Greek Debt Default Introduced Eurobonds And A Common Debt Agency, Papandreou Says

Financial market report for the week ending July 29, 2011

1) … The European Financials, EUFN, fall six percent lower on the week as the Greek Debt Default introduced Eurobonds and a common debt agency.
King World News reports Germany’s Fourth Reich has conquered Europe.

Open Europe reports Last week’s deal introduced Eurobonds and common debt agency, Papandreou says.
Greek Prime Minister George Papandreou yesterday told MPs from his PASOK party that, “The decision of our European partners to lend us at 3.5%, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet.” According to Euractiv, he added that the measures taken to bolster the EFSF bailout fund, which will allow it to purchase bonds on the secondary markets, mean that “in an embryonic form, a truly common debt management practice is beginning in the eurozone.”
His comments are unlikely to go down well in Germany and contradict those of Finance Minister Wolfgang Schäuble, who yesterday stressed that the Greek situation was a one off and that his government “rejects a ‘carte blanche’ for widespread purchases” of bonds. The lack of clarity about when and under what conditions the EFSF will be allowed to intervene in markets has continued to send Spanish and Italian borrowing costs upwards. “Greece will at least take a decade to become competitive again,” Schäuble added in an interview with the Passauer Neuen Presse. “There is no free pass for the use of the newly created instruments.”
The WSJ notes that IMF financing of the new Greek package “is not a done deal,” according to Paulo Nogueira Batista, Brazil’s representative on the IMF’s executive board. There are legitimate questions about whether the package is sufficient to lower Greece’s debt profile enough to make the country’s debt sustainable, he said. The FT notes that Germany is launching a complimentary initiative to encourage its businesses to invest in Greece, a move which has been met with resistance by German business leaders.
Meanwhile, in the latest downgrades to hit the eurozone, Standard & Poor’s has joined Moody’s and Fitch in saying that last week’s summit deal would put Greece in “selective default”. The IMF has warned that France will miss its target of cutting its budget deficit to 3% by 2013 unless it carries out more spending cuts and that French banks are also “significantly exposed” to peripheral area countries and remain less capitalised than their European peers.
Telegraph BBC Les Echos FT FT 2 FT 3 WSJ European Voice EUobserver FT 4 WSJ 2 EurActiv EurActiv 2 WSJ 3 IHT Liberation El Pais El Pais 2 El Pais 3 FTD 3 Zeit City AM City AM 2 City AM 3 Irish Times FAZ 2 Handelsblatt Irish Independent: Keenan WSJ: Heard on the Street Telegraph: Evans-Pritchard Times: King Le Monde Les Echos: Prandi Irish Independent: O’Callaghan PNP

Open Europe reports an editorial in the FT that looks at French President Nicolas Sarkozy’s call for a constitutional ‘golden rule’ to curb the budget deficit and notes, “Mr Sarkozy is playing politics with the balanced budget rule. Constitutional amendments that serve as fiscal straitjackets are not the answer. What France needs most of all are political leaders with the courage to tell voters that the nation must live within its means.

Open Europe reports David Cameron’s advisor proposes ignoring EU rules on temporary workers
An article in the FT reports that Steve Hilton, David Cameron’s strategy director, has proposed the abolition of maternity leave and all consumer rights legislation as a means to boosting Britain’s economic growth, both of which would come up against EU legislation. He also suggested that the UK ignore EU rules on temporary workers, due to enter into force in the UK in October. Meanwhile, in a letter to the Telegraph, Conservative MP Bill Cash argues, “50% of our business regulation comes from the EU. This is strangling our domestic growth and costs at least five per cent of GDP.” FT Telegraph: Letters

Other significant fallers of the week:  XBI -5.3, IWO, -5.2, IBB, -4.8, RZG, -4.6 IYT, -4.5, PEJ, -4.2%.

2) … In today’s seigniorage news
Yahoo News reports Bank trading slump to spark more job losses

Irvine Renter reports Lenders delay foreclosures to slow a worsening home-price double dip  In an effort to ease the saturation on the MLS, lenders have slowed the rate at which they are filing default notices and moving on foreclosures. The result is more shadow inventory, more delinquent mortgage squatting, and another delay for the hoped-for housing market recovery.  And he relates Lenders sporadically foreclose on large loans with second mortgages. Lenders have been concentrating shadow inventory in communities like Irvine with larger loan balances and numerous second mortgages. They foreclose only on rare occasions, and they do so in a capricious manner to combat strategic default and avoid large losses. And he asks Should the GSEs rent REO instead of selling at very low prices?  Real estate sellers that can’t get their asking price often consider renting the property and waiting for better days. Now even the federal government is considering holding some if its property purchased as REO through the GSEs. Is that a good idea?

Mike Mish Shedlock reports Vote of no confidence in Debt Plan Investors wasted not time in a vote of no confidence on the latest debt package supposed to save Europe. 10-year Spanish government bonds are back above 6% and yields on Italian government bonds are close behind. Yields on Portuguese and Irish debt fell, supposedly on the belief the latest debt deal will lower borrowing costs. It won’t. The S&P”s statement “some provisions of the EU’s rescue plan would help protect Ireland and Portugal” is laughable. There is no way the EU’s EFSF, the European Financial Stability Facility, can cover Spain, let alone Italy.

3) … In today’s financial news
As seen in this Yahoo Finance three month chart Exxon Mobil, XOM, continues to under perform peers. chart of XOM

Banks involved with carry trade lending turned lower this week as the Yen, FXY, and the Swiss Frank, FXF, rose strongly.





Bonds, BND, rose, as the the Flattner ETF, FLAT, rose as the 10 30 yield curve flattened, and the 30 10 Leverage Curve steepened.

The Flattner ETF, FLAT

The 10 30 Yield Curve flattened

The 30 10 Leverage Curve steepened manifesting a massive dark cloud covering candlestick

All US Treasuries rose: The Zeroes, ZROZ, rose, the 30 Year US Government Bonds, EDV, rose, and the 10 Year US Government Notes, TLT, rose as the benchmark interest rate on the 10 Year US Note fell lower.


Mortgage Backed Bonds, MBB, rose.

Longer duration corporate bonds, BLV, rose as did the shorter duration ones, LQD

Corporate Bonds, LQD

Emerging Market Bonds, EMB rose.

The 300% of the 20 Year Treasuries, TMF, was a slam dunk short selling opportuntiy.

Rising world currencies, and a supposed flight safe haven from falling stocks, have driven both international corporate bonds, PICB, and world stocks, BWX, to what is essentially new highs.

The U.S. dollar, $,USD slipped 0.4% this week to close at 74.0  Currencies rising this week included
the Swiss franc, FXF, 4.3%,
the Japanese yen, FXY, 2.3%,
the New Zealand dollar, BNZ, 1.7%,
the Australian dollar, FXA, 1.3%,
the South African rand, SZR, 1.2%,
the Swedish krona, FXS, 0.9%,
the British pound sterling,  0.8%, FXB,
the Norwegian krone, 0.7%,
the Russian ruble, XRU, 0.5%
the Indian rupe, ICN, 0.5%
the Singapore dollar, 0.4%,
the Danish krone, 0.3%,
the Euro, FXE, 0.3%,
the Chinese Yuan, CYB, 0.3%
the Brazilian real, BZF, 0.2%.  
Currencies declining  this week included
the Taiwanese dollar, 0.2%,
the South Korean won, 0.2%,
the Canadian dollar, FXC, 0.8%,
the Mexican peso, FXM, 0.8%.

Gold is both a commodity and a currency; it closed on the Comex at $1627.70, a new all-time high.

Peter Garnham of FT reports “Foreign exchange trading volumes in London have risen sharply to record levels.  The surge in activity in London came as turnover in New York and on electronic broking platforms remained relatively stable, suggesting that London banks were strengthening their hold on the world’s largest financial market.  Average daily turnover in traditional forex products in London rose to $2,000bn in April 2011.  That was up 25% from the $1,600bn daily volume reported in April 2010 and was driven by a 43% surge in daily spot forex volumes, which climbed from $642bn in April 2010 to $919bn.”

4) .. Political and economic regimes have fathers …. and powerful leaders as well.
The world passed through peak stock in July 2011, as world stocks, ACWI, entered an Elliott Wave 3 Down in April 2011.

Peak wealth finally turned lower as is is seen in today’s fall of Utilities, XLU, such as NEE, NI, and IDA, falling sharply lower.

The world is now passing through peak credit, as bonds, BND, are completing an Elliott Wave 5 up.

The world is now passing through peak currencies, as the world’s major currencies, DBV, and the emerging market currencies, CEW, topped out in April 2011. The chart of Small Cap Pure Value shares relative To Small Cap Pure Growth shares weekly, RZV:RZG Weekly, the currency yield curve, suggests that competitive currency deflation, that is competitive currency devaluation, will soon get underway.

Rising currencies have driven a number of country ETFs to historic highs; these include New Zealand, ENZL. Indonesia, IDX, and Thailand, THD. Soon these will no longer be safe haven investments; the only safe haven investment will be ownership and possession of gold bullion.

Whereas the neoliberalism was characterised by the spirit of Dr. Seuss’ The Cat In the Hat, neofeudalism is characterised by a Spirit of Wilding; it is a Beast System, a Beast Regime, occupying all of mankind’s seven institutions and ten regions. The Age of Wilding, which accompanies the Age of Deleveraging, is exemplified in the Associated Press report US review finds Iraq deadlier now than a year ago.

Doug Noland noted that neoliberalism is characterized by wildcat finance; I relate that neoauthoritarianism is characterized by wildcat governance where political parties are at sharp odds with each other, and the world’s ten regions in conflict with each other. Business Insider reports Hell is re-breaking loose in Europe, as Bailout Fund gets closer to blowing up and Business insider reports Germany accuses China of causing catastrophic starvation in Africa and OfTwoMinds reports The coming global instability. Also, NPR reports In Chicago, a test of wills over a budget deficit and EconomicPolicy Journal reports Chicago is an economic train wreck with Rahm Emanuel at the throttle.

Governance in America is characterized by Leadership Default. Associated Press reports the GOP controlled House and the Democrat controlled Senate remain at loggerheads over debt legislation required to avoid a first-ever default on U.S. financial obligations as lawmakers and the White House head into a pressure-packed weekend in search of compromise. The fundamentals of Leadership Default is that the Democrats want to eliminate war spending; the Republicans want to cap and shrink government social spending so that government can fit in a briefcase, specifically their briefcase; and the Tea Party wants to totally eliminate Federal government so that sovereign individuals can live in liberty.  Robert Wenzel of EconomicPolicy Journal relates Details of Federal Reserve meeting with Primary Dealers: “This is real inside baseball stuff It is important for those of trading the Treasury market. For the rest of you, move to the last paragraph and note that dealers are telling Treasury that they might be able to repo their MBS portfolio to raise cash. In a way, the repo of the MBS portfolio would be the start of the liquidation of the government. I’m all for it and government land and buildings should be next.”

The concept of sovereign individuals living in liberty is a delusion of the anarcho capitalist mind. The concept of choice is a dream of the neoliberal mind, as the prior age of prosperity has given way to the age of austerity; most assuredly liquidation of government is not coming, rather diktat is rising to rule mankind. Milton Friedman’s dream of Free To Choose will soon be a mirage in the Desert Of The Real.  2 Corinthians 5:17-18 presents there is no choice, as all things are of fate; all things are of destiny.  

I am practically alone in presenting the idea that a Global Economic Collapse is coming soon and that sovereign leaders will rule the world. I believe that a Chancellor, The Sovereign, Revelation 13:5-10, and a Banker, The Seignior, Revelation 13:11-18, will rule in Europe, and that President Obama will declare Martial Law and rule by Executive Order, and that a Triumvirate of North American Leaders will waive national sovereignty, and rule along the lines of the Security and Prosperity Partnership of North America, the SPP, that was announced at Baylor University by Bush, Marin, and Fox on March 23, 2005.  I see the 1974 Clarion Call of the Club of Rome, soon being fulfilled where ten regions economic governance are announced by Leaders’ Framework Agreement, with state leaders waiving national sovereignty. Emergency stakeholders appointed by government ministers and corporate leaders will oversee factors of production, and manage these for continental and regional security and prosperity, with state corporatism, that is statism, as the form of governance. Emergency management is exemplified by the Jerry White report Democratic mayor rolls out Detroit downsizing plan. “Detroit Mayor David Bing revealed further details Wednesday of his plan to shrink the city by forcing residents out of neighbor hoods deemed too poor or under populated.” Basic materials and natural gas providers such as TransCanada Corporation, TRP.TO, will expropriated. The North American Continent will become known as CanMexAmrica and governed as the North American Union.

Political and economic regimes have fathers and powerful leaders as well. Throughout history, powerful leaders have risen to rule mankind; the progression of five leaders is seen in the fulfillment of Nebuchadnezzar’s Dream of  Daniel 2:31-35 with the Statue of World Governments shown:
1) Nebuchadnezzar ruling Babylon; the Head of Gold.
2) Cyrus and Darius ruling Merdo Persia; the Chest and Arms of Silver.
3) Charlemagne ruling Rome; the Belly and Thighs of Bronze.
4) Tony Blair ruling Great Britain, and George Bush The Decider, ruling America with Unilateral Authority; the Two Feet of Iron And Clay.
5) And soon the European Chancellor, The Sovereign, and the European Banker, The Seignior, ruling the Eurozone, as other Authoritarians rule, in the other nine regions of the world; Ten Toes of iron and Clay.

Neoliberalism was the Free To Choose currency economic, investment, banking and cultural regime, that was great grand fathered by Milton Friedman, grand fathered by Alan Greenspan and fathered by Ben Bernanke.  

There has been a moneyness and governance tectonic plate shift. A global economic, investment, banking, and government tsunami is on the way, and will strike through the Debt Ceiling Leadership Default, as well as the Leaders Announcement of Greek Default.    

With the Leader’s Announcement of Greek Debt Default, on July 21 2011, and the subsequent stock market downturn of July 27, 2011, there has been a global sea change with humanity’s matrix, that is economic, political and investment regime which was changed by Leaders’ decree.

Neoliberalism fell to the diktat and deleveraging of neoauthoritarianism, whose great great grandfather was Adam Weishaupt, great grandfather was Leo Strauss, grandfather was Altiero Spinelli, and father is Nicholas Sarkozy of France, who insisted upon empowering the EFSF, as the Eurozone’s Monetary Fund, that is the European Treasury.  

Greeks cannot become Germans. There is a cultural divide, a chasm, as the Germans are nose to the grindstone, whereas the Greeks are Club Med. Germans are far right pursuing entrepreneurialship, while the Greeks are far left pursuing socialism.

Soon of Götterdämmerung, that is a clash of the gods, specifically the bond vigilantes and the government leaders, a global economic collapse is going to occur, as the head of mankind’s most important institution, being economic, investment, trade and banking will suffer a mortal wound, that is a stroke, Revelation 13:3.      

Out of chaos, a powerful leader will emerge in the Eurozone, This New Charlemagne, will establish a type of revived Roman Empire, that is a Federal and Fiscal Union, where fiscal authority will reside at the core with leadership coming from Germany and France, and not at the periphery, that is the PIIGS.  The Sovereign, will be accompanied by a banker, The Seignior, whose authority will come from regional framework agreements that waive national sovereignty. Former citizens of sovereign nation states will be residents living in a region of global governance, as called for repeatedly call for by Mr. Trichet, president of the ECB. All will be one, living as debt serfs, in debt servitude, under a One Euro Government.

The seigniorage, that is the moneyness, of neoauthoritarianism, will be quite different that that of neoliberalism.

The seigniorage of neoliberalism was based upon the securitization of debt by investment bankers, in particular the primary dealers of US Treasuries, the securitization of GSE Debt by mortgage REITS such as Annaly Capital Management, NLY, the marketing of junk bonds, JNK, and the US Federal Policies of credit liquidity, such as TARP, which traded out money good US Treasuries for distressed investments like those traded in Fidelity’s FAGIX, which in turn were place back with the Fed, and are being held as Excess Reserves. The seigniorage of neoauthoritarianism will be more political than economic, and come from two sources. First, Leader’s Frame work Agreements which establish monetary authorities, like the EFSF, and assign  stakeholders from government and industry to impose economic governance and austerity, ruling through state corporatism, that is statism. Secondly, seigniorage will come from the word, will and way of sovereign leaders, who will have waved national sovereignty and rule by diktat. The Leader’s Announcement of the the Security and Prosperity Partnership of North America, the SPP, of March 23, 2005, and the recent Bilateral Perimeter Security Talks, have effected a coup de etat in North America, and established a defacto North American Union, one of ten regions of global governance, called for the Club of Rome in 1974.    

The coming economic and political cataclysm will be such that the world’s people will long for the security provided by powerful leaders. The people will readily give their allegiance, and follow after regional economic governance, as well as the Sovereign and the Seignior as presented in Revelation 13:4.    

Neoauthoritarianism, manifesting as state corporatism, in all of mankind’s seven institutions, and ten regions, is the ultimate form of governance, and economy, for mankind, as held forth in Revelation 13:1-4.  It will be characterized by one region fighting politically, economically, and religiously with another. Eventually the Sovereign will make himself out to be God and demand to be worshiped.    

Suggested reading includes Doug Noland’s Prudent Bear article Money On Moneyness  Fed governor Bernanke concluded his November 2, 2002 speech commemorating Milton Friedman’s 90th birthday with the following:  “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we (the Federal Reserve) did it. We’re very sorry. But thanks to you, we won’t do it again.”

For more than twenty years now (commencing with aggressive monetary ease to recapitalize the banking system back in 1990), the prevailing objective of Federal Reserve policy has been to ensure that deflationary forces were not allowed to take root.  And while these deflation “panics” occurred only on those few occasions when market confidence in the U.S. Credit system waned, Fed alarm and associated policy responses were sufficient to convince the markets that the Fed held a singular top priority.  This “asymmetrical” policy bias has been instrumental in distorting the markets’ view of financial excess.  The Greenspan/Bernanke Federal Reserve communicated clearly to the markets that the Fed would not intervene to thwart asset Bubbles, but would instead focus on having aggressive “mopping up” measures ready in the event that faltering asset markets risked impacting the real economy.  In short, accommodatiive Fed policy incentivized speculation throughout Bubble periods – and the bigger the Bubbles inflated the more speculative profit potential available to financial operators seeking to profit from the government’s “mop up” reflationary measures.  And, as we’re witnessing both at home and abroad, the greater the scope of the bust the more confident the markets become that policymaking will factor potential market responses very importantly into all decisions.

We now have an almost three year “mopping up” experience to contemplate.  I’ve referred to this period as the “global government finance Bubble.”  Sovereigns have issued Trillions upon Trillions of debt, while global central bank balance sheets have inflated somewhere in the neighborhood of $5 Trillion (largely with holdings of government debt).  Moreover, governments around the world have both explicitly and implicitly guaranteed Trillions more of private-sector debt and various obligations.  The notion of “too big to fail” has evolved from a focus on major financial institutions to the system overall.

Here at home, the mortgage finance market has essentially been nationalized, with combined GSE and FHA obligations continuing to swell.  FDIC insurance obligations grow by the week.  Washington is assuming additional current and prospective healthcare expenses, and so on.  In Europe, debt failure at the “periphery” has added greatly to obligations now weighing on the “core.”  It is worth noting that Moody’s this morning addressed the additional cost of European debt bailouts as an important factor behind the deterioration in France’s Credit standing.

On the causes of the Great Depression, I side strongly with the “contemporaneous” view that economic cataclysm emanated primarily from a collapse of what evolved over years into an exceedingly fragile Credit structure.  This fragility was primarily the consequence of more than a decade of Credit excess, policy accommodation, reckless speculation, and an economic structure that over time had become dangerously distorted and imbalanced.  Similar critical issues haunt the global system today.

Major fissures are developing in the global government finance Bubble.  And, to be sure, so-called “mopping up” strategies have become pressing factors in an evolving crisis of confidence in sovereign debt.  In Europe, the markets are better appreciating the enormous, and unending, costs associated with bailouts of badly maligned “periphery” Credit systems and economies.  And, importantly, markets are seriously questioning the perception that eurozone politicians and central bankers retain the capacity to thwart any crisis that risks the stability of its euro currency.  The market distortion that allowed sovereigns from Greece to Italy to borrow at rates inconsistent with their underlying Credit standing has come to a rather abrupt end.  Moreover, the market’s reassessment – the repricing of sovereign debt to incorporate more reasonable risk premiums – is illuminating the severe structural debt and economic problems afflicting the region.

Here at home, the politics of dealing with massive deficit spending is illuminating the vulnerability of the market’s unflinching faith in our debt.  Similar to Europe, our nation’s debt problem has been festering for many years.  But unlike European policymakers, our policymakers have yet to confront debt market confidence issues.  In this respect, there is some truth to the notion that this is a self-imposed crisis.  On the other hand, Washington is doing its best to test both market perceptions and general complacency, an exercise I last week noted was “playing with fire.”

Debt crises tend to follow a common path:  the problem mounts over an extended period, with distorted markets doing an increasingly poor job of adjusting constructively to significantly heightened risk late in the cycle.  However, at some critical juncture the pressure becomes too much to bear.  Markets will likely react abruptly and, often, in dramatic fashion (think subprime, Greece or, more recently, Italy).

Today’s dismal Q2 GDP data and the Q1 downward revisions provide added confirmation that ongoing massive fiscal and monetary stimulus has had diminished economic impact.    I certainly see ample confirmation that economic issues are fundamentally structural, from my viewpoint ensuring that aggressive stimulus (and concomitant distortions) exerts only fleeting boosts.  Indeed, there is a strong argument that unprecedented “mopping up” has aggravated structural issues and only delayed economic reform. The Wall Street Journal’s Greg Ip penned an insightful article back in December 2005, “Lessons of the ‘30s”.  “Even as a child, Mr. Bernanke…was intrigued by the Depression.”  Mr. Ip conveys a story (recounted in a Bernanke textbook) where Bernanke’s grandmother explains to young Benjamin why “many neighborhood children had to go to school in tattered shoes or barefoot.”   When he inquired as to why parents didn’t buy new shoes, grandmother replied that they had lost their jobs when the (shoe) factory shut down.  When Ben asked why the factory had closes, she responded “because nobody had the money to buy shoes.”

The “revisionist” view is that the Fed was negligent in the 30’s for not ensuring there was sufficient money in the system.  The Fed should have created additional “money” both to recapitalize the banking system and to ensure that there was an ample supply of money available in the economy for consumers to buy shoes and things and for companies to invest.  OK. It sounds reasonable enough.

Yet the problem was not so much a lack of money supply as it was a lack of confidence in the entire monetary system.  And this gets right to the heart of my issue with “revisionist” analysis and current policymaking doctrine.  From my perspective, it seems rather obvious that the root cause of the Great Depression was the collapse of trust in system Credit along with faith in the broader financial apparatus.  And I have argued for going on three years now that the utmost (post-mortgage/Wall Street finance Bubble) policy priority should be to safeguard the creditworthiness of the core of our monetary system – government debt obligations in particular.  Above everything else, there must be bounds placed on stimulus measures (debt expansion and market intervention/manipulation) to protect the credit standing of our “money” system.  Policymakers have gone in an opposite direction, sparing no (current and future “public”) expense pursuing the top priority of supporting asset markets and stimulating economic recoveries.

Importantly, the dangerous flaw in this approach is becoming increasingly apparent.  First, tepid economic recoveries in Europe and the U.S. are demonstrating acute vulnerabilities – this despite unprecedented fiscal and monetary stimulus.  Second, “core” debt markets are showing the strains associated with a combination of persistent massive deficits and the assumption of more and more typically “non-core” obligations.   And whether is it U.S. deficit spending or European bailouts, the further policymakers proceed down the current path the less flexibility they will have to change course.

We are, indeed, witnessing the proverbial “throwing good ‘money’ after bad.”  Over the years I have harped on the importance of the notion of “moneyness of Credit.”  The past decade notwithstanding, “Moneyness” is a precious commodity.  If the market demonstrates great trust in a particular type of financial claim (say, perceptions of liquidity and a store of nominal value), this amounts to “moneyness.”  Why is this so important?  Because there will be basically insatiable market demand for additional issuance of these claims so long as the market perceives money-like qualities.  Throughout history, this special attribute has repeatedly led to over-issuance and attendant consequences.  This certainly played a fundamental role in the massive Bubble in (mostly “AAA”) mortgage-related securities.

“Moneyness” continues to play a profound role in the unfolding global government finance Bubble.  Markets have accommodated unprecedented issuance of sovereign debt, both on the assumption that this worldwide Credit boom would fuel economic recovery and that global central banks would ensure ongoing ample liquidity and low official interest rates (essentially placing a very elevated floor on sovereign debt prices).  The market assumption that massive U.S. stimulus – while good for GDP, corporate profits and stock prices – would pressure the dollar lower has been integral to the global reflationary boom.

The perception of ongoing dollar devaluation has been a critical factor for global sovereign “moneyness” (helping explain why negative U.S./dollar fundamentals have been generally viewed bullishly with respect to global risk markets).  

A weak greenback ensures the ongoing recycling of dollar liquidity by (primarily Chinese and Asian central banks) global central banks back to the Treasury market.  Ongoing dollar devaluation would also continue to entice huge speculative flows to “undollar” assets, including the emerging markets and commodities – fashioning an unusual degree of “moneyness” for securities issued by countries with unimpressive histories of monetary management.  And the worse things look for the dollar, the more the world’s new financial powers (accumulators of massive international reserves) would have vested interests in supporting the euro as a competitive store of value to dollars.

So, the markets’ hardened perceptions of “moneyness” owe a great deal to the notions 1) that the Fed will buy as many Treasurys as it deems necessary to sustain abundant market liquidity and support economic recovery; 2) that “developing” economy Credit systems will continue enjoying unprecedented flexibility and capacity; 3) that Asian central banks have too much invested to back away from dollar and Treasury market support; and 4) that China and others will bolster an increasingly fragile euro as a critical counterbalance to the dollar.  In sum, markets have viewed global central bankers as sharing a unified interest in sustaining the sovereign Credit boom.

I really worry when I see divergences between headstrong market perceptions of “moneyness” and a marked deterioration in the trend of underlying creditworthiness.  Such “gulfs” are the trappings of market dislocations and crises of confidence.  I believe this is especially the case currently.  Emboldened by past successes, market perceptions have been driven by unrealistic assumptions of the efficacy of government policy measures.   

Italian bond yields surged 47 bps this week, as market enthusiasm for Greek bailout II dissipated with an alarmingly short half-life.  Meanwhile, negotiations to avoid an August 2nd debt ceiling debacle became only a greater national embarrassment – and the Treasury market enjoyed another rally!

Perceptions of “moneyness” played a major role in nations attaining the capacity to accumulate unmanageable debt loads.  And it was not long after market perceptions began to normalize that periphery European sovereigns faced untenable situations.  As I’ve written recently, debt loads (from Greece to Italy) were manageable only so long as markets disregarded (mounting) underlying Credit risk.  Today, the markets are content to perceive perpetual “moneyness” in Treasury debt.  And this guarantees that an insidious impairment to underlying creditworthiness runs unabated.  Yes, the Fed has thus far succeeded in ensuring that the system remains flush with “money.” Meanwhile, a dysfunctional market pricing mechanisms ensures that these debt obligations continue to be over-issued in ridiculous quantities.  It will be an interesting weekend in Washington.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: