Well well well, my fellow Slope-a-Dopes, we find ourselves here once again, comfortably floating just above the 1400 water level for the third time since Mayday….Mayday….Mayday. Blissfully bathing in the calm, warm, inviting aqua blue waters of the Med, or should I say Fed. Apparently, many avid Wall Street sailors are looking forward to further fair weather cruising ahead. The well paid crews are pulling up anchors & hoisting mainsails, in anticipation of more delightful sailing in the balmy, "easy money" late Summer breeze. Unfortunately for them, lurking just below the smooth surface in the darker blue water directly ahead, await numerous nefarious naval mines. These lethal, man made, mechanical sea urchins, are about to detonate against the unsuspecting bulls' boat hulls, sending their party yachts plunging deep into the chilled murky abyss, 10,000 feet below the bliss. Something is clearly amiss amongst the jellyfish……
08-31-12 Underwater Mine # 1: Captain Bluff Bernanke is set to give his jackass commands Friday 10AM EST at the St. Louis Fed’s annual symposium in Wyoming. Market deep sea divers are hoping for some new insight into what the Federal Reserve is thinking, including whether and when the Fed might take further easing steps. However, most economists and Fed watchers don’t expect The Bernanke to say much that is new, as the Fed continues to weigh incoming economic data ahead of its Sept. 12 FOMC meeting. My take is that Captain Ben will continue down his pathetic path of incremental bluffing, and the good ship "Market Mistress III" will narrowly miss hitting the underwater mine, avoiding a deadly disaster. Please be advised that on Monday Chicago Fed President Charles Evans speaks in Hong Kong, and on Wednesday Cleveland Fed President Sandra Pianalto gives her views on the economy. Both these smaller depth charges could create some small waves rocking the ship up & down just a bit. On a detonation scale of 1 to 10, we assign this activated mine only a "yellow card" code 3 alert.
09-01-12 Underwater Mine # 2: Mariner Mario Draghi shells out his littleneck clams Saturday afternoon at the very same Jackoff, Wyoming watering hole. Although Benny & the Squid Inkjets are the headliners, Mario & the Blowfish could well steal the show. Markets already have somewhat of a handle as to where the Federal Reserve is headed. The minutes from the last Fed meeting made it pretty clear that they are considerably closer to acting. “Draghi’s way more important, because Europe’s the greater concern,” says Jason Schenker, president of Prestige Economics in Austin, Tex. “The U.S. story is one of modest but tepid growth, but the story in Europe is quite uncertain.” Let's not forget that Draghi set the markets on fire late July in London when he said this: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” My guess is that this time around, he will tone it down a bit, in order to avoid appearing like a seahorse's ass barking out infeasible orders to head galley chef Angela Merkel. The market will most likely be disappointed by a timid approach, especially the failure to further define the specific maneuvers he has in mind to tame the imminent squall. On a detonation scale of 1 to 10, we assign this activated mine a "very volatile" code 6 alert.
09-06-12 Underwater Mine # 3: The ECB's Governing Council meets 20,000 Leagues under the Sea the following week. Rumors that the ECB is planning on yield or spread targeting have been swirling around the economic MSM for the past 10 days. We will presumably find out more about this potential policy measure when we hear from Mario Draghi at the post meeting stress conference on the 6th. Significantly lower Spanish & Italian short & long-term bond yields would suggest that investors are betting on these rumors to be true. Megan Greene, the well respected director of European economics at RGE (Roubini Global Economics) specializing in the Eurozone crisis, disagrees with this trusting assessment. Her view is that too much upside has already been priced into the periphery bond markets due to the proposed implementation of this dubious ECB intervention, thus the room for disappointment is more than substantial. She sets forth a very well reasoned and comprehensive case outlining in detail the probable pitfalls of the proposed Central Bank policy. I highly recommend you read her analysis: http://economistmeg.com/2012/08/24/will-we-see-yieldspread-targeting-by-the-ecb/. Furthermore, this morning Deutsche Bundesbank President Jens Weidmann, himself a member of the ECB's governing council, publicly stated his opposition to the proposed yield targeting scheme. His own words from Sunday's Der Spiegal magazine: "In democracies, parliaments, not central banks, should decide about such comprehensive sharing of risks,". Weidmann is clearly against obliging the ECB "to guarantee that member countries remain in the euro zone at all costs." On a detonation scale of 1 to 10, we assign this activated mine a "red card" code 8 alert.
09-12-12 Underwater Mine # 4: The German constitutional king crab court is due to vote on the legality of the ESM and the fiscal compact on September 12th. Nearly all market Sand dollar wagers are expecting the court to rule in the affirmative, confirming the European Stability Mechanism Treaty's legitimacy. Should this favorable ruling not occur, or if it were delayed any further, it would most certainly deal a major unexpected blow to Eurozone policymakers, who are counting on ESM's primary market bond purchases to relieve the intense deep water pressure on Spanish and Italian sovereign bond yields. Interestingly, according to two central bank officials this past Friday, Bloomberg suggested that Draghi may well wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds. On a detonation scale of 1 to 10, we assign this activated mine a "docile dolphin" code 2 alert.
09-12-12 Underwater Mine # 5: The Netherland Navy's Naked diving team, a Prominant Eurozone member, has an important general election going down on the 12th of September. From Bloomberg: "Next month’s Dutch elections risk complicating Europe’s efforts to resolve its debt crisis, with the coalition government that emerges likely to reflect both anti-European sentiment and resistance to more austerity." In the run up to the September 12th elections, a third of Dutch voters either backed the Socialists, who oppose more spending cuts and refuse to hand over more sovereignty to Europe, or the Freedom Party, which seeks an exit from the European Union and the euro altogether. Juergen Michels, chief eurozone economist at Citigroup London commented on the subject as follows; "The September election outcome will be an important indicator of the willingness of one of Germany’s most important pro-austerity allies to continue to support euro-zone rescue measures." On a detonation scale of 1 to 10, we assign this activated mine a "Navy Seal" code 5 alert.
09-13-12 Underwater Mine # 6: The all important FOMC Coast Guard meeting takes place September 12th-13th. As per the minutes of their most recent helicopter rescue effort, the majority of Federal Reserve policy makers have now intimated that additional stimulus will most likely be initiated soon, unless the economy shows signs of a durable pickup. According to MSM CNBC: Ward McCarthy of Jefferies Inc., said he sees a 70 percent chance the Fed extends its rate guidance at the September meeting. The Fed is expected to say it will keep interest rates very low into mid-2015, from its current end of 2014 time frame. As for QE, McCarthy sees a 30 percent chance it will be announced in September, but a 90 percent chance it is announced by the end of the year, with December the most likely time frame. BDI's take is that the Fed will probably want to keep its powder dry for more QE until it sees how the coming events unfold in Europe next month. This may well torpedo the QE happy cruise control market. We assign this activated mine a "Jumbo Shrimp" code 7 alert.
09-15-12 Underwater Mine # 7: In mid September, pencilfish auditors KPMG, PwC, Deloitte and Ernst & Young are scheduled to present their comprehensive findings on the capital requirement for Spain’s decimated financial system. The reports will be used to determine the actual amount the Spanish banking sector will need to borrow from the EFSF. Be warned, that Spain is likely to request EFSF primary market sovereign debt support only after the ESM is officially sanctioned on September 12th after the German Court ruling, but before it has significant bond redemption obligations in October. The size of Spain's requested / required banking bailout will be something to behold. Moving along to Spain's little mermaid sister swiming beneath the underwater Iberian peninsula, Portugal’s economic performance is also contracting more than the troika had targeted. It is highly improbable that Portugal will be able to return to the bond markets by next year, and thus the country may well begin negotiations for a second bailout program as early as September. In Italy, the general election campaign begins in earnest once everyone returns from Venice beach. Watch for much more internal domestic water pressure to be applied onto Super-Sub Mario Monti, emanating from the entrenched regional political operatives that will try to energize their constituents, whom are vehemently oppose to the relentless drive for austerity. On a detonation scale of 1 to 10, we assign this activated mine a "hot Andalusian sausage" code 8 alert, which could detonate anytime mid-September though October.
09-15-12 Underwater Mine # 8: The OctoTroika returns to the Aegean Sea, and is due in Athens early September to assess Greece's reform efforts. Here again, we draw from our EZ expert Megan Greene: "the Greek government has reportedly proposed a relaxation of its fiscal targets to Merkel and Hollande. Having been unable to find agreement among the Greek coalition partners on EUR11.5bn in savings (a whopping 5% of Greek GDP), prime minister Antonis Samaras will request that the adjustment be made between 2012-16 instead. He is also likely to suggested that the budget deficit be slashed by 1.5 percentage points of GDP annually rather than the current 2.5 percentage points." So far Merkel & Holland have not publicly accepted any of these specific requests, only re-stating their undying Euro-Centric devotion to keeping Greece in the Euroclub above all else. How that will be achieved, of course remains a complete mystery to us all. The IMF now expects that the Greek economy could contract around 7% this year, 3.5% in 2013, 1.5% in 2014 and 0.5% in 2015. That is far worse than the official, but dated, forecasts, made under the second bailout program in March, which sees Greece returning to growth in 2014. This ongoing Poseidon death spiral clearly remains far from resolved, and an abrupt return to the drachma is being whispered throughout the halls of Sovereign legislatures all over the sinking old Continent. This activated ancient mine could clearly go off at anytime now, however it will probably delay its powerful explosion until early November after the U.S. election are decided, and the final Troika numbers are officially confirmed. We assign this activated mine a "Carton Noir" French Fencing code 9 alert.
We have no choice but to navigate through the troubled waters directly ahead. Each treacherous deep water naval mine listed above, eerily lurks just below the equity market's surface. It is often said that the market hates uncertainty, well we sure have it in spades today; Eurobortion, China crack up boom, U.S. fiscal cliff, endless Government deficits, municiple defaults, a massive Fed balance sheet, ZIRP, QE, vanishing Global GDP, zero net new job growth, contracting corporate earnings, a depressed housing sector, commodity inflation, a wide open Presidential election, the Arab Spring clusterfuck, Putin, Iran, Syria, Afghanistan, Iraq…..the list seems to get longer with each passing day.
The many unresolved problems in Europe alone could certainly torpedo our markets. Many will insist that the European debt crisis is nearly behind us, and well on its way to a final long term resolution. Nothing could be further from the truth. We continue to see only more big empty promises & grandiose master plans, but very few specifics on the actual implementation of these proposed solutions. All foam no beer!
As the main European actors return from their sumptuous R&R retreats, to once again man the lead position on their respective battleShips of State, they will quickly realize that their best laid war plans are much easier to draw up on the chart table, then actually execute in the rough seas during the heat of battle. They will get cold feat, and sea sick all over again, when directly facing the enormous liabilities involved in the complex, perilous, herculean EuroFix.
As we have seen time and time again, each Euro captain shall balk to preserve their own ship. The market will immediately sense this cautious, uncertain trepidation, and will quickly subermarine dive sharply lower. During this ongoing Eurobortion fiasco, it is only when the market clamps down hard on their Euro balls, that the reluctant parties are forced to accept that they either swim together as a team, or drown alone. We will see this encore, Europeans simply don't play for the same unified team, which is why this is such a monumental task.
We could drift back up towards 1435, but that's all she wrote, this great ship is going down. It's not if or when, it's now. Man the torpedos! Launch the depth charges! Detonate the naval mines!……..Evil Plan 79.0