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Investors this week got a whiff of the ultimate logic of the core contamination trade. This is
that the longer the Eurozone crisis continues, the more likely that it ultimately affects
Germany’s own credit rating. GREED & fear refers of course to the “failed” German bund
auction yesterday. The auction of 10-year German bunds attracted bids totalling only €3.889bn
or 65% of its sales target of €6bn. As a consequence, the 10-year German bund yield surged
by 23bp yesterday to 2.15%.
This is the sort of market pressure that is likely to lead, sooner or later, to German agreement
to a more overt move to monetisation by the ECB. But the German demanded quid pro quo for
such a development will be a move to a more concrete fiscal union, as discussed here
previously. Still as this week’s bond auction makes clear, Frau Merkel cannot wait too long. For
otherwise Germany’s own credit will be undermined by the spreading disease caused by
Euroland’s fault line, namely monetary union without fiscal union. Still for now Frau Merkel has
continued to tolerate this financial equivalent of spreading gangrene. Thus, this week she
seemingly shot down European Commission President José Manuel Barroso’s proposal for
eurobonds. Merkel said in a speech before the Bundestag on Wednesday that “it is extremely
worrying and inappropriate that the European Commission is directing the focus to eurobonds
today,” and that it was false to assume that “collectivisation of debt would allow us to overcome
the currency union's structural flaws”.
Still the pressure continues to mount, even if the French-German bond spread has of late
declined. Thus, the spread between the 10-year French government bond yield and the 10-year
German bund yield, which rose to a euro-era record high of 190bp on 16 November, has since
fallen to 154bp due to a 33bp rise in the German bund yield over the past week (see Figure 1).
Investors should continue to focus on this spread. But they also now need to keep an eye on
the absolute level of bond yields, both in the case of the French and German ten year bonds.
This is because the time has now passed where it only made sense to look at spreads.
Meanwhile, it is becoming ever clearer that the contagion in the Eurozone sovereign bond
markets has been aggravated by the efforts not to trigger CDS payments in the proposed
private-sector “voluntary” Greek debt restructuring. The result has been to motivate banks to
sell their underlying bond holdings since they can no longer be sure that they can hedge these
positions. It is interesting whether this unintended consequence of the latest Greek bailout
package has finally caught the attention of European policymakers. It probably has since it
finally caught the attention of the editorial writers in the pinko paper today (see Financial Times
article “In praise of CDS”, 24 November 2011). Still the damage has already been done.
Meanwhile, from a financial market standpoint, the growing tremors mean investors still need
to prepare themselves for a likely euroquake which will be deflationary in nature. Markets have
begun to move in this direction with the US dollar beginning to rally again and commodities
beginning to sell off. Still the surprise to GREED & fear is that the move has not yet gone
further. After all, the Brent oil price is still US$108/bbl and the Aussie dollar is still US$.097/A$
(see Figure 2). But this also means that there is plenty of scope for further declines if such a
deflationary shock hits. Meanwhile, the latest data out of the Eurozone reflects growing
economic weakness. Thus, the Markit Eurozone Manufacturing PMI fell from 47.1 in October to
46.4 in November, while the German Manufacturing PMI declined from 49.1 to 47.9 (see Figure
3). It is also interesting that the latest German wage data shows the first decline, albeit
marginal, since 2Q09. Thus, German gross wages and salaries fell by 0.1%QoQ in 3Q11, after a
1.3%QoQ increase in 2Q11. This sort of data should be no surprise to anybody. But sometimes
markets need to see the evidence to react.
The practical consequences of the spreading Eurozone crisis are throwing up some interesting
issues in terms of what it might mean for individuals trying to protect their wealth from these
historic developments. Consider for example an article posted and referenced in many “blogs”
recently written by a former hedge fund manager, which caught GREED & fear’s attention (“On
Capital Flight and Forced Repatriation” by Bruce Krasting, 19 November 2011). The story
quoted a high level European Union official as saying that the European Commission is helping
Greece to negotiate an agreement with Switzerland to repatriate as much as US$81bn believed
to be “hidden” in Swiss bank accounts. If such a report is true, and GREED & fear has no idea if
it is, that would suggest forced repatriation which is clearly setting a dangerous precedent.
True, the Swiss government has been forced to agree deals with numerous countries where
there is evidence of alleged tax fraud. But in the case of Greece much of the wealth has
traditionally come from Greek ship-owners, and GREED & fear’s understanding is that the
foreign earnings of Greek ship-owners are not taxed by the Greek government.
This will be an interesting test case to monitor in terms of precedent-setting expropriation, a
more overt form of what CLSA’s legendary investment guru, Russell Napier, likes to call
“financial repression”. That there is lots of private wealth in Greece would seem to be in little
doubt. Thus, a Greek contact recently informed GREED & fear that when representatives of
famous investment banks were asked why they still kept visiting Athens, the response was the
need to keep meeting the more than 500 Greeks with assets of more than US$1bn each. If
true, that would certainly be a lucrative market for the one area of international banking that
the financial behemoths have not yet given up on as they increasingly abandon the world of
asset-backed speculation and the like. That is, of course, “private banking”.
In Australia in recent days talking to investors, GREED & fear notices a continuing, though
unsurprising, obsession with all things to do with China. There is, certainly, a general
understanding that Australia’s fate is geared to that of the mainland economy. This can be
seen, in part, in terms of the gearing of the export sector. Thus, China accounted for a record
30% of Australia’s total exports in September and 27% in the first nine months of this year, up
from 15% in 2008 and 5% in 2000
But, perhaps more interestingly, the same phenomenon is reflected in Australia’s rising
investment to GDP ratio even if that is nothing like as dramatic as China’s own bloated
investment to GDP ratio. Thus, Australia’s gross fixed capital formation has risen from 22.5% of
nominal GDP and 19.5% of real GDP in 1Q01 to 26.8% of nominal GDP and 29.3% of real GDP
in 2Q11 (see Figure 5). This rise has occurred concurrently with a similar continuing rise in
China’s own investment to GDP ratio, in part driven by the consequences of the 2009 post-
Lehman infrastructure stimulus. Thus, China’s gross fixed capital formation to nominal GDP
ratio has risen from 39.1% in 2007 to 46.2% in 2010.
There is nothing much the Australian policymakers can do about the China gearing save to
acknowledge it. Still the central bank has openly addressed the “dual-speed economy” with its
relatively hawkish monetary policy since the financial crisis, or “GFC” as it is known “Down
Under”. The monetary tightening of recent years, involving rate hikes of 175bp since October
2009 and only one rate cut since easing resumed on 2 November (see Figure 6), reflects the
desire to manage the inflationary implications of the mining investment boom, as well as the
need to cool down a housing market stimulated by the sharp rise in the grant for first time
home buyers, which in October 2008 rose from A$7,000 to A$21,000 on new homes purchased
before 30 September 2009. This led to a corresponding surge of first time buyers as a
percentage of overall mortgage lending. Thus, first-time homebuyers as a percentage of total
owner-occupied housing finance commitments rose from 16.4% in March 2008 to a peak of
28.5% in May 2009
Meanwhile, the growing potential for a sharp US dollar rally against the euro is also a reason
why the renminbi is no longer a one way bet. Indeed if the euroquake hits, investors should
expect Beijing to behave in the same way as it did in 2009. That is to stop the appreciation of
the renminbi against the US dollar. Indeed Beijing may even be prepared to let its currency
decline against the dollar given that exports to Euroland account for 14% of China’s total
exports. In this respect, it is interesting to note that official spokesmen in Beijing have recently
taken to referring to the need to make the renminbi more “flexible”. And “flexibility” means a
currency can go down, as well as up.
Whether this subtle distinction is understood by American President Barack Obama GREED &
fear is not sure. Still a renewed row between Beijing and Washington on the Chinese currency
is increasingly likely in the months leading up to the American Presidential election due to be
held in November 2012. For now though the topic of focus in Washington is the failure of the
so-called Congressional “Super Committee” to agree on savings of US$1.5tn before the 23
November deadline. It is interesting that the markets chose not to sell down the US dollar or
the US Treasury bond market on the news. This suggests that the markets’ focus on US fiscal
issues will be deferred until the Eurozone crisis is resolved one way or another (i.e. fiscal union
or break up).
Meanwhile, Obama’s efforts to blame recalcitrant Republicans for the Super Committee’s failure
have been undermined by his own conspicuous failure to exercise any leadership on this issue
in the weeks prior to the deadline. This is reflected in the American President’s continued
depressed support ratings (see Figure 21). The outcome of the 2012 US presidential election
remains, for now, too difficult to call.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sydney
Investors this week got a whiff of the ultimate logic of the core contamination trade. This is
that the longer the Eurozone crisis continues, the more likely that it ultimately affects
Germany’s own credit rating. GREED & fear refers of course to the “failed” German bund
auction yesterday. The auction of 10-year German bunds attracted bids totalling only €3.889bn
or 65% of its sales target of €6bn. As a consequence, the 10-year German bund yield surged
by 23bp yesterday to 2.15%.
This is the sort of market pressure that is likely to lead, sooner or later, to German agreement
to a more overt move to monetisation by the ECB. But the German demanded quid pro quo for
such a development will be a move to a more concrete fiscal union, as discussed here
previously. Still as this week’s bond auction makes clear, Frau Merkel cannot wait too long. For
otherwise Germany’s own credit will be undermined by the spreading disease caused by
Euroland’s fault line, namely monetary union without fiscal union. Still for now Frau Merkel has
continued to tolerate this financial equivalent of spreading gangrene. Thus, this week she
seemingly shot down European Commission President José Manuel Barroso’s proposal for
eurobonds. Merkel said in a speech before the Bundestag on Wednesday that “it is extremely
worrying and inappropriate that the European Commission is directing the focus to eurobonds
today,” and that it was false to assume that “collectivisation of debt would allow us to overcome
the currency union's structural flaws”.
Still the pressure continues to mount, even if the French-German bond spread has of late
declined. Thus, the spread between the 10-year French government bond yield and the 10-year
German bund yield, which rose to a euro-era record high of 190bp on 16 November, has since
fallen to 154bp due to a 33bp rise in the German bund yield over the past week (see Figure 1).
Investors should continue to focus on this spread. But they also now need to keep an eye on
the absolute level of bond yields, both in the case of the French and German ten year bonds.
This is because the time has now passed where it only made sense to look at spreads.
Meanwhile, it is becoming ever clearer that the contagion in the Eurozone sovereign bond
markets has been aggravated by the efforts not to trigger CDS payments in the proposed
private-sector “voluntary” Greek debt restructuring. The result has been to motivate banks to
sell their underlying bond holdings since they can no longer be sure that they can hedge these
positions. It is interesting whether this unintended consequence of the latest Greek bailout
package has finally caught the attention of European policymakers. It probably has since it
finally caught the attention of the editorial writers in the pinko paper today (see Financial Times
article “In praise of CDS”, 24 November 2011). Still the damage has already been done.
Meanwhile, from a financial market standpoint, the growing tremors mean investors still need
to prepare themselves for a likely euroquake which will be deflationary in nature. Markets have
begun to move in this direction with the US dollar beginning to rally again and commodities
beginning to sell off. Still the surprise to GREED & fear is that the move has not yet gone
further. After all, the Brent oil price is still US$108/bbl and the Aussie dollar is still US$.097/A$
(see Figure 2). But this also means that there is plenty of scope for further declines if such a
deflationary shock hits. Meanwhile, the latest data out of the Eurozone reflects growing
economic weakness. Thus, the Markit Eurozone Manufacturing PMI fell from 47.1 in October to
46.4 in November, while the German Manufacturing PMI declined from 49.1 to 47.9 (see Figure
3). It is also interesting that the latest German wage data shows the first decline, albeit
marginal, since 2Q09. Thus, German gross wages and salaries fell by 0.1%QoQ in 3Q11, after a
1.3%QoQ increase in 2Q11. This sort of data should be no surprise to anybody. But sometimes
markets need to see the evidence to react.
The practical consequences of the spreading Eurozone crisis are throwing up some interesting
issues in terms of what it might mean for individuals trying to protect their wealth from these
historic developments. Consider for example an article posted and referenced in many “blogs”
recently written by a former hedge fund manager, which caught GREED & fear’s attention (“On
Capital Flight and Forced Repatriation” by Bruce Krasting, 19 November 2011). The story
quoted a high level European Union official as saying that the European Commission is helping
Greece to negotiate an agreement with Switzerland to repatriate as much as US$81bn believed
to be “hidden” in Swiss bank accounts. If such a report is true, and GREED & fear has no idea if
it is, that would suggest forced repatriation which is clearly setting a dangerous precedent.
True, the Swiss government has been forced to agree deals with numerous countries where
there is evidence of alleged tax fraud. But in the case of Greece much of the wealth has
traditionally come from Greek ship-owners, and GREED & fear’s understanding is that the
foreign earnings of Greek ship-owners are not taxed by the Greek government.
This will be an interesting test case to monitor in terms of precedent-setting expropriation, a
more overt form of what CLSA’s legendary investment guru, Russell Napier, likes to call
“financial repression”. That there is lots of private wealth in Greece would seem to be in little
doubt. Thus, a Greek contact recently informed GREED & fear that when representatives of
famous investment banks were asked why they still kept visiting Athens, the response was the
need to keep meeting the more than 500 Greeks with assets of more than US$1bn each. If
true, that would certainly be a lucrative market for the one area of international banking that
the financial behemoths have not yet given up on as they increasingly abandon the world of
asset-backed speculation and the like. That is, of course, “private banking”.
In Australia in recent days talking to investors, GREED & fear notices a continuing, though
unsurprising, obsession with all things to do with China. There is, certainly, a general
understanding that Australia’s fate is geared to that of the mainland economy. This can be
seen, in part, in terms of the gearing of the export sector. Thus, China accounted for a record
30% of Australia’s total exports in September and 27% in the first nine months of this year, up
from 15% in 2008 and 5% in 2000
But, perhaps more interestingly, the same phenomenon is reflected in Australia’s rising
investment to GDP ratio even if that is nothing like as dramatic as China’s own bloated
investment to GDP ratio. Thus, Australia’s gross fixed capital formation has risen from 22.5% of
nominal GDP and 19.5% of real GDP in 1Q01 to 26.8% of nominal GDP and 29.3% of real GDP
in 2Q11 (see Figure 5). This rise has occurred concurrently with a similar continuing rise in
China’s own investment to GDP ratio, in part driven by the consequences of the 2009 post-
Lehman infrastructure stimulus. Thus, China’s gross fixed capital formation to nominal GDP
ratio has risen from 39.1% in 2007 to 46.2% in 2010.
There is nothing much the Australian policymakers can do about the China gearing save to
acknowledge it. Still the central bank has openly addressed the “dual-speed economy” with its
relatively hawkish monetary policy since the financial crisis, or “GFC” as it is known “Down
Under”. The monetary tightening of recent years, involving rate hikes of 175bp since October
2009 and only one rate cut since easing resumed on 2 November (see Figure 6), reflects the
desire to manage the inflationary implications of the mining investment boom, as well as the
need to cool down a housing market stimulated by the sharp rise in the grant for first time
home buyers, which in October 2008 rose from A$7,000 to A$21,000 on new homes purchased
before 30 September 2009. This led to a corresponding surge of first time buyers as a
percentage of overall mortgage lending. Thus, first-time homebuyers as a percentage of total
owner-occupied housing finance commitments rose from 16.4% in March 2008 to a peak of
28.5% in May 2009
Meanwhile, the growing potential for a sharp US dollar rally against the euro is also a reason
why the renminbi is no longer a one way bet. Indeed if the euroquake hits, investors should
expect Beijing to behave in the same way as it did in 2009. That is to stop the appreciation of
the renminbi against the US dollar. Indeed Beijing may even be prepared to let its currency
decline against the dollar given that exports to Euroland account for 14% of China’s total
exports. In this respect, it is interesting to note that official spokesmen in Beijing have recently
taken to referring to the need to make the renminbi more “flexible”. And “flexibility” means a
currency can go down, as well as up.
Whether this subtle distinction is understood by American President Barack Obama GREED &
fear is not sure. Still a renewed row between Beijing and Washington on the Chinese currency
is increasingly likely in the months leading up to the American Presidential election due to be
held in November 2012. For now though the topic of focus in Washington is the failure of the
so-called Congressional “Super Committee” to agree on savings of US$1.5tn before the 23
November deadline. It is interesting that the markets chose not to sell down the US dollar or
the US Treasury bond market on the news. This suggests that the markets’ focus on US fiscal
issues will be deferred until the Eurozone crisis is resolved one way or another (i.e. fiscal union
or break up).
Meanwhile, Obama’s efforts to blame recalcitrant Republicans for the Super Committee’s failure
have been undermined by his own conspicuous failure to exercise any leadership on this issue
in the weeks prior to the deadline. This is reflected in the American President’s continued
depressed support ratings (see Figure 21). The outcome of the 2012 US presidential election
remains, for now, too difficult to call.
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