Old News
Unlike Mr. Market who seem to be in full risk-on mode at the moment I am a bit handicapped on account of an awfully slow internet connection which is why posting is unusually slim at the moment. Another part of the market which seems to be a bit handicapped is the usual suspects in the form of the European periphery which seems to be ever so slowly creeping its way back to the front line of the discourse after having stirred in the background. Perhaps this is a sign of the the market attention-deficit-disorder which follows naturally from the inability of anyone to keep track of all discourses at the same time [1], a point which Team Macro Man described recently quite elegantly;
It’s a right old mess out there at the moment. There are so many broad macro themes all colliding at the moment it looks like a slow motion replay of a motorway pile up. Deflation meets printing presses, meets commodities, meets politics, meets intervention, meets civil unrest, meets desperation, meets Voldemort.
Perhaps, this was also why the FT’s Ralph Atkins felt that he had to remind us of something we already knew this morning but which is still at the crux of the economic issues in the Eurozone. Basically, the ECB would like to think that everything is fast returning to normal and that, by consequence, monetary conditions should follow suit. Apart from the obvious in the form of a gradual increase in the main refinancing rate (currently at 1%) this would also mean a gradual withdrawal of liquidity support to the European banking system and a dismantling of the possibility to post collateral to obtain liquidity.
Mais, plus ca change in Frankfurt as the same problem which has been nagging the past 2-3 years is still, well, nagging;
Overall lending by the ECB has fallen to about €600bn ($780bn) compared with peaks of up to €900bn. But the amounts have stabilised at high levels in those countries worst hit by this year’s crisis over public finances. Greek, Spain, Portugal and Ireland account for 61 per cent of the total, despite comprising only 18 per cent of eurozone gross domestic product.
And this is indeed a royal mess since obviously not all banks in the Eurozone are equally distressed but just as the single interest rate policy creates macroeconomic distortions so will an overall liquidity scheme create the same kinds of distortions on a market level. One would think they would have learned by now. The problem though is no laughing matter. Jacques Cailloux, European economist at the Royal Bank of Scotland makes a key point when he notes that while the ECB clearly knows which banks that are using the funding facilities because they really need and which who use it for arbitrage (borrowing at 1% from the ECB and invest in the widening periphery yields to the Bunds) it is very difficult to do anything about the latter as annoying and frustrating it might be for the ECB to be a part of. Of course, you start to make differentiated access to auctions either by positive or negative discrimination but the end result would almost surely be the downfall of a number of European banks since the market would interpret this, and rightly so, as a sign that these banks would not be able to survive as independent private entities.
Meanwhile, in market land and while the SP500 tests new highs at around 1130ish the water is starting to boil under the Irish cooker just as you might have thought that Ireland was one of the better of the bunch. Yields on 10 year Irish bonds rose to an all time high today nudging above 400 bps as worries mounted that the government would not be able to meet its otherwise fine and lauded austerity plan on account of a darkening economic outlook not to mention the odd bank bailout (this time being Anglo Irish’ turn). The problem is essentially that at some point you simply run out of line and as such, finance minister’s Brian Lenihan’s assurances over the weekend that Ireland would not only have no problem finding bid for its 1.5 billion euro bond offering today and that the market would get a final tally on the recapitalisation of Anglo Irish, the screw has so far kept turning.
On Anglo Irish, WSJ’s Market Beat raised a further concern today;
In the coming days, Ireland’s central bank will also provide more clarity on the biggest bug bothering investors: The total cost to the government of winding down troubled lender Anglo Irish Bank Corp.
Investors will be watching not just the final tally, but also details on what could happen to holders of the bank’s senior bonds and roughly 2.5 billion euros worth of riskier “subordinated” bonds.
This is a point also recently made by John Dizzard in the FT and it goes to heart of the uncertainty surrounding Anglo Irish and indeed the whole bailout mechanism since where it is all well and good that stockholders get buggered bondholders have, for now, in most cases been spared. The cost so far of bailing out the bank has been staggering for Ireland. To date the government has injected a full 23 billion Euros and Standard & Poor estimated back in August that this figure might rise to 35 billion Euros over time. Even at 25 billion Euros Dizzard points to the dizzying fact that this already constitutes 5600 euros for every man, woman and child in Ireland.
While all this trundles on the yields of the periphery continue to widen and apart from Ireland, Portugal has also found its spot in the market cross hair.
The real question to answer then is if and when Ireland (and Portugal) capitulates and goes to the trough of the European Stability Fund (charging 5% for a loan) and/or the IMF. According to Goldman Sachs' Erik Nielsen, anything beyond 5% (i.e. as a lingering yield on Irish bond offerings) would mean that they are cooked and this, remarkably and scarily, is even in the context of a country that is actually fully funded until mid 2011. However, with the underlying assumptions on the economic outlook almost certainly too positive and the butcher’s bill on Anglo Irish more likely to rise than fall this particular fact might mean very little. But this I reckon is already old news by now.
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[1] I intend to present a solution for this at some point so stay tuned!
Full Disclosure: Some readers at Seeking Alpha have requested that I disclose what I am "buying and selling" and while this of course requires that I am actually buying and selling anything in the market I do run a small time retail portfolio. Now, before you sharpen your pens too much please note that the money committed so far probably amounts to half the Salomon Brother bond desk's budget on Guacamole on Mexiday, (in 1985 prices!) but still. Here are my positions as of today;
Long Amedisys (AMED) (in profit)
Long Seagate Technology (STX) (in profit)
Long Grains (ETF) (in profit)
Long Natural Gas (ETF) (in loss, almost flat though)
Long Ultrashort S&P500Proshares (most recent trade as a put option on the market basically, oh and of course in loss!)
As a parasite on the financial system I trade through CFDs through IGMarkets which, as far as I can see, is neither better or worse as broker for your average small time retail punter.