(AN HOUR LATER THE MARKETS WILL BE HUNGRY FOR MORE RUMORS)
Another day and another round of rumors. As the financial markets awaited the EU LEADERS’ statement, the rumor of China agreeing to buy European SOVEREIGN DEBT and EFSF paper provided a boost to a falling EURO and a BID TO the U.S. EQUITY MARKETS. It seems that the market wants to BELIEVE that the Chinese are going to ride to the rescue of the EU and provide the backstop that the Germans are so reticent to bankroll.
Readers of this BLOG know that the Chinese have promised this before and failed to deliver on promises to buy Greek, Portuguese, Spanish and Italian debt. There is no doubt that the Chinese are concerned about a deep recession in Europe but do they want to be the holders of massive amounts of BAD DEBTS on a EUROPEAN DREAM GONE BAD? The question the Europeans need to ask is: What PRICE are the Chinese going to exact for any effort they make to bail out Europe? China is a very accomplished REALPOLITIK PLAYER and nothing they promise without a price.I s Europe willing to sell its soul for a FEW SOVEREIGNS? I think that Shakespeare answered that long ago and the pathetic figure was ANTONIO. Oh wait, news flash: Berlusconi to meet with the Chinese tomorrow.
The EU leaders statement revealed little on the EFSF and ECB funding of any type of leverage program to buy debt in the secondary market. It seems that the LEADERS were primarily concerned with the need to FORTIFY the banks against massive losses, thus the need to deleverage, forcing asset prices lower. The backstop of the EFSF and the Greek haircuts will probably be handled through the IMF, but that is a mere GUESS. The IMF has been missing from the scene for the moment but with a G-20 meeting in Cannes on the immediate schedule, it seems that the IMF is going to fill the VOID. Global growth will be the RATIONALE for a major role for the IMF and that will get the G-20 to be a willing participant.
Certainly the Geithner/Bernanke team will not be an impediment to IMF bailout actions. The world’s central bankers are very concerned that the European debt crisis can morph into a global depression with any misstep. This afternoon the Reserve Bank of New Zealand (RBNZ) voted to hold rates steady at 2.5% because of fears of the EU situation being an increasing drag on global growth. Tuesday, the Canadians put forward the same reason and last week it was FOMC members, YELLEN and TARULLO voicing the same concerns. It is up to the IMF. Christine Lagarde, saddle up that white stallion and ride to the rescue of the European Union. The question will remain if the world is betting on a bad horse?
***Bank of Canada Governor Mark Carney delivered a speech today discussing the BOC‘s views on the Canadian economy and why the bank held rates steady at 1%. Carney voiced his concerns over Europe and the recent impact of the U.S. and Europe slowing export growth from Asia and other emerging markets. Fiscal policy in the U.S. will also create greater uncertainty and thus the BOC wants to be cautious. No where did Carney discuss the improvement in Canada’s LABOR MARKET. A Bloomberg chart illustrates that the Canadian unemployment rate has dropped steadily and returning to 2008 levels. By failing to mention the Canadian job situation it seems Governor Carney wanted to provide a more dovish stance on growth and help to keep the LOONIE from appreciating too rapidly across the world’s currencies. Bottom line is that the BOC reflects the nervousness of the world’s central bankers.
*** In the U.S., durable goods for September were reported and the core number was better after AIRCRAFT ORDERS were removed. The number was 1.7% gain versus a projected 0.5%. The noise in this data is always great and therefore of little importance on its own. The only reason to analyze it is that it antithetical to yesterday’s consumer confidence data. With stronger retail sales and durable goods data the disconnect between perception and reality is sure to mean increased market volatility as we head into the last two months of the year when liquidity tends to diminish. More DISSONANCE with less liquidity–get long DIAGEO for the global investment community is going to an Art Cashin … marinate those ice cubes.
***In a BLOOMBERG item, “Geithner Focus Missing Bigger European Debt Risk,” by Cheyenne Hopkins, it seems that Geithner’s view about U.S. financial exposure to Europe is bigger than the Treasury Secretary wants us to believe. In a Senate Banking Committee hearing on October 6, 2011, Geithner said, “The direct exposure of the U.S. financial system to the countries under most pressure in Europe is very modest.”
At the same hearing, Chairman Bernanke told the Committee, “U.S. banks’ risk to troubled European sovereigns is ‘quite minimal’ and the direct exposure is ‘not large’.” Bernanke and Geithner both stated their belief that it was the threat to the global economy that was the main concern. But that is not the whole story of the EXPOSURE OF U.S. BANKS. The Bloomberg piece reveals that BIS data shows that U.S.banks’ direct risk to Greece is only $7.32 billion versus German banks’ risk of $34 billion. However, “the exposure was reversed for indirect commitments, with $34.1 Billion at risk for American banks and $5.95 billion for German institutions.”
This is significant because it shows how much OTC derivatives and CDS have been written by U.S. banks. The lack of transparency in the OTC markets means Bernanke and Geithner are making decisions with limited knowledge. REMEMBER THAT IN 2007 BERNANKE was certain that the subprime crisis was CONTAINED and would not be a major drag on the housing market. Now, about that drink…