Europe has been a showcase for the falsification of what seems as conventional relationships between financial markets and fundamentals or what I call as "parallel universes".
For instance, in Spain instead of the bond markets reflecting on credit quality, where soaring non-performing ‘bad’ loans should have prompted a bond selloff (higher yields), we get to see the opposite, rallying bonds (falling 10 year yields)…
From the Zero Hedge… (bold-italics original)
Despite the onslaught of confidence-inspiring flim-flam from leadership in Europe and a Spanish Prime Minister (and finance minister) desperate to distract with "soft" survey based data, the hard numbers keep coming in and keep getting worse and worse. The latest, seemingly confirming the IMF's fearsome forecast that European banks face massive loan losses in the coming years, is Spain's loan delinquency rate. Bad loans across Spanish banks amounted to $247 billion in August - a new record-breaking 12.12% of all loans outstanding (now 30% higher than any previous crisis in the history of Spain). Credit creation continues to implode with a 12.3% plunge in total loans outstanding but of course, none of that matters (for now), as Spanish bond spreads (and yields) press back towards pre-crisis lows...
This has been a product of entwined manifold political factors.
One, ECB’s Mario Draghi’s “do whatever it takes to save the euro” via a bond buying guarantee program [the unused Outright Monetary Transactions (OMT)] as well as the previous or OMT’s predecessor Long Term Refinancing Operations (LTRO). The LTRO has also functioned as credit subsidies to the banking system. The LTRO, the ECB learned lately, has entrenched the dependence of the banking industry, where the latter can hardly wean away from the LTRO without disorderly adjustments.
Also the Spanish government via Social Security Funds and other public pensions, as well as, the banking (€225bn in March) and financial sectors have been made to support sovereign bond prices. The banks likewise use these bonds as collateral to draw loans on the ECB. By keeping rates low, banks and the Spanish government benefits from these political subsidies financed by the economy.
International politics have also been a factor. For instance, Abenomics has spurred Japanese buyers to buy international bonds, including Europe, where Spain's bonds could have been a part of.
Zero bound rates has also spurred a yield chasing dynamic for private sector funds.
As one will note politicization of markets results to a vast distortion of relationships between market prices and the orthodox view of fundamentals.
Yet the mainstream who largely frames the above as 'recovery' either has blinded by such developments or deliberately twist or spin them to justify their actions
Such parallel universe applies to Europe's stock markets relative to ‘fundamentals’, which I have repeatedly been pointing out such as here and here
Again from another Zero Hedge article: (bold and italics original)
Goldman has, in the past, indicated how little forecasting power the soft survey data has in Europe and yet still, day after day we are treated to the herd of mainstream media types proclaiming that Europe is recovering and that their fundamentals have turned a corner. The problem with that "story" is that is that is a lie. In fact, European macro data has been sliding since the start of September and has plunged recently to 3 month lows. Of course, the reality is that a record high for European stocks is all that matters to the fast-money charging momo players and betting against divergences from fundamentals is for dummies...
Are these divergences 'This time is different'?
Thanks for the article.
ReplyDeleteI comment that On Thursday, October 17, 2013, In the wake of the political deal in Washington to fund Obamacare and raise the US Debt, World Stocks, VT, rose 1.0%, to a five year high, Nation Investment, EFA, rose 1.3%, and Global Industrial Producers, FXR, rose, 0.8%, all rallying to new highs, on monetization of debt stemming from a sell of the US Dollar, $USD, which traded strongly lower to close at 79.72, as the Euro, FXE, blasted strongly higher to 135.35.
The Finviz daily chart presentation of the Euro, FXE, at 135.35, is truly an awesome thing; it’s terrific that the Euro would rise to its February 2013 level given the fact that the European Banks, EUFN, are loaded to the gills with really worthless PIIGS sovereign debt. The Euro’s strength is not a function of free market place trading between buyers and sellers of nation state treasury debt; but rather the Euro has been given seigniorage by the sovereignty of one man, that being the ECB’s Mario Draghi. Not only is the Euro standing at 135.35 an awesome thing, it is truly and epic, and pivotal thing; and it is also a terminal thing.
The US Dollar’s dramatic fall lower is seen in the chart of the 200% ETF, UUP, trading parabolically lower, as currency traders bought the Major World Currencies, DBV, such as FXB , FXF, FXS, FXE, FXA, FXC, and FXY, and Emerging Market Currencies, CEW, such as BZF, ICN, which can be seen in the trading of these financial instruments in their Finviz Screener.
With this week’s strong trade in Euro-Yen currency carry trade, that its the EUR/JPY, FXE:FXY, and the Australian Dollar-Yen currency carry trade, AUD/JPY, FXA;FXY, coupled with the strong surge in risk free lending, seen in the chart of the short term credit ETF, FLOT, which is translated into a parabolic rise in World Stocks, VT, it is reasonable to perceive that peak fiat money has been achieved, and that Major World Currencies, DBV, an Emerging Market Currencies, CEW, will be trading lower, as investors pivot from risk-on investing to risk-off investing, deleveraging out of risk assets.
Global Financials, IXG, rose a stunning 1.3%, higher, taking Nation Investment, EFA, 1.3%, higher. The world’s leading banks can be followed in this Finviz Screener ... http://tinyurl.com/k72t6bp
The chart of Euro-Yen currency carry trade, EUR/JPY, presented as FXE:FXY, trading higher at 33.92, together with the chart of Australian Dollar-Yen, AUD/JPY, currency carry trade, presented as FXA:FXY, trading unchanged at 94.31, communicate the zenith of liberalism’s schemes of carry trade investment.
The rise in the credit ETF FLOT, to an all time high, and strong rise in Ultra Junk Bonds, UJB, and Junk Bonds, JNK, communicates the zenith of liberalism’s schemes of credit.
On October 17, 2013, liberalism is achieving peak fiat wealth, as stocks rose beyond their No Taper Rally highs of September 20, 2013 to rally strongly higher.
The concept that peak fiat money is being achieved on October 17, 2013, is seen in Major World Currencies, DBV, and Emerging Market Currencies, CEW, trading up to strong resistance; look for competitive currency devaluation to recommence drawing these lower once again, as bond vigilantes call the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.59%.
The strong rise in European Financials, EUFN, taking the Eurozone Stocks, EU, and Eurozone Debt, EU, to stratospheric levels, is truly unprecedented, and is something beyond irrational exuberance, something beyond tulip mania, best described by Nature Economist Elaine Meinel Supkis as Attaining Infinity http://tinyurl.com/ma7hfef something that only the gods can experience.