The Curse Of The Euro: Money Corrupted, Democracy Busted – David Stockman’s Contra Corner 07-17-15

Salient to Investors:

David Stockman writes:

  • Germany has set fire to the Eurozone in order to save it. Lending another $96 billion to a bankrupt country makes no sense, while the fiscal targets set for Greece are ridiculous. Greece has a de facto public debt of $400 billion vs. $200 billion of GDP. Within days the entire banking system of Greece will be taken over by the ECB, meaning that depositors will be given a big haircut. Greece will become an outright debtors’ colony and its government will function as page-boys for the Troika occupiers, resulting in political and social upheaval which will spread throughout Europe as Greece implodes.
  • Another recession is coming to Europe. The Eurozone is a fatally flawed monetary union. If any sovereign state of the EU cannot pay its debts, those debts need to be written off or restructured.
  • The euro is the doomsday machine, or more precisely the rogue ECB behind it. The euro will eventually collapse and Keynesian policies will be repudiated and dismantled, but not before European prosperity is extinguished for a generation.
  • Europe had a de facto common currency before 1914 under the fixed exchange rates of the gold standard, which helped produce a multi-decade of prosperity not seen before or since.
  • The ECB printing press has fundamentally falsified the price of debt, produced phony economic growth in the early years and fiscal profligacy after the growth bubble burst after the 2008 crisis, resulting in only 0.9% annual rate of nominal GDP since. The EU-19 debt ratio has climbed steadily towards 100% of GDP since the financial crisis vs. the 60% debt-to-GDP target of the EU treaty.
  • Bond market discipline is fully compatible with national sovereignty and democratic fiscal governance and is a requisite for Europe.
  • Merkel was conned into believing that the original bond sell-off was due to the same speculators who supposedly caused the great financial crisis of 2008.
  • The burst global credit bubbles of 2008 and euro bond crash of 2010 and after had the same cause – central bank financial repression causing government bonds to be underpriced and global investors to scramble for yield; speculators could surf the financial bubbles on the back of cheap carry from the central bank pegged money market.
  • Superstate bureaucrats cannot meaningfully elevate economic growth rates and so enable insolvent state borrowers to grow out from under unsustainable debt. Portugal, Italy, Ireland Greece, Spain – PIIGS – and France prove that quasi-socialist welfare states in the contemporary European setting prove this.
  • When you destroy honest bond markets you eventually end up with Stalinist governance in the name of the free market.
  • Speculators who rode the Draghi bubble made hundreds of billions of profits buying PIIGS debt on 95% repo, and were then positioned to sell their bonds back to the ECB at the first sign of a market break.
  • Spain’s real GDP at the end of Q1, 2015 was still 6% below early 2008, but its debt ratio has risen sharply to near 100% of GDP. There is no possibility of honest fiscal governance in a social democracy like Spain when its debt price is blatantly falsified. Spain’s budget deficit in 2014 remained at 5.8% of GDP so won’t survive another recession, and will be bailed out fueling radical popular movements a la Greece.

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Euro Forecasters See Pain After Worst Year Since 2005 – Bloomberg 01-02-15

Salient to Investors:

  • Strategists expect the euro to decline to $1.18 by the end of 2015. Over 90% of respondents surveyed in December predict the ECB will expand the supply of euros by purchasing sovereign bonds in 2015, versus 57% in November. 44 of 59 analysts expect the euro to fall against the dollar – the median projection sees a 2.5% decline by the end of 2015. Options premiums on the euro are the most bearish since October 2013.
  • Kit Juckes at Societe General said the best thing the ECB can do is to try to engineer a weaker euro and predicts it to drop to $1.14 by end of 2015.
  • Michael Sneyd at BNP Paribas expects the euro to decline to $1.15 by end of 2015.
  • Jane Foley at Rabobank Intl want to see how this plays out, certainly through January, before drawing strong conclusions, and predicts the euro will end 2015 at $1.20 – so much is already in the euro price so it cannot fall much further.
  • Simon Derrick at Bank of New York Mellon said the euro will fall in 2015 to reflect the economy and monetary policy.

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Dollar Rally to Gain Fuel as ECB Talks Stimulus, Goldman Says – Bloomberg 09-25-14

Salient to Investors:

Robin Brooks at Goldman Sachs said:

  • The dollar’s rise is small in historical and economic terms as many traders wait/hope for a pull-back which won’t come.
  • Euro-dollar levels are not remotely pricing in the kind of balance sheet expansion that Draghi talked about in September, so future ECB press conferences will trigger more euro-dollar downside – to $1.25 in 6 months and parity by the end of 2017.
  • Factors ranging from monetary-policy divergence to inflation trends indicate the dollar’s rally against its major peers during the past 4 months has room to continue.
  • Recent dollar strength has been an unusual confluence of idiosyncratic trends, and as Fed forward guidance fades, we will see real dollar strength.

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Stocks Triumph 3rd Month in Best Run Since ’09 as Gold Sinks – Bloomberg 12-01-13

Salient to Investors:

Bill O’Neill at UBS Wealth Mgmt said the story is still the combination of easy money policies and expectations of growth into 2014 and that growth is on the horizon.

The Investment Companies Institute reports individual investors gave $30 billion to managers in 2013, the first net inflows into equity funds since 2006, and versus $400 billion outflows in the previous 4 years.

The average of 19 forecasts expects the S&P 500 to fall 4 percent in December to 1,733. December has been the second-best month for US equity returns in data from 1928, with an average return of 1.5 percent, versus the monthly mean of 0.6 percent.

The S&P 500 trades at 16.3 times projected earnings.

Michael O’Sullivan at Credit Suisse Private Banking & Wealth Mgmt said the economy looks much, much more healthy.

4 of 5 investors, traders and analysts expect the Fed to taper in March or later, with just 5 percent looking for a move this month.

Goldman Sachs expects gold at $1,110 and Brent at $105 in 12 months.

Barclays sees gluts in aluminum, copper, nickel and zinc this year or next, and says copper will average $6,500 in Q4 2014.

The US is meeting 86 percent of its own energy needs, the most since 1986, and the International Energy Agency predicts the US will overtake Russia and Saudi Arabia as the world’s largest oil producer by 2015.

The median economist expects the 10-yr Treasury yield to rise to 3.1 percent by mid-2014.

John Rutledge at Safanad expects many months in which the Fed is the dominant story, and said the tapering story worries investors as to whether the Fed is there to sop up Treasury issues.

The median economist expects the euro to weaken to $1.30 against the dollar by mid-2014, and the yen to weaken to 104.

Benoit Anne at Societe Generale sees no appetite to invest into emerging markets as fear of the Fed prevails and investors are reluctant to take on risk as year-end looms.

 Jim McDonald at Northern Trust said economic momentum and monetary policy momentum are better in the developed economies, while there is too much uncertainty in the emerging world as reflected in their stocks.

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Fink Sees Equities Returning 7% as Dalio Expects 4% Gains – Bloomberg 11-12-13

Salient to Investors:

Laurence D. Fink at BlackRock said:

  • Stocks may decline as much as 15 percent because of political risks in China, Japan, France and the US.
  • Stocks may return more than 7 percent in the long-term, assuming the global economy expands at 4 percent
  • Investors already invested 100 percent in equities should hold.
  • France may be the cause for an eventual failure of the euro currency.

Ray Dalio at Bridgewater Associates said:

  • Equity returns will slow to 4 percent annually in the next decade.
  • The Fed won’t be able to raise interest rates for years as the economy has not strengthened sufficiently.
  • The next major financial crisis will come from France because of a rise in their debt-service payments that will constrict their economy.

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Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg 11-11-13

Salient to Investors:

Axel Merk at Merk Investments said it is a very real concern of countries to keep their currencies weak, and Draghi has persistently been trying to talk down the euro since earlier this year.

Neil Mellor at Bank of New York Mellon sees a new era of currency wars, and sees a change in tone from South Korea, Australia and New Zealand.

Alan Ruskin at Deutsche Bank cites some economies that are generally weak and whose inflation is already low, and said Japan was in that mix for over 20 years and nobody wants to go there. Ruskin said Draghi is taking the disinflation story very seriously, while the Czech Republic is the same story.

Adam Cole at Royal Bank of Canada said the idea that central banks are setting policies to weaken their currencies has always been overstated: in most cases they are happy to see their currencies fall, but they are not targeting weakness.

Lane Newman at ING said the euro-zone central bank wanted to engage in a currency war because they cut rates knowing it was going to put the euro on the back foot.

The Australian Dollar is 27 percent overvalued versus the US Dollar according to a gauge of purchasing-power parity compiled by OECD.

Analysts predict the Fed will delay tapering until March.

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Euro Becoming Haven With Breakup a Memory on Economy: Currencies – Bloomberg 09-06-13

Salient to Investors:

The 90-day correlation between changes in the euro and a Citigroup index of bond and swaps risk has turned positive for the first time since November 2008, indicating the euro is gaining favor as investors’ perceptions of turmoil in financial markets rises. Hedge funds et al are the most bullish on the euro since 2011.

Valentin Marinov at Citigroup said the euro remains resilient and repatriation from emerging markets is playing an important role, and predicts the euro will end the year at current levels and then fall to $1.30 by June 2014. The median analyst sees the euro falling to $1.28 by year-end, and then to $1.26 by June 2014.

EPFR Global said more than $47 billion has left global funds investing in emerging-market bonds and stocks since May, and the outflow in 2013 to $7.5 billion. Outflows last week were the highest in 2 months, with record withdrawals for Mexico and Philippine equity funds.

Sebastien Galy at Societe Generale said the euro is perceived as a safe haven in the current environment, where we’re not in a G-10 crisis, but an emerging-market one. Galy said people who were wrongly very negative on the euro zone have now changed their mindsets.

CFTC data shows futures contracts signal more gains for the euro.

Economists predict Germany will grow 0.5 percent in 2013, the euro area will shrink 0.6 percent, and the US will expand 1.6 percent.

Simon Derrick at Bank of New York Mellon said that Germany might be showing positive signs, but we still have horrific numbers in peripheral Europe, so the likelihood markets will outperform starts to dwindle. Derrick said the euro may fall to $1.25 in 2013 if the Fed tapers and investors start pricing in higher interest rates.

IMF data shows the euro’s share of worldwide currency reserves remained above levels immediately after its 1999 debut: 24 percent in March 2013 versus 28 percent in September 2009 and 17 percent in September 2000.

BIS said the euro is the most widely traded currency after the dollar and accounted for 33 percent of average daily turnover in foreign-exchange markets in April, versus 87 percent for the dollar. (Foreign-exchange trades involve 2 currencies, so the sum total of percentage turnover is 200 percent.)

Niels Christensen at Nordea Bank said it is difficult to find something negative for the euro, or at least not anything that’s in focus, and when there’s more optimism about the economy, suddenly there is a positive spiral for the euro.

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Dollar Seen Too Weak in Lowest Index Since June: Market Reversal Bloomberg 08-07-13

Salient to Investors:

MacNeil Curry at Bank of America said any close for the Dollar Index above its pivot point of 82.41 would be a good sign that we have a base in place and a larger bull trend can resume. Curry said the diamond-top pattern in the euro says that its rally is complete and will reverse lower. Curry said all the weakness in the dollar v. the euro has been very impulsive and is bullish on the dollar.

A diamond-top pattern signifies a widening in volatility, which often coincides with a change in trend. The euro – 58 percent of the Dollar Index – is creating a diamond-top pattern versus the dollar, implying an imminent reversal.

The median economist expects US GDP to grow 2.7 percent in 2014 versus an average estimate of 1.9 percent for the G-10.

Options traders are bullish on the dollar.

JPMorgan Chase said the Dollar Index may test 83.96 if it can break through resistance at 82.68 – its 38.2 percent Fibonacci retracement of the Index’s July range.

Roelof-Jan Van den Akker at ING said a Dollar Index close above the 200-day moving average would confirm the successful test of horizontal support, while a close above the 50-day moving average line definitely confirms a bottom, and that the next rally is underway to 83.20.

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Investors Are Lab Rabbits in Central Bank Experiments – Bloomberg 07-28-13

Salient to Investors:

Vincent Reinhart at Morgan Stanley said investors are the little white lab rabbits in the central bank experiments.

Gilles Moec at Deutsche Bank said the potential for the dialog between the central banks and the market to fail is significant.

Nathan Sheets et al at Citigroup said the UK and euro region are adopting the Fed’s forward-guidance strategy in an effort to decouple their bond markets from that of the US, while the US economy is way ahead of those economies in terms of place in the business cycle and the strength of the recoveries. Sheets et al predict yields will average 1.8 percent on 10-yr German bunds and 2.75 percent on 10-yr UK gilts in Q4 2014, while the 10-yr T-note will average 3.25 percent in Q4 2014 compared.

David Bloom at HSBC sees the dollar powering ahead by the end of 2014, with sterling weakening to $1.45 and the euro falling below $1.25.

Over 50% of 43 economists predict the BOE will adopt a data-contingent form of communication, while 40% predict a calendar-based commitment.

Sven Jari Stehn at Goldman Sachs said Fed research has highlighted the importance of forward guidance in aiding the economy while de-emphasizing the role played by quantitative easing.

Jonathan Loynes at Capital Economics said central banks have no idea what will happen in the future, so to commit to a particular policy stance carries risks, including loss of credibility.

The IMF forecasts the euro economy will shrink 0.6 percent in 2013.

Azad Zangana at Schroder Investment Mgmt said the BoE is trying to address the pickup in yields without actually buying bonds, and while forward guidance has been successful so far, it’s pushed yields back down and limits to how far it can go.

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