Central Perk: Mish's Global Economic Trend Analysis

sâmbătă, 24 septembrie 2011

Mish's Global Economic Trend Analysis

Has Operation Twist Played Out Already? Time to Short Bonds?
European Markets "Survive the Sorry Session"; Is that the New Goal? Only Cure is Default
Goldman Surprised by Reaction to "Operation Twist"
Greek Parliament Vote on Austerity Postponed Due to Insufficient Votes; Slovak May Reject ESFS; EU to Abandon Greece
Asia Pacific Equities Slump Following Ridiculous Pledge by G-20

Has Operation Twist Played Out Already? Time to Short Bonds?

Posted: 23 Sep 2011 06:39 PM PDT

Curve Watchers Anonymous notes a reversal in US treasury yields today, with the yield on the long end of the yield curve rising sharply as show below.

Has Operation Twist Played Out Already?

Recall that the Fed's goal in "Operation Twist" (selling the short end of the curve and buying the long end) was supposed to drive down long term rates.

Yield Curve as of 2011-09-23

Time to Short Bonds?

Today, yields on the long end of the curve rose, as shown above. Inquiring minds may be wondering if it's time to short bonds.

The short-answer is "No it's not, but that does not mean buy them either".

30-Year bonds are now approaching all-time lows. Should that happen, and I now expect it to (that is a reversal for me), the bond-bull market never ended no matter what duration you measure the bull market by.

However, much of this trade was front-run. Nearly everyone assumed the Fed would announce Operation Twist, so now we are in a potential "sell the news" situation. If so, it may have started today.

However, the global economy is fading fast. That is supportive of more government bond purchases as a safe haven.

I see no edge to buying or shorting the long end of the US treasury curve here. Sometimes the best thing to do is nothing. To be sure, bond bears have been taken out to the cleaners and I warned about that in advance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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European Markets "Survive the Sorry Session"; Is that the New Goal? Only Cure is Default

Posted: 23 Sep 2011 10:55 AM PDT

CNN Money reports European markets survive the session

European markets managed to cross the finish line Friday on an updraft, after sucking wind during a mostly sorry session.

The CAC 40 (CAC40) in Paris was up 1% at the close, while London's FTSE 100 (UKX) rose 0.5% and the DAX (DAX) in Frankfurt rose 0.6%.

European stocks pulled partway out of their trough earlier in the session when the FTSE was down 2.1%, the CAC 40 dropped 2.7% and the DAX plunged 3.6%.

Mark Luschini, chief investment strategist for Janney Montgomery Scott, said the lack of direction from European leaders "is troublesome for investors looking for some profound announcement coming from European officials as to what they're going to do to rectify the crisis circumstance."

"Investors just want to know, even if it's just a Band-Aid, that there's some cure that's going to be announced," said Luschini.

CNN World Markets

click on chart for sharper image

Only Cure is Default

There are only two things that will remove uncertainty about Greece.

The ECB announcing a plan to print money to cover bank losses
Greece defaults

Since I do not expect number one, default it is, and the sooner the better. However, the EU still needs a credible plan for a Eurozone exit because Spain and Portugal are waiting on deck.

Alternatively, Germany, Austria, Finland, and the Netherlands can break away. This crisis will linger until the mess is resolved.

Unfortunately the EU, ECB, and European leaders refuse to discuss the only things that can help.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Goldman Surprised by Reaction to "Operation Twist"

Posted: 23 Sep 2011 10:15 AM PDT

I seriously do not understand how anyone could have thought "Operation Twist Again", could do anything meaningful. What good can another 20 or even 50 basis point lowering on the 10-year rate do?

Operation Twist will not spur lending because banks are capital impaired and businesses have no reason to expand. Moreover, the flattening of the yield curve will hurt, not help bank profits.

Nonetheless here is something I picked up from ZeroHedge the other day and wanted to comment on.

ZeroHedge reports Goldman Is Surprised By The Market's Reaction

The yield curve did indeed twist--with the difference between ten-year and two-year Treasury yields flattening 11bp to 166bp. But other asset prices responded in ways atypical for monetary easing: the dollar rallied, equities slumped, and commodity prices fell. On net, our GS Financial Conditions Index actually tightened on the day, certainly not the reaction Fed officials would have been hoping for. Given the market most focused on the implications of the "twist" did react in the way we expected, we are surprised at the behavior of other markets; one possibility is that the unconventional move will take more time to digest in markets less familiar with its likely method of action. Indeed, we found in prior work that the equity and foreign exchange markets seemed to lag behind the fixed income market in pricing in asset purchases.

The above snip is a Goldman quote. I am quite certain Zero Hedge was not surprised by the reaction.

However, most market participants were surprised by the announcement. How else can one explain the reaction?

The market clearly expected more from Bernanke. However, I explained why more was not coming on Tuesday in Six Things the Fed May Announce Tomorrow (But Likely Won't); Would Any of Them Matter? Gaming the Reaction.

Since neither the Fed nor the ECB did anything substantial, and most thought they would, why shouldn't this have been a sell the news phenomena?

Academic Gibberish from Goldman Sachs

Check out this chart from Goldman Sachs.

I am not going to bother explaining that chart because it is academic gibberish. More importantly, even were it not academic gibberish, the idea that somehow the Fed's move would spur a positive reaction from the markets is ludicrous.

Surprise, Surprise, Surprise

There is absolutely nothing to be surprised about the reaction. Yet, Goldman Sachs was surprised.

Speaking of surprises, I will be surprised when a majority of Goldman Sachs recommended ideas work. I will also be surprised if Goldman Sachs did not make money on the day, perhaps even betting against its own advice.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Greek Parliament Vote on Austerity Postponed Due to Insufficient Votes; Slovak May Reject ESFS; EU to Abandon Greece

Posted: 23 Sep 2011 02:41 AM PDT

Even politicians have had enough of Greek austerity programs as noted in Measures divide PASOK

Prime Minister George Papandreou and Finance Minister Evangelos Venizelos on Thursday began the tough task of talking round PASOK MPs who are opposed to the austerity measures announced by the government over the last few days, as the prospect of the steps being rejected by Parliament becomes a strong possibility.

The House had been due to vote Thursday on the emergency property tax, just one of several measures unveiled in recent days, but sensing a very negative mood among Socialist deputies, the government put off the ballot until Tuesday.

Sources said that at least five or six PASOK deputies said they were not prepared to support the real estate tax. Were they to carry through their threat not to vote for it, the bill would sink as PASOK only has 154 of the 300 seats in Parliament, down from 160 when the party was elected to power two years ago.

"Categorical Denial" of 50 Percent Haircut on Debt

Reuters reports Greece Sees Possibility of 50 Percent Haircut on Debt

Greece's finance minister has told lawmakers he sees three scenarios to resolve the debt crisis, including one involving an orderly default with a 50 percent haircut for bondholders, two Greek newspapers reported on Friday.

A government spokesman dismissed the reports.

Newspaper Ta Nea, citing a person who heard a speech by Finance Minister Evangelos Venizelos to ruling Socialist party lawmakers, quoted him as saying "it would be dangerous to request" the 50 percent haircut.

Two Socialist deputies who said they were present at the speech in which Venizelos tried to rally support among the ruling party for a new wave of austerity measures, denied that he had floated the 50 percent haircut scenario.

"I categorically deny it. There is no such scenario," lawmaker Theodora Tzakri told Reuters.

Slovak May Reject ESFS

Please consider Slovak parliament committees to open euro debate next week

Slovak parliamentary committees are expected to start discussion on beefing up the euro zone bailout fund next week, with the final vote seen later in October, the parliament website showed on Thursday.

The euro area's second poorest country's has become a serious risk for the plan to strengthen the European Financial Stability Facility (EFSF), as one party in the ruling coalition is adamantly rejecting to support to approve the plan.

EU to Abandon Greece

Please consider yet another "official denial", this time from the EU Economic commissioner: EU won't permit 'uncontrolled' Greek default

The European Union will not permit any disorderly default by Greece that could break down the eurozone, European Commissioner for Economic and Monetary Affairs Olli Rehn said Thursday.

"It is important to underline that the European Union is not going to abandon Greece. An uncontrolled default or exit of Greece from the euro zone would cause enormous economic and social damage," Rehn said in Washington.

Default is Imminent

Greek default is clearly hanging by threads, anyone of which could break at any time. Now that we have multiple "official denials" default is imminent.

For a discussion of "denial theory", please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Asia Pacific Equities Slump Following Ridiculous Pledge by G-20

Posted: 23 Sep 2011 12:53 AM PDT

Check out this statement by the G-20 following the recent multi-day plunge in global equities and commodities: "We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required"

Is that statement supposed to ignite global laughter, relieving the market of stress? I suspect not, which means it should be worrying. At any rate, Asia-Pacific equities responded with a big yawn.