The European Central Bank's (ECB) unprecedented use of a three year, low cost LTRO (Long Term Repurchase Agreement) policy initiative may have removed some of the short term pressures from the EU Banking crisis, but like the Greenspan PUT, the unintended consequences are not yet fully understood. One is the moral hazard which is fostering financial "games" to be played with reckless abandon. Some of the mischievous and cunning games are frankly questionably as being even legal! But then, nothing is illegal if the regulators and those organizations charged with surveillance are not bothering to investigate. Extend > Pretend > Bend is the new approach. MORE>>
The Global Markets have reached the point of waht can be best labeled as "Elevated Risk". Analytics measurements including Fundamenal Analysis, Techncial Analysis and Risk Anlysis all are independently signalling this along with warnings. This months report lays out the Risk Assessment, Risk Levels as determined by our proprietary aggregated Global Financial Risk Index, changes in Tipping Points and the Macro Risk-On, Risk-Off Drivers.
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The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
EURO EXPERIMENT : ECB's LTRO Won't Stop Collateral Contagion! Released December 27th, 2011
I would argue that the problem short term is a shortage of real collateral and that US dollar cash, versus 'encumbered' cash flow, is now king. It is clear that the rampant advancing Collateral Contagion will quickly eat the futile LTRO attempt like ravenous wolves. A well circulated Tweet from PIMCO bond king Bill Gross said it all: " What does LTRO stand for? 1- A shell game; 2-Cash for trash; 3 Three-card Monti; or 4. All of the above." Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can". MORE>>
04/04/2012 3:08 AM
Postings begin at 5:30am EST
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While the Global Manufacturing PMI drops to 51.1, it remained relatively constant as it came in at 51.2 in February. Production expanded for the fourth consecutive month and new orders increased as well. The increase was modest, but it was an improvement. Source: Markit
The Eurozone index fell to a three-month low of 47.7 in March, down from 49.0 in February. Cost pressures have built and further signs that manufacturing weakness is spreading were main causes for the drop this past month. Source: Markit
Reduced factory output reflects falling new business from home and abroad
Manufacturing employment down at sharpest rate in three years
Input price inflation ticks higher, but remains modest over.
March data showed manufacturing production falling for the fourth time in the past five months. Factory output was reduced largely in response to lacklustre demand from domestic and external markets. New orders fell at the fastest rate in 2012 so far, while new export business decreased for a second month in succession. Manufacturers reduced their employee numbers as a result, while purchasing activity was also down from one month earlier. There was little change on the price front, with factory gate charges falling modestly, and the rate of input cost inflation remaining somewhat subdued. Companies reported a renewed decline in manufacturing output during March, with the rate of contraction the steepest since November and the second-sharpest in three years. Behind the overall decrease in factory output was a further decline in total new business. Underlying demand weakness was broad-based across domestic and external markets, with new export business also falling moderately from one month earlier. Rates of decline in both cases were among the sharpest seen since the 08/09 financial crisis
CHINA - OFFICIAL REPORT SAYS: Renewed Acceleration from 51.0 to 53.1
China’s manufacturing PMI improved from 51.0% in February to 53.1% in March, the highest in twelve months. The index has stayed above the critical level of 50% for four consecutive months, indicating that the underlying momentum of the manufacturing sector in China has continued to improve. 10 of the 11 sub-indices were higher than their respective levels in the previous month. The new orders index rose strongly by 4.1 ppt. while the new export orders index gained 0.8 ppt. in March. The index readings indicated significant improvement in domestic demand. On the other hand, the input prices index went up from 54.0% in February to 55.9% in March, showing that upstream price pressures have increased.
Back in February we were quite amused by conflicting internal and external reports of manufacturing growth in China, which according to the HSBC Markit Manufacturing PMI index had contracted for a 4th consecutive month even as the official Chinese PMI data showed 3 consecutive expansions. It just happened again, only this time the spread between the two indices has jumped to the second highest ever, with the official PMI index surging to 53.1, an expansionary number, an eleven month high while according to HSBC it slid to 48.3, indicative of contraction, and paradoxically indicating that in "the first quarter as a whole, the index averaged its lowest reading since Q1 2009." In other words, the Schrödinger paradox - where the economy was doing better and worse at the same time - which was experienced for the past three months in the US (and is now finished with the economy rolling over), has shifted to Shanghai, where it is now the PBOC's turn to baffle all with bullshit. Why? One simple reason: despite what everyone believes, China still has residual and quite strong pockets of inflation. So while the world may be expecting an RRR, or even interest rate, cut any second now (just as China surprised everyone literally house before the November the global FX swap line expansion by the Fed in November 2011), the PBOC is just not sure it can afford the spike in inflation, or even perception thereof.
This also explains why while HSBC, being a member of the banking cartel would love nothing more than more easing from PBOC, China is far more more cautious about further easing, especially if the Fed does go ahead with more QE anyway, the bulk of which China would import as excess inflation anyway. For vivid proof of this observe chart two: the last time we had a record spread between HSBC and China PMI, Chinese CPI soared from -2% to over 6%. China is now at 3%, just as the index spread is the second highest ever. If we are to assume that Chinese easing will follow the March 2009 episode, and thus assume a trough Chinese inflation of 3.2%, one can see that the 12% implied inflation at the end of the current easing episode is why the PBOC will be far, far more reluctant to engage in the same easing policies as the Markit group of banks would wish for it to.
4 - China Hard Landing
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - APR 1st- APR 7th, 2012
there is widespread agreement that the regional Spanish banks, the cajas, are bankrupt, as they made massive loans for construction and mortgages. The government has taken some action, forcing 45 caja savings banks that were threatened by bankruptcy due to bad property loans to consolidate down to 14. But although bank regulators have estimated that Spanish banks will need €26 billion in extra capital, many skeptics believe this severely underestimates future losses and that the government may have to step in with a much larger bailout for the financial sector. The Bank of Spain contends that construction debt to banks stands at some €400 billion, of which repayment of €176 billion is questionable, with €31.6 billion of those considered nonperforming. (WSJ)
Spanish private debt is 220% of GDP, dwarfing government debt, which is high and rising. So not only are banks being forced to raise capital and reduce their loan books, consumers and businesses are also overextended. The government wants to increase taxes or reduce spending by 17% to get the deficit down from over 8% to 5.5%, a combination that is not geared for growth.
€12.3bn will be raised in new taxes, with €5.3bn coming from corporations, and €2.5bn is projected to come from a temporary amnesty on tax evasion (you've got to love the optimism). We have seen how such policies worked in Greece. They meant lower, not increased, revenues. Note that Britain also raised taxes on "the rich" and saw revenues fall in that category, not increase as projected.
Further, as we go along this year, watch for "breaking" news that off-balance-sheet guarantees by the Spanish government will be huge, adding multiples of 10% to total debt-to-GDP. Spain's admitted government debt is over 70% of GDP, which in comparison to other European countries is not all that bad. Except that is not the extent of the problem. There is regional debt, bank-guaranteed debt, sovereign guarantees, etc. that take it to roughly 85%.
And then we add the guarantees that Spain has made to the EU for all the stabilization funds, ECB liabilities, etc., at which point Mark Grant suggests that Spanish debt may be closer to 130% of GDP. (Of course, if we count all debt and guarantees, something that a normal bank would make you or me do if we wanted a loan [at least since the subprime debacle], then Italy has over 200% debt-to-GDP. Just saying.)
Spain is going to have an uphill struggle to keep its deficit down to 5.5%. Unemployment is still rising, as Spain is after all in a recession and costs will be up and revenues down. But the current budget buys time and what will amount to good will from the rest of Europe, as Spain will be seen to be trying, conducting yet another experiment in austerity. When those deficits come in higher, then what will Europe do? With each piece of bad news, the problem of funding Spanish debt will grow. Right now, Spanish banks are buying Spanish government debt with everything they can muster, which is to say, ECB loans at 1% for three years, invested in 5.5% bonds. With 30 times leverage. All the while trying to cut losses and reduce their loan books – a trick worthy of Houdini.
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