Financial Market Report for October 27, 2011
1) … World Stocks, ACWI, World Small Cap Stocks, VSS, the BRICS, BIK, and Emerging Markets, EEM, Emerging Market Small Caps, EWX, and the Russell 2000, IWM, soared on news of the European leaders plan to write down Greek debt and increase the lending capability of the EFSF. The seigniorage of diktat has commenced.
The seigniorage of the European leaders rose up the most dead of zombie stocks. The word, will, and way of the European sovereigns rallied the stocks which were Neoliberalism’s stars. Today was the death of the Keynesians. Keynesianism and Neoliberalism died today. Time Magazine wrote in 1965, We are all Keynesians Now. Soon all be vassals of the Neoauthoritarians, living in debt servitude, to the vassal state of Neoauthoritarianism. Stock ETFs rising the most today included the following: TAN, CHIX, EUFN, CHII, FGEM ALUM SLX COPX EWO, KCE,RSXJ, EMMT, CHIM, WCAT, PSP, ARGT, RZV, URA, SKYY, XHB.
Neoliberalism’s hot money stocks seen in this in this Finviz Screener increased an average of 7%.
The Too Big To Fail Banks, RWW, Nasdaq Banks, QABA, Banks, KRE, Emerging Market Financials, FGEM, China Financials, CHIX, Australian Dividends, AUSE, India Earnings, EPI, and Brazil Financials, BRAF, rose. Bespoke Investment Blog writes You know this market has gotten crazy when 100% of Financial sector stocks are trading above their 50-days! Bank computer service firm FISV rose strongly
The Morgan Stanley Cyclicals Index, $CYC, rose 5%.
Junk Bonds, JNK, rose manifesting a shooting star and a triple top. Financial Preferred, PFF, rose 2% to just shy of 200 day moving average.
The volatile mobile home builder, CVCO, rose 17%.
Utilities, XLU, rose with the chart of DTE, rose manifesting a likely dark cloud covering candlestick.
A number of banks, DB, BBVA, RBS, CS, CHIX, UBS, KB, LYG, STD, likely manifested what will turn out to be evening stars; all of the world’s leading banks, IYG, rose strongly as seen in this Finviz Screener.
Education Companies, LRN, APOL, rose strongly
The Yen’s, FXY, rose to 129.79. And the world’s major currencies, DBV, and emerging market currencies, CEW, rose even more strongly with the Commodity Currencies, CCX, leading. Rising currencies, blasted world government bonds, BWX, and emerging market bonds, EMB, higher. But pummeled the US Dollar, $USD, which closed at 74.88 … The currency demand curve, RZV:RZG, rose, but still shows that a debt deflation, that is currency deflation, bear market is underway. The emerging markets yen carry trade, CEW:FXY, rose to 50 day moving average … Jamie Saettele, of Daily FX wrote the USDJPY has finally broken down, confirming the 5th wave interpretation. Look lower towards the measured 7400 level. I plan on playing an early November (bullish) reversal. Previous – “The sharp advance may be the beginning of the end of the wave 4 correction that has been unfolding since August. Currently testing Elliott channel resistance, 7784 is also resistance. As long as price is below 7956, I favor a top, reversal and decline to all time lows in order to complete 5 waves down from April for USD/JPY.
Copper, JJC, Timber, CUT, Base Metals, DBB, Silver, SLV, and oil USO, jumped, leading commodities, DBC, higher.
Bonds, BND, turned lower. The longer out US Treasuries, ZROZ, and EDV, fell more than the US Ten Year Notes, TLT, causing the 30 10 Yield Curve, $TYX:$TNX, $TYX:$TNX, to fall lower as reflected in the Flattner ETF, FLAT, falling and the Steepner ETF, STPP, to rise. Of note, LQD, is trading near its all time high, but BLV is trading sharply lower. The BLV:LQD ratio shows that investors are rapidly disinvesting from longer duration corporate bonds. A falling yield curve shows investors are derisking out of bonds.
2) … Will the rating agencies declare a default or write down sovereign ratings as a result of the EU’s Greek writedown and the leveraging of the EFSF?
2A) … The EU sets 50% Greek writedown.
Bloomberg reports EU Sets 50% Greek Writedown, $1.4T in Rescue Fund. European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.
Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.”Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”
The resulting “voluntary” losses by bondholders were the key plank in a second bailout for Greece, which was awarded 110 billion euros in May 2010 at the outbreak of the crisis. The new program includes 130 billion euros of official aid, up from 109 billion euros envisioned in July. The Washington-based IMF, meanwhile, said it is ready to disburse its 2.2 billion-euro share of the next installment of Greece’s original bailout. The release of the euro zone’s 5.8 billion-euro share was approved last week.
The Bloomberg article quotes Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, as saying “There are several issues left open, but I do believe that getting a more necessary debt relief for Greece is a pretty important step.”
The WSJ reports that Herman Van Rompuy, who called the Eurozone leaders for the first summit in May of 2010, relates that the agreed upon new voluntary writedown for private greek creditors will be 50%
An inquiring mind asks, with a 50% writedown, are the banks any more solvent, are the bonds any more tradeable, are the bonds worth 50% ?
2B) … The EU plans to leverage the EFSF.
Reuters reports Greek Prime Minister George Papandreou said in Brussels after the deal was struck. “The debt is absolutely sustainable now … Greece can settle its accounts from the past now, once and for all,”
An inquiring mind asks, does a 50% write down on Greek debt provide substantive relief? Does it make the Greek indebtedness any more sustainable, that is, can the people of Greece pay off their debts with any amount of relief?
Reuters continues, A top lawyer for the International Swaps and Derivatives Association said that because banks had agreed to accept the losses, the deal was unlikely to trigger a “credit event” in which default insurance contracts would be paid out.
An inquiring mind asks were the banks were coerced into accepting losses and should this trigger a default?
Reuters presents the details of the EFSF leverage. Around 250 billion euro remaining in the fund will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways. The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle, SIV, that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil. The methods could be combined, giving the EFSF greater flexibility, the euro zone leaders said. But EU finance ministers are not expected to agree on the nitty gritty elements of how the scaled up EFSF will work until some time in November, with the exact date not fixed. There is also concern about Italian Prime Minister Silvio Berlusconi’s commitment to implementing reforms seen as crucial for restoring confidence in the bloc’s third largest economy. Dogged by scandals, Berlusconi has promised to raise the retirement age to 67 by 2026 and attempt other reforms, but the EU is reserving judgment.
And an inquiring mind asks are the means to increase the EFSF’s firepower achievable? Will the rating agencies downgrade sovereign debt due to the leveraging of the EFSF? Will the markets eventually see the leverage as either ineffective or a monetization of debt and call interest rates higher? Will anyone or any organization purchase leveraged or guaranteed bonds? Would you buy a CDO backed by the European sovereigns?
Euro Intelligence provides the best of coverage in their for fee investment newsletter. I recommend that one purchase their news coverage which relates that FT Deutschland said this morning that Angela Merkel, Nicolas Sarkozy, and Jean-Claude Juncker made the banks an offer they could not refuse. Either they accept a 50% voluntary haircut, or an even larger haircut will be forced on them. The European Council said in its statement that this was a unique agreement that applied only to Greece. Of course, such pledges lose credibility once they are broken, as was a similar pledge in relation to the July agreement of a 21% haircut. It will take until the end of the year when the details of this agreement will have been worked out.
EuroIntellilgence adds that the IIF has until end of the year to deliver the voluntary participation.
And EuroIntelligence relates Herman van Rompuy said leveraging was no big deal, since banks have been doing this for centuries.
An inquiring mind asks will the Institute for International Finance, IIF, consider the European leaders voluntary haircut?
2C) … The EU calls for bank capitalizations.
The Telegraph reports European Banks Given Just Eight Months to Raise €106bn. And Bloomberg reports Greek banks to raise 30 Billion, Spain 26, France 9, Italy 15 and other banks the balance.
European Union talks with banks on bondholder losses as part of a second Greek bailout ran aground, dimming the chances for a comprehensive strategy at a summit to stamp out the debt crisis. A statement issued close to midnight in Brussels by the Institute of International Finance, the bank lobby, said there was no agreement “on any element of a deal.” The outlines of a deal to safeguard banks emerged, centering on a June 30, 2012 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings, according to a statement after all 27 EU leaders met. A group of 70 European banks will need to raise 106 billion euros in the next eight months to meet the goal, the European Banking Authority, the banking regulator, said. Greek banks need 30 billion euros; those in Spain need 26.2 billion euros. In France, the need totals 8.8 billion euros and in Italy, it’s 14.8 billion euros. And Mike Mish Shedlock, relates Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort
An inquiring mind asks, is it believable that the French banks only need 9 Billion in recapitalization? Can the banks be recapitalized, or will they eventually be nationalized and known as the government bank or gov bank for short? Have the European leaders have kicked the can down the road, and if so, for how long? Till next year?
2D …Bloomberg reports Italy Is Key to Euro-Zone Crisis, Barclays’s Callow Says
2E) … New sovereign authority is emerging.
Gary of Between the Hedges writes One of the large problems over the last 15 years is the market rewarding politicians for short-term “fixes” to major problems that have devastating longer-term consequences.
Obama in his first official act under Neoauthoritarianism provides a stealth bailout to loan owners. IrvineRenter relates By directing the GSEs to relax their eligibility requirements for refinancing, the Obama administration will increase the losses on the GSE portfolio and add to the final cost of the bailout.
Nature economist Elaine Meinel Supkis writes The Greeks know what is happening next so they are Sending their savings to Switzerland! Wealthy Greeks stashed 200 billion euros in Switzerland and the little people are stashing their money under the bed or buying gold in preparation for fleeing Greece. Just like in the stock market crash/currency crisis of the Great Depression, people flee their home states. Inside the US, people fled places like Oklahoma for California. States tried desperately to stop citizens from entering and the system nearly collapsed here
The EU banks need ‘core tier 1 capital’ which is a very funny thing since there is a huge, immense debate over ‘what is capital’ which as raged for um…about since a book called ‘Das Kapital‘ appeared 150 years ago! Defining ‘capital’ has been a messy, messy business. Much of what passes for ‘capital’ has turned into ‘debt instruments’ and of course, stocks. And then there is FOREX accounts that hold raw ‘money’. Money, by the way, is another financial thing that is hotly debated. Right now, all it is ‘pieces of paper and or numbers on a computer somewhere’ and has only a tenuous connection with reality which is why it threatens constantly to fly to infinity and then collapse to zero.
And what is ‘capital’? Karl Marx had this brainstorm: it is LABOR when added to COMMODITY MATERIALS and then advanced via cooperative actions into producing GOODS that can then be sold in markets or sustain societies. It is not stocks, it isn’t bonds, it isn’t printed paper money and above all, it is not gold. It is labor added to materials. Kill off labor and you have no capital. All the gold in Midas’ coffers couldn’t buy him a drink of water because it turned to gold. That is, eliminate labor from capital accumulation via cutting wages and accumulating all wealth at the top and voila: capital vanishes.
People really think this whole thing is now over. It isn’t over for the simple reason, the EU can loot Germany’s capital base but they can’t look China’s capital base. Even so, European Debt Deal: Markets Rally Because It Could Have Been Worse. The ‘worse’ part will get worse because all countries are now frantically cutting public and private debt as fast as possible. They must do this to create ‘capital’ since the game of using debt as capital has collapsed. Neither Germany nor China are holding toxic levels of debt capital. They hold industrial/manufacturing capital which can be systematically destroyed by the EU and US via currency collapse and defaulting on debts.
Regional economic government is rising to replace sovereign nation states as sovereign authority.
Traditionally sovereign nation states have effected seigniorage by issuing sovereign debt and this has expanded both the economy and investments. But with the EU leaders Crisis Plan and use Force Majeure to write down debts they are effecting a Eurozone wide political, economic, and financial coup. In as much as news reports relate that they are pleased with the efforts of the Italian President in beginning to press for structural reforms, pension overhaul and austerity measures, the leaders are now sovereign in Europe: sovereign authority is now in the hands of the EU leaders.
The evidence is clear, cogent and convincing, that the EU leaders are now the sovereign authority. Bloomberg reports Prime Minister George Papandreou urged Greeks to support his efforts to revamp the economy after euro area leaders hammered out a new bailout package for the country and imposed deeper losses on bondholders. Read and weep, a new bailout package and deeper losses on bondholders, means the EU leaders are now the ruling authority in the EU.
Leaders issuing diktat has replaced central banks issuing treasury bonds. The financial markets gave their faith to the leaders authority by rising strongly. The markets gave allegiance to the leaders. The seigniorage of diktat commenced on October 27, 2011 as the financial markets accepted the EU leaders plan for resolution of the European sovereign debt crisis, and the write down of Greek bonds by fifty percent, and as Prime Minister George Papandreou urged Greeks to support his efforts to revamp the economy.
The European Leaders spoke, and a catastrophe was averted but not avoided. Sovereign Armageddon, a credit bust and global financial collapse, is now in abeyance, it cannot be avoided. Sovereign default is coming. The Leader’s decree took a bite out of credit default swaps today. Mike Mish Shedlock writes As a result of labeling 50% haircuts “voluntary”, Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge; Derivatives King Always Win.
Neoliberalism was characterized by wildcat finance, a Doug Nolan term. But, Neoauthoritarianism is characterized by wildcat governance, as The Telegraph reports Italian MPs In Fist Fight Over pensions. Mr Bossi has objected to plans to reform Italy’s generous pension system, crippling the government’s attempts to convince the EU that it is serious about embarking on serious structural reforms to kickstart the moribund economy. In a television interview, Mr Fini claimed that Mr Bossi’s opposition to a pensions overhaul was linked to the fact that his wife had retired on a generous state pension at the age of 39 from her job as a teacher. Italy’s complex and outdated pensions system allows some state employees to retire unusually early.
Despite the statement of leaders, the Greece has lost debt sovereignty. And its debt is not sustainable. The Greek people receive seigniorage aid from the Troika. The fiscal spending resource of the Greeks does not come from debt, but rather the sovereigns of the Troika. Because those in the EU, live in a currency union, and the leaders have sovereign authority with a plan and authority over debt, the debts of one nation are now the debts of all nations. All one one, living in debt servitude to the sovereign leaders. Bloomberg continues with the doublespeak of the leader relating Papandreou said, “We negotiated and managed to erase a very important part of our debt. Tens of billions of euros have been lifted from the backs of the Greek people.” And Sarkozy said “Greece can save itself, but it has to make efforts.” The reworked deal on Greece will cut the debt ratio to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent for next year. The 130 billion euros in public funding plus the 50 percent writedown on Greek debt follows a fully taxpayer-funded package of 110 billion euros in May 2010
3) …. Monetary contraction has intensified in Portugal
Ambrose Evans Pritchard writes 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.
4) … Between the Hedges relates People’s Daily reports More than 60% of Chinese bankers surveyed felt pressure from limited lending and uncertainty in economic growth and inflation trends, citing a survey by the China Banking Association. Chinese Financials, CHIX, blasted 6% higher today.
5) … In today’s sovereignty news
Front Page Interviewer with the David Horowitz Freedom Center questions Sovereignty or Submission? And quotes John Fonte, a senior fellow and director of the Center for American Common Culture at the Hudson Institute.in interview, Today the forces of global governance are a major actor in world politics and a serious adversary of our constitutional regime. My book is a moral and intellectual defense of democratic, or what I call “Philadelphian” sovereignty.