More Parallel Universes: Spain’s Bond Markets and EU Macro

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'?

European Recovery? Greece Reservist Calls for Coup

Mainstream pundits keep saying that Europe has been on the mend mostly relying on surveys to backup such calls. They suggest that a European economic recovery will ripple and support economic conditions of Emerging markets amidst the Fed Taper-Untaper conundrum.

Yet recent real events such as industrial production and car sales have defied such promising outlook. 

In fact, just yesterday loans to the private sector in the EU reportedly contracted again in August led by Germany. German's private sector loans dropped nearly 4% (month-on-month) and 4.7% (year on year)

We have been told too that the crisis shattered Greece economy has shown signs of recovery. This has been supported by buoyant financial markets.

The Greek equity bellwether the Athens index has been ascendant… 

…as Greek government bonds have been rallying (falling yields), whose late rally has coincided by the Fed’s UN-taper

Since economics drives politics, a call for a putsch by reservists of the Greek army hardly evinces signs of ‘recovery’, despite the above.

From the Guardian

No country has displayed more of a "backslide in democracy" than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country's slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by a group of reservists in the elite special forces calling for a coup d'etat, the study singled out Greece and Hungary for being "the most significant democratic backsliders" in the EU.

"Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment," it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. "It must worry us," said a government spokesman, Simos Kedikoglou. "The overwhelming majority in the armed forces are devoted to our democracy," he said. "The few who are not will face the consequences."

Today the yield chasing mania, where falsehoods have been interpreted as truths, has made the markets anesthetized to risk. In other words, central bank induced parallel universes or divergent real events vis-à-vis financial markets, have become ubiquitous.

European Economic Recovery? Car Sales Plunges to Record Low

We have been told that the Eurozone will be one major force in alleviating the plight of Asia and emerging markets. Unfortunately, it seems that Eurozone will have to fix their problems first before assisting anyone.

Despite positive surveys and all that, what people say and people actually do have been different. In the Eurozone, cars sales fell to the “lowest on record” last August. 

This compounds on the significant decline in July’s Industrial output which has been oceans away from consensus expectations

From Bloomberg: (bold mine)

European car sales fell in August, bringing deliveries this year to the lowest since records began in 1990, as record joblessness in the euro region hurt deliveries at Volkswagen AG (VOW), PSA Peugeot Citroen (UG) and Fiat SpA. (F)

Registrations dropped 4.9 percent to 686,957 vehicles from 722,458 cars a year earlier, the Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement. Eight-month sales declined 5.2 percent to 8.14 million autos.

The economy of the 17 countries using the euro emerged from a record six-quarter recession in the three months through June. Aftereffects such as a jobless rate in the area that held at 12.1 percent in July led industry leaders at the International Motor Show in Frankfurt a week ago, including Peugeot Chief Executive Officer Philippe Varin, to stick to predictions of a sixth consecutive annual car-market contraction in 2013.

"Record low" car sales appear to be undermining the supposed re-emergence from “a record six-quarter recession”.

And to think that “record recession” means soaring stock markets where the Stoxx 50 has been in the proximity of “record highs”. Economic growth drives the stock market? Duh.

Rising stocks provide mainstream media the delusion of a perpetual “recovery” that has gone amiss as signified by “record recession”. 

The reality has been that the Draghi Put (“do whatever it takes” OMT etc…) or guarantees on the markets, has been shifting resources from the main street to Europe’s Wall Street. So Europe's Wall Street feasts on the subsidies provided by the ECB. The real economy then goes only for the morsels.

Yet recent gains in car sales have been misinterpreted by the mainstream and the officialdom as sustainable. 

The European car market rose 4.9 percent in July to 1.02 million vehicles. The gain was the second this year, following a 1.7 percent increase in April that marked the first growth in European car sales in 19 months. The trade group releases July and August sales figures simultaneously each September.

One can call this a “head fake” or in chart lingo a “dead cat’s bounce”.

The car recession has not only been deep but has been widespread.

Four of Europe’s five biggest automotive markets shrank last month. Deliveries in top-ranked Germany dropped 5.5 percent to 214,044 vehicles. That compared with a 2.1 percent increase in July. The U.K. market, the region’s second biggest, expanded 11 percent to 65,937 cars in August.

Don’t worry be happy. The consensus will keep on piling onto the stock markets which it should drive to stratospheric highs, since all other alternatives (bonds, commodities and the real economy) have been down. 

As ex-Citigroup chief executive Charles O. Prince haughtily expressed during the 2007 mania:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Despite signs of the music stopping as manifested by rising global bond yields, let’s keep dancing.

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.

Germany’s Bundesbank Consolidates Gold Holdings

Possibly in response to German’s federal authorities call for the audit the gold holdings of their central bank, the Bundesbank—which has the second largest after the US of nearly 3,400 tonnes (valued at 133 billion euros $174 billion) held at foreign central banks, particularly at the vaults at Federal Reserve Bank of New York, the Banque France and the England—has begun to redeem them, despite their disagreements with the Feds.

Writes Telegraph’s Ambrose Evans Pritchard 

Roughly 66pc is held at the New York Federal Reserve, 21pc at the Bank of England, and 8pc at the Bank of France. The German Court of Auditors told legislators in a redacted report that the gold had "never been verified physically" and ordered the Bundesbank to secure access to the storage sites.

It called for repatriation of 150 tons over the next three years to test the quality and weight of the gold bars. It said Frankfurt has no register of numbered gold bars.

The report also claimed that the Bundesbank had slashed its holdings in London from 1,440 tons to 500 tons in 2000 and 2001, allegedly because storage costs were too high. The metal was flown to Frankfurt by air freight.

Has German’s federal government smelled something fishy? Or have they been influenced by the concerns of US Texas Congressman Ron Paul whom has urged, through a bill, for the audit of the US Federal Reserve’s gold?

What if central bank vaults have indeed over-declared their holdings through accounting wizardry? What if central bankers have used of gold for loans, swaps and repurchase agreement partly to control or manipulate or suppress gold prices?

If the suspicions of gold bugs are exposed as true, will the German “audit” prompt for a wider international or domino effect of gold audits that would force central banks, who could have been naked short on gold, to cover or buy them back which should drive gold prices significantly higher?

Or will this be just another white wash? Thus, perhaps the recent price pressures on gold?

Or by securing their gold holdings, have German federal authorities been dabbling with the prospects of an eventual departure from the euro?

More questions than answers from such interesting turn of events.

Exodus in Spain: More Foreign and Local Residents Emigrate

Early this year, I posted about the coming European diaspora. Current events seem to confirm on such trends as Spain continues to suffer from an exodus of foreign and local residents.

From ABC.es 

In the first nine months of the year have left Spain 420 150 people, of which 365,238 were foreigners and 54,912 Spanish, 37,539 more than in the same period in 2011, primarily for the Spanish emigration. 

Nationals who have left Spain increased by 21.6 per cent from the 45,161 who were between January and September 2011 to 54,912 this year, according to current population estimates published on Monday that the INE. The net migration-the difference between people coming and going, which was less than 137,628 people, of which 25 539 112 089 Spanish and foreign-and for the first time has been negative for the Spanish in all the Autonomous Communities.

As previously pointed out such dynamics are cumulative symptoms of the manifold policy failures in providing economic opportunities from the rampant interventionism by European governments such as Spain.

Germany Wants New EU Constitution: Lebensraum Merkel Version?

Sometimes I ponder upon the possibility that today’s crisis has been engineered to impose ulterior goals. In the resonant words of former White House Chief of Staff Rahm Emmanuel,

You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.

This I think may apply to the European Union

The Reuters reports,

Germany wants to reignite a debate over creating an EU constitution to strengthen the bloc's ability to fight off financial troubles and counter-balance the rising influence of emerging economies, Germany's foreign minister said on Friday.

Guido Westerwelle said the bloc's Lisbon treaty, drafted after Dutch and French voters rejected a proposed constitution in 2005, was not enough to keep European decision-making structures effective.

"We have to open a new chapter in European politics," Westerwelle told reporters on the sidelines of a meeting of EU foreign ministers in Copenhagen. "We need more efficient decision structures."

The German minister presented the idea to his counterparts at the Copenhagen meeting, during which they also discussed plans to run foreign policy more cheaply. He said discussions on the issue of a new constitution should continue in Berlin.

The desire and the insistence to centralize the EU translates to an implied expansion of Germany’s political power over the region. Since the EU crisis unfolded, it has dawned on me that the path towards a fiscal policy union seems like a variant of one of Adolf Hitler’s major goals—Lebensraum (living space) for the German people.

But instead of forcible (military based) annexations, the Germans have leveraged the acquisition of political power through stealth ‘expansionist policies’ such as bailouts and the attendant ‘proposed’ changes in EU’s political and regulatory framework as the above.

Yet in a world where forces of decentralization has been snowballing, these surreptitious designs are likely to meet the same fate as with the Hitler version.

Integrating the EU, should not be coursed through centralization but through economic freedom and sound money. With economic freedom, the relevance of geographical political borders diminishes.

Will the European Central Bank Relent to Political Pressures to Increase Debt Monetization?

Here is what I said last week

I would conjecture that rules, laws, regulations, policies or self-imposed limits change according to the convenience and the interests of politicians.

This seems to be happening. A dithering European Central Bank (ECB) may be “softening” their stance as pressures for her to backstop the Eurozone mounts.

The Euro crisis has been rapidly spreading like a wildfire.

Even Germany’s bonds are being dragged by the crisis. (chart from Bespoke Invest).

Last night, Belgium’s credit rating had been lowered by the S&P. Belgium follows Slovenia, Spain, Italy, Ireland, Portugal, Cyprus and Greece as euro-area countries having their credit rating cut this year. The country of 10.8 million people, whose capital, Brussels, is home to the European Commission and the North Atlantic Treaty Organization, last had its credit standing lowered in December 1998 by Fitch Ratings. (Bloomberg)

The following report from Bloomberg shows us how political interests will likely lead to a change in the rules of the game in dealing with the Euro Crisis, (bold emphasis mine)

European governments may ease provisions in a planned permanent rescue fund requiring bondholders to share losses in sovereign bailouts, German Finance Minister Wolfgang Schaeuble suggested.

Schaeuble signaled that Germany may retreat from demands that private creditors contribute to rescues in exchange for European treaty amendments toughening rules on budget oversight.

European efforts to speed the setup of the 500 billion-euro ($662 billion) European Stability Mechanism from its planned mid-2013 debut have lost momentum as Germany and the Netherlands resisted pleas by France, Spain, Portugal and Ireland to drop its bondholder-loss provisions.

“Basically, we agreed on the principle for the ESM already in July,” Schaeuble told reporters in Berlin after talks with his Dutch and Finnish counterparts today. “If we now manage to move toward a stability union, we’ll see how one might possibly adjust the treaty.”

The debt crisis rattled Germany, Europe’s biggest economy, with the failure of a bund auction two days ago. Bond yields in Spain and Italy surged today, with Spain dropping a plan to auction a three-year benchmark next week and Italy being forced to pay more to borrow for two years than for 10. Belgium's credit rating was cut today to AA from AA+ by Standard and Poor's.

While there “may be discussions in Brussels” next week on sector involvement under the ESM, the aim of a finance ministers’ meeting will be to flesh out details of the agreement by EU leaders last month to write down Greek debt, recapitalize banks and strengthen the existing rescue fund, the European Financial Stability Facility, Schaeuble said.

ECB Pressure

As the crisis worsens, the European Central Bank is coming under pressure to step up its response. While France yesterday agreed to stop pressuring the ECB to print money, policy makers today signaled they are willing to offer cash-strapped banks more liquidity if needed.

Pieces of the jigsaw puzzle seems falling into place.

The probable reason why France has “agreed to stop pressuring the ECB” is because Benoit Coeure, chief economist at the country’s finance ministry has reportedly been nominated to the ECB to replace Lorenzo Bini Smagh, which appears to be part of the horse trading on the political appointments happening at the European Central Bank.

The growing clamor for the EU to have a "fiscal union" has served as veneer for the ECB to go on the path similar to the US Federal Reserve in pursuing an aggressive monetary policy stance.

Looks like we may be headed there pretty soon.