Home > Uncategorized > 2012/06/15: Euro-zone seeming like currency union equivalent of US NINJA mortgages

2012/06/15: Euro-zone seeming like currency union equivalent of US NINJA mortgages

© 2012 ROHR International, Inc. All International rights reserved.

You remember NINJA mortgages: No Income, and No Job or Assets. Well the rolling fiasco that is the European Sovereign Debt Crisis seems to have a recurring theme that is now reaching a critical inflection point. That would be No Urgency, Deposit Insurance or Stability Mechanism.

Yep, that’s right… the (very rightful) acronym is NUDISM. And it is indeed the naked mendacity of the entire project that is now coming to the fore. Whether or not that lands Europe in a real crisis on the Greek election results this weekend that infects the rest of the global banking system is problematic. However, those both inside and outside of the Euro-zone are now allowing that without some extreme adjustment of positions on both sides of the indebtedness divide the entire project might finally be shown to be less than viable.

However, before we even get to the way in which Germany has managed to fail its next ‘Jerry Maguire (“show me the money”) Moment’, there is another bit of foolishness worth discussing. That is the fanfare accompanying the idea that a majority of the European Central Bank board might agree that lowering its base rate is probably a good idea at this juncture. Why now? Why not at any point up until this moment other than the fact they are scared witless by the prospect of a negative outcome from this weekend’s Greek election?

Should they proceed with an ex-meeting rate cut, it will undoubtedly go down as the most meaningless…

 

 …and at the same time wholly discounted rate move in the history of central banking. Signore Draghi has certainly shifted policy away from some of the more dirigiste and draconian policies implemented under Monsieur Trichet. Yet, he has still stubbornly allowed the base rate to remain unreasonably high in an economy so clearly headed for a more than mild weak patch. Somehow it failed to dawn on him that the nominal strength of the German economy was going to be undermined not just by weakness in the southern tier of the Eurozone, but also Asia and even the now seemingly infected US.

Central banks often lag long rate indications

There is a long history of central bank easing only confirming longer-term government bond yields already telling them about the economic and inflation environment. And there is a key dynamic here worth noting: the longer the central bank waits once long rates signal conditions are weak, the more so the rate cut becomes necessary across time. And the degree to which the central bank delays beyond a reasonable indication from the long rates can be damaging to the economy, and leave whatever they do nothing more than an acknowledgment rather than leadership.

And just to be clear, it is not just the ECB that is guilty of such sins. There were many phases under the Greenspan regime during the 1990s into the first decade of this millennium where short rates were left higher than necessary as a guarantee against inflation; often at the wrong time, and driving an even more aggressive trend toward lower long term yields. Sound familiar? Regardless of current inflation measures, the longer there is not only a lack of stimulative central bank policy but also any hope of growth in the Euro-zone, the more the economy will suffer and long rates will continue to decline.

And the way in which that relates to the broader Eurozone crisis is the misguided notion that an ECB easing at this point will somehow buffer any of the negative consequences from a poor result in the Greek election and the already botched Spanish bank bailout effort (more on that below.) The extended yields out along the curve have been screaming at the ECB to lower rates for weeks (if not indeed months.) The two year government bond yield actually went negative within the past couple of weeks. How do you maintain a 1.00% base rate when the markets are telling you that things are so bad people will pay the government to park their money?

NUDISM not just our assessment

In fact, while he did not necessarily use the exact terms (much less the acronym), that was the assessment of estimable Evercore Partners head Roger Altman. Whether or not one agrees with his liberal political instincts, there is no denying his finance expertise. In summary he said that they have neither ratified nor adequately funded the European Stability Mechanism, and have not established a bank deposit guarantee scheme that might help address the crisis atmosphere. And the whole issue on those two items revolves around the degree to which all of that is still less than credible right into the teeth of a real crisis potential this weekend.

He also did chapter and verse on the flawed nature of the €100 billion Spanish bank bailout at the top of this week. You don’t need to take our word for what he said. CNBC has been typically kind enough to post the video of that Friday (June 15th) morning segment.  What is of note is that this followed a repeat appearance of the Financial Times’ highly regarded chief financial commentator Martin Wolf Friday morning as well.

Both are worth watching, as they focus upon the bottom line being a lack of finance for the overall solution.  As we have noted on quite a few occasions, that is due to the recalcitrance of the Germans and their successful northern tier cohorts on funding relief for the South. And that means recurring crises are the undoubted future. The northern tier may well be right that reforms must be aggressively pursued.

Yet to ask for reforms as a precursor to committing ample funding that will create some hope the European economy can stabilize and grow seems a bit benighted. While they undoubtedly made their own bed on this one, there is only so much suffering you can request from the struggling South without offering support as well. Otherwise, the opt-out begins to look less scary to the South (especially Greece) than it might be in practice, and (as Greece is currently demonstrating) the social dimension encourages counterproductive political developments.

It’s kind of like Bob Dylan quipped in his epochal paean to discarding societal convention Like a Rolling Stone, “…when you got nothing, you got nothing to lose.” While things will get much worse if they opt out, there is a sense that the average Greek in the Street already feels that way; and can a Spaniard looking around at 25% unemployment feel much different? And yet, rather than allow there might be some support offered their Euro-zone brethren along with the nasty tasting medicine, the Germans are back to insisting on full political integration, and blaming it on the markets!!?

Merkel’s madcap market mention

First of all, ‘political integration’ is code language for the Germans being in charge. Everyone knows the Golden Rule: He who has the Gold makes the Rules. And the insistence in this case is certainly more so fiscal than generally political. That much was clear months ago during what we termed the OGB Movement… Occupy Greek Budget. Of course, while not quite there yet due to the size and clout of Spain, there is little doubt the OSB Movement is more than a twinkle in the Teutonic eye if there are going to be any further significant funds provided.

Aside from all that, and very much like during the Greek bailout before it, there seems to be a natural German tendency to blame the markets. Along with her discussion on Thursday about her lack of interest in a European bank deposit insurance scheme and any form of Euro-zone bonds, Chancellor Merkel said (according to the front page of Friday’s Financial Times), “Here we are certainly in a race with the markets.”

Race with the markets?! What a breathtakingly misguided perception. Upon further consideration, it is actually borderline delusional. The markets are only a reflection of the anticipated reality based on trends in fundamentals.

Believing one is in a race with the markets is like a golfer believing they are in a race with the course. You cannot “outrun” the course, because it is the context within which your game is being played. If his round is not going well, all the golfer can do is get back to more solid fundamentals.

And therein lays the indication for Germany and its northern tier cohorts: the only thing that is going to allow the markets to stop reflecting what has been an inept, heavy-handed statist approach is a more timely, robust and fully-funded effort. Yes, indeed, tie the funding to the requisite reforms; and that will give you the right to audit the results, and apply clawbacks to substandard efforts. However, withholding funding until political consensus arrives (with folks who we hasten to add despise you more by the day) is begging for a tragic dislocation to occur at some point.

It is impossible to predict whether next week or the week after, or the week after that is going to be Germany’s truly critical ‘Jerry Maguire (“show me the money”) Moment’. But there will be an inflection point that relates to the Greek or Spanish banking system and the sovereign debt which is now increasingly tied to it (especially after the structure of this week’s Spanish bailout) soon enough.

And unless the ratification and funding for the European Stability Mechanism along with any other necessary functions are pursued post haste, we can expect a crisis that goes beyond anything we have seen so far. Central banks promise that there will be no lack of liquidity responsible for an interbank market lock up of the sort that occurred in the wake of the Lehman Brothers collapse.

But global banking has always been based upon a confidence factor that has already been patched up by repeated central bank interventions. As extensive as the forbearance shown by them in accepting specious collateral might have gone so far, there is no guarantee that banks will be trusted by other banks and the public if the political class remains mired in ideology-driven inaction.  

Growth restoring compromise is the only acceptable path. And we should be clear that this applies equally as well to the perniciously partisan shenanigans of the political class in the US. Trying to patch things together only because the situation has become so dire all politicians feel they’ve “… got nothing to lose…” risks the global economy falling back into a deep recession or worse. Of course, in that case they’ll all have ample reasons why it was the other guy’s fault; but at that point none of us out here in the real world will care.

General Market Observations

September S&P 500 future maintained its Thursday push back above last week’s 1,322 Close, and even above last week’s lead contract (the now expired June) 1,328 weekly Close. That said, those are strictly interim levels with 1,338 hit into the Close today and the 1,350-55 range significant resistances above the market. That is still the case even if the Greek election goes well. And 1,310 along with 1,297 remain the much more important interim supports below the market. It is also of note that the DAX was only up to the mid-6,200 area, which is short of more prominent 6,320-6,285 resistance (failed support.)

EXTENDED TREND IMPLICATIONS

Primary Government Bonds

Previous strong sister September Bund future sagging well below the lead contract Bund future 142.83 Tolerance of the 143.60 UP Acceleration still did not manage to make it all the way down to support in the 141.00-140.00 range. While it was not even back up to 142.83, equities weakness at resistances noted above are likely to leave it well supported.

That is even more so the case if the German ‘refuse-nik’ position on funding for the rest of Europe remains the case. After all, part of the rationale for the Bund weakness was the idea that any comprehensive Europe was going to impact the German purse.

The same would be true for the September Gilt future that had slipped back below the lead contract 119.30 UP Acceleration. That is also interesting Fibonacci, congestion and/or moving average support; not to mention the 119.40 DOWN Break out of its aggressive upward channel from the early April low. Pushing back above that area today seems to Negate the DOWN Break, which would normally point toward a restoration of the overall uptrend.  

And all the while the September T-note future sat blithely up in the mid 133-00 area. Yet in this case as well there is important near-term support from moving averages and gaps in the 133-00 area; which was confirmed to be the case on Wednesday’s test of that support that brought an immediate three-quarters-of-a-point improvement. However, with the lead contract June future set to expire next Wednesday, it will be important for the September contract to demonstrate it can push above the key 134-00 area once again as well.

Foreign Exchange

Weakness of the euro below EUR/USD 1.2400 saw it snap back up on Friday two weeks ago. Now back above violated 1.2550-00 support at that time and the 1.2621 January low opens the door to a retest of at least the interim 1.2750 area, and possibly 1.3000. Yet, that presumes a friendly outcome to Sunday’s Greek election.

Similarly for the US Dollar Index, recent strength stalled right into its .8350 area resistance. And even if it is slightly back below initial support around the .8178 trading high from January, there is plenty of extended support back into the upper-mid .8000 area.

And while it very negative initially on Friday two weeks ago, the Australian dollar held below AUD/USD .9700 Tolerance of (its major Fibonacci and channel support in the) .9800 area and cleaned up for a weekly Close right back at .9700: a clear rescue. That left it strengthening now back above 1.0000, even if the bigger resistance was always going to be up into 1.0250.

Not very surprising that weak sister euro saw EUR/JPY drop further below its recent 104.00 DOWN Break, and even its important 100.00-99.25 support. However, there as well it was unable to put in a weekly Close below the major 97.03 January low. However, now the push back above 100.00-99.25 that was also an aggressive down channel UP Break initially seems to have stalled; which is not a good sign for the overall uptrend.

In that context it is not a huge surprise that EUR/GBP should have slipped so significantly into and slightly below its interim support at .8000 after serial failures below important .8250 and .8150 supports. And in spite of the fact that .8000 area is only interim support in a major range from back in 2008, it managed to clean up above the .8100 area. However, based on moving averages and somewhat heftier congestion resistances the .8150 area turned out to be more important.

▪ July Crude Oil future not only failed hefty 95.50-94.50 range congestion, it was also dropped below important lower support (December pullback lows) in the 93.00-92.50 range on its way to failure below significant 90.50-89.50 congestion support. Yet the really significant failure was two weeks ago Friday’s gap open below the significant 85.00 area UP Break from last October. Next supports are not until the interim congestion and psychological support into 80.00-79.50 and the significant August-October 2011 lows in the 75.71-74.95 range. Yet, at least for now the improved psychology has stabilized it, even if it is having trouble getting any traction back above 85.00.    

And the August Gold future finally capitulated after its previous ability to hold its major 1,615-1,600 support. And that should have also scared the equities bulls, as the only time the Gold heads down this heavily with the equities is during a potential for a significant deflation scare. Back below the 1,615-1,600 support last December’s 1,526 low was the initial key lower support. Having held near that on recent selloffs hinted that the crisis was getting bad enough for the yellow metal to regain a classical ‘haven’ bid. That was confirmed with its surge back above 1,615-1,600 while equities and all commodities weakened further two weeks ago.

Thanks for your interest.

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