Thursday, October 16, 2014

doubting Europe's creditworthiness!

La grande correction?  I don't know.  Generally, you only know that a big move is afoot once its all over.  Dragi could once again put forward the "plunge protection team" at work and prove that everything is fine, by buying every bond in sight.

But the reality of core/non-core Europe is serious.  First off, Germany is exporting to the rest of Europe, and still works on the premise that its client's inability to pay their bills is not its problem (right).  France is starting to behave like a non-core (that may be temporary) yields are rising fast in France:



But that's northing compare to Greece that saw a 200 bps yield rise in the past week.  (Hurray to all the French and German banks that sold off their Greek exposure to ECB over the past 36 months).   Don't know how many Macro funds went bust this week -- my guess is that its going to take a few weeks/months before the blood bath there emerges fully, but these leveraged hedge funds are simply not equipped to take that kind of price movement in the bond market.

US 10 years treasury trade with a yield of 1.99% and for Germany (similar instruments) the price is 0.79%.  If Germany cannot have a roaring economic growth when interest rates are as low as they are now -- compare to 7% in 2007, its an indication that even in Germany, not all is well.

I am still far from certain that Europe has done everything it can to delay the inevitable.  Clearly, with correcting stock markets, a wild ride bond market its getting more and more difficult to make the problem go away.  There was also a rather dramatic "tiff" between France and Germany after Sapin was told by Schaeuble (their country's respective minister of finance) that more stimulus was out of the question.

Add to all this that the wheels are coming off in Japan.  Abe's plan of fiscal stimulus, easing money and structural reform is not working out as planned.  Japan's GDP is shrinking fast -- 1.8% in the second quarter (7% annualized...).  Take home pay in Japan is shrinking by 3% per annum.  

China's own challenges are forcing it to re-energize its drive to slow property prices; a massive challenge when you consider the strength of the entrenched forces to maintain the status quo (never mind the current, and very public, mess that is Hong Kong).  China cannot be counted on to be a helpful force.

America is in the middle of a Ebola crisis mid term election cycle.  If the GOP is successful in taking over the Senate they have a real chance at miring what is left of Obama's presidency into irrelevance. More Bengazi enquiries more votes to defund the ACA (ObamaCare to the rest of the word).  Overall drive the economy down.  Just watching Fox News (GOP propaganda organ) its clear that the mission of the right's media outlet is to cause mayhem and fear in the heart of all Americans.  In other words, the usual politicking before a critical election -- that may shut down the US government over the next two years (not that much has been achieve of late anyway). 

Back to Europe, things could still work out for savers (temporarily anyway) if Dragi decides (with the help of Germany and France) that they need to push the correction into the future.  The question is how long can they afford to to this?  In the end, its a question of will on the part of Germany and France to make the ride continue.  There no elections for either Germany or France within the next 18 months (that matter) and it may be a good (as any) time to allow for correction to occur.  Despite's Dragi's very public statement that everything is fine in Europe, he is fully aware that Europe's economy is not well.  



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