Just when it looked like the risk-on paradigm was gaining some traction, Chancellor Merkel, through her spokesman, Steffen Seibert, said, “…dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.” The global equity markets were experiencing a continued rally from Friday when the Merkel statement was released and the market immediately went into sell mode and risk off. The U.S. equity markets tried to maintain Friday’s sizable rally as the news of CITI and WELLS FARGO earnings provided a momentary boost. Overnight the U.S., markets were supported by the news that KINDER MORGAN was buying the pipeline and energy producer, EL PASO.
Posts Tagged ‘TARP’
In a speech today, President Obama proclaimed that European inaction on its debt crisis was scaring the world, implying that the EUROCRATS were causing global growth to slow by raising fears of the a major credit debacle. It seems that the G-20 was entirely dedicated to bashing the European financial policymakers about the foot-dragging and infighting that is delaying action on the dual problems of sovereign debt and the newly discovered bank solvency issues. Rumors arose Sunday night that a package had been crafted to leverage the EFSF to almost 2 trillion euro from 440 billion euro. However, failure to verify the rumors left the markets moving up and down as confirmation was not forthcoming from European authorities.
Yes, the ECB raised rates today and Trichet failed to listen to the wisdom offered by NOTES FROM UNDERGROUND. That means I have overestimated the wisdom of Trichet while underestimating the size of his ego. The rate rise to 1.5% was widely anticipated so the EURO was immediately sold but regained some strength after the ECB announced that it was WAVING THE MINIMUM CREDIT RATING FOR PORTUGUESE BONDS USED AS COLLATERAL FOR REPOS. As the ECB raises rates, it allows for weak collateral to be utilized thus allowing for a large liquidity infusion. This is a fine example of Dostoyevsky’s Grand Inquisitor as bread is taken from the people with one hand and returned to them with the other and the people believe it is a miracle. Europe has become a “ball of confusion.” Why raise rates when you are simultaneously lowering credit standards to prevent a sovereign default?
We have been Europe-focused for more than five months and while important, and yes, even market shaking, we must remember that there are many other areas of concern and interest on the global stage. The Eurocrats have bought themselves a few nights of sleep with the robust package cobbled together during the weekend, but as the acrimony and ill will continue to ferment we will always have Paris. There are reports that Sarkozy is feeling the victor as he believes he vanquished the ECB and allowed the inflationists to gain the advantage over the German liquidators. Many in Germany and other Northern European countries fervently believe that the profligate nations should suffer the pain of balance sheet reduction.
The news out of central Europe is that Russian oil is again flowing to Belarus and heading through the Druzhba Pipeline and the refineries were working normally. As our readers are aware, we believe this energy situation will be an on-again, off-again story as Putin and company flex their well-oiled muscles to let the world know that they are indeed a”player.” Word later came that Belarus had threatened to retaliate by cutting electricity to Kaliningrad, a Russian region of the Federation, under the precepts that no agreement had been reached on the pricing of the electricity produced by Belarus. This was more tit for tat but will be resolved amicably. It is important to keep in mind that Russia supplies Germany with 350,000 barrels per day (15% of German consumption), and Poland with 400,000 barrels per day (three-quarters of its consumption). While oil is fungible, it still lets Europe know that Russia will have a voice in its affairs and this growing dependence will magnify that voice going forward.
Greece was also back on the radar today as the European ministers are going to meet with Greek officials to analyze the effort to reduce the deficit to more tolerable levels. This is all show as the Greek politicos don’t have the fortitude to take on the unions. The German-Greek 2-10 spread narrowed to 235 basis points but we will watch this as the EURO seems to sell off when the spread widens.
We want to revisit the analysis we did last week on the nationalization of Fannie and Freddie under the stealth of Christmas Eve. Secretary Geithner’s move was the greatest act of subterfuge since George Washington crossed the Delaware and attacked the Hessians long ago on Christmas Eve. This event will not pass lightly, for the Treasury’s action will have severe ramifications. The Obama administration has created the largest slush fund ever as it now has taken it upon itself to absorb a huge chunk of the bad debt in the housing market and make the U.S. taxpayer liable to an undefined amount–and it was done without Congressional oversight.
The audacity of this action is the fallout from Hank Paulson’s original TARP proposal that called for no judicial review of Treasury’s actions. As usual, the republicans will blame the democrats, but this is the cause of all in Congress who abdicated their authority under the stress of financial system meltdown. This arrogance of power cloaked in the darkness of Christmas EVE and holiday festivities make us question the governing intent of the administration. It makes us leery of dollar assets but we will await to see how the market treats it. This year sets up to be very difficult because there is so much turmoil both politically and financially. If the problems in Europe weren’t so great, selling the DOLLAR would be easy, adding to the global strains are the nascent attempt at currency controls by some of the emerging market countries. Throw in Iran and Middle East and the situation gets cloudier–nowhere to run, nowhere to hide.
In Washington D.C. today, we heard from Fed Governor, Elizabeth Duke. We wish that the FED could get on the same page. Yesterday, we had Bernanke discussing the Taylor rule and today Ms. Duke was back to the output gap argument. As long as unemployment stays high and capacity utilization is low (negative output gap), the FED will keep the Federal funds rate at a low level for an extended period of time. This constant vascillating in speeches between meetings is going to confuse the credit markets and further undermine the FED’s credibility. It would be alright to have different opinions but we have to ask then why all the votes are unanimous.
Also out tonight is a story about a $2 trillion pension shortfall in the U.S. It was previously thought that state and local governments had a projected shortfall of $400-$500 billion but Orin Kramer, chairman of New Jersey’s investement council, believes the number to be quadruple the amount if you include future obligations. Do you think this country could really take a deflationary period? And is there any wonder as to why the FED and the Treasury are so desirous of the carry trade pushing up equities? A slumping equity market would make this pension shortfall all the more painful, adding to the pain of this past decade.
In a famous exchange between Chou En Lai and Henry Kissinger, the U.S. Secretary of State asked Chou what he thought of the French Revolution. Being 1972, Chou answered it was too early to tell.
The reason we bring this up is as the Greek tragedy unfolds, it will take a German-led bailout to keep the Greek government from defaulting. Today, the German/Greek 10-year-note spread widened to 245 basis points and the German/Irish 10-year-note spread widened out 20 basis points to 200 basis points. Being that the European Union has no statue for a bailout, it will take a massive amount of transfers to show up the Greek economy, let alone the rest of the PIGS. Several pundits have imagined that the Greeks will cut public sector wages to get their debt situation under control,but they seem to forget that this is a democratically elected socialist government. The chances of squeezing the unions has as much chance as going a day without seeing Obama making a speech on television. From a trading perspective, the only way to play in this arena is to use the bund futures and the recently re-listed Italian bond futures, both at the Eurex and denominated in EUROs. Check your system provider for the appropriate symbols–and no this is not a paid advertisement but a public service message. The question facing Europe is what political price the Germans will exact for any aid they may provide. So maybe it is too soon to determine who in fact was victorious in World War II.
The calendar is heavy tomorrow with three central bank meetings. The Kiwi bank has already announced and they stayed at 2.5% but changed some language to suggest that they move earlier to tighten then previously thought. The KIWI went bid against all the crosses but we think that this is an overreaction. The BANK of ENGLAND and The SWISS NATIONAL BANK both meet in the early morning but no change is expected from either. The Brits presented the pre-budget plan and it had to do with raising taxes and few budget cuts. The middle class in Britain will carry the brunt of the hike but some red meat was tossed to the torch and pitchfork crowd by supertaxing bank bonuses more than 25,000 pounds.
We will never defend the pay of bankers but this tax will go a long way toward subverting the role of London as a financial center. French President Nicholas Sarkozy and German Chancellor Angela Merkel are laughing in their Reisling. Europe is a mess and not getting out of this predictament anytime soon, yet the EURO held up fairly well today.
It really makes one wonder where the safe havens are–we know the DOLLAR for lack of any where else but the news from the U.S. today was not helpful. The Obama administration moved to extend TARP until Oct. 3,2010. This cannot be a positive event as this program was meant to be for the insurance of systemic financial solvency. But with the banks rushing to repay TARP funds what can the real purpose be–this is Paulson’s ghost as he jammed this through with little thought and much malice. Remember his three-page missive that demanded there could be no judicial review of Treasury’s actions? Oh,Expediency what has thou wrought! So risk may be declining but where does one go for wealth and capital preservation–the gold/currency crosses seem to be the last bastion of financial rectitude.
Tomorrow morning brings us the jobless claim number–463,000 is the guesstimate and that is followed with the trade number. The trade report was always a centerpiece for the currency world but because markets are dynamic this data has little relevance. If something out of the ordinary is reported, it could have a minor impact but most probably a yawner–just to prepare you negative 36 billion is projected. Tonight the Aussie employment report came out and it was much stronger then estimated putting a bid to the AUSSIE DOLLAR. Also, S&P gave Spain a negative outlook presenting Europe with on more problem–something more to think about.