European Union : The Risk of Splitting Is High

On March 25, 1957 in Rome, two representatives each from West Germany, Italy, the Netherlands, Belgium and Luxembourg sat around a large, fancy table, took out their large, fancy fountain pens and signed a rather large and fancy document that was rather grandly known as The Treaty of Rome. At a stroke the European Economic Community (or 'Common Market') was established (along with the European Atomic Energy Commission those Europeans do LOVE a commission), the purpose of which was to gradually eliminate trade barriers between member nations and introduce common policies for agriculture, transportation and economic relations between both the member states and those outside the Treaty.

In 2007, on the 50th anniversary of the signing of the treaty, one of the lawyers responsible for its drafting, Pierre Pescatore, told the BBC that all was not as it seemed that day:

"They signed a bundle of blank pages... The first title existed in four languages and also the protocol at the end; nobody looked at what was in between."

A fitting start for what would eventually morph into the European Union as we know it today. The reason for the hastiness in getting an 8-inch high stack of papers signed by the dignitaries present? Fears that General de Gaulle could soon return to the French presidency and block the treaty.

And so it began.

But the origins of the Treaty of Rome were founded in the Treaty of Paris which created the European Coal and Steel Community (ECSC) 6 years earlier, in April 1951, in an attempt to bind together a continent rent asunder by the horror of WWII. The architects of this political construct were a pair of Frenchmen, Robert Schuman (the French Foreign Minister) and Jean Monnet (a civil Servant), and their idea was to tie together the coal and steel industries of France and Germany under a High Authority that would allow other European countries to join should they wish to do so, thus reuniting the war-torn countries of Europe and forever banishing the chances of another conflict between them. Italy and the Benelux countries joined the negotiations and, on April 18 1951, the Treaty was signed.

The intervening 6 years between the signing of the Treaty of Paris and that of Rome, were a sign of what was to come in Europe as Commission after Commission, several Assemblies, a couple of Communities and a bunch of Committees were formed and countless Reports written to be presented at numerous Conferences in an attempt to further the idea of a united and peaceful Europe. This passage does a very nice job in outlining just how bureaucratic Europe was, even in its nascence:

(Wikipedia): The Spaak Report drawn up by the Spaak Committee provided the basis for further progress and was accepted at the Venice Conference where the decision was taken to organise an Intergovernmental Conference. The report formed the cornerstone of the Intergovernmental Conference on the Common Market and Euratom at Val Duchesse in 1956.

The outcome of the conference was that new communities would share the Common Assembly (now Parliamentary Assembly) with the ECSC, as it would with the Court of Justice. However they would not share the ECSC's Council of High Authority. The two new High Authorities would be called Commissions, this was due to a reduction in their powers. France was reluctant to agree to more supranational powers, and so the new Commissions would have only basic powers and important decisions would have to be approved by the Council

The Treaty of rome would form the foundation for what would later become the EU that we know and love 50+ years on in all its bureaucratic glory and amongst those original signatories as well as those that abstained are the clues as to just how important a part the idea of 'Europe' was and is to various countries.

Case in point: the Netherlands and the United Kingdom.

The Dutch were signatories to the Treaties of Paris and Rome and to every major European Treaty since and are staunch supporters of a unified Europe as well as having a reputation for being amongst the more fiscally disciplined members of the EU. When Greece and, latterly, Spain prove to be a little recalcitrant when it comes to balancing the cheque book, Europeans shrug and express dissatisfaction but little surprise. When the Dutch announce they will be a little short in meeting their fiscal targets, you can bet your bottom euro that eyebrows will be raised.

A mere six months ago, in September of 2011, Dutch Prime Minister Mark Rutte and his Finance Minister, the delightfully-named Jan Kees de Jager, penned an opinion piece in the Financial Times that was entitled 'Expulsion From The Eurozone Has To Be The Final Penalty' in which they laid out their views on fiscal profligacy amongst the more prodigal (Southern) states in the union. Right from the outset, Rutte and de Jager were in no mood to take prisoners:

(FT): The eurozone is in stormy waters. The turmoil on the financial markets shows no sign of abating. Tackling the debt crisis is complex and calls for several immediate measures. But amid our hectic day-to-day efforts to fight the crisis, we need to ask how we can guarantee a stable euro and prosperous Europe in the long term.

What is to be done? Our answer is that we must anchor the agreements we have made more firmly and take tougher action to enforce them.

Tough talk indeed from two hitherto bit-part actor in the Merkozy/Shaueble/Juncker Show.

Clearly warming to the sudden glare of the spotlight, Rutte and de Jager took off their jackets, loosened their ties and rolled up their sleeves:

...(b)ut the main cause of the current problems is that some countries played fast and loose with the very rules designed to guarantee budgetary discipline. Other countries allowed that to happen, and this took place at a time when the financial markets were being rapidly integrated. The result is that acute financial problems can spread from one country to another at lightning speed.

So what is to be done now? We must return to the anchors of the eurozone. The rules are still valid, but all participants must abide by them. If the eurozone is to survive in its present form as a stable currency union that supports the internal market and our prosperity, there needs to be radical break with the past. Ah yes, but it's all very well proposing a 'return to the anchors of the eurozone', but practicallyspeaking, what does that entail, we wondered?

Well, we weren't left wondering for long:

What we propose is twofold, and builds on the ideas already put forward by the French and German leaders. First, we call for independent supervision of compliance with the budgetary rules. Second, we believe that countries that systematically infringe the rules must gradually face tougher sanctions and be allowed less freedom in their budgetary policy.

Independent supervision requires a commissioner for budgetary discipline. His or her powers should be at least comparable to those of the competition commissioner. The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits. The first step is to require the country concerned to make adjustments to its public finances.

If the results are insufficient, the commissioner can force a country to take measures to put its finances in order, for example by raising additional tax revenue. At this stage sanctions can also be imposed, such as reduced payments from the European Union Cohesion and Structural Funds, or higher contributions to the EU budget. The final stage will involve preventive supervision, and the budget will have to be approved by the commissioner before it can be presented to parliament. At this stage, the member state's voting rights can also be suspended.

Countries that do not want to submit to this regime can choose to leave the eurozone. Whoever wants to be part of the eurozone must adhere to the agreements and cannot systematically ignore the rules. In the future, the ultimate sanction can be to force countries to leave the euro.

Bravo! Finally, amidst the back and forth and contradictory statements of the main players on the EU stage, some clear, concise and sensible steps proposed by one of Europe's mainstays.

But September was a LONG time ago and a matter of days after Spain's unilateral decision to abide by its own budget deficit target of 5.8% as opposed to the mandated 4.4% was announced (and a compromise quickly reached by EU finance ministers who took Senor Rajoy at his word that the 2013 target of 3% would still be met.....<blink>), rumblings began about the likelihood of the Dutch taking on the role of (unlikely) Euro Bad Boys:

(The Economist): It was a far cry from the bright autumn day in 2010 when the smiling leaders of the three right-of-centre Dutch parties came together to announce a deal to run the country. The Liberals, the largest party, would form a minority coalition with the Christian Democrats. Outside support from Geert Wilders's Freedom Party would give the government a slim majority in parliament. This year, on a foggy March morning, the same three leaders looked sombre in the face of a daunting task: how to cut another €9 billion ($12 billion) from the budget for 2013 when the economy is already in recession.

The extra cuts are needed to deal with what forecasters say would otherwise be a 2013 budget deficit of 4.5% of GDP, way over the 3% limit enshrined in the euro zone's new fiscal pact. Yet Mr Wilders is likely to object. Indeed, he is in an objecting mood: this week he presented a report commissioned from British researchers making the case for Dutch withdrawal from the euro. Mr Wilders, who wants a referendum on the matter, claims that the country has not profited and may even have lost from its membership of the single currency.

Ten days after The Economist published that article, the Dutch officially jumped the shark:

(UK Daily Telegraph): Just a few weeks ago officials from Madrid begged in Brussels for their fiscal targets to be relaxed they said the current ones were "suicidal" for Spain. Jan Kees de Jager, the Dutch finance minister, was among them who demanded the answer to be "neit".

So now fiesta, forever, all night long today the Netherlands Bureau for Economic Policy Analysis (CPB) said the country's budget deficit could increase to 4.6pc of GDP during 2013 and 2014. The level drives a coach and horses through the fiscal pact which is less than three weeks old.

On tend à l'oublier mais la BCE est occupée à gonfler une bulle boursière d'anthologie

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Il y a quelques mois, le grand public ne savait pas ce qu'étaient les dépôts overnight des banques européennes à la BCE. De même les opérations de refinancement de ces mêmes banques auprès de la BCE n'intéressaient que les étudiants en macro-économie et les spécialistes de la politique monétaire des banques centrales. Aujourd'hui, les journaux grand public nous en parlent. 


Revenons un peu sur ces notions car je ne suis pas bien sûr que tout soit clair, avant de passer aux conséquences sur les marchés.

Le ratio de la "normalité du système" est au plus bas
. On peut dire qu'il existe, pour simplifier, les opérations normales de refinancement que l'on appelle les MRO (pour main refinancing operations) et des opérations "anormales" de refinancement appelées les LTRO (pour long terme refinancing operations).

Le ratio des MRO/LTRO nous permet de voir si le marché monétaire est dans un fonctionnement normal ou complètement anormal. 

 De mars 2008 à novembre 2011, la masse de liquidités allouée aux banques européennes lors des opérations d'appels d'offres de la BCE s'est située, en moyenne mensuelle, autour de 565 milliards d'euros. Mais la répartition est complètement atypique : 152 milliards sont octroyés à travers des opérations normales de refinancement (les MRO) et 413 milliards à travers des opérations de refinancement plus longues de repos extraordinaires sur des durées de 1 à 12 mois (les LTRO). Soit une répartition MRO/LTRO de l'ordre de 27%/73%. Historiquement, sur la période 1999-2007 avec un fonctionnement normal du marché monétaire de la Zone euro, cette répartition était de l'ordre 90%/10% !!!"
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Après le LTRO trois ans du 21 décembre 2011 qui avait permis de servir un montant gigantesque de 489 milliards aux banques au taux de 1%, celui du 29 février 2012 a alloué un montant record, toujours à trois ans et toujours à 1%, de 529,5 milliards d'euros à 800 banques européennes. En termes de liquidités nettes allouées, cet appel d'offres représente autour de 300 milliards d'euros (compte tenu des remboursements d'anciens appels d'offres), ce qui devrait porter le bilan total de la BCE à environ 3 000 milliards d'euros.Les marchés monétaire et bancaire ont bel et bien quitté les rails de la normalité puisque les LTRO en question portent sur des montants colossaux et offrent de la liquidité sur des durées de plus en plus longues (trois ans pour ces deux opérations). 


Si un jour la BCE met en place un LTRO à cinq ans, il faudra alors comprendre que nous sommes rentrés dans une période de crise durable et que nous ne reverrons pas avant longtemps un retour à la normalisation de la politique monétaire.

Le marché interbancaire reste complètement bloqué



Mais avec cet afflux de liquidité, on pourrait penser que le marché interbancaire s'est calmé et assaini. PAS DU TOUT ! Les dépôts overnight vont de record en record, ce qui montre que les banques n'ont absolument plus confiance en elles.


Aujourd'hui, la situation est encore plus aberrante :

- la corrélation LTRO/explosion des dépôts overnight se confirme depuis la mise en place du second LTRO massif à trois ans le 29 février dernier. Nous avons franchi de nouveaux records : 776 milliards d'euros déposés pour la journée du 01/03/2012 (comme par hasard lendemain de l'appel d'offres du 29/02/2012) et nouveau record à 827 milliards d'euros le 05/03/2012 ;

- la liquidité stockée à la BCE au jour le jour par les banques bat record sur record alors qu'elles ne sont rémunérées qu'au bas de la fourchette des taux directeurs de la BCE, à savoir 0,25% aujourd'hui. Les banques préfèrent donc "momentanément" perdre de l'argent avec un portage négatif de 0,75%. L'évolution anormale -- pour ne pas dire absurde -- du comportement des banques en matière de stockage de la liquidité à la banque centrale est le reflet du comportement tout à fait "anormal" (mais souvent nécessaire) de la banque centrale en matière d'injections de liquidité.

Que faudrait-il alors pour que les marchés interbancaires re-fonctionnent ? 


Chacun dira qu'il faudrait que la confiance revienne enfin. Car nous nous trouvons dans une situation de blocage de circulation de la liquidité. Donc déjà, au lieu de parler de crise de liquidité, on devrait parler de crise de confiance, car la liquidité, au sens macro-économique, n'a jamais été aussi abondante. (Il suffit de regarder l'évolution du bilan de la BCE avec l'extraordinaire croissance de ce que l'on appelle la base monétaire, définie comme la somme de la monnaie émise et des réserves bancaires.) Mais chacun sait que la confiance ne se décrète pas.


Attention à la création de bulle sur les actions
Il faudrait donc que les responsables politiques arrêtent de réclamer à longueur de journée à la BCE qu'elle rachète les dettes d'Etats insolvables, qu'elle prenne ses pertes sur les dettes les plus pourries ou qu'elle mette en place des LTRO tous les deux mois pour inonder les marchés de liquidités. Evidemment, c'est tout le contraire qu'ils font.

 Certes, cet afflux de liquidité fait monter les marchés actions et autres actifs dits risqués -- ce qui endort tout le monde à court terme --, mais on ne résout rien. Pire, on crée les conditions de nouvelles bulles d'actifs financiers et donc de nouvelles crises.

Les investisseurs qui sont payés pour investir et pour être suffisamment benchmarkés vous diront qu'il faut bien investir quelque part toute cette liquidité BCE, surtout que le carry (différence entre le rendement des actifs achetés et le coût de la liquidité BCE empruntée) est important. 




Je ne rappellerai jamais assez que quand on se sent obligé d'investir pour des raisons réglementaires (améliorations de ratios), comptables (absence de mark to market) ou psychologiques (on fait comme tout le monde et on ne veut pas manquer le prétendu rally), eh bien l'on participe à la création de bulles dont l'éclatement aura vite fait d'anéantir le carry attractif de stratégies d'investissement court-termistes. 


Rappelez-vous la crise obligataire de 1994, la crise des émergents 1997-1998, la bulle Internet de 1999, la bulle des titrisations synthétiques de 2006-2007, la bulle sur des dettes souveraines périphériques, sans parler d'accidents spéculatifs ponctuels sur d'autres classes d'actifs... Autant de bulles qui ont fini ou finiront par éclater.

"This Time It's Different?" - David Rosenberg Explains The Melt Up And The Latent Risks


The market is ripping. That much is obvious. What some may have forgotten however, is that it ripped in the beginning of 2011... and in the beginning of 2010: in other words, what we are getting is not just deja vu (all on the back of massive central bank intervention time after time), but double deja vu. The end results, however, by year end in both those cases was less than spectacular. In fact, in an attempt to convince readers that this time it is different, Reuters came out yesterday with an article titled, you guessed it, "This Time It's Different" which contains the following verbiage: "bursts of optimism have sown false hope before... Today there is a cautious hope that perhaps this time it's different." 
http://www.reuters.com/article/2012/03/19/economy-global-weekahead-idUSL2E8EGGCU20120319


So the trillions in excess electronic liquidity provided by everyone but the Fed (constrained in an election year) is different than the liquidity provided by the Fed? Got it. Of course, there are those who will bite, and buy the propaganda, and stocks. For everyone else, here is a rundown from David Rosenberg explaining why stocks continue to move near-vertically higher, and what the latent risks continue to be.


UP, UP AND AWAY!
It has been quite a move up in the U.S. equity markets. The S&P 500 just completed its fifth straight week of gains, the longest streak of the year. From the closing low of last October 3rd, the index has rallied a breathtaking 28%. So far in 2012, the Dow is up 8%, the S&P 500 is up 12% and the Nasdaq is up 17%. Breathtaking to say the least.
What accounts for all this optimism:


The European LTRO program has obliterated financial tail risks in the region.
-The successful second bailout of Greece.
-Chinese inflation down to 3.2% has fuelled hopes of monetary ease.
-Perceptions that that the U.S. economy is reaccelerating — all the Fed had to do was change "modest" to "moderate" (plus the ECRI leading --index has improved to a seven-month high).
-Tentative signs that the secular headwinds are subsiding — housing, credit, employment, local government fiscal restraint.
-Oil prices stabilizing with a calm emerging with respect to Iran.
-Technically, the market is making higher highs and higher lows — a confirmed uptrend.
-Global earnings estimates are no longer going down.
-Financial conditions are easing with corporate bond spreads narrowing sharply.
-The success evident in the Fed's latest banking sector stress tests — bank
-Stocks advanced 9% last week.
-The snapback after the early-March triple-digit decline in the Dow — the first of the year has emboldened the 'buy the dip' psychology.


What are the risks?
That we wake up some time in the second quarter and discover that the economy may well have contracted if not for the extremely warm weather we had in the opening months of the year, which provided a huge, if not unprecedented, skew to the data (see Weather Alert: Why the Sun Could Be Bad for Risky Assets on page 14 of the weekend FT).


Remember —January and February were both 5 degrees warmer than usual. For months usually beset by winter weather, the seasonal factors attempt to correct for this by boosting the raw data, which at that time of year are about the lowest given that many folks are snowbound. If not for the seasonal adjustment process, we would only be able to compare the data on a year-to-year basis because there is no apples-to-apples comparison between economic activity in January and what you would typically see in May. So in January and February in particular, the raw nonseasonally adjusted basis get a "bell curve" like we would in school in a tough mid-term exam. The problem this time is that January and February were downright balmy. This wreaked havoc on all the data, especially housing, employment and spending.


We estimate that over 40% of the job gains were weather-related, taking both months into account. We also know that productivity is contracting and 100% of the time in the past decade, companies responded by curbing their hiring. So taking the weather effect into account and the reversal this will have in coming months with respect to the data impact, combined with the likely cooling-off in hiring plans already evident in many surveys, and we could well see the nonfarm payroll numbers get cut in half and come in closer to 100k than 200k as we move into the spring and summer months.


This is not a disaster story at all, but recall that it was this sort of sluggish backdrop that brought at least a temporary end to the equity market rally last year and forced the Fed into more intervention in support of the bond market. Don't write off QE3 just yet. On top of all that, we do expect to see the trade deficit continue to widen as the European recession and Asian slowdown hit the U.S. shores, and contraction in net exports is going to very likely emerge as a big headwind for the GDP data in the next few quarters. In fact, it is only now starting.


And by the time it subsides later this year, households and businesses will be preparing for next year's massive tax grab. If logic prevails, this preparation is probably going to include a move to boost savings and raise liquidity (ostensibly at the expense of spending growth — expect the retailers to head into the 2012 holiday season lean and mean).


The weather also had a direct impact on spending by releasing more than $30 billion in recent months in terms of household cash flow from a radically lower utility bill. Absent that de facto tax cut', and retail sales would have stagnated over the past three months as opposed to rising at what appears to be a healthy 8% annual rate. This will subside now and we have not yet seen the full brunt of $4 gasoline either — many a commentator has stated that the consumer sector is less vulnerable now and there is less of a "shock factor" this time around. We shall see about that.


As it stands, nominal spending at the pumps is at its lowest level since last June — we have not seen the draining impact on household cash flows yet. But we did see the impact on University of Michigan consumer sentiment, which surprised to the downside in a month that saw the Nasdaq head to 12-year highs and employment rip by more than 200k — going from 75.3 on sentiment to 74.3 is largely explained from the rise in gasoline prices.


The IBD/TIPP economic optimism index also slumped to 47.5 in March from the one-year high of 49.4 in February. The components of the recently released March survey data from NY Fed Empire and Philly Fed looked on the soft side, especially order books and production plans. This has also shown up in a recent reversal in President Obama's approval ratings — so the gasoline impact, with a lag, is only now starting to rear its ugly head.


Keep in mind that even with WTI consolidating, the prices that consumers pay at the pump are on a steady march higher — up 31 cents in the past month to an average of $3.82 a gallon (nationwide) — but already nearly one-third of Americans are paying $4 or higher. What does this then do to the GDP price deflator and hence to real growth — well, just have a look and see what happened in the first quarter of 2011. It's called stall speed, not escape velocity.


It is unclear just how stable things are in Europe. The ECB has papered over the problems for now but has jeopardized the sanctity of its balance sheet at the same time. The U.K. is seemingly on the precipice of losing its AAA rating status. Then we have Asia. India in a full-blown economic downturn and its banking system is in disarray. And the Chinese economy is now slowing down at a pace we have not seen since the 2009 hard landing. As the U.S. market has been surging, the MSCI China index sagged 2.7% in March —not a constructive signpost for the commodity complex. While this has caused the TSX index to lag the S&P 500, the Canadian dollar has managed to stay above par, in part because the rate-hike that is now being priced into the local bond market (Canadian 2-year note yields now offer a hefty 90 basis point premium to the U.S. comparable).


Back to China for a minute — the country's A shares are down 3.3% in the past month while the H shares have gained 18%. The Chinese stock market now trades at a 9.9x forward multiple, versus a 15-year average of 12x. So the market there is well valued and the A shares (those listed in China; the H shares trade in Hong Kong) may well be poised to play some catch-up here. Something we have noticed and are definitely keying on.


As for the overall market, our CIO, Bill Webb, likes what he sees in the form of the lingering wide gap between the prevailing return on capital and the cost of capital. Screening for GARP (Growth at a Reasonable Price) and yield remains in vogue. While we are involved in those slices of the market, the major averages have managed to rally to levels above the year-end targets the consensus established at the start of 2012 (of 1,355 on the S&P 500), as was the case this time last year. The S&P 500 has actually risen as much in 2012 so far as it did at this stage in 1998 and when you consider how benevolent 1998 was in terms of fiscal, monetary and economic stability just three years after the advent of the Internet, how can anyone really compare the two years?


What we are seeing unfold really is a liquidity-induced rally that is built on a lot of hope. Neither were required in 1998 — the Fed kept a neutral policy in place for most of that year and there was no need for hope; the growth in the economy was organic and self-sustaining without unprecedented government assistance. Even then, we had a near-20% correction that summer. Nothing moves in a straight line indefinitely and while Bill and the investment team have been tactically bullish for most of this year, we are feeling the need to dial back the risk somewhat near-term given the high levels of complacency and the fact that valuation is less compelling than it was four-six months ago.


For example, the FT cites research showing that the S&P 500 is now two standard deviations above its 50-day moving average, which is far beyond the norm of even an overbought market and in the past this has proven to be a pretty good 'chill for now indicator. Breadth has also deteriorated of late as the market has scaled new highs, which is often a technical sign that an intermediate top is at hand.


In the name of being 'tactical' and 'nimble', which is critical in today's rapid-fire volatile backdrop, getting a little more defensive here is not a bad idea at all. We also remain long-term bulls on gold and commodities, but with the U.S. dollar breaking out and the Chinese data coming in softer than expected for the most part, we have taken on a less ebullient posture for the time being and plan to get more involved at better pricing levels once this corrective phase runs its course. The mining stocks have broken below key support levels here and over the near-term, the chart points are to be respected.


Also keep an eye on the bond market, which has become a bit unglued in recent weeks. Of course, this happens at least four times a year so hiccups like this are really par for the course. And as usual, we are hearing once again how we should all be prepared for the end of the secular bull market in Treasuries. These Wall Street reports come out at least once per year, the latest coming from UBS strategists. When will these people ever learn? In any event, it has been a rocky road as the 10-year note yield spiked 27 basis points last week to a five-month high of 2.3%. This is all part of the global risk-on trade because German bunds sold off just as much, and other assets that tend to do better in risk-off environments, such as gold, also suffered setbacks (the yellow metal lost S50/oz over the week).


Bond yields are not yet at a level to upset the equity market apple cart, especially with the yield on the banks improving so much in one fell swoop. But if we approach 3% on the 10-year note then we could start to see the stock market pay some attention — it's not so much the level, as the change, and at a time when gasoline prices start to really pinch the consumer (driving season is right around the corner), rising borrowing costs are not going to provide a very constructive backdrop.

INVESTLOGIC : UPDATE MARCH 2012

If short-term economic rebound seemed to have begun in the United States, electoral year obliges, it is only hoped at the moment in Europe. The decline recorded in last quarter of year 2011 will be undoubtedly confirmed during the first quarter 2012, what technically at least will confirm the recession for the Old Continent. But the hope of a stabilisation of economic activity for the second half is allowed thanks to the action of the monetary authorities.

The European central bank decided since the beginning of the year to join the supporters of "Expansionists". It so injected liquid assets in great numbers to stimulate growth, and especially, to contain systemic risks and to lower the effects of austerity.

Markets have already marked their enthusiasm on this orgy of liquidity, all the more as the valuation are still attractive. Side benefits, firms succeeded in supporting their margins at high levels by playing on the job flexibility.

It is therefore mainly the interest rates at their lower levels which support the tactical rebound of stock markets.

Aggressive monetary policies of central banks could however draw away eventually a loss of value of the fiat currencies.  The only asset which allow to preserve the intrinsic value of the capital in the course of time remain gold. We think that current correction is a period of accumulation for the precious metal even if we forecast that gold shouldn't record a strong bullish movement in 2012.

On emergent markets, recorded disappointment the last year could make room for a renew interest in 2012. We support our overexposure on EM, deducing that their predominance with medium to long terms (3-5 years) should increase.

On the forehead of currencies first, the loss of confidence contrary to the main paper currencies (USD, EURO) and the ineluctable evolution of balances of economic powers  favors emerging currencies in the medium term. In this context, Asian currencies appear to us be attractive positions.

Let's note that the management of the public finances is of better quality than that the one recorded by the developed countries, a an improvement of deficit of current accounts, a strengthening of the local capital markets and the needs of financing of the emerging companies support the regional public and private debts. We recommend to keep a total bond allocation in Emerging countries on horizon of 24 months.

This good health will reverberate on the economic dévelopement and will reinforce the weight of these countries in worldwide economy, after the last period of higher risk aversion. Nonwithstanding the volatile character which shouldn't be ignored, an exposure in emerging  equities seems justified.

Si la reprise conjoncturelle semble amorcée aux Etats-Unis, année électorale oblige, elle n’est pour l’instant qu’espérée en  Europe. Le déclin enregistré au dernier trimeste de l’année 2011 sera sans doute réitéré durant le premier trimestre 2012, ce qui techniquement du moins confirmera l’entrée en récession du Vieux Continent. Mais l’espoir d’une stabilisation de l’activité économique pour le second semestre est permis grâce à l’action des autorités monétaires.

La banque centrale européenne s’est décidée depuis le début de l’année à rejoindre le cano des “expansionistes”. Elle a ainsi massivement injecté des liquidités pour relancer la croissance mais,et surtout, pour contenir les risques systémiques et amortir les effets de l’austérité.

Les marchés actions ont déjà marqué leur enthousiasme à cette fête de la liquidité, d’autant que bien des valorisation sont encore attrayantes. Côté bénéfices, les entreprises ont réussi à maintenir leur marges à des niveaux élevés en jouant sur la fléxibilité du travail.

C’est donc prinicpalement le maintien des taux d’intérêt à leur faibles niveaux qui soutien le rebond tactique des marchés boursiers.

Les politiques monétaires aggressives des banques centrales pourraient cependant entraîner à terme une perte de valeur de la monnaie fiduciaire. DAns ce cadre, le seul actif qui permette de préserver la valeur intrinsèque du capital au fil du temps reste l’or. Nous estimons que la correction actuelle est une période d’accumulation du métal précieux même si nous pronostiquons que l’or ne devrait pas enregistrer un fort mouvement haussier en 2012, alors que le US dollar retrouve ne certaine fermeté dans le rebond conjoncturel.

Sur les marchés émergents, la déception enregistrée l’année passée pourrait faire place à un nouvel engouement en 2012. Nous maintenons notre sur-exposition sur les EM, arguant que leur prédominance à moyen-long terme (3-5 ans) devrait s’accroître.

Sur le front des devises d’abord, la perte de confiance à l’encontre des principales devises papier (USD,EUR) et l’ineluctable évolution des rapports de forces économiqes militenten faveur d’une revaloraisation des devises émergents à moyen terme. Dans ce contexte, globalement les devises asiatiques nous apparaissent être des psostions raisonnables.

Notons que la maîtrise des finances publiques de meilleure qualité que celle affichée par les pays développés, une fragilité réduite sur le front des déficits des comptes courants, un renforcement de la profondeur des marchés de capitaux locaux et les besoins de financement des sociétés émergentes constiruent autant de soutiens pour les dettes publiques et privées régionales. Nous  recommmandons de maintenir une allocation obligataire globale dans les émergnets à horizon de 24 mois.

Cette bonne santé se répercutera sur le dévelopement économique et renforcera le poids de ces pays dans l’économie mondiale, après une période d’aversion plus sévère au risque. Nonobstant le caractère volatil qui ne doit pas être ignorer, une exposition en actions émergentes semble justifiée.

The market cheered up the good NonFarm Payroll figures. But will it last ?

Following the article in the Barron's The Worst of Times to Buy Stocks? stating  that conditions in today's market that presaged past plunges. A "perfect storm" lies ahead. 


The criteria being:

• the Standard & Poor's 500 trading at more than 8% above its 52-week exponential moving average

• the S&P 500 up more than 50% from its four-year low

• the "Shiller P/E," based on the cyclically adjusted trailing 10-year earnings, developed by Yale economist Robert Shiller, greater than 18; it's currently 22

• the 10-year Treasury yield higher than six months earlier

• the Investors Intelligence's bullish advisory sentiment over 47%, and bearishness under 25%; in the latest data, the numbers were 47.9% bulls and 26.6% bears

We looked at the Hussman fund's weekly market comment  and we found some interesting analysis which will point out to some less happy time in the second half and which to our 

opinion is more relevant that the various above mentioned criteria.

A week ago, Lakshman Achuthan of the Economic Cycle Research Institute reiterated his own case for an oncoming recession saying "Consider it reaffirmed." Achuthan observed that given a broad aggregate of GDP growth, real sales, personal disposable income, industrial production, and other measures, we've never observed a similar decline in year-over-year growth without seeing a recession. Note that Achuthan does not simply consider the extent of the decline from a growth peak, but instead defines a downturn based on what he calls the "three P's" - pronounced, persistent, and pervasive. On this feature of the data, we are in agreement with ECRI - we've observed a uniformity of recession warnings in a broad set of leading data that we simply haven't observed across history except in association with recession.

At the same time, we've also seen an improvement in some measures - particularly new claims for unemployment - where the extent of positive progress we've seen is not at all typical of pre-recession periods. Similarly, while year-over-year employment growth remains quite tepid, that growth rate has been rising rather than falling (though we also saw that just before the 1981-1982 recession). While we know that payrolls and new claims for unemployment are actually lagging indicators, not leading ones, we still generally see new claims for unemployment creeping higher before recessions, unlike today.

So from our standpoint, the essential question is whether the improvement in job growth negates the evidence from leading indicators, and from coincident indicators that are now at year-over-year growth rates also associated with oncoming recessions. As uncomfortable as it is to contemplate a renewed economic downturn, the weight of the evidence still leans to the leading indicators and coincident growth rates. Achuthan made this point very precisely, noting that "downturns in job growth lag downturns in consumer spending growth, which is very clearly in a downturn. That's the sequence: jobs growth follows consumer spending growth, not the other way around."

To illustrate this, the following chart shows how growth in disposable income, personal consumption, and payroll employment correlates with recession. Leading up to a recession, and even until about 5 months after a recession starts, the evidence from personal consumption growth swamps the evidence from payroll employment growth. The growth rate of disposable income also provides better leading evidence of recession risk than payroll growth.

 

Notice that the peak in the correlation profile for personal consumption leads the peak in the profile for payroll employment by about 5 months. This is exactly what Achuthan is talking about. Consumption growth leads payroll growth, not the other way around. Indeed, in order to line up the peaks and troughs of the two, we have to shift payroll growth by a 5-month interval.

Now examine the year-over-year growth rate in personal income and personal consumption. With respect to personal income, we briefly observed slower year-over-year growth without recession in 1987, but recent months have shown a more persistent downturn. Similarly, real personal consumption growth (red) at 1.5% year-over-year growth is at levels that we have simply never observed historically except in connection with recessions.

 

Will things work out differently in the present case? Possibly, but it's a challenging argument. Consumption and income both disappointed expectations in the latest report last week, government spending is under pressure, last quarter featured a striking inventory buildup coupled with tepid final sales, we're seeing divergences between industrial stocks (production) and transport stocks (distribution) that smacks of oncoming inventory accumulation (which is the economic basis behind Dow Theory), and around the world, we're seeing a sudden dropoff in trade growth. Maybe despite the abominably weak menu of prospective returns available to investors, the Fed can engineer even further financial speculation and drive prospective returns even lower. Probably the best hope is that the recent improvement in job growth will be sustained - that it is a sign of a revival in production that will create its own demand - despite the indications from consumption growth, which suggest deteriorating job growth instead.

We've seen arguments that recession concerns can be discarded because GDP growth has increased over the past three quarters. But we often see this prior to recessions, just as we often see a burst of job growth in the months prior to a recession. That's exactly what keeps those periods in the "recovery" camp. Looking at the year before a recession starts, the general pattern is for GDP growth to stall to a fairly slow but positive growth rate 3 to 4 quarters ahead of the recession, followed by a strong but brief acceleration in GDP growth about 2 quarters before a recession begins, a modest positive quarter, and finally a drop to negative GDP growth. You rarely see a nice stair-step to lower and lower quarterly growth rates. The lowest quarterly GDP print in the year before a recession begins is usually about 3 quarters ahead. As a result of that stall, coupled with new quarters that are slower than the year earlier, we often see a slowdown in the overall year-over-year GDP growth rate as a recession approaches. On that note, the rate of GDP growth over the past three quarters is already lower than in the three quarters prior to 7 of the past 10 recessions, and the year-over-year growth rate is slower than it was just before 9 of them.

http://www.hussman.net/wmc/wmc120305.htm

First attack on the MES : Prelude to a final showdown or just a n*th iron-arm pass ?

Dublin will hold a referendum on the eurozone fiscal pact, plunging Europe into months of uncertainty and potentially placing a question mark over Ireland’s membership of the euro.

Enda Kenny, Ireland’s prime minister, said Dublin’s head legal official had advised that “on balance” the Irish constitution required the treaty to be put to a vote. It is likely to take at least three months to organise a referendum.

A recent opinion poll found 40 per cent of the 1,000 Irish people questioned said they would support the treaty, with 36 per cent against and 24 per cent undecided.

EU officials believe by holding a referendum Dublin could increase its leverage over the EU to force new concessions on winning debt relief on its banking debt and resisting pressure from France, which wants Dublin to increase its corporate tax rate.

Under the Irish constitution, the Irish people have to vote to ratify any significant transfer of sovereignty to Europe. Dublin has held referendums on every significant EU treaty since 1987 when Raymond Crotty, an economics professor, won a landmark legal challenge against the state, forcing a plebiscite on the Single European Act.

The Irish public have twice rejected EU treaties, only to approve them in second referendums. In 2008 the Lisbon treaty was rejected only to be approved in a second referendum held 18 months later.

Dublin had desperately hoped to avoid a politically divisive referendum while implementing more than €30bn in austerity measures to cut its budget deficit. Irish officials had worked closely with EU officials to try to limit the scope of the treaty in the hope it would enable Dublin to ratify the treaty through legislation rather than a national vote.

A no vote would mean Ireland was not eligible for funds from the European Stability Mechanism, the eurozone’s new bail-out fund. The pact can enter force with the support of 12 of the 17 countries that use the euro, effectively removing any single nation’s veto over the accord.

“Be the change you want to see in the world.” 

Gandhi

Une ambiance de démission qui flotte dans l’air. De résignation.

http://youtu.be/sScmvnEkWpE

En Occident, nous croyons baigner dans un océan de libertés, mais, à y regarder de plus près, ce sont juste des permissions, des latitudes, voire des laxismes par inadvertance. Les institutions en place ont même réussi à nous faire accepter certaines restrictions de nos libertés comme des bénédictions. Pire: dans les prochaines années, nous allons peut-être les demander, puis les exiger.

Cela veut simplement dire que nous renonçons de plus en plus facilement à nos responsabilités, que nous attendons de plus en plus des institutions-providence qu’ elles pensent à notre place et qu’elles nous proposent sur un plateau un modèle aux allures de liberté et de bonheur. Et ce modèle devient une norme, un objectif à atteindre. C’est en effet un objectif, celui des pontes de l’économie qui veulent nous amener de plus en plus dans l’ état de zombies-consommateurs, avec juste ce qu’il faut dans la société pour que nous puissions râler (cela donne l’illusion d’être libres), avoir peur (cela donne envie d’un peu plus encore de loi et d’ordre) et avoir l’occasion de faire des dons (cela donne l’impression d’être utiles).

Or, qu’est-ce qui va dans le sens d’un changement de société?

Ouvrir les yeux et réaliser qu’il y a une autre façon de voir les choses. Sortir des ornières de l’habitude. Comprendre que la “norme” qu’on nous propose n’est pas nécessairement épanouissante. Les pouvoirs économiques et politiques actuellement en place savent qu’on ne peut pas résoudre un problème en restant au même niveau de pensée que le niveau qui a créé le problème. Ils ne veulent pas que le problème soit résolu parce que cela signifierait qu’on aurait fini par comprendre qui était à l’origine du problème: eux. Alors, ils font tout ce qu’ils peuvent (et ils peuvent hélas beaucoup) pour nous persuader de ne pas nous inquiéter et qu’ils s’occupent de tout. Et comme nous ne voyons pas très bien quoi faire de toutes façons, nous retournons à notre ronronnement béat.

Alors, au lieu de se laisser embarquer dans un monde qu’on a pensé pour nous, au lieu de donner à nos enfants une éducation qui équivaut à les sacrifier sur l’autel de la norme, au lieu de se réfugier derrière une attitude mi-lâche mi-proprette, je me pose une question fondamentale:
“Si l’avenir de la Terre dépendait de changements que je pourrais faire dans ma vie, qu’est-ce que je changerais ?”. Eh bien faisons le. Même si les changements que nous ferons dans notre vie ne seront pas suffisants pour changer le monde. Mais je le fais, parce que ces changements dans ma vie, personne ne pourra les faire à ma place.

Belle journée

Existe


Le vivre est solitaire et solidaire. L'être vivant émerge à la solitude en accédant à l'égocentrisme. mais la vie solitaire ne peut pas ne pas être solidaire. En vivant chacun notre vie, nous nous inscrivons dans une chaîne de vies, les quelles, en retour, nous font vivre notre vie. Nous participons à des myriades d'autres vies qui nous nourrissent et que nous nourrissons. Chaque vie autonome est possédée de l'intérieur et de l'extérieur par d'autres vies. Nul ne naît seul. Nul n'est seul au monde, et pourtant chacun est seul au monde.


Edgar Morin

By Gold

Have you ever had any doubts about gold? Does it sometimes feel like it should be performing better? Are you concerned about its volatility? Do you worry about how it might perform in the future? Have you ever wondered about its true purchasing power? Maybe you’re nervous about a big drop in price again? I decided to go directly to the source to address these concerns: Gold himself. He put his arm around me and asked me to tell you a few things…I hear that you’ve had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don’t understand some basic monetary principles, making things even more unsettling.

But I want you to know that the problems you’re experiencing are actually nothing new. I’ve seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you’re safe with me. That’s a bold proclamation, but I’ve provided monetary protection numerous times throughout history — too many to count, in fact. I’ve served all kinds of people over the centuries, from kings and counts to serfs and servants.

To put your mind at ease, let’s review my core characteristics, along with some history, to show how I can protect you against the monetary danger that’s likely to worsen in your near future. We’ll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we’re done, I think you’ll feel much better about my ability to help your portfolio withstand whatever is thrown its way.

Enduring Characteristics

Let’s start with the basics. I have some characteristics that no other matter on Earth has…

I cannot be:

• Printed (ask a miner how long it takes to find me and dig me up)
• Counterfeited (you can try, but a scale will catch it every time)
• Inflated (I can’t be reproduced)

I cannot be destroyed by;

• Fire (it takes heat at least 1945.4 degrees F. to melt me)
• Water (I don’t rust or tarnish)
• Time (my coins remain recognizable after a thousand years)

I don’t need:

• Feeding (like cattle)
• Fertilizer (like corn)
• Maintenance (like printing presses)

I have no:

• Time limit (most metal is still in existence)
• Counterparty risk (remember MF Global?)
• Shelf life (I never expire)

As a metal, I am uniquely:

• Malleable (I spread without cracking)
• Ductile (I stretch without breaking)
• Beautiful (I am the ultimate accessory)

As money, I am:

• Liquid (easily convertible to cash)
• Portable (you can conveniently hold $30,000 in one hand)
• Divisible (you can use me in tiny fractions)
• Consistent (I am the same in any quantity, at any place)
• Private (no one has to know you own me)

I am internationally accepted, last for thousands of years, and probably most important, you can’t make any more of me.

And by the way, don’t fret about those who say I’m not as good an asset as an income-producing vehicle. They misunderstand my role. I’m not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none.

Remember, I am the only financial asset that is not simultaneously someone else’s liability. I don’t require the backing of any bank or government.

The History Lesson

Because I am eons old, I’ve observed something throughout history that you may not be aware of: government fiat currencies are a relatively new invention, and none has endured.

Eventually, they have all failed. Me? I’ve never been defaulted on or worth zero. Remember this the next time you have any doubts about my long-term worth.

You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

What Color Is Your Money?

Like you, I’m concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They’ve incurred too much debt and are spending too much money. It’s important that you understand some lessons from history about this kind of behavior so that you’re certain of what I can do for you.

The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following:

• Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they have exceeded 80% of GDP. US government debt will exceed 100% of GDP this year.
• Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” By some estimates, the US will hit that ratio this year.
• Peter Bernholz, a leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” Next year’s US budget deficit is projected to be $1.3 trillion.

The solution many of your leaders are pursuing is to create more currency units. The US monetary base has exploded 205.8% during the last three years, while my price is only up 65.8%. This fact, alone, implies that my price in dollars is likely to climb much higher.

This is also the reason why I’m not in a bubble, as some have tried to claim. It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency.

Think about this: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

Meanwhile, the warning bells continue to sound regarding Europe’s debt crisis. In just the past 30 days:

• Moody’s cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgraded six other European nations including Italy, Spain, and Portugal.
• Standard & Poor’s cut the triple-A status of France and Austria, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia, and Slovenia were downgraded.
• Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50% chance of further cuts in the next two years.
• Standard & Poor’s downgraded 34 of Italy’s 37 banks.
• Moody’s warned just last week that it may cut the credit ratings of 17 global financial institutions and 114 European ones.

The European crisis is far from over; and the path of least resistance for politicians is to create more currency units. This action can and will have clear and direct consequences: currencies will devalue, and inflation — perhaps hyperinflation — will result.

Once again, I encourage you to use me to protect some of your wealth.

How Much Is Enough?

Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I’ve witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank.

If you don’t own enough of me when these fiscal troubles really accelerate, I fear you will regret it. I’ve warned many in the past about the dilution of nations’ currencies, and those who didn’t heed my warnings experienced severe financial pain. Excuses won’t pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook.

Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price.

How do you know if you own enough? Ask yourself:

• If inflation returns, or even hyperinflation hits…
• If the economy is flat…
• If uncertainty and fear continue around the globe…
• If stock markets languish…
• If the amount of spending from the world’s governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the US dollar takes a major fall…
• If the world enters a recession or depression…
• If you wonder if you have enough “safe” money…

…would you feel that you own enough of me?

Buy a sufficient amount so that as your currency continues to lose value, your portfolio won’t. If you do your part, I promise I’ll do mine.

Your monetary friend.

http://dailyreckoning.com/by-gold/