The Trader wrote about Rajoy when Zapatero was kicked out. We asked ourselves how competent Rajoy was when it comes to solving the Spanish economic mess, inherited by Zapatero. Rajoy, gave a rather muted impression, and has since continued down the same path. Judging by the reforms and the action, Mr Rajoy seems to be stuck in the great Spanish denial, we have covered over the year. Rajoy needs to adress the real economic problems Spain faces, and not simply proclaim “Yesterday, the credibility of the euro won, yesterday the future won. Yesterday, the European Union won.”. A relevant question is whether Rajoy actually sees what needs to be done, or is he trapped in a “fantasy” world, just like Cervante’s Don Quijote. Some more on Rajoy’s credibility, by Bloomberg.
He clearly doesn’t get it,” said Gary Jenkins, founder of Swordfish Research Ltd. near London, who has tracked bond markets for more than 15 years. “Spain needs someone who can come in and grasp the seriousness of the situation and react to that, not just pretend everything’s okay.”
Then, he announced that since the banks’ funding problems were resolved he would continue with his plans to watch the national soccer team play that night and climbed aboard his government jet to fly to the Polish city of Gdansk.
After leaving Goldman Sachs, Monti was president at the Bocconi University. Since joining the political space, Monti has had serious problems with regards to “fixing” the Italian economy. People just don’t want austerity, and at the same time increased taxes. IN Italy, it simply doesn’t work. Would you pay, if you felt you are totally pushed into the corner? From Bloomberg.
“I didn’t pay it,” Di Pardo, 75, said of the levy that was the centerpiece of Monti’s austerity budget. “I get that we are on the edge of failure and disaster, but you can’t keep taking from ordinary people.”
“It’s not a huge amount,” said Dario Castiglia, chief executive officer of real estate broker RE/MAX Italia, which has about 200 agencies in Italy. “It’s just that Italians were used to not having any taxes for three years, and also it’s hitting home right when we’re in the middle of perhaps one of the worst recessions in decades.”
Some market charts from the second worst day of the year, by Doug Short.
The selloff in the benchmark S&P 500 was a steady downward slope to the second worst close of 2012, a loss for the day of 2.23%, just a few basis points from the 2.46% selloff on June 1st. What’s to blame? Take your pick: A week unemployment claimsreport, a nasty Philly Fed Business Outlook Survey, slowing worldwide manufacturing growth and rumors of bank rating downgrades.
The index is now up 5.40% for 2012, which is 6.59% off the interim closing high of April 2nd.
From an intermediate perspective, the S&P 500 is 95.9% above the March 2009 closing low and 15.3% below the nominal all-time high of October 2007.
First a 5-minute snapshot of today’s steady downward slope:
Remember capital controls? Sovereign debt guru and Greece’s lawyer, Lee Buchheit, stopped by to chat about the eurozone debt crisis. We spent a lot of time talking about capital controls; whether we’ll see them in Europe (probably) and what can be done to avoid them (a lot of hard work).
Lee also talked about which countries would need a restructuing in the EU next and the prospects for the eurozone making it through this crisis intact.
Greece’s Lawyer: EU Bailout Will Cost Trillion Euros & Cyprus Is Next.
Must watch video by Bloomberg’s Anthony Lee Pacchia continue below.
Guest post by Peter Tchir of TF Market Advisors.
The term “perma” seems to get attached to anyone who has an opinion for more than a couple of weeks, but yes, I have changed my view on Europe. By the end of LTRO2 when most of the world was bullish we were bearish. It was painful for a bit, but we saw the signs as early as March 2nd, and accelerating by March 16th that Spanish debt was struggling. We remained bearish for quite some time but gradually shifted to a bullish bias. Too early as we had to ride it down further, but got more bullish on the back of two main catalysts – Grexit and JPM.
How did Grexit Make Me Bullish?
The fact that Europe was finally starting to face up to the possibility of Greece exiting became a positive for me. The people I have spoken to at the German Ministry of Finance and senior Greek politicians all admitted that until recently almost no time had been dedicated to what a Greek exit would look like.
In spite of all the negotiations around the bailout, neither side had taken a serious look at what it could mean. Both side were living in a world of assumptions about how it would play out that had no basis in reality. Germany somehow had this vision of not having to make good on all its guarantees, that the ECB would get paid, and the “firewall” would stop contagion. All of those are laughable assumptions yet basically is what the “core” of Europe believed. So on June 2nd when we wrote our widely read Why a Grexit would make Lehman look like childs play piece, the basis for the bullish view was formed.
Some points on the Economy via Biderman and Schnapp.
Our real-time economic indicators are telling us that economic growth is sluggish as it has been since the beginning of the year. Our economic growth view has been consistently lower than government forecasts all year and we think the government is finally catching up to the reality of a slow growth economy.
The strongest driver of economic growth is jobs and growth in wages and salaries. In the last two months the U.S. economy has only added approximately 150,000 far lower than the amount needed to keep up with population growth and certainly not enough to propel the economy out of its slow growth mode.
Recently however, there have been a few tailwinds to economic growth. Video below.
Guest post by Doug Short.
The latest Federal Reserve intervention, Operation Twist, which was set to expire at the end of next week, has now been extended through the end of the year. We’ve seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three months before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the collapse of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the Lehman bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy), now in its fourth year.
If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.
With Greece “fixed” people have turned their attention to Spain and Italy. Investors have almost forgotten about how China, the white knight, is doing. The Chinese economy is not showing the “perfect” Madoff like trend up the world wants to see. It sure seems China needs more stimulus, just like the rest of the world. More on the Chinese economy via Bloomberg below.
A top European Central Bank policy maker has publicly backed the rapid use of the eurozone’s bailout fund to buy distressed sovereign bonds on the open market, saying such action could ease the “very severe strain” being felt by Spain and Italy. Speaking to the Financial Times, Benoît Cœuré, the ECB executive board member who oversees financial market operations, also said a cut in interest rates was likely to be discussed at next month’s ECB rate-setting meeting, to help boost confidence. But he stressed that political agreement on fiscal integration was needed to tackle the eurozone’s underlying problems. http://www.ft.com/intl/cms/s/0/2007154e-baf0-11e1-b445-00144feabdc0.html#axzz1yOqI48tC
The Federal Reserve has extended “Operation Twist” – a plan to sell short-term bonds while purchasing longer-term securities – to support a slowing US economic recovery, but refrained from a more aggressive plan to ease monetary policy. At the end of a two-day meeting, the Federal Open Market Committee, which sets interest rates, offered a bleaker picture on Wednesday of the US economy than it had at its last gathering two months ago. It noted that employment growth had slowed and consumer spending was rising at a weaker pace. The Fed warned that global financial strains continued to pose “significant downside risks” to the economic outlook. Officials cut forecasts for US growth this year to a range of 1.9 to 2.4 per cent, from between 2.4 and 2.9 per cent in their previous projection in April.http://www.ft.com/intl/cms/s/0/5a7bbe52-baee-11e1-b445-00144feabdc0.html#axzz1yOqI6tZF
The government’s new “funding for lending” programme, designed to boost credit for British business, will cut banks’ costs to as little as 1.2 per cent, according to people briefed on the scheme. The supply of such cheap money to the banks is supposed to encourage them to lend to companies and stimulate the sluggish economy. Under current plans, which are still being revised the rate at which banks could borrow government money would start at the baseline Libor rate plus 125 basis points and fall to a minimum possible surcharge of just 25 basis points, according to one senior banker.http://www.ft.com/intl/cms/s/0/c8e3c988-bab8-11e1-83e0-00144feabdc0.html#axzz1yOqI6tZF
Guest post by Azizonomics.
Most of us are at least passingly familiar with the theory: the completion of a new tallest skyscraper presages a market crash. Over-exuberant construction reflects over-exuberant markets, and over-confidence often spills over as the hyper-bullish slowly (and then quickly) realise that the good times are over
Here’s the story so far: