Bob's (latest) World is here.Other than that Bob...
They told me it was fixed
From Bob Janjuah of RBSNomura
1 – My secular views remain unchanged. I see no (fundamental) developments or market (price action) developments that warrant a change of view. My very negative view of the latest (late October) round of eurozone "shock and awe? appears to have been quite accurate. All those European policymakers and sell-side commentators who told us on 27-28 October to great fanfare that the solution was now finally in place and that it was now "all fixed?, seem to have gone extremely quiet. The October deal was, as I said in my previous note, a confidence trick that has failed. And as a result it has made things a lot worse. At some point I hope that enough lessons will have been learnt, and we can finally move into the long endgame – hard (non-voluntary) default in the eurozone. Q1 2012 and the €80bn payment to Greece should be the focal point.
2 – My short-term view is also proving correct. Since the 27-28 October meeting, it has been a bad month for risk, especially in the case of peripheral eurozone debt, French debt, credit spreads, and the euro itself. Also as forecast, the dollar has done well, as have core government bond yields (bunds, USTs and Gilts). I expand further on my short-term view in point 2 below, as there are some very short-term risks to the views I set out in my last note regarding the very back end of 2011.
There are two points I want to focus on a little:
1 – Eurozone solutions: With the late October "deal? now in tatters, and with subsequent developments in Italy, in Greece, and in the market pricing of French risk, the future for the eurozone now seems to be all about the ECB and outright monetisation. It seems amazing that the same folks who insisted that Greece would not default, that the eurozone was solvent and was just going through a CDS-trader-driven liquidity squeeze, that kicking the can down the road was a viable plan, and who trumpeted the late-October deal, now think ECB monetisation is the solution. I would urge extreme caution, again. In my view, the eurozone can either go down the path of full political and fiscal integration, which clearly means a smaller neue-eurozone and default by the nations that don?t fit in with this hard-money Germanic ideal or it can take the soft-money Latin/UK/US-style soft-money route, where the ECB agrees to unlimited monetisation. It is clearly a case of "either, or?, but not both. These are two divergent policy paths.
Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB's balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, "you can?t always get want you want?.
I firmly believe that any conditional or finite monetisation would actually be the worst idea (most of the downside, very little of the upside, of infinite monetisation), but probably the most likely "compromise? if Germany were ever to "give? on this issue.
2 – Macro Divergence: While (to date) my risk-off call after the late-October deal has been the correct strategy, there are clearly growing divergences between credit/bond markets and equity markets, and also between optimism on the US and pessimism on the eurozone. On a secular basis I am convinced of two things. First, credit and bond markets are far better lead indicators than equity markets. Second, Europe will experience a hard default, worsening global growth and global financial conditions....MORE