Wednesday, January 28, 2015

El-Erian on Greece

What Syriza's Sweep Means for Greece and Europe

Mohamed El-Erian

Mohamed El-ErianInfluencer

Chair, Investment Advisory Committee at Microsoft


What Syriza's Sweep Means for Greece and Europe

Jan 26, 2015

This post originally appeared on Bloomberg View.

The Coalition of the Radical Left, known as Syriza, placed first in the Greek elections today, with at least 36 percent of the vote, according to exit polls. The result could even give Syriza an absolute majority and, if it wishes, allow it to govern without a coalition partner. With these outcomes going beyond what markets expected and priced in, here is a Q&A before trading resumes Monday.

QUESTION: What happened and why will it matter for markets?:

ANSWER: The early parliamentary elections have given Syriza a significant and historic victory that surpasses the market consensus.

This is the first time Syriza is in a position to form and lead a government. Its popularity reflects intensifying economic and social frustrations among Greek citizens, including the perception that their long sacrifice hasn't yielded any meaningful gains, let alone any hint of an end to what they see as years of austerity and deprivation.

An alternative economic approach was the core of Syriza's electoral campaign. Its program, which rejects austerity and seeks debt reduction, was pursued with vigor by the party's leader, Alexis Tspiras, who frequently took swipes at Germany, including personal attacks on Chancellor Angela Merkel. He argued that the most influential power in the euro zone was too austerity-obsessed in its approach to Greece.

Greece's Fiscal Odyssey

This has led to concerns that Greece could exit the euro zone. A so-called Grexit would entail the return of a national currency to replace the euro, losing access to European Central Bank financing windows and, most probably, less financial support from the European Union and the International Monetary Fund. It would also raise doubts about some other countries in the region, leading to a repricing of individual and collective risk factors.

An exit from the euro would require the Greek government to counter the immediate threat of significant disruptions, come up with a new medium-term economic vision, strengthen its domestic institutions and pursue a different relationship with European partners that would preserve the country’s access to free trade and certain financing arrangements.

Grexit concerns have been amplified by indications that, particularly compared with 2010-2012, Germany appears less concerned about the negative spillovers for the euro zone -- and for good reason, given the (albeit still incomplete) efforts to strengthen the region’s institutional structures. For example, regional financing mechanisms have been strengthened, banks have been subjected to more rigorous stress testing and a significant portion of national debt has been refinanced with longer maturities and lower interest rates.

Q: How are markets likely to react when trading resumes Monday?

A: If the larger-than-expected Syriza win is confirmed, and especially if it results in an absolute majority, expect a sell-off in European risk assets, including equities. High-quality bonds would be supported by flight-to-quality flows, resulting in lower yields (particularly on German bonds). And look for prices to fall and risk spreads to widen on bonds issued by European peripheral nations such as Italy, Portugal and Spain.

On the currency front, the euro will probably come under pressure, too, exacerbating the recent weakening to levels not seen in 11 years.

Greek markets are likely to be subjected to the greatest pressures, including a notable widening in risk spreads on sovereign and bank bonds. The question is whether this also translates into a significant pick-up in withdrawals by residents of bank deposits as well as capital flight. If it does, Greek politicians would need to quickly take major steps to counter the threat of cascading market dislocations.

Q: Is a Grexit inevitable?

A: No. To reduce the risk, Tsipras would need to embark quickly on a "Lula pivot." That is, he will need to assure markets that the relaxation of austerity would be accompanied by a big push on structural reforms, that the alleviation of the debt burden would be pursued in an orderly and negotiated manner, and that he is willing to engage in constructive discussions with Germany and other European partners.

Q: Are there broader implications?

A: Yes. The outcome of the Greek elections is indicative of a broader political phenomenon in Europe that involves the growth of non-traditional parties. Fueled by concerns about disappointing growth, unemployment and social issues, it is powered by large-scale dissatisfaction with the established political order. And it isn't limited to the peripheral economies.

Mohamed A. El-Erian is the former CEO and co-CIO of PIMCO. He is chief economic advisor to Allianz, chair of President Obama’s Global Development Council, and author of the NYT/WSJ bestseller “When Markets Collide.”

Follow him on Twitter, @elerianm.

Tuesday, January 27, 2015

Will European Stimulus Work?

John Hussman: Is Q-ECB A Favorable Development?

Jan. 26, 2015 3:45 PM ET  |  1 comment  |  Includes: FXE, IEV

Excerpt from the Hussman Funds' Weekly Market Comment (1/26/15):

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Last week, the ECB announced that it will begin a new program of quantitative easing on March 15 – a delay that allows plenty of time for various rugs to be pulled out, if the experience of recent years is informative. Assuming that the program proceeds as announced, the ECB envisions bond purchases of 60 billion euros per month. Fully 92% of these purchases must be made by the central banks of individual countries in the Eurosystem, with the ECB sharing the risk of losses on only 20% of it (12% being investment-grade institutional debt, and 8% being the sovereign debt of Euro-area countries). This was essentially as expected, but - thus far - without an option for national central banks to treat their share of purchases as discretionary. I still suspect that this shoe will drop in the weeks ahead, but there's actually a much more important factor driving our outlook.

Is Q-ECB a favorable development? With regard to the stock market, our immediate response is to examine market internals, credit spreads, and other measures that provide information about the risk-preferences of investors. The difference between an overvalued market that continues to advance, and an overvalued market that drops like a rock, is primarily determined by those risk-preferences. For now, we observe no meaningful evidence that investor preferences have shifted back to risk-seeking.

Put simply, quantitative easing “works” to inflate the prices of risky securities only to the extent that low-interest, default-free liquidity is viewed as an inferior asset compared to risky securities. We’re not seeing evidence of that to an extent that defers our concerns about extreme overvaluation, overbought market action, overbullish sentiment, widening credit spreads, a flight-to-safety in Treasury yields, and weakness in oil and industrial commodity prices that is consistent with an abrupt shortfall in global economic activity.


Recall, for example, that from the beginning of 2011 through March 2012, the ECB expanded the monetary base by 1.2 trillion euros. Linear thinking might lead one to expect that the value of the euro deteriorated sharply during this period. It did not. Similarly, from October 2010 when the Federal Reserve launched QE2 through September 2014, the U.S. monetary base expanded by more than $1.4 trillion. This might lead on to expect that the U.S. dollar index deteriorated during this period. It actually rallied considerably. Currencies frequently overshoot, and in the present case, they have overshot a great deal.

It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we're seeing an abundance of what we call "leveraged mismatches" - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch..

Warning to Dip Buyers


Today’s “Dip” Is A Warning—-Get Out Of The Casino!

by David Stockman • January 27, 2015

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Shortly after today’s open, the S&P 500 was down nearly 2% and off its recent all-time high by 3.5%. But soon the robo-machines and day traders were buying the “dip” having apparently once again gotten the “all-clear” signal.

Don’t believe it for a second! The global financial system is literally booby-trapped with accidents waiting to happen owing to six consecutive years of massive money printing by nearly every central bank in the world.

Over that span, the collective balance sheet of the major central banks has soared by nearly $11 trillion, meaning that honest price discovery has been virtually destroyed. This massive “bid” for existing financial assets based on credit confected from thin air drove long-term bond yields to rock bottom levels not seen in 600 years since the Black Plague; and pinned money market costs at zero—-for 73 months running.

What is the consequence of this drastic financial repression along the entire yield curve? The answer is bond prices which keep rising regardless of credit risk, inflation or taxes; and rampant carry trade speculation that can’t get out of its own way because  central banks have made the financial gamblers’ cost of goods—the “funding” cost of their trades—-essentially zero.

Needless to say, this is all too good to be true because it has generated humungous funding mismatches. That is, on the warranted word of central bankers—-who are petrified of a Wall Street hissy fit in any event—-speculators have funded long-term debt and equity securities with overnight money which must be rolled every day. This “works”, of course, until the carry-traders are hammered by a sudden, powerful and unexpected shock owing to either a sharp drop in the price of their “long” asset or spike in the carry cost of their overnight funding.

Thus, the true evil of central bank “wealth effects” pegging of risk asset prices (i.e. the Greenspan/Bernanke/Yellen “put”) is not merely the undeserved windfalls which accrue to the financial asset owning households at the very top of the income ladder. An equally baleful effect is that it suppresses fear of risk and eventually drives it from the casino entirely.

This destruction of fear is commonly measured by the VIX index, but that’s only the tip of the iceberg. Where the amnesia really shows up is in the carry trades—-most of which materialize in the options and futures markets, and which are fabricated or “bespoke” in the meth labs of Wall Street trading houses.

Notwithstanding a few short, sharp stock market corrections in recent months, the six-year central bank suppression of fear remains largely in tact. Looked at in terms of the trading charts since the March 2009 bottom, the buy-the-dips crowd remains supremely confident that the bull is still running up hill.

Accordingly, beneath the parabolic run pictured above, there has set-in a monumental spree of speculation and leveraged gambling that makes Wall Street’s pre-crisis plunge into toxic mortgage deals look like a Sunday School picnic.

Just last week, for example, after the Swiss National Bank’s surprise abandonment of the 120 peg, the CHF soared by 40%. Literally within minutes they were carrying currency traders off the field on their shields because they had been leveraged 50:1.

It might be asked who in their right mind would fund currency cowboys on 2% margin? The answer, of course, is nearly every  major dealer in the casino! But that’s just the herd at work.

The truly scary part is the reason for this collective recklessness. Currencies move by inches, not yards and never miles at a time, the Wall Street apologists declaimed. And, besides, the SNB had double-promised that it would never, ever remove the peg.

So fast money traders borrowing short in CHF and speculating long in Italian 10-year bonds thought they were shooting fish in a barrel.  Mario Draghi had guaranteed that he would buy their bonds yielding 1.95% at the time at ever rising prices; and on the funding side, the SNB had pledged that speculators could borrow virtually zero carry costs up to 95 cents on the dollar for so long as they pleased. Pocketing a 190 basis point spread plus capital gains on virtually no capital invested, speculators were truly laughing all the way to the bank

So last Thursday’s CHF massacre happened because it was not supposed to happen! That is, financial markets are no longer honest, rational, stable or independent; they are merely gambling hall subsidiaries of the central banks where most of the punters still believe that the latter will not permit risk asset prices to fall for more than a day or two or funding costs to rise unexpectedly.

The reason that the casino has become so stupendously dangerous, therefore, is that the whole financial house of cards—including vastly over-valued asset prices of every kind and insanely extended leverage like the CHF currency speculations—all depend on maintenance of confidence in central bank competence and omnipotence.

But it’s not so—not by a long shot. Last week’s CHF episode rang the bell. And as the cascades of collateral damage begin to flow in, it will become harder and harder to hide the truth—-even from the heedless gamblers in the casino.

The next layer of leverage behind the currency speculators in the CHF trade was comprised of households all over central and eastern Europe who took out mortgages denominated in Swiss francs owing to dirt cheap interest rates. Suddenly, the amount they owe is soaring in local currency, and banks and government throughout the region are scrambling to forestall a disaster.

In the case of Poland, for instance, outstanding CHF mortgages total $36 billion or nearly 8% of GDP. On a US scale basis, that would be the equivalent of $1.5 trillion in home mortgages that suddenly soared in repayment costs.

Not surprisingly, the allegedly “conservative” government of Poland has insisted that zloty-based homeowners will be protected from the CHF flare-up, but that the government will not bear the cost. That is, the banks are going to be hammered by state regulators just like they were in Hungary awhile back.

One thing leads to another and ultimately to a daisy chain of wreckage when honest “price discovery” is destroyed by the central banks. Even now several Austrian, Italian and other European banks, which plunged into the CHF lending business, are on the rocks.

It is only a matter of time before one “surprise” after another turns up owing to the speculative mania of the last six years. And it is virtually certain that the central bankers who have presided over this fiasco will be caught as flat-footed as they were during the sub-prime fiasco.

In a nearby re-post from the New York Times this morning (Wake-Up Call To Yellen: Here’s How To Buy A BMW On Food Stamps—–Soaring Auto Junk Loans), we suggested that Janet Yellen needed a wake-up call. The NYT obsessively “fact checks” everything—so here’s the real deal. The auto junk paper market is so out of hand that an unemployed NYC food stamp recipient recently got a $30,770 loan to buy her daughter a BWM 328xi so that she could drive to work… style, apparently.

This beneficent mom told no lender or dealer a lie. As related by the NYT:

Ms. Payne went with her daughter to a dealership that arranges loans for Santander and other auto lenders to buy the car. She said an employee at the dealership in Great Neck, N.Y., assured her that, even though she was on food stamps, she could afford the loan. At the time, Ms. Payne said she thought she was co-signing the loan with her daughter.

“I looked him in the eye and said, ‘I don’t have any income,’ ” said Ms. Payne.

Needless to say, Santander Consumer USA is a pure artifact of financial engineering deeply subsidized and coddled by the Fed. As a former LBO and now IPO, it is overwhelmingly funded with securitized auto paper. That is, it is able to fund BMW loans to mom’s on food stamps because it can bury them in massive baskets of loans that are then sliced and diced by Wall Street, and sold to investors desperate for “yield”.

If that sounds familiar—it is. Yellen did not see it coming last time, nor did the buy-the-dip bulls who claimed that the market was “cheap” at its peak in October 2007.

The S&P was then trading at 20X reported LTM earnings. That’s where it is today, as well.

But there is one huge difference. This time the casino gamblers have been playing with free money for 73 months running.

Accordingly, the joint is an accident waiting to happen. Forget the dip. Get out of dodge.

Thursday, January 22, 2015

Will C wave get back to 1254?

I think not.  The fireworks are over.  The Central Bank believers have had their moment in the sun.  Abe and Japan have been fighting deflation for years with "stimulus" and where is 2% inflation in Japan?  It takes time for truth to sink in.  What Dragui is doing is third generation failure.  Stimulus is impotent next to vast amount of debt.  Sooner than later the markets will reflect this policy.  In Elliott wave terms, the conditions of wave 2 are satisfied--buy TVIX!  Be careful and Good luck.

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Tuesday, January 20, 2015

No decision is easy

It is never easy to figure out what the hell is going on--still, fools like me try.  I think, if you look at chart below, that we are tracing out 1s and 2s--1519 being the top--724 wave 1--1254 wave 2--822 another smaller wave 1--1052 wave 2--773 a yet smaller wave1 and MAYBE 880 wave2.  IF this true, the next wave down is right in front of us.  Of course there are other options--i.e. 1254 could be a wave A and 773 could be wave B, which means wave C could go back to 1254.  So be careful.  Generally, I'm betting on first option--but keeping my finger on trigger.  GL

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Friday, January 16, 2015

Still sticking with my TVIX

The bulls know if they don't hold the line today all hell will break out.  I'm betting on hell.  GL

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Tuesday, January 13, 2015

Monday, January 12, 2015

Beat the Bull

Beat the Bull

Game ends in :

290 days, 22 hours, 48 minutes

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