its bills on Aug. 3, which is ultimately what matters most.”
Global economic collapse is coming soon: a mortal wound, a stroke, is coming to the head of worlds’ most important institution, that is the financial, economic, banking, investment and sovereign debt markets as Euorpean debt sovereign crisis and the US Treasury Debt Limit crisis deepens.
Chart of world government bonds, BWX, shows their rise to a triple high on today’s parabolically higher world currencies.
Chart of International Corporate Bonds, PICB, shows their parabolic rise higher today on higher world currencies.
Chart of the 30 Year US Government Bond, EDV shows these topped out in early July 2011.
Chart of the 10 Year US Government Note, TLT. shows these topped out in early July 2011.
The fall seen in the Chart of the Flattner ETF, FLAT, since July 19, 2011, communicates that the The 30-10 US Sovereign Debt Leverage Curve Daily, $TYX:$TNX, is falling lower as the 10 30 Yield Curve, $TNX:$TYX, has steepened since July 19, 2011. The Age of Leverage has given way to the Age of Deleveraging with Prosperity giving way to Austerity.
The Leverage Curve $TYX:$TNX
A whole new economic and investment regime and experience is at hand.
As like in The Matrix where just before Neo takes the red pill takes effect, Cypher warns Neo “Buckle your seatbelt, Dorothy, ’cause Kansas is going bye-bye!”. Now with the turning lower of the seigniorage stocks and the defensive stocks, the world is passing from the dusk of neoliberalism and into the night of neoauthoritarianism.
The seigniorage stock Annaly Capital Management, NLY, turned lower yesterday and manifested a long legged doji today.
The defensive stocks, such as the Biotechnology, XBI, and Pharmaceutical, XPH, Small Cap Health Shares, PSCH, Staples, XLP, Water Stocks, FIW, and the Small Cap Revenue Shares, RWJ, fell lower today.
Stocks falling lower today included
Metal Manufacturing, XME,
Morningstar Mid Growth, JKH,
Manufactured Housing, CVCO,
Home Builders, ITB,
Too Big To Fail Banks, RWW
Natural Gas Partnerships, AMJ,
Small Cap Industrial, PSCI,
India Small Cap, SCIN,
Brazil Financial, BRAF,
US Steel, X, fell sharply as Reuters reports inflation destruction. Wall St. Hammers U.S. Steelmakers on Weak Outlooks. Shares of U.S. steelmakers fell sharply on Tuesday after the companies warned of lower third-quarter profits due to slow economic recovery, a drop in steel prices due to over-capacity, and higher raw material costs. Consumer Staples, XLP, fell lower on Inflation destruction as the Associated Press reports diaper manufacture Kimberly Clark, manufacture of Kleenix and Huggies Diapers, cites costs as profits decline eighteen percent.
Open Europe relates Le Figaro reports that French President Nicolas Sarkozy has written an open letter to both houses of Parliament, a procedure never used before, calling for France to be “exemplary in the rearrangement of its public accounts”, in a clear allusion to the “golden rule” included in the EU’s economic governance pact, that would inscribe in the French Constitution the obligation of a return to budgetary stability. Le Figaro Le Figaro: du Limbert
Open Europe reports The Commission has demanded that Spain show evidence that Romanian people have a negative impact on the labour market, after the Spanish government passed rules to restrict Romanians’ work permits. Expansion
Wall Street Journal reports A Leadership Default. The Obama Presidency has been unprecedented in many ways, and last night we saw another startling illustration: A President using a national TV address from the White House to call out his political opposition as unreasonable and radical and blame them as the sole reason for the “stalemate” over spending and the national debt. We’ve watched dozens of these speeches over the years, and this was more like a DNC fund-raiser than an Oval Office address. Though President Obama referred to the need to compromise, his idea of compromise was to call on the public to overwhelm Republicans with demands to raise taxes. He demeaned the GOP for protecting, in his poll-tested language, “millionaires and billionaires,” for favoring “corporate jet owners and oil companies” over seniors on Medicare, and “hedge fund managers” over “their secretaries.” While he invoked Ronald Reagan, the Gipper would never have used such rhetoric about his opposition on an issue of national moment. (Hat Tip to Between The Hedges)
Politico reports Harry Reid’s Debt Ceiling Plan Faces Tough Odds. Senate Majority Leader Harry Reid’s new budget proposal to raise the national debt ceiling faces tough odds in his chamber, even with a White House endorsement. The Nevada Democrat’s proposal includes each party’s sacred cow: no revenue increases for Republicans, and no cuts to Social Security, Medicare or Medicaid for Democrats. But the bill calls for $1 trillion in savings from winding down the wars in Iraq and Afghanistan, a provision that Republicans, and even a Democratic caucus member, dismissed as a budgetary gimmick since the Pentagon already had planned to cut military spending through the troop drawdown. “I don’t think it’s a real cut,” Sen. Joe Lieberman (I-Conn.) told POLITICO, though he didn’t rule out supporting the plan. “It’s like a bookkeeping cut. It goes to an artificially high [Congressional Budget Office] number to just what we assume will be a reduction in overseas contingencies fund because we’re drawing our troops out of Iraq and Afghanistan.” Sen. Marco Rubio (R-Fla.) called it a “terrible plan” that “does not solve our problem.” And Sen. John Cornyn (R-Texas) pointed to the $1 trillion in savings from Iraq and Afghanistan and said, “I don’t know how you call that a savings.” (Hat Tip to Between The Hedges)
Neofeudalism will see conflicts amongst leaders. Wall Street Journal reports Frenemies: Two Greek Rivals Hold Nation’s Fate in Balance. Amongthe most adept and capable, will be the Sovereign, the European Chancellor, who will have a fierce disposition and who will be adverse to any contrarians, or libertarians who oppose him. Ron Paul in most ways, is the polar opposite of the coming Sovereign; but is like him, in that both have zeal and determination to rise to be the top dog. Speaking of top dogs, the Sovereign, will be accompanied by the Seignior, the top dog banker, who eventually will effect unified regulation of banking globally, as called for by Timothy Geither in Financial Times article. Doug Noland communicated that Neolilberalism was charactized by wildcat finance; Neoauthoritarianism is charactrized by wildcat governance. Both are fascinating and terrifying to observe; the former is like a giant anaconda slithering across the jungle floor; the latter is like a seven headed and ten horned beast rising from the sea of humanity; the beast of global governance compbined with state capitalism is coming to rule mankind. Most investors are totally unprepared for Neoauhoritarianism as they are invested in fiat assets of a prior age of plastic wealth; they are going to experience the investment “desert of the real” and like Neo in the movie The Matrix, quickly “want out. I’ve consistently recommended that one be invested in gold bullion.
4) … The US Dollar, $USD, traded by UUP, closed lower today at 73.50
The world currencies, DBV, emerging market currencies, CEW, commodity currencies, CCX, FXA, FXE, FXM, FXC, ICN,FXB, FXS, SZR, FXF,CYB, BZF, XRU, FXY, BNZ, all moved parabolically higher.on the trade that the US sovereign debt is going to loose its top rating.
5) … Base Metals, DBB, rose to a triple high.