Wednesday, June 30, 2010

It's the Euro Debt Crisis, Stupid

EUR/USD 1.2226 Hi 1.2238 Low 1.2165
USD/JPY 88.59 Hi 88.71 Low 88.38
AUD/USD 0.8536 Hi 0.8560 Low 0.8463
EUR/JPY 108.31 Hi 108.53 Low 107.67

Well, what you gotta love about the FT is it's remarkable consistency. As a paper they are there to paint a picture, to create a narrative. And they do. The facts are secondary but the narrative is crystal clear: whatever economic problems there may be out there in the world there is one unifying theme: it's all the fault of the European Sovereign Debt crisis.

Today, consistent with their mandate, the FT is leading with not one but two "Euro doom-and-gloom headlines". The first, in nice big bold letters is: Markets tumble on ECB loan fears. Right. No mention of the plunge reported yesterday in U.S. Consumer Confidence, which is probably attributable to the European Debt Crisis anyway. No mention of the major correction on the Chinese stock market. No mention of the strong rally which European stock markets registered Monday this week; a rally which was not replicated on U.S. markets...... No, the poor performance of global stock markets Tuesday was entirely the result of the dire state of the eurozone.

The Financial Tabloid's second (slightly smaller headline) today was: What will save the euro? Well nothing to worry about there, the FT's Wolfgang Munchau has the answer: Only a closer union can save the eurozone. Phew, glad they have the answers up their sleeve, I was beginning to think the Euro was a lost cause.

Now it doesn't bother me overly that these people continue to produce ponderous, all-knowing articles about the "crisis" in the eurozone after completely missing the imminent and obvious Anglo-Saxon "Credit Crunch" until well after the global economy was splattered all over its windscreen. What really bothers me is the lack of reporting of the basic facts. Basic facts are important. Opinions are a dime-a-dozen, largely superficial and of no great import to anybody. But facts count.

So let's get to some facts. As part of the FT's leading front-page article our friends Oakely, Mulligan and Atkins note that the euro tumbled "to an eight-and-half year low against the Japanese yen" yesterday. Well yes, indeed. And the USD/JPY hit another major low too. In fact the USD/JPY has been on the slide since the Credit Crunch started and looks likely to hit an all-time record low soon. So the low seen on the EUR/JPY is probably not that significant. Not that you'd notice from reading the FT.

One of the interesting little tidbits that I garnered from an ocean of opinion in another article yesterday, which was trying to make the point that Greek debt troubles parallels the subprime crisis (it was a laboured point and the parallels were shaky), was this: in June 1992 five year bonds in Greece yielded 8.25%. The government deficit was 11.5% of annual GDP and debt was 110%. Greece's rating at the time was triple B minus. Right. Sixteen years later in June 2008 the Greek deficit was 5% and accumulated government debt was 98% of GDP, even though Greece had been running government deficits in the interval.

HUH ???
How did they manage that? Well it happens all the time actually. Same thing happened in Italy. In Italy government debt to GDP ratios have been up around the 100% level for decades. It's part of the furniture.

And why were these basic facts on Greece interesting? Well for all the talk of "this is not sustainable", this will end in disaster etc. etc. etc. ad nauseum, it seems that even with relatively high yields, a massive level of accumulated government debt and ongoing deficits the Greek "situation" was sustainable in 1992 and, in fact, the history shows it was sustained.

You can, of course, make the case that: this time it's different but then we are right back to opinion and conjecture. The naysayers can have their opinions but the facts are facts and they speak for themselves. Please no more back-of-the-envelope calculations. No more straight-line projections, opinions and general blatter. Can we get back to reporting at least the data, maybe even the history and some facts.

Friday we have Non-Farm Payrolls. The market is not expecting good news. Yesterday when U.S. Consumer Confidence came out well under market expectations the markets sold the EUR/USD, which makes sense. Not. Well it didn't last. Everything, everywhere is not the fault of the European debt crisis. This boring refrain will run into trouble sooner or later. Euro bears beware.

OIL 76.11
GOLD 1,243.70

No new news

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Tuesday, June 29, 2010

Scardey Cat and Boo

EUR/USD 1.2189 Hi 1.2290 Low 1.2150
USD/JPY 88.43 Hi 89.40 Low 88.27
AUD/USD 0.8540 Hi 0.8702 Low 0.8506
EUR/JPY 107.80 Hi 109.86 Low 107.30

The Financial Times led today with a photo on page one. A nice big photo of a lightening strike hitting a Greek monument on a scary, dark night. This particularly informative piece was accompanied by a three line caption: Investors signalled alarm at Greece's planned return to capital makets next month. One economist said it was "a very odd thing to do" and warned that the high yields charged "could undermine confidence not just in Greece, but across the eurozone".

The caption does have a point. It is an odd thing to do, unless of course your real goal is to create a crisis. As part of a larger strategy aimed at undermining the Euro and Euro credit markets this "odd" auction makes perfect sense. And let's be perfectly frank: so far the Greeks have done a rather good job of messing up European debt markets. So credit where credit is due. For a small country with a relatively unimportant debt market, Greece has been extremely successful in creating a much wider European debt "crisis". Not, it appears, that they are happy with their success so far. So now they are having another shot at it.

And just how "odd" is this next auction? Pretty "odd" actually. Greece has seen no good news recently, indeed it has been downgraded again by one or other of the Ratings Agencies and Greek government bond yields have risen well above the 5% rate guaranteed by the ECB loan package. So the idea that this is the perfect time to test the markets seems, well, a little hard to justify. I have heard no cheering from the Ratings Agencies about how good the Greeks have been in trimming their deficit. Not that that is expected to happen. Ever. That's not the nature of the game. But financial markets don't seem to be cheering either.

That said, despite the rather unpleasant position in which Greece finds itself and the ominous noises about sovereign debt markets generally, the end-of-the world-as-we-know-it scenario has manifestly failed to unfold. Tardy but effective packages put in place by the plodding Euro Team has effectively ring-fenced the Greek crisis. That is, up till now. If the Greek Central Bank decides to by-pass all that and go directly to capital markets to roll over this piddling amount of debt then we could have a problem. With a little more hysteria from well-placed Financial Tabloids and ponderous articles by the usual suspects, not to mention sound bites by that bundle of joy, Nouriel Roubini (has this man the most dismal manner of any still-living human in the universe, or is it just me?) suggesting that the Euro's days are numbered, well, in days, then this next crisis might have legs.

We need the "odd" Greek auctions to go off badly, which is not that unlikely, and then we need at least some of the corporate press to run around screaming and waving their arms around about how awful it all is. Which is what they do best, at least of late. The Financial Times has become a tabloid and Rupert Murdoch now owns the Wall Street Journal. Expect more photo-journalism from both.

And in the midst of all this doom-and-gloom there are, of course, consolations. The Americans can and actually have tried to pin the failure of their economy to show signs of autonomous life on the "European sovereign debt crisis". In addition, if investors can somehow be persuaded that the Euro is doomed then maybe investment flows will shift towards that obviously fabulous safe-haven: the USD and more particularly the U.S. Treasury market.

Some success has been reported. Though there have been little sign of Japanese or Chinese buyers stepping up to finance Uncle Sam, of late U.K. buyers of U.S. Treasuries have shown a spike. Not much of a trend when you think about the state of the U.K.'s government deficit, not to mention the U.K.'s huge external deficit (ie. it's own savings deficit). We are not talking about a real and enduring source of cash here, but it's a start. Maybe.

But let's be optimistic. In July the Euro Zone will start to move into Summer mode. (Nice timing by the Greeks.) Volumes on financial markets are likely to fall and you never know what you can get away with in thin markets. It's worth a shot. Now the only problem with this strategy is the possibility that the Euro Team gets off it's collective backside and actually decides to turn up at said auction in order to stave off a further crisis in credit markets which would roil the banking sector, further disrupt credit markets generally and create a real economic crisis which, so far, despite all the valiant efforts of our heroes has actually failed to be created thus far. And I know you wouldn't know that from the headlines and the ponderous articles which have all been doom-and-gloom, particularly where the Euro Zone is concerned. The European economic recovery continues and, provided the Euro Team does not ignore the risks inherent in this new Greek move, then a gathering in the speed of recovery can be expected into year end.

Currency markets have been interesting. The real mover has been the JPY. Expect more of the same. My target for USD/JPY is 80.00 by year end. And what that tells you is that Japan as a source of finance for deficit nations is going the way of the dodo. Nothing is likely to change that particular fact and this is bad news for countries and/or currency areas which are running an external deficit. (Note to Euro doom-and-gloomers: the Euro is not running an external deficit.)

OIL 76.46
GOLD 1,235.40

With global economic growth looking strained the outlook for commodities remains ugly. OIL is unlikely to see strength. Assuming, of course, that we don't engineer another war in a sensitive area located somewhere in an OIL producing region. If OIL falls too far, there is always the attack on Iran which can be pulled off the shelves, dusted down and put into action. But there has to be quite a lot more massaging of public opinion to be done before we get there. For now the outlook for OIL is clouded at best.

GOLD, however, is another story. It's not inflation. We don't have any of that. The driving force behind the GOLD move is the rush to diversify away from the current international reserve currency: the USD. No other currency wants this dubious status because of the chronic currency over-valuation which results. So we haven't found one. Everyone is happy to talk about 'a basket'. The Chinese have been doing it and so have the Russians. But until someone, somewhere actually comes up with a basket the shift out of USD and into GOLD continues. A little diversifying into JPY might be in order. After all it is chronically under-represented in Central Bank holdings and the intellectual justification for it's absence is flimsy.

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