Quebec Welcomes Catalonia to the United Nations!
Guest post by Peter Tchir.
But Quebec Isn’t a Country? Exactly.
The Catalonian elections are interesting and shouldn’t surprise anyone. In stressful economic times people look for alternatives. They want someone to blame (“the other guy”) and like to be told how great they themselves are. If that wasn’t the case, it is unlikely that an angry megalomaniac with a toothbrush moustache would ever have ruled Germany.
At this stage, the elections and referendum movement remind me a lot of Quebec in Canada. Economic decline coupled with an identity lead to the belief that separation was a good way to go. For many of us outside of Spain it is hard to realize how long Catalonians have held a belief that they are different. I remember back in the 1980’s being corrected by a soccer player when I said he was Spanish, and he replied, with a bit of anger, that no, he was Catalonian.
Spain in Pain
A few links via El Pais.
Millions Join Largest European Strike Ever
Europe’s Mediterranean rim trembled on Wednesday as violent clashes broke out following the largest coordinated multinational strike in Europe ever. In the hope to stave off decades of austerity, precarity and unemployment, European labor unions united for the first time since the start of the European debt crisis to organize strikes and protests in a total of 23 EU member states, with millions of workers walking off their jobs and marching on parliament buildings across the continent. Bloody street battles ensued across Spain, Portugal and Italy.
In Italy, over 300,000 protested in over 100 cities as workers observed a 4-hour stoppage in solidarity with Greek, Spanish and Portuguese workers. In Milan and Rome, scenes of street “guerriglia” were witnessed as thousands of students clashed with riot police, bringing traffic to a standstill and leading to dozens of injuries. In Sardinia, industry minister Corrado Passera and Fabrizio Barca, minister of territorial cohesion, had to be evacuated by helicopter after angry protesters besieged a meeting and started burning cars all around them.
Courtesy ZCommunications.
Spain Will be Forced to Choose
Spain has a few choices in order to start dealing with the pain the country is experiencing. None of the choices look very attractive, but something must be done in order to start fixing the economy. Mr Rajoy, what u gonna do? Via the think tank Carnegie Europe
In the great debate over the economy we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to Spain.
For many years, thanks partly to bad policies in Spain but mainly to aggressive attempts by Germany to achieve growth by forcing a trade surplus onto its European neighbors, Spain, and many other countries in Europe, ran enormous trade deficits. It is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.
Portugal shut out of OMT in order to keep Greece out
Guest post by Sober Look.
In late August JPMorgan argued that the ECB’s OMT (Outright Monetary Transactions) program should start with Portugal (see discussion). The prediction was wrong – the ECB disqualified Portugal from participating. But why? After all Portugal has complied with multiple troika reviews and the monetary transmission mechanism in Portugal has clearly been broken. The chart below shows that Portugal’s private sector has not benefited from the ECB’s liquidity injections (LTRO) and the lower overnight rate (prime example of broken monetary transmission).
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| Source: JPMorgan |
What’s particularly strange is that the whole justification for the ECB launching this sovereign bond buying program to begin with had to do with problems of monetary transmission (see discussion) in the Eurozone.
Time to Think
Guest post by Peter Tchir.
Last week was a feeding frenzy for algos and a disaster for those who were poorly positioned. Crowded complacent trades were pummeled, including, or especially, investment grade CDS. But now we have had some time to think about what happened and the markets seem calmer. On this bond market holiday, let’s just take a look at 5 simple things. These will be the drivers for the market.
Apple
If there was ever a case of people lamenting now owning a stock, swearing they would buy more if it ever came down, then dumping en masse when it did come down, this is it. Apple is unique in that it isn’t just a huge component of the indices (which it is) but it has become such an indicator of sentiment, that guessing Apple correctly is very important, if not critical. I like AAPL here. Sadly I started liking it at $570 but added some Friday morning. The sell-off seems overdone, at least for now. All those worried about paying taxes on their “big” gains, now need to worry about the gains. While everyone else was “amazed” by the great Apple products, I went to stores and found the iPhone 5 available on launch date, and remain confused about why the iPad mini which is either a small iPad or a big iPhone with no voice capabilities was such a big deal. But that was at $650 and above. Here I like it and it is oversold by many measures, including my personal favorite – RSI. I am also encouraged how many people were talking about the 200 day moving average. Many were investors who normally would demand you wash your mouth out with soap for saying such a naughty word. Finally, if they finally do something big with their cash, the multiple should look very attractive.
Whew what a week
Guest post by Peter Tchir.
First, today’s move seemed bullish to me. Yes we failed to hold the highs of the days. That isn’t good. But we didn’t break to new lows as we closed and that’s not bad given all the concerns about Europe. Even more importantly we didn’t completely give up when Obama made his sheech. I can’t be bothered to correct that typo because Obama was so disappointing.
I’m not sure that I would consider the election a strong endorsement of his policies. If anything I viewed the election as reasonably split and indicative of a divisive country. He definitely won, so he shouldn’t capitulate but seriously, isn’t it time for some for cooperation? Not that the republicans were any better. I can’t tell whether they are behaving as sore losers, or arrogant winners that somehow haven’t accepted they lost.
We need to do a few things. Work together to create a reasonable plan forward. It won’t make everyone happy but we need to do what is best for the economy, and to some extent, the market. I don’t agree with everything that Ben does, but while he is out there trying to promote growth through liquidity the politicians have been messing it up. I didn’t expect hugs and kisses on day 1 but the politicians need to understand the people aren’t happy, and the only real mandate, from those in the center, is to figure out some useful compromise.
A Lot to Catch Up On
Guest post by Peter Tchir.
Europe
Is Europe really going to let Greece go and risk a series of exits? That was my concern last week when I invoked quotes from Planet of the Apes. Nothing much has happened since then to change that view.
Greece has a vote that may or may not pass. If it doesn’t pass, the process of a nasty Greek exit and full default is likely accelerated. If they pass it, which I expect they will, then that process is likely just delayed. Until the “official sector” takes losses on all of its dumb purchases of Greek bonds and restructures the loans that were made that never had a chance of getting paid back, there will be no other course for Greece. The fact the European officials either don’t see it, or are just ignoring it is a major concern. Greece and the risk of a painful and chaotic exit for Greece that affects the other weak countries is a real risk. I expect a small pop when the vote is done and it “passes”. If it doesn’t pass I will quickly get very nervous about the markets, but history tells us it will pass and everyone will pretend this time it will work. At least for a couple of days we can live that fairytale.
Then there is Germany. The comments coming out of Germany are growing more hostile. Germany today mentioned direct influence on other country’s budgets. Draghi specifically tried to point out to Germany that the European debt crisis is hurting Germany already and will hurt it more. He is clearly trying to make it easier for Germans to get on board with some aggressive ECB action. If you are truly an optimistic, you can think Draghi said this as a warning shot before he acts “independently”. While not completely at the beck and call of Germany, the ECB is far less independent than our Fed. Draghi has already made it clear that the IMF would be a model for any new programs, so he has given away some independence. He won’t just act unilaterally and aggressively. That leaves us with the conclusion that he is pushing Germany, and that Germany needs to be pushed. Back in September, Merkel sounded downright dovish. She pointed out even to her own finance people that the ECB had to remain independent. That is not the message that came out last week when she appeared to backtrack on letting banks get direct bailout money, and that message was further diminished by today’s comments. Germany will be hurt by not supporting more aggressive action, but people know smoking is bad, and yet many still do.
A Paucity of Change, Greece & CPDO
Guest post by Peter Tchir.
Maybe it is just me, but the election already seems anti-climatic. After what seems like close to 3.5 years of campaigning, the election is finally upon us. Maybe it is the length of the campaign, or the after effects of hurricane Sandy, or that bankers are vilified by both sides, or that I don’t live in a “swing” state, but it seems like people don’t really care that much about the election.
The over-riding sense I get, is that most people expect the situation to remain basically the same no matter who wins. Maybe that is an overstatement, but many people seem to be coming to the conclusion that the system is not working. No matter who wins, there is little that can be done by the winner to materially change the direction of the country. Yes, each leader would have their own agenda, and the make-up of Congress will have an impact, but unless something unexpected happens, whoever wins will face a lot of roadblocks in trying to implement their dream.
One of the biggest hurdles for either party is our mounting debt and the rules we have in place to stop it. Maybe we will go full Krugman and not worry about debt. I won’t refer to it is as full Keynesian because that might be unfair to the man who isn’t able to say whether he agrees with the policies or economists that use his name in vain. If we go full Krugman and stop worrying about debt, maybe we will see some dramatic new programs. I hope we don’t go that direction, as I think debt does matter (ask the people in Greece and Spain), but I guess it could happen.
If we stick within our feeble and weak debt “ceiling” restrictions, then the president will face severe roadblocks every direction he tries to go. The debt is becoming a limiting factor in potential policy action.
Fixed Income Overview and Allocation Strategies
A few observations via TF Market Advisors.
The week started positively. In spite of fears related to hurricane Sandy, risk assets started the week on a positive note. Wednesday, when U.S. markets finally opened, the rally was a bit tentative, but then it gained strength on Thursday. We had remained positive that morning on risk, in a large part because of The Visible Hand of central banks. But as the day wore on, we became concerned that news out of Europe was not good. We recommended getting out of risk-on trades and ultimately on Friday morning became bearish over fears that the European “Maniacs” would finally do it and let Greece implode, causing problems for Spain and Italy.
Apple certainly helped the bear case as it broke its 200 day moving average and triggered an avalanche of selling – I’m assuming a lot of algorithms were set up to push on that once it broke.
With the election looming, some allegedly good numbers out of China and the speed of the correction, so clearly led by one stock, I wouldn’t be surprised to see some stability early in the week, and even a bounce, particularly if some people get caught short Apple here and the algorithms decide to sweep it the other way.
In spite of the potential to bounce, and in spite of lingering thoughts on Spanish OMT (the thoughts are fears when short, and hopes when long) we are in mild “risk off” mode. I’m not expecting a big sell-off, but events in Greece and comments from various Troika representatives send a chill down my spine. After 2.5 years of trouble, they still don’t seem to understand credit.
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