Despite Booming Markets, Europe is still bleeding

European markets boomed last night as US financial markets were closed due to a public holiday.

The rally in Europe’s markets (quote from Bloomberg) are likely to provide fuel for the embattled ASEAN bulls today.

Nonetheless global markets are looking for all sorts of rational to justify the continuation of unsustainable asset booms.

Yet the so called recovery in Europe is nothing less than propaganda. Sovereign Man’s Simon Black argues:

the disconnect between reality and propaganda is at an all-time high.

The political leadership across the continent is sounding the ‘all clear’ signal and trying to hype up anything they can pass off as ‘recovery’.

(This, brought to you by the same people who said ‘when it gets serious, you have to lie…’)

To be fair, the continent does have its bright spots. Germany, Luxembourg, Austria, etc. are comparatively awash with paper prosperity.

But in Greece, despite phony political promises that ‘this year will be better’, the numbers tell a completely different story. Here’s an example:

Based on the Finance Ministry’s own numbers, the Greek government collected 4.31 billion euros in tax revenue in January 2013.

This was less than the 4.87 billion euros Greece collected in January 2012, which was less than the 5.12 billion collected in January 2011, which was less than the 5.68 billion collected in January 2010.

You can see the trend. Down. And the data is very clear about this: the Greek government’s tax revenue in January 2013 was 23.2% lower than three years before.

Moreover, Greece has managed to rack up another 6.5 billion euros in debt during the first seven months of this year at a time when the economy is actually shrinking.

Higher debt, shrinking economy… meaning that the nation’s 175% debt to GDP ratio is worsening. This suggests that another bailout request is imminent.

Meanwhile, I saw complete devastation in the real estate market over in Spain and Portugal– assets being liquidated at far less than the cost of construction. And still there are few buyers.

In Cyprus, I saw a country still operating under the intense capital control framework they imposed after freezing and confiscating people’s bank accounts.

In Italy, I saw an entire generation of young people coming of age at a time when there is practically zero opportunity for anyone under the age of 25. And this is taking a huge toll on the national psyche.

And in Iceland, I saw a forgotten story of collapse that has been erroneously heralded by mainstream financial press as the poster child for recovery.

Iceland is far from recovery.

The government’s own data shows that they posted a RECORD cash deficit for the first seven months of 2013 (which was double last year’s cash deficit).

And they’re now spending a massive 21.94% of non-pension tax revenue just to pay interest on the debt!

Perhaps most problematic for Iceland, though, is the steep turn in domestic bond appetite.

For the last several years, Iceland’s politicians have been able to sell more government bonds to their people than they’ve had to pay back.

But this trend came to a screeching halt this year as Icelanders are now dumping their government’s bonds.

All of these numbers paint a completely different picture than what the governments are telling us.

Politicians lie. People can be easily deluded. But numbers don’t ‘feel’ optimistic or pessimistic. Numbers are simply truth.

And the truth is that Europe is still bleeding.

We can expect more bailout requests for sure. But more importantly, we should also watch out for deepening capital controls, higher taxes, and even more severe tactics in the war on cash.

The  Zero Hedge uncovers more parallel universe:

So in summary: manufacturers feel broadly better about themselves: in fact the best in 26 months, with new orders largely fueled by export demand. Yet exports to where one wonders, considering net trade surplus data has been stronger than expected for virtually all nations in the past month: after all in a zero trade sum world someone has to be substantially increasing their imports? But more importantly, actual jobs - the real growth dynamo for the European economy - continue to deteriorate, accelerating their downward pace having declined for 19 months in a row.

Finally, and the biggest concern for Europe, continues to be the clogged monetary pipeline. As was reported last week, even with European M3 having peaked recently and is now rolling over, it is the credit to the private sector that posted the largest Y/Y drop on record. The Goldman breakdown was as follows:

Loans to non-financial corporations, on a seasonally adjusted basis, declined by €19.4bn in July, following a €12.5bn contraction in June. Adjusted for securitizations and sales, the figure was broadly similar. This larger fall is somewhat concerning after the rate of contraction in loans to NFCs moderated within the second quarter, although Q2 on average saw large falls in lending.

Loans to households fell by €4.8bn in July after a similar move in May. This is the third fall in loans to households since July 2012. Unlike corporate lending, loan growth to households remained broadly unchanged between mid-2012 and mid-2013, albeit with monthly loan flows well below their long-term average of €15bn.

So, in summary: better than expected European manufacturing driven by surging exports to somewhere, forcing employers to cut jobs for 19 straight months and at an accelerating pace in August, in the context of record low loan creation.

Forgive us if we remain skeptical on Europe's so-called "recovery", which just may meet reality once the German elections are over in less than a month.

Last night’s stock market boom, came with a substantial selloff in bond prices (thus higher yields) in most major European nations with the exception of Italy, Spain and Portugal). 

Ironically rallying bonds in the crisis stricken PIGS area comes in the face of more economic woes as stated by Mr. Black above. 

Low yields in the PIGS serves as a subsidy to the PIGS governments, apparently being financed by the majors EU states.

Yields 10 year US Treasury (futures) notes even spiked to 2.83%.

Higher yields amidst surging debt levels and tepid recovery has been seen as beneficial for stocks. Add elevated oil prices, for me, this would seem as the surreal Wile E Coyote moment.

A Very Eventful Week: Philippine Elections And The Euro Bailout

``It's simple: when the utility of what you want (however you measure it) is less than the cost of the debt, don't buy it.” Seth Godin, Consumer debt is not your friend

The past two weeks have been quite eventful both in local and in international terms.

From an international perspective, we’ve been seeing the unfolding of the controversial political developments in Europe, which has apparently sent markets into steep pendulum swings.

From the local perspective, the culmination of the national elections has added to the ongoing optimism in domestic market activities as seen in the Peso and the Phisix.

And this seems to have partially created a divergence which has resulted to an outperformance (see figure 1).

Figure 1: Phisix Outperforms Global Markets

As to whether the Phisix and the Peso can sustain these divergences outside the sphere of global influence remains to be seen.

In the chart, fundamentally the undulations of the Phisix, has coincided with the actions abroad, i.e. the US S&P 500 (SPX), Europe’s (Stox50) and Dow Jones Asia (DJP1), as revealed by coincidental troughs from the Greece tremors last February (vertical line), aside from the sharp selloff during the other week which also signified as a sequel of the previous Greece episode (arrows).

Let me add that Friday’s selloff in the international markets have yet to be factored in the Phisix.

The point is, it would seem fallacious to assert that the local markets have been operating independent of global influence until last week.

Where the Phisix has broken out of the consolidation to a 25 month high last week, we can only discern that such buoyancy had been a consequence from the recent local elections.

All told, we have been validated anew that election jitters or risks had only been an exaggeration[1] apparently a figment of imagination of media and the politically obsessed groups.

Further, news reports where the nation was supposedly stunned[2] by the speed of election count only reveals of the backward orientation held by the public with regards to the current state of technological capability. Yet in today’s technology enhanced real time world, these returns, while fast, have not been impressive, or fast enough.

Nevertheless, the question in our mind is whether the Phisix will manage to sustainably diverge from the global markets, or if the current pressures seen in the global markets imply for a reversal, which may eventually affect the performance the Phisix.

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[1] Why The Presidential Elections Will Have Little Impact On Philippine MarketsPhilippine Markets And Elections: What People Do Against What People Say and

[2] Inquirer.net, Fast count stuns nation