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Kiron Sarkar
November 16, 2011
Hi there,
Last Monday, the ECB announced that they had bought just E4.5bn of
peripheral Euro Zone Sovereign debt, less than half the previous weeks
total - likely to have been mainly Italian, with some Spanish and
possibly Portuguese bonds. I had believed, somewhat optimistically, that
the ECB would have been far more aggressive, particularly given that
Draghi had supported the idea of bond purchases, even before he took
over at the helm at the ECB - however, it was not to be. Italian
10 year yields had declined by over 100 bps at one stage last week (rose
subsequently), suggesting some aggressive buying, though - will have to
wait for next Monday's announcement. They rose above 7.0% today, but I
presume the ECB is buying as yields re lower today in spite of a weaker
Euro/Market
German officials continue to express their opposition to QE, but in
reality, the fact that they are talking about QE to such an extent,
suggests to me that it is being discussed seriously. The real problem is
trying to convince the Germans, given their total paranoia of inflation
- they still remember the 20's/30's and the resultant rise of the Nazi
party, which was blamed/caused by hyper inflation. Whilst this is
understandable, it is not a realistic position for the present. Indeed,
I believe that Mrs M has finally understood this - the problem is that
neither she, nor her colleagues, have persuaded or even discussed the
need for it with the German public (read voters).
As I keep banging on, QE in the Euro Zone will be introduced, sooner
rather than later. The Euro Zone will, I expect suggest that it is a
"temporary" measure (as the ECB claims in respect of its unlimited
financing of European banks, but if I recall, this unlimited financing
has gone on for 3 years), but "temporary" will last quite some time -
certainly not months.
A German official, with a wonderful name of Mr Bofinger (hope I got the
spelling right and need to check him out, particularly to his standing
in Germany), stated that it was unrealistic to expect that countries
such as Italy could continue with the current level of bond yields - he
is clearly correct. Expect more such statements, to get the German
public ready for impending QE.
To "sell" the idea even more, the Euro Zone will have to introduce
measures that force countries to comply with predetermined fiscal
targets, particularly given the antics of the Greeks. You will be amazed
to hear that the Greek finance Minister suggests that Greece will
produce a budget surplus in 2012 - must have been the ouzo, probably
mixed with the awful metaxa. In addition, treaty changes have been
proposed by Germany and Holland - inevitable. The Dutch, for example,
want changes which will allow for the expulsion of countries that do not
comply with their pre determined fiscal commitments - a clear reference
to Greece. This is also positive, as these countries have to start
getting real.
Once these measures are in place (and may require a period of time - not
too long - to monitor compliance), the Euro Zone can then issue Euro
Bonds, which clearly is the final objective. At that stage, you may
finally have a workable Euro ie with fiscal and monetary union -
political union to follow thereafter
A number of you believe that the above is impossible. Well, certainly
based on recent comments by Euro Zone (particularly German) politicians,
I don't blame you. However, may I suggest that you don't listen to what
politicians say. As a character from the famous UK TV sitcom "yes Prime
Minister" used to say "it's only true once it has been officially
denied", or words to that effect and, boy oh boy, we have had many, many
official denials.
Timing - well certainly some next year at the latest - though in the
case of another crisis (quite likely), possibly even sooner. I listened
to an interview with an EU politician on Bloomberg the other day. He was
clear that QE was coming. However, he added, that his Euro Zone
colleagues (German) were not quite there YET. He believed that the Euro
Zone had to have a deep, deep, deep problem before its introduction - to
date you have had a deep, deep problem ie one more nudge necessary.
Sensible guy, but not surprisingly, he was a Brit, though importantly he
was on an EU Finance Committee.
Could Spain provide that last and necessary nudge before QE is
introduced. This weekend the Spanish go to the polls. The current
administration will be kicked out and the Conservative party will take
over - not before time. Wait a bit longer and horror stories will emerge
as to the true state of Spain's financial position. As you know, I
believe that Mr Zapatero/Mrs Salgado have LIED constantly - Spain is in
deep trouble - in my opinion much more so than Italy. The market
(finally) seems to be getting it - Spanish bond yields are rising to
levels where LCH Clearnet is likely to impose additional collateral
requirements - oops. French bond yields continue to rise inexorably -
basically the game is up and there is no alternative to QE. Having said
that the Spanish index, the IBEX, may well rally on a change of
Government - covered my short yesterday. I've just read that the Spanish
Finance Minister is reiterating GDP of +1.3% (well at least its not the
previous one of +1.7%) for 2011 and, in addition, he adds that the
Government is "targeting" a budget deficit of 6.0% of GDP for the
current year (interesting word "targeting" don't you think
- basically means not a hope in hells chance of achieving it) -
Furthermore, I notice, its not Mrs Salgado, the Spanish Finance
Minister, who I understand is a laughing stock in the Euro Zone,
particularly given her forecasts - electioneering do you think.
However, it just confirms my view that a miss will be (lets be polite)
unwelcome, though recent scepticism by markets is ever increasing, I
admit.
A number of you advise me that Germany has number of supporters within
the Euro Zone and who support their opposition to QE namely, Finland,
Austria and Holland. Whilst certainly an interesting country please, do
you believe that the Euro Zone will take Finland seriously - remember
the deal the Finns negotiated with the Euro Zone re their requirement to
receive collateral in order that they participated in the additional
Greek bail out - it was a dreadful deal for the country
- much worse than if they had withdrawn their request for collateral.
The Austrians - well they have significant exposure to Central and
Eastern Europe (also through their banks - look at the recent w/offs by
Raifaissen for example) and their economy is under pressure - bond
yields are rising as well. Their previous opposition is unsustainable
and maybe not publicly, but they will not oppose QE. The Dutch - well,
in my opinion, Holland is the only sensible country in the Euro Zone and
one interpretation of the Dutch PM comments that countries who don't
meet their commitments get kicked out, is that they understand that QE
is inevitable.
On the other hand, the proponents for QE include France, Italy, Spain et
all, given the state of their economies, which are ll getting worse.
Given the current voting system at the ECB ie 1 country 1 vote (which
will be changed in due course - a German demand, which will have to be
met), QE is inevitable. In addition, a number of the 6 member ECB board
are changing which, with Draghi at the helm, will make QE easier to vote
for. In total, there are 23 voting members who vote on monetary policy
decisions - the 17 countries within the Euro Zone and the 6 ECB members.
Little discussed is Slovenia, a recent addition to the Euro. 10 year
bond yields are around 7.0%, last I checked. Never underestimate a
totally unexpected event to force a fundamental change in policy.
There are numerous other reasons which suggest that QE is coming. Set
out below are some of them.
To date, Germany has worked with France to propose policy in the Euro
Zone. France is clearly in favour of QE. Germany cannot and does not
want to be seen as the sole leader of the Euro Zone - even though they
are - they need French support, as a minimum. Today, an unnamed senior
French official stated that "France was confident that he ECB will take
the necessary measures to ensure the stability of the Euro Zone"
- in non diplomatic terminology it means, the EFSF will not work
(oops) and the ECB has to go for purchases of Euro Zone bonds/QE;
Germany and its band of merry men cannot go it alone - their resultant
currency will be a supercharged Swissy and the Germans have clear and
recent evidence of what has happened in Switzerland - who by the way,
have introduced QE - OK for different reasons. However, if the Swiss do
it - political cover perhaps. Mrs M repeated her support of the
Euro/Euro Zone today and, in addition, conceded that Germany would have
to cede some Sovereignity to make it work;
Germany's opposition party, the SPD are more Euro Zone friendly than Mrs
M'/the CDU - it's only her marginal and insignificant political partner,
the FDP, who are vehemently opposed - based on current polls, they are
unlikely to gain any representation, so why bother listening to them -
their anti Euro Zone rhetoric has not worked. Furthermore, Mrs M is not
a lame duck - she is still popular in Germany, which allows her some
flexibility. Sure, the opposition, combined with the Greens are ahead,
but not by an awful amount. However, if she wants to go radical and
support QE, she better do it sooner, rather than near the 2013 elections
- thereby giving her time to "work her electorate".
The unwritten rule is that you need 18 months at least;
The EFSF is not up to its task, as is becoming patently obvious - well
if France gets it.......... Mr Junker stated today that details relating
to the EFSF will be released by the end of the month - don't hold your
breath. The ECB is and will remain the only player capable of turning
round the situation within the Euro Zone;
International criticism of the Euro Zone is ever increasing - whilst not
critical, the rhetoric is rising, given the potential negative impact on
global economy. It will be difficult for the Euro Zone to continue to
ignore international criticism;
The Euro Zone is likely to witness social unrest (OK not as yet in the
important countries, because it's its winter, but wait until summer),
unless there is a change ie QE. Austerity is important, but the public
will not take it forever, without some hope of growth in the not to
distant future;
Euro Zone banks are close to imploding. The need to raise capital is
resulting in these banks selling assets (particularly non Euro assets
and remitting the proceeds - hence one of the recent reasons why the
Euro has held up, which otherwise should be trading closer to US$1.20).
However, if banks reduce lending in the Euro Zone, we really will have
catastrophe on our hands. It is rumoured that UniCredit has requested
that the ECB assist Italian banks far, far more - how long before
Spanish banks (who are much, much worse off), make the same panic
request;
Draghi, who has taken over, is a much more market savvy operator than
Trichet (though this would not be difficult) and whilst he has to
"manage" the Germans, given hat he is Italian, he certainly does not
want to have a Euro collapse on his CV. In addition, my first
impressions are that he is skillful, though back room, operator - notice
that comments by Draghi have been few and far between - if only Euro
Zone/other ECB officials would follow this example;
Discussions as to a Portuguese haircut (possibly as much as 40%) is
coming. Wait for the impact of that news.
ESSENTIALLY, THERE IS NO CREDIBLE AND/OR WORKABLE PLAN B, as I keep
banging on.
I have hated/been short (in the past) the financial services sector,
particularly in Europe as you know - is it time to buy Euro Zone
financials (banks, insurance companies), do you think. Personally, I
have and I believe a nibble, at the very least, is looking particularly
interesting.
Just read that super Mario (the latest Italian PM) has appointed a bunch
of technocrats in his Government - no surprise. Interestingly, he has
appointed himself as Finance Minister - hope he does better job than he
did when he was an EU Commissioner. The key is whether he can get enough
of the Italian political parties to back him - especially as that
lunatic Berlusconi is still around and itching to stage a come back.
Amusingly, Mr B advised an Italian newspaper (his own
presumably) that the Russian President considered him to be he best
European leader - must be the bunga, bunga parties with Ruby, Constanta,
Danielle, etc, etc. Maybe, Mr B should have invited a few
Germans............. Oh, oh, I'm going to get into trouble - yet again.
Currently in India - the alleged high tech EM. Unfortunately, the guys
who provide broadband seems to have forgotten about this claim, though
it may just be Goa. However, it does impact my ability to send out notes
- you lucky people.
Better US economic data yesterday - retail sales/confidence - just
confirms the recent trend. Inflation data out today - core up +0.1%, CPI
down -0.1% - YOY CPI +3.5% and core +2.1%. Interestingly, WTI is back
above US$100 and the gap between Brent and WTI is narrowing - reflecting
stronger US economy?. Better September forex inflows into the US as well
- no great surprise.
In the UK, higher (though less than forecast) unemployment and fast
falling inflation, accompanied by further (and increasingly non
diplomatic) warnings by Governor King as to the shambles in the Euro
Zone (as is the case with Geithner) and its likely negative impacts on
the UK economy - however, just means that an increase of QE is more
likely earlier and of a larger amount.
Markets are all over the place today. However, I remain bullish - on the
face of it crazy, I know, but given my (lucky, I suppose) performance
YTD, gives me some flexibility.
However, this remains a trading market and if the facts (confirmation of
no QE in the Euro Zone) change (which I don't believe), well..........
Excellent note by Credit Suisse in respect of Euro Zone/QE. They agree
with me, but are more cautious, I must admit.
Goodbye from a sunny and very warm (85 degrees) Goa - its easier to
communicate by smoke signals (sorry, corny joke) than work with this
broadband connection.
Best
Kiron
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