Tags: 10-yr OATs, ADP, bond vigilantes, Bundesbank, CDU, deleveraging, ECB, Fed, Francois Hollande, Greek elections, Merkel, Merkozy, Norwegian Sovereign Wealth Fund, operation twist, SPD, unemployment
Notes From Underground: MAY 6 — A Flash Crash For the European Political Elite
Before politics, it is important to review the two big stories from Friday:
1. The U.S. unemployment data was certainly on the weak side of expectations as nonfarm payrolls came in at a tepid 115,000, very close to the ADP report. Average hourly earnings were soft, which will challenge the view of consumer demand ramping up any time soon. Yes, the unemployment rate dropped to 8.1%, but with so many people dropping out of the job market this indicator lends itself to so much POLITICAL SPIN THAT ITS USE IS BECOMING NEGLIGIBLE. Economists have twisted its meaning and therefore markets are disregarding its usefulness. The real positive in the data was the continue growth in MANUFACTURING as 16,000 factory jobs were created. Otherwise, the number was weak and will be a reason for the FED TO KEEP THE MUSIC OF OPERATION TWIST IN PLACE.
The EQUITY MARKETS FELL BY ALMOST 2% AS THE INITIAL CONCERN IS ABOUT THE STRENGTH OF THE RECOVERY. ZERO INTEREST RATES WILL NEED TO PROVIDE THE TONIC FOR INVESTORS. If the markets go into a RISK-OFF paroxysm, Mr.Bernanke will have to work very hard to keep the PORTFOLIO BALANCE CHANNEL. Somebody better explain to the FOOLS ON THE HILL ABOUT THE WARNINGS OF A FISCAL CLIFF. The FED governors and presidents had better stop the infighting about the end of ZIRP and start lecturing U.S. politicos about the coming dangers of economic retrenchment.
2. News out on Friday concerned the most powerful HEDGE FUND, THE NORWEGIAN SOVEREIGN WEALTH FUND. The NSWF utilized the ECB’s LTRO program to dump its holdings of Irish and Portuguese bonds and lighten up on its ownership of Spanish and Italian debt. This is not a favorable statement from a recognized high quality global investor. The way the Greek debt issue was handled scared the Norwegians and reveals how the impact of the LTRO is to help investors bail out of Europe at much better prices than would have been possible without the help of the ECB.
Massive intervention always comes with a price and while the liquidity provides short-term relief and scares the BOND VIGILANTES, there are always other outcomes not immediately recognized. The move by the Norwegians will put pressure on other sovereign wealth funds and large pension funds to be very cautious about EURO SOVEREIGN DEBT.
3. In a London Telegraph piece by Ambrose Evans-Pritchard titled, “Francois Hollande Has Ten Weeks to Avert A French Bond Crisis,” the author notes that it would be a mistake for the new French president to think that BOND VIGILANTES will “stomach his big state romanticism.” There has been a widening of the spread between German and French 10-YEAR NOTE YIELDS and it is portending danger for the French budget and austerity plans. There is a foreboding sense that France’s 10-year OATs are under stress as it “reflects a gut feeling in global markets that France is sliding into deep trouble, clinging to a RUINOUSLY EXPENSIVE SOCIAL MODEL IN A TEUTONIC MONETARY UNION AND A CHINESE TRADING WORLD.”[emphasis mine]
This is a very good summation of where the world is at and it picks up on the piece I wrote last week on how the Gaullist French Model is caught in a very difficult situation. If Hollande abandons the electorate who put him in power and pursues the MERKOZY AUSTERITY PLAN it will be more than Jose Bove tossing tomatoes. The citizens of Europe, from both the political LEFT AND RIGHT are voting against the SPECTRE OF AUSTERITY AND ITS IMPACT THAT ARE PLACING ITS CITIZENRY IN BONDAGE.
Now on to the election results. The French election wound up almost exactly as the last polls on Friday predicted: HOLLANDE 52% vs Sarkozy 48%. Thus, no surprise as the market had predicted the outcome, but the EURO is under pressure from the GREEK ELECTION RESULT. The fact that the PASOK (socialists) came in third means that the anti-austerity parties performed far better than expected. The citizenry of European nations is sending a stern message to the EUROCRATS IN BRUSSELS and the elites that have forced the EURO and all its shortcomings down their throats. It seems that Europeans do not want to pay the price of bailing out investors who bought sovereign debt by continuing the AUSTERITY PROGRAMS DEMANDED BY THE BUNDESBANK-DEPENDENT FINANCIAL SYSTEM.
The irresistible force of austerity is meeting the immovable object of democracy. Even in Germany Merkel is feeling the effects of a disillusioned electorate as the votes in Schleswig-Holstein today proved inconclusive for an outright CDU victory and will result in a coalition with the SPD. What’s more problematic is that some of the more extreme parties did far better than expected, reflecting unhappiness with Merkel even though the German economy is relatively strong.
This election result may set up next week’s more important election of the German state of North Rhine-Westphalia and signal a defeat for Chancellor Merkel, who is now seen as vulnerable. Again, the outcomes for the Eurocrats and the EURO ESTABLISHMENT SENDS A MESSAGE OF DISILLUSIONMENT ABOUT THE PRESENT STATE OF EUROPE. Austerity and its costs have played havoc with the domestic politics of so many European nations. If Europe is no panacea for investors, the emerging markets are becoming uncertain because of global growth, and the U.S. FED is dedicated to its models and the role of monetary policy, can Japan be the only HAVEN IN THE WORLD?
Will the world’s monetary authorities sit back and allow another bout of MASSIVE DELEVERAGING? The world now looks like 1937: What will the response be? Will Germany try to placate Hollande by backing off the FISCAL SADISM OF AUSTERITY? Many questions have arisen in the wake of today’s election results. If the bet is on less austerity and more liquidity then GOLD WILL BE THE RECIPIENT OF GLOBAL INVESTOR DEMAND. With today’s Greek and French results it shows that TURKEYS DON’T ALWAYS VOTE FOR THANKSGIVING.