Guest post by Ice Cap Asset Management.
Dodge City, Kansas is a lovely place. The home to 26,101 people regularly enjoy old west casinos, old west rodeos and old west movies. Like we say – it is a lovely place.
Yet years ago when it was still cool to be a cowboy, cowboys of all types were getting’ out of Dodge. And who could blame them – bullets flew around town on a regular basis.
As we look across the globe today, Dodge City’s are popping up all over the place across America, Europe and Asia. However, within the World of financial markets, government sponsored economic policies are desperately trying to keep everyone in the 2012 financial version of Dodge.
Today’s question of the century is which market is the equivalent of Dodge? One thing is for sure, financial bullets are flying fast and furious these days forcing every sane investor to keep their head down. For all other investors, be a good cowboy and be sure to have an exit plan – you never know when you’ll need it.
Spain tried playing poker vs ECB using peanuts, but the strategy failed. Bankia won’t be allowed to use ECB funding via the backdoor. The Peninsula Iberica is on fire. Some further insight via Macro Business.
The news from Europe was all Spanish overnight as the country continues to struggle to find traction on any plan that will lead it away from the need for external help:
Spain backtracked on a plan to use government debt instead of cash to bail out Bankia, as Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.
An Economy Ministry spokesman said yesterday that the government was considering using an injection of treasury debt instead of cash to recapitalize BFA-Bankia, as laid out in legislation approved in February. Spanish bond yields rose and investors criticized the idea, which the spokesman, speaking anonymously under ministry policy, said today had become a “marginal” option for the 19 billion-euro ($24 billion) rescue.
The government’s push to merge banks continues with the announcement that three savings banks, Ibercaja, Liberbank and Caja3, will vote shortly on whether to combine into a single entity. The merger, if approved, would create the country’ seventh largest financial institution with a combined £96bn in assets. Obviously we’ve seen this before with Bankia, which unfortunately didn’t go to plan.
Market thoughts by Peter Tchir of TF Market Advisors.
So the EC wants the ECB to bypass the EFSF and use the ESM to recap EU banks? That was the rumor that shifted global stock markets by 1% in a matter of minutes?
The ESM is not yet up and running. There was talk that it would be done by June or July of this year, but in typical EU fashion I don’t think much progress has been made towards that promise. So right now the EU is stuck with EFSF and the potential to set up the ESM.
The EFSF actually has a lot of powers. I’m not sure exactly why it is such a big deal if the EFSF (or ESM) invests directly in banks or lends money to countries to invest in banks. In theory the countries could lose on their bank investment but pay back EFSF loans? That is a possibility but it would seem more and more likely that if the bank rescues fail the sovereign is dead anyways, so the market might be reacting too much to that distinction.
The bigger problem is that the EFSF is not well set up to leverage itself. The EFSF is technically the entity that could be buying bonds in the secondary market. It is supposed to have taken over that role from the ECB, yet it hasn’t done that. Why not? It is possible that they haven’t figured out a good way to leverage the EFSF and therefore would get minimal bang for the euro by buying bonds in the secondary market without leverage. The same issues apply to its role in the primary markets. Yes, the EFSF can intervene in the primary markets, but again, had very convoluted leverage schemes, which would never work.
The problem isn’t so much what the EFSF is allowed to do, it is how constrained it is in terms of leverage and access to funding. There is almost nothing that can be done about how EFSF is set up at this stage, nor should there be. That messed up entity should be put out of its misery.
Austerity bites. Latest out of Spain, is that Roche actually wants to get paid for providing medicine. As the Spanish economy is continuing the fall into the abyss, companies are now adjusting to the fact many regional municipalities lack money. From El Pais.
The pharmaceutical giant Roche has decided to set a ceiling on the orders that 11 Spanish hospitals will be allowed to place until they settle at least part of their ballooning unpaid bills. One more center, the Hospital Provincial de Castellón, will have to pay the Swiss multinational, which manufactures many of the cancer treatments used in Spanish hospitals, for its orders in cash.
Farmaindustria, the pharmaceutical industry association, calculates that the outstanding debt on drugs ordered by hospitals was close to 6.4 billion euros in late 2011. A delay in payments from struggling regional governments is leaving public hospitals in the red, while pharmacies in some regions, such as Valencia, have gone on strike to protest the fact that the Generalitat also owes them millions of euros for subsidized drugs.
Guest post by Azizonomics.
Charles Hugh Smith (along with many, many, many others) thinks there may be a great decoupling as the world sinks deeper into the mire, and that the dollar could be set to benefit:
This “safe haven” status can be discerned in the strengthening U.S. dollar. Despite a central bank (The Federal Reserve) with an avowed goal of weakening the nation’s currency (the U.S. dollar), the USD has been in an long-term uptrend for a year–a trend I have noted many times here, starting in April 2011.
That means a bet in the U.S. bond or stock market is a double bet, as these markets are denominated in U.S. dollars. Even if they go nowhere, the capital invested in them will gain purchasing power as the dollar strengthens.
All this suggests a “decoupling” of the U.S. bond and stock markets from the rest of the globe’s markets. Put yourself in the shoes of someone responsible for safekeeping $100 billion and keeping much of it liquid in treacherous times, and ask yourself: where can you park this money where it won’t blow up the market just from its size? What are the safest, most liquid markets out there?
The answer will very likely point the future direction of global markets.
Smith is going along with one of the most conventional pieces of conventional wisdom: that in risky and troubled times investors will seek out the dollar as a haven. That’s what happened in 2008. And that’s what has happened throughout the era of petrodollar hegemony.
Two of the best-known business dynasties in Europe and the US will come together after Lord Jacob Rothschild’s listed investment trust and Rockefeller Financial Services agreed to form a strategic partnership. RIT Capital Partners is to buy a 37 per cent stake in the Rockefeller’s wealth advisory and asset management group for an undisclosed sum, giving Lord Rothschild’s London-listed trust a much sought-after foothold in the US. The transatlantic union brings together David Rockefeller, 96, and Lord Rothschild, 76 – two family patriarchs whose personal relationship spans five decades. http://www.ft.com/intl/cms/s/0/efe93494-a9a3-11e1-a6a7-00144feabdc0.html#axzz1w8XyzKzt
A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said. News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early. Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets. http://www.ft.com/intl/cms/s/0/7730ca10-a9b4-11e1-9772-00144feabdc0.html#axzz1w8XyzKzt
The decline in Facebook’s market value since its initial public offering earlier this month increased to 24 per cent as the social network’s shares dropped a further 9.6 per cent on Tuesday to a new low of $28.84. Facebook’s stock options, which traded for the first time on Tuesday, indicated that the stock’s volatility is expected to continue. The stock options were already among the most heavily traded in the US market, demonstrating the frenzy around the eight-year-old company and its May 18 IPO. http://www.ft.com/intl/cms/s/0/6769765c-a9a2-11e1-a6a7-00144feabdc0.html#axzz1w8XyzKzt