Guest post by Lance Roberts of Street talklive.
Economic reports all across the board this morning continue to confirm a further deterioration in the overall economy. The first set of releases came overnight with Markit’s Flash Purchasing Manager Indexes from around the globe. The numbers were not pretty.
Note: A reading below 50 indicates contraction.
Guest post by Peter Tchir of TF Market Advisors.
Chinese PMI was better than feared, but if I had to bet on what number is less manipulated, Chinese data or LIBOR, I would have to bet on LIBOR. Since we don’t have much else to work with, I guess we are stuck looking at it, and it shows that the slowdown is slowing, but I can’t get very excited about that.
European manufacturing PMI came in at 44.1, worse than the already low expectations of 45.2. The situation in Europe is deteriorating and all the summits aren’t helping. The banks need to be recapitalized and “uncertainty” needs to be removed or else business will continue to grind to a halt.
Most interesting, I thought, was that German Manufacturing PMI came in at only 43.3 and even German service remained under 50. Germany is not immune to the woes in the rest of Europe or to the global economy. French manufacturing PMI was an equally dreadful 43.6. Maybe the growing weakness in the core will light a fire. It isn’t enough to have firewalls. They either have to spend that money and finally take serious default and currency risk off the table, or the economies will continue to slide deeper into recession or depression.
Pesetas and Real Madrid
Spain had a reasonable t-bill auction today. The yields were high compared to any of the core with 6 month t-bills coming in a 3.69%. In a normal world, that isn’t bad, but in a world where Germany and others get paid to issue money for 6 months, it doesn’t look great.
In any case, talk of redenomination continues. Many people argue that the only way out for Spain and others is to exit the Euro and create their own currency that they can devalue at will.
I continue to see several problems with that. Devaluation will be controlled by the markets and not the politicians making it uncertain where the exchange rate will settle in. If the bets are “too high”, “too low” or “just right”, I would certainly bet against “just right”.
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.
Maybe the idea of growing cannabis to pay off debt, presented by a small town in Catalonia, isn’t such a bad idea after all. Spain has been living in denial for many years, and now reality is catching up. Italian PMI soon, stay tuned.
Investors were quite excited last week when central banks announced a coordinated reduction in the interest rate for U.S. dollar swap lines. It’s interesting that the more arcane an intervention is, the more excited investors get – maybe because complex-sounding interventions allow Wall Street’s imagination to run wild and substitute for actual understanding.
Very simply, what happened last week was a liquidity operation – essentially, European banks can now borrow dollars for a fraction of a percent less than they previously could. This prevents transactions denominated in dollars from “freezing up” across Europe (since European banks are no longer willing to lend to each other). But it does nothing to address the sovereign debt crisis. It does nothing to make European banks more solvent. All a “swap” is, really, is a loan of X dollars, in return for some number Z euros. At the end of the period, the borrower pays back X dollars, plus some interest, and gets back exactly Z euros. Notably, it doesn’t matter what the actual value of the euro is at the time of repayment. X and Z don’t change. So the Federal Reserve, for example, doesn’t take on any foreign currency risk in this trade. The euros are really nothing but collateral for what otherwise is a simple loan of U.S. dollars.
Meanwhile, we’re seeing various proposals for more complex ways for some institution to buy distressed European debt. The most recent iteration looks for the IMF to buy the debt. But when the IMF buys debt, it takes a senior claim to all other bondholders, and imposes conditions to make sure that their tranche of debt gets repaid (the IMF is emphatically not in the business of providing loans that it doesn’t think it will get back).