What a difference a month makes. We entered this year with a debt crisis in Europe and a growth crisis in the US. Investors were terrified, governments were falling and there was a total lack of political leadership both in Europe and the US. Corporations were in retrenchment mode and even the bulls were retreating, having taken a battering in 2011, particularly in the second half of the year.
This weekend, the first one of February, we are looking at financial markets all over the world booming. It is almost total reversal. Bond yields in Europe have fallen significantly, with the exception of Portugal.
For example, Italian bond yields are now down at 5.6 per cent, not a million miles from where they were this time last year before the European bond crisis blew up in Silvio’s reconstructed face.
Stock markets, too, are roaring ahead. In fact, the rally in stocks since the dark days of late November has been spectacular. And the feelgood factor isn’t just limited to Europe and the US. The Indian rupee, the Brazilian real and the Mexican peso have risen by more than 7 per cent in four weeks. And investors have added about $7.7 billion to emerging-market equity funds in the same period.
What is happening? Most fund managers have been caught out by the rally, having opened the year in cautious mode. I have also been very surprised by the rally. But the job of columnists is to deal with what is happening. If they have been caught out, acknowledge it – and then seek a few explanations.
In answering the ‘why’ question, one aspect of the rally which is important to note is that the most ‘risky’ assets have risen most – we are talking about emerging market currencies and many European bond markets. Why is it happening in the riskiest assets? For example, are Europe’s peripheral countries, including us, suddenly more creditworthy? No, we are not. The data in Ireland remains appalling. Meanwhile, EU-wide growth and unemployment figures are still atrocious.
Taken together, in Ireland, Portugal, Italy, Spain and Greece, youth unemployment is well over 30 per cent. Given the fiscal contraction announced by last Monday’s fiscal compact, countries will have to reduce national debt significantly each year for the next 20 years, to get us moving down to the target debt-to-GDP-ratio of 60 per cent.
So how could we be more creditworthy? With the fiscal compact, there will be precious little money left here, so much will be going out in debt reduction and interest payments.
The reason markets are rallying is that the central banks are creating money as never before. They are inflating the bubble again. The European Central Bank (ECB) for example, will lend €1 trillion to European banks at the end of this month at 1 per cent. The banks of Ireland, Greece, Portugal, Italy and Spain give trashy collateral to the ECB and the ECB will give them fresh crisp cash. Then the banks lend this money to the bust governments. This is causing the yields on the bonds to fall.
The banks borrow from the ECB at 1 per cent and lend to the host government at 6 per cent. They make a free 5 per cent. With all this profit margin, they can rebuild their balance sheets by what they see as a risk-free trade. It is called a ‘carry trade’ in finance.
Seeing this free trade, the hedge funds change tack and decide to ride the wave of €1 trillion of free ECB cash. They buy ‘put options’ which are a trade that gives the hedge funds the right to buy an option to purchase government bonds at today’s price for delivery in one month.
This means that, if the bond market keeps rallying, they will make good profits. But with the giant tsunami of €1 trillion of new liquidity in the market, why wouldn’t they buy on that trade?
The only problem is that someone subsidises this trade. Who pays? You do, because the difference between the 6 per cent at which the governments borrow and the 1 per cent at which the banks lend has to be paid by someone. That someone is the taxpayer.
Outside Europe, the US Federal Reserve has stated that it will keep the rate of interest below the rate of inflation for the foreseeable future. This means you would be mad to save, so the market borrows dollars and lends these dollars to high-yielding risky assets. Another state-sponsored ‘carry trade’.
The taps have been turned on. My favourite way to visualise this (apologies to regulars because I have used this image before) is the champagne pyramid. When someone keeps pouring champagne at the top (the central banks printing money) this liquidity gushes into all the glasses – even the risky ones at the very bottom. So long as the central banks keep the taps open, most asset classes should rally.
Significantly, had this financial market news not been accompanied by huge gains in the US job markets, it would be easy to dismiss it as a localised casino event in the global roulette table that is the international financial markets. But the US is creating jobs again, lots of them – and just in time for Obama, too.
As we pointed out last week, the most important thing for a president in re-election year is that the economy is moving in the right direction. The US economy is moving in the right direction for Obama. Combine this with a cynically timed pull-out of Afghanistan, and the election may be his to lose.
Now before you go out screaming it is all over and the global corner has been turned, be careful because, below the surface, things are not so rosy. Even with the new jobs numbers, house prices in the US continue to fall, average wages are stagnant or falling and consumers are continuing to pay back debt. This means consumer spending is still very weak and might remain so, dragging the economy back.
This is a liquidity-fuelled rally. But it is a rally nonetheless and cleverer people than me are betting big money on it lasting. Time will tell if last week was a significant milestone or just a flash in the central bank pan. Let’s keep watching the numbers.
For a novel look at the economy, look at my new initiative, Punk Economics, using cartoons to explain tricky stuff on YouTube.
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Call Options not Put Options
So the fed lent the ECB 1 trillion dollars, then through leveraging “fractional reserve magic” they created up to 10 trillion and gave this to the european banks who have bought the bonds of the kaput governments and speculated the rest on the markets.
Add to this QE3 and of course there will be a lift in the markets!!!
Pop the cork guys!!!
Crisis over forever!!! :)
David, does this mean Irish banks will start giving out mortgages? Will this affect (upwardly) house prices?
The books are being cooked and the printing press is in full over drive mode.
Why can’t we do the same and make the jobs we so badly need.
Why are things here getting worse and worse.
Where is our help coming from or are we to be thrown to the wolves.
Well, seeing as we are in a low interest rate environment, with suspicious inflation statistics, and central banks shoving hundreds of billions into the banking system in an effort to shove the banks into funding the sovereign bond market, maybe a quote from Alan Greenspan might be relevant. Just for the sake of irony. He was an expert in Bubbles. Retrospectively speaking of course. “History has not dealt kindly with the aftermath of protracted periods of low risk premiums.” This is another effort to kick start the Ponzi asset bubbles. This is nothing new. The Japanese have being doing it… Read more »
Unless this government tears up it’s gombeen plan and invents a plan thought out buy people who think outside the box we will run out of road
German Banker thanks the people of Ireland for bailing out the banks.. http://www.youtube.com/watch?v=SnX_q5Pbnac
All that cash floating around should mean that sooner or later that the real value of mortgages relative to assets (Houses) will drop in other words the politicians are happy to allow savings become worthless to facilitate borrowers and busted banks by inflating away the problem. The people to watch are the Germans. It remains to be seen whether Gunther and his Frauline are happy to allow themselves to be shafted to save German and French delinquent bankers especially since the Germans don’t have the same love affair with their houses as we do. It would seem so. It would… Read more »
A clear, concise, simple a-z on financial ponzi mechanics the central bank warfare model system of economics provides us with in the computer-info age we find ourselves in living on planet earth.
Do a punk economics specifically on this article a.s.a.p/
[…] David McWilliams » The Champagne is flowing…again […]
David, whilst I agree the the QE taps have been turned on by he major central banks, I dislike your vivid analogy of the champagne pyramid. I think the intervention is taking place much more subtly via the exchange rate mechanism. Transnational T bond buy and sell orders by central banks are the intermediary that balances the various exchange rates. The counter parties to these trades are the beneficiaries. Consequently the effects of QE are effectively masked from the markets as the new money flows in from T bond profiteers.
So Let me get this straight. According to insider David ,who gets confused between his puts and calls (rollseyes), the Federal Reserve (its not federal and it has no reserves btw) prints 1 tr to lend to the ECB to ‘give’ |(yes I mean give) to the irreversibly insolvent oligarch interalpha banking system to lend to gimpy Enda at 6 % who in turn hands it back, + the 6% of course,to the same interalpha cartel who then in turn give it back to the ECB who then gives it back to the Fed who then take it out of… Read more »
Hi David,
Have a look at John Mauldin, re “Putting a good employment number in Perspective”
Conor
Interesting stuff David. It is election year and there is going to be miracles appearing out of the blue for sure. Smoke and mirriors everywhere Your Punk Economics producition was very good by the way. You mentioned the disconnect between politicians and the public. You forgot to mention the western media. Here is another short movie that Jum Kirwan linked to regarding Libya. It is well worth watching and shows us the real power of propaganda. Look out for the quote by the Zionist rat Sarkozy Never believe all you hear Libya & Gaddafi -The Truth you are not supposed… Read more »
Hi david, Just to hand re your comments on US unemployment numbers. Conor Three Official Lies About Jobs! by Martin D. Weiss, Ph.D. and Mike Larson Monday, February 6, 2012 at 7:30am While Washington announced last Friday that unemployment dropped to 8.3% … And while Wall Street rejoiced with another rally … The true unemployment in the United States actually rose to an estimated 22.5%, nearly the worst since the Great Depression. Hard to believe? Just consider how the government is lying to us about jobs in America: Lie #1. “Discouraged workers – unemployed workers who give up looking for… Read more »
Punk Economis is excellent. Full marks.
The EU financial system is about to go “pear shaped”.
If credit is an addictive substance, causing delusions of wealth propsperity, then the ECB has decided that the patient needs continued sustained addiction, rather than withdrawl.
Congratulations David.
You finally said what is the root cause of booms.
Central banking with fractional-reserve banking helped with sovereign debt bond issuance.
Now, just to correct all other mistaken views you had in recent articles and you will be healed :)
Champagne, known in insider circles as Bubbly, is very apt, causes terrible hangovers. These “rallies” are getting shorter and shorter-lived. This means we are approaching a barrier. Each bubble, exponentially bigger than before leaves an expanding economic crater when they “pop”. Some here confuse “bubble”, “rally” with “boom”, which causes all sorts of endless argument. Almost none have ever lived in a physcal economic boom, during the Bretton Woods era, know nothing else than bubbles, and oppose the very measures needed to boom, which we must, to repair the cratered economic landscape. Perversely the very explanation of this looting, which… Read more »
Yeah well, while the Idiot Rallies are in full swing, In the meantime….the global fascist coup continues and a 88 billion Dollar deal is prepared to control the global resource supply chain on mining products and more. A year ago I wrote about it here on DMW, now it is turning into reality…
Glencore-Xstrata
So the wheel just keeps turning. The deal in Greece goes through. The ISDA calls it a “Credit Event” and not a “Default” as it should be. The Big 5 US banks which hold 97% of the Insurance on the CDS’s don’t have to pay out ‘cos it is not a “Default”. There is now a “NEW” 1 Trillion sloshing around (and ten Trillion after Fractional Banking Magic). So the Boyo’s who lost out on Greece have plenty of opportunity to get back their losses a hundred fold. And to pop that Icing on the cake roll on QE3, Equity… Read more »
I believe it is a managed crisis with global strategic aims (New World Order). This is just a minor temporary re-inflation of the debt bubble to prepare for the next stage of the operation. In Europe, as we know, the intention is to force and fast-track federalisation; initially as non-democratic central fiscal control. This is already well advanced. The increased sovereign debt which will be generated by this latest pumping/printing operation will increase the pressure on the nations to submit. Notice the ECB will only lend to bankrupt banks for usury or speculation. There will be no cheap money for… Read more »
This entire Financial and Government crisis along with continuing military instability throughout the World IS entirely planned and what is happening is the desired result of years of planning by the Corporate Elite. Unless the people decide to take peaceful action , the path we are on is the one we and our children should and will get use too. Debating individual skirmishes is pointless , the whole world picture needs to be studied and dissected , questioned and politicians pounded with queries. This current “idiot rally” is purely driven by debt and the printing of valueless money around the… Read more »
What can you do , David ?
writing 3000 words a week is great but can you help ?
American Employment numbers may well be fudged.
“I wouldn’t get anywhere near the champagne,” Jared Bernstein
http://moneymorning.com/2012/02/06/jobs-in-america-the-ugly-truth-behind-those-unemployment-numbers/
Btw the year Reagan ran for re-election in the U.S , IN 84, unemployment dropped than as well…………
I posed a question above on the perverse effect of describing accurately what is going on, while depriving viewers of a way forward. I begin to see that that is when a huge fight starts. Various Friedman/Hayek/Keynesians pounce like, I must say, crazed dino’s on any creative human way forward. It becomes impossible to debate then in any civilized way. I think DMcW, very understandably, knows this from personal experience. If one confronts the core irrationality of certain economic theories, raw irrationality breaks out. In a way this is an amazing trap. It is a kind of packaged psychosis, delivered… Read more »
@redriver6
I agree 100% with your sentiment,
For our part we are trying in a small way to do something. “Fermoy says no” meet every week and do a protest march through the town, usually we are only 30 – 50 people, but it makes a difference and everybody agrees with the protest!, elsewhere in cork ballyhea are doing the same, almost for a year already, occupy in cork, dublin, galway etc are also doing their bit. we all need to play our part. come join us at 12.30 catholic church car park on sundays, alternatively start your own.
Why don’t we just stop using banks ?
Fellow contributors and readers please support the defence of the internet as a forum for intellectual freedom.
http://stopsopaireland.com/
RSA Animate – Crises of Capitalism
http://www.youtube.com/watch?v=qOP2V_np2c0
re employment numbers and fed swap lines & QE & greece
http://www.jsmineset.com/2012/02/06/consolidate-your-holdings-and-save-your-money/
http://www.zerohedge.com/news/greek-pm-demands-report-
default-consequences
Greek Composer, the 86-Year-Old Mikis Theodorakis, Forms Resistance Movement A new resistance movement has been created in Greece, the Unified Democratic People’s Resistance (ELADA), founded by Greece’s most famous composer, the 86-year old Mikis Theodorakis, and fellow-octogenarian Manolis Glezos. Glezos began his resistance activities against the Nazi occupation, as a 15-year-old, when he climbed the Acropolis and took down the Nazi flag from the Parthenon. Today the resistance is against the new Nazi occupation by the international financial oligarchy. At ELADA’s founding event last week in Athens, both declared that Greece was passing through a “national tragedy” and therefore they… Read more »
Lord Jimbo, thanks for the link to
RSA Animate – Crises of Capitalism.
Well worth watching.
U.S. Vulture Funds Gorge on Lehman Corpse Today’s DT has a story, which pretty much speaks for itself: “Four large American hedge funds — Elliot Associates, King Street, CarVal and Baupost — now stand to make billions of dollars in profit from Lehman. They have snapped up big tranches of the bank’s debt at knock down prices in one of the biggest vulture swoops in history…” “Vulture funds typically buy up debt of poor nations when it is cheap and due to be written off and sue for the full value of the loans plus interest. The tactic has attracted… Read more »
Reading an snippet on the US/UK and Ireland -(I think it was Dan O’Brien on last saturday’s IT) about how recent legacies in economic histories have led to the huge disparities in income we see today. For example, in the US and the UK where we had large manufacturing derived middle classes which have now been wiped out leading to a minority and rich service industry class in the IT, Banking etc who are 10s of times better off than their blue collar equivalents. In Ireland, we never had manufacturing – meaning the disparities are not there. We simply do… Read more »
Vertical Global Monopoly operates from tax haven “Zug” in Switzerland Due to the actuality of events, here is just a little follow up to my Glencore IPO articles on DMW from last year. Sorry, I have no way to look up the WordPress database and link to them, but perhaps some of you remember. Both, Glencore and Xstrata operate from Zug, how convenient. This 90 bn dollar merger creates a monstrosity of the largest vertical monopoly possible, the biggest mining company and the worlds largest commodities trader in one entity. This is total control from raw material to trade, and… Read more »
Latest update. http://www.independent.ie/business/european/debt-crisis-europe-could-survive-if-greece-left-the-eurozone-eu-official-3012105.html It is serious, when somebody from a country that is persistently stuck with the bill, and which has a zero tolerance for political corruption makes this remark. It is an honest reflection on the unsustainability of the current process. Maybe, if the Greeks were treated honestly, and respectfully, we might get a practical resolution that will enable the Greeks to reform their society, and at the same time reduce the instability that is coming from Greece ? Everybody agrees that there is a civic responsibility deficit in Greece, most of all the Greek citizens. Perhaps if Greece… Read more »
Maybe the powers that be will eventually do the right thing when they have exhausted all other possibilities
David you sound like a fourteen year old boy struggling with an uncomfortable erection while watching Debby Harry on TOTP aka 1979 as the idea that there might be some positive movements in the economy is giving you cause for false joy. YouTube ‘Cool Hand Luke You Gotta Get Your Mind Right’ … and I mean RIGHT!’ It is seven seconds of wisdom and will make you piss your pants laughing. Shades of growing up in Catholic schools where misery is the only form of spiritual companion. We are all in misery now and do not have the means nor… Read more »
Greece Continues To Show Euro in `Debt Spiral’ The suicidal austerity against which Greeks are battling for their nation’s life, far from being the fantasized “debt and deficit reduction plan”, is pulling the whole Eurozone into a “debt spiral” for which Greek figures are only typical. A report from the EU’s statistical agency Eurostat on Feb. 6 showed that Greece’s debt, already in the third quarter of 2011, rose to 159.1% of its GDP, from 138.8% of GDP one year earlier. Eurostat reports the ratio is “projected to have risen further in fourth quarter 2011.” To 200%, perhaps? It was… Read more »
Another Brazen Scheme: Escrow Account for Greece To Prioritize Paying the Debt First Merkel and Sarkozy yesterday presented another murderous idea for how to guarantee cash flows from the Eurozone’s bankrupted former nation-states into the bankrupt banks — a priority “escrow account” for making sure that debts are paid first. To that, the Greek government would then no longer have any access. This proposal had been included in the last working paper of the German government, in which an austerity commissioner had been proposed. The “alternative” was the escrow account. The Greek Parliament would have to decide that the debt… Read more »
Greek Founders of Anti-Troika Resistance, Mikis Theodorakis and Manolis Glezos, Issue Appeal to the Peoples of Europe “Sixty-five years after the defeat of Nazism and fascism, European people are today confronting a dramatic threat, this time not military, but a financial, social and political one. A new ‘Empire of Money’ has been systematically attacking one European country after another in the last 18 months, without facing any substantial resistance.” So begins a call to action by Mikis Theodorakis and Manolis Glezos, who have just formed the new anti Troika movement, United Democratic Peoples Resistance (ELADA). The four-page manifesto, released at… Read more »
Mish Shedlock gets to the bottom of the latest Sarkozy plan, with an interesting theory for explanation of what Merkozy are attempting.
http://globaleconomicanalysis.blogspot.com/2012/02/new-merkozy-proposal-i-will-give-you.html
We should understand this perfectly well. It has similarities with the Anglo strategy being instructed on us.
The results of ECB low interest rate policy between 2002 and 2007.
http://www.economicnoise.com/2012/02/06/twenty-reasons-why-europe-is-in-deep-doo-doo/
Merkel Goes Overboard Campaigning for Sarkozy, Creates Consternation Among Socialists According to press reports, Merkel is refusing to meet with Socialist Presidential candidate François Hollande, while campaigning for incumbent Nicolas Sarkozy. Yesterday, “Merkozy,” as they are known, granted their first joint TV interview to French and German TV journalists, and Merkel has announced more joint appearances with him, explicitly for the campaign. Sources at Berlin’s Foreign Ministry are not happy about this, especially the refusal to meet the head of the main opposition party, which is the diplomatic standard. It is highly questionable whether Merkel’s antics are going to help… Read more »
DWalsh, finally…..finally someone stepped up to the plate and addressed the true nature of the beast. I am amazed how the majority of people still deny the existence of the NWO. How many YouTube videos of US Presidents (or British PM’s) announcing to the world the introduction of, aims of and the steadfastness of the NWO before people wake up from their self induced comas? If you’re middle class (aka the new poor)and refuse to understand and accept that you’re part of the NWO plans for impoverishment; your bad. Own it. History has a habit of repetition clearly demonstrating regime… Read more »
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