Ambrose Evans-Pritchard is SERIOUSLY ALARMED

Our last visit from Ambrose began with:

We last linked to Ambrose Evans-Pritchard in "Metal prices fall further than during Great Depression" with the comment:

A visit from our terminally depressed pal*, Ambrose Evans-Pritchard.

naked capitalism tips us to today's story by saying:

Ambrose Evans-Pritchard, Telegraph. For him, this is almost cheerful. But his optimism for the US rests in part on his conviction that the euro "will die a slow death."

Clicking that "Ambrose" link will get you to some astounding econ. and market calls.
From FT Alphaville:

In case you haven’t heard enough depressing news about sterling and feel like a supplementary dose of depression central, you simply must check out the latest blog post from Telegraph business editor Ambrose Evans-Pritchard.

Clearly if there’s ever a time to break into an upper casing blog-title panic, it’s a five cent drop to $1.39 in cable; for Evans-Pritchard is SERIOUSLY ALARMED about sterling. As he explains (our emphasis):

The slide in sterling has turned “disorderly”. We can argue over whether or not the first phase of devaluation acted as a shock-absorber for a badly mismanaged economy, providing a cushion against debt deflation and the housing crash. But the latest dive has a very malign feel. For the first time since this crisis began eighteen months ago, I am seriously worried that British government is losing control.

So there you have it, a problem that is potentially bigger than the UK government.

What does that entail? A sequence of events which may, according to Evans-Pritchard, conclude in something far worse than what happened to Iceland (our emphasis):

If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposure in dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to let its national debt jump in a crisis — or a war — perhaps even to 100pc of GDP. It is another to take on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets as well to match the debts. But how much are these assets really worth?

This is the moment when the “rubber hits the road” — to borrow from American argot — the moment when the reckless debt experiment of our economic and political leaders comes back to haunt.

We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreign debts of its buccaneering banks. It let them default, parking the losses in Resolution Committees. Small islands can do that. Iceland has fish instead, and lots of metals. Britain cannot follow suit. The debts are too big. If London takes such disastrous action it will set off global panic and lead to an asset death spiral, drawing the entire world into deep depression.

What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housing boom have all combined to bring the country to the brink of disaster. England has not defaulted since the Middle Ages. There is a real risk it may do so now.

Of course, need we remind readers, Ambrose Evans-Pritchard has never much liked the euro, the euro zone, Trichet or the ECB....MORE

Enjoy the rally while it lasts - but expect to take a sucker punch

Here's how we intro'd some of Ambrose Evans-Pritchard's stories:

Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown

I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.

Metal prices fall further than during Great Depression

A visit from our terminally depressed pal*, Ambrose Evans-Pritchard.

Phase III (or is it IV?): Europe on the brink of currency crisis meltdown

Ambrose Evans-Pritchard makes Nouriel Roubini look like a Chamber of Commerce booster. Here are some of our previous links to his writings. With the U.S. markets looking to trade up 4%, a lot of folks may be tempted to start a chorus of "Happy Days are Here Again". Not our A. E-P.

We like the Telegraph's International Business Editor, a lot (some of his market calls* in 2008 looked like inside information). Here's the latest:

Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.

Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.

James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.

"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.

Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.

Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said....MORE

*If you are interested, use the Search Blog box, keyword Evans-Pritchard.

Swiss slide into deflation signals the next chapter of this global crisis

Here are some of our past links to Ambrose Evans-Pritchard:
Feb. 16: "Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown"

I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.

Jan. 30: "Ambrose Evans-Pritchard is SERIOUSLY ALARMED"
Dec. 30: "Metal prices fall further than during Great Depression"

A visit from our terminally depressed pal*, Ambrose Evans-Pritchard.

From The Telegraph:

Watch Switzerland closely. It is tipping into deflation, the first Western country to succumb to Japan's disease.

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

"This is something that we must prevent at all costs. The current situation is extraordinarily serious," said Philipp Hildebrand, a governor of the Swiss National Bank.

The SNB is not easily spooked. It is the world's benchmark bank, the keeper of the monetary flame. Yet even the SNB's hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

"We don't fully realise in the West what a catastrophic collapse Japan has suffered," says Albert Edwards, global strategist at Société Générale. "The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.">>>MUCH MORE

See also: "You can't trust the Swiss, that's the bottom line,"

U.S. Faces Global Funding Crisis: Merrill Lynch

As we said in "Oil Price Shock Means China at Risk of Blowing Up":

We are fans of Ambrose Evans-Pritchard. Whenever we feel too chipper a dose of A.E.-P. calms us right down. From our post "Barclays warns of a financial storm as Federal Reserve's credibility crumbles":

Ambrose Evans-Pritchard grooves on this kind of story and because he looks for them, he finds them. It was he who brought us RBS's warning "Royal Bank of Scotland: Global Stock and Credit Crash Alert". He's useful for putting stuff on the radar, not so much for inflection/turning points.

From the Telegraph:

The US Treasury may have just days to act before foreign patience snaps, writes Ambrose Evans-Pritchard
Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world.

The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700bn (£350bn) current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.

"Japan was able to cut its interest rates to zero," said Alex Patelis, Merrill's head of international economics....MORE

HT: Naked Capitalism who writes:

Ambrose Evans-Pritchard appears to be trying to corner the market in apocalyptic financial news. But his sources aren't evangelicals, survivalists, or even goldbugs. The experts he cites are with respected financial firms, meaning they don't sound alarms casually. Even more significant, the terms they are using to describe what might be coming are uncharacteristically dire....

US will emerge as undisputed top dog in 2009

We last linked to Ambrose Evans-Pritchard in "Metal prices fall further than during Great Depression" with the comment:

A visit from our terminally depressed pal*, Ambrose Evans-Pritchard.

naked capitalism tips us to today's story by saying:

Ambrose Evans-Pritchard, Telegraph. For him, this is almost cheerful. But his optimism for the US rests in part on his conviction that the euro "will die a slow death."

From The Telegraph:

Interest rates near zero across the G10 bloc will prevent a replay of the Great Depression, but they will not pull us quickly out of the doldrums, writes Ambrose Evans-Pritchard, in a semi-serious look at 2009.

Central banks will do whatever it takes to combat debt deflation. Even Frankfurt will join the rush to print money, buying every form of debt from mortgages to corporate bonds.

The Fed will follow the Bank of Japan in propping up stock markets. Puritans will grumble, but the surprise will be how it long takes for this stimulus to gain traction. We will learn the term "pushing on a string".

Western societies will feel the first shivers of raw fear as people twig that the authorities are not in control. Iceland's winter will set an awful example. Job losses will reach 1m a month in the US at the point of peak pain. Economists know this is a late-cycle effect – darkest before dawn – but the public will see it otherwise. This will be the phase that shakes society.

The geopolitical landscape will look different. Cohesive states with a rule of law and old democracies – the Anglosphere, Holland, France, Scandies – will muddle through. They will start to enjoy a political premium in investor psychology, despite horrendous debts.

Obama's America will shine. The country will reemerge as undisputed top dog, the only one with real demographic, scientific, and strategic depth. As first into the crisis, it will be the first to hit bottom. Those expecting the dollar to collapse will have to wait.

The damage to core Europe will take longer, but run deeper. Belgium will face a break-up scare. Markets will test highdebt states as they try to roll over bonds – €200bn (£191bn) for Italy and €40bn for Greece. Spain's corporate debts will turn bad.

Germany's economy will contract by 3pc as exports collapse, and the delayed effects of the strong euro and tight money feed through. Angela Merkel's (pictured below) Left-Right coalition will be haunted by its failure to tackle the crisis earlier. The neo-Marxist Linke party and the hard-Right will muscle in. The country will start to look ungovernable. This will at least divert attention from the Club Med mess, making a North-South split in the eurozone less likely. After sterling's sudden death, the euro will face slow death. The pair will refind their accustomed level....MORE

*Some prior A.E-P. articles (sometimes our headlines, sometimes his):

Oct. 28, '08
Phase III (or is it IV?): Europe on the brink of currency crisis meltdown

July 16, '08
U.S. Faces Global Funding Crisis: Merrill Lynch

July 7, '08
Oil Price Shock Means China at Risk of Blowing Up

June 27, '08
Barclays warns of a financial storm as Federal Reserve's credibility crumbles

June 18, '08
Royal Bank of Scotland: Global Stock and Credit Crash Alert

Citigroup warns of fresh wave of bank failures in Europe

Same story, two headlines/datelines from Ambrose Evans-Pritchard at the Telegraph:

By Ambrose Evans-Pritchard, International Business Editor 7:33PM GMT 21 Dec 2010
Citigroup has warned of a fresh wave of bank failures and sovereign defaults in Europe unless EU leaders come up with a credible response to the crisis.

Prof Willem Buiter, the bank's chief economist, said the eurozone was paralysed by a "game of chicken" between the European Central Bank and EMU governments.

Both sides are trying to shift responsibility on to the other for shoring up southern Europe and Ireland, raising the risk of contagion spreading. "The market is not going to wait until March for the EU authorities to get their act together. We could have several sovereign states and banks going under. They are being far too casual," he said.

Mark Schofield, Citigroup’s global head of interest rate strategy, said Portugal would need an EU rescue soon and that it was "highly likely that Spain will go the same way". This risks overpowering the €440bn (£373bn) bail-out fund....MORE

And the longer version:
Citigroup fears fresh wave of sovereign defaults and bank failures in eurozone
By Ambrose Evans-Pritchard, International Business Editor 6:18AM GMT 22 Dec 2010

Barclays warns of a financial storm as Federal Reserve's credibility crumbles

Ambrose Evans-Pritchard grooves on this kind of story and because he looks for them, he finds them. It was he who brought us RBC's warning "Royal Bank of Scotland: Global Stock and Credit Crash Alert". He's useful for putting stuff on the radar, not so much for inflection/turning points.
From the Telegraph:

US central bank accused of unleashing an inflation shock that will rock financial markets, reports Ambrose Evans-Pritchard

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth.">>>MORE

Credit Anstalt All Over Again "UniCredit Stock Halted After Plunge As Fresh Wave Of Italian Fears Emerges"

Following up on June 27ths "Is The Big Money Looking for a Credit Anstalt in Italy? (GS; JPM)":

I've mentioned Credit Anstalt a few times. Both Ambrose Evans-Pritchard and I were thinking about counterparties and bank runs. The collapse of CA brought on the second, nastier phase of the Great Depression.
Before the current bull move, Feb. 16, 2009:

Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown

I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.
From the Telegraph:

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung....

Well, other than that Generalfeldmarschall Paulus, how's the weather?
Creditanstalt failed in May 1931. From Kindleberger's "World in Depression: 1929-1939":

In 1929, the Bodenkreditanstalt was fused overnight with the Creditanstalt. The Bodenkreditanstalt brought to the Creditanstalt large loans to industrial concerns which could be maintained only by the device of ignoring market values...

Hmmm, sounds familiar.
Unicredit now owns Creditanstalt.

After the rescue of the bankrupt corpus and a couple mergers CA became part of Italy's Unicredit in 2006....

Here's the latest, from ZeroHedge:

Another day, another implosion in Italy, this time focusing on core bank UniCredit, which earlier dropped by 6.5% resulting in a stock halt, only to reopen just modestly higher.

There was no immediate catalyst, just more of the same: rumors that FinMin Tremonti is resigning, especially following the arrest of Marco Milanese which indicates the fallout is imminent (see below), rumors that Italian banks are failing stress tests, rumors that Italy has the most exposure to Greece, and other generalized fears which today coalesced around the bank that was the most active today on the European version of Sigma X.In other news, 2 Year government spreads are once again surging as GDP-weighted EU sovereign risk is at fresh all time highs (probably to make company to the Dow Jones Transportation index).
UniCredit stock plunging:

Most active Goldman's European dark pool...MORE

Remember When the BIS Was Warning That A Strong Dollar Would Wreck Everything?

Me too! We posted it on Sunday Dec. 7 as "Evans-Pritchard: 'Dollar surge endangers global debt edifice, warns BIS'" and noted:

Two quick points*:
1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.

Here's their first warning, six months earlier: "BIS: 'Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally'"

Here's the BIS press release and the Quarterly Review.

Although the Bank was focusing on Emerging Markets holding dollar denominated debt there are some other problems as well.

You really don't want to be Brazil.

Alphaville's Izabella Kaminska also picked up on how important the BIS heads-up might be:

Oh Crap: There's An Oil Angle In The BIS' Warning On Market Instability
"In Which Izabella Also Comments On Russia and Foreign Liabilities" 

The spot dollar index, which closed at 89.041 on Dec. 8 is at 94.5590 right now.

Recently:
"Dollar index hits 11-year high on strong jobs report"
Dollar and Oil Charts
A Primer on Oil's New Math

Also, from late November:
Evans-Pritchard: "Dollar smashes through resistance as mega-rally gathers pace"
"Dollar's Next Leg Up" 

Markets: What's Big and Bad and On the Horizon?

I usually don't have much time for Gluskin Sheff's David Rosenberg. His pig-headed refusal to listen to the market as the averages advanced more than 70% was not only arrogant but expensive for his firm's clients.

I can handle arrogant as long as you're right, hell I can tolerate a fat guy in a grass skirt and spike heel Manolo Blahniks if he's right.
It would be fun to watch him tottering around.
But Mr. Rosenberg hasn't been right for a while and he's not funny.

Funny is important if you're doing the Angel of Death schtick. Here's our thinking:

Unlike his fellow gloomster David Rosenberg, Société Générale's Albert Edwards amuses* as he forecasts gloom, doom and despair. They both bow to the master, the Telegraph's international business editor, Ambrose Evans-Pritchard whose writing I once described as a "continuum that ranges from morose to suicidal.
Here he is at his despondent best...

Back in October we posted "Gluskin Sheff’s David Rosenberg has finally lost it":

We haven't posted much, if anything, from Mr. Rosenberg. His adamant refusal to acknowledge the rising market is at odds with our approach, playing the cards you're dealt.
Unlike our gloomy pal Ambrose Evans-Pritchard who can be downright funny in the depths of his despair, Mr. Rosenberg is a strategist. He'll be right one of these days, we hope we are too.
Oh well, here's the story from FT Alphaville:

Poor Dave

Much as we love him, we must report that Gluskin Sheff’s David Rosenberg has finally lost it. Here’s the evidence - from his latest “Breakfast with Dave” note to clients on Thursday:

So far, the backup for the U.S. 10-year Treasury note yield is a 38% Fibonacci retracement of the decline from the nearby high established in August.

Fibonacci analysis!?!? That, surely, is the domain of wacko tip sheets and self-help investment seminars.

It seems the Dow’s journey above the 10,000 mark finally tipped Dave over the edge:

The media are certainly going to town on this news but it is, in fact, old news; it’s “only” the 26th time the Dow has managed to cross this milestone.

Dave, of course, has been leading us all in fighting the tape these past few months. A selfless act - and also a bit foolhardy, in hindsight. Look at the sad result...MORE

On the other hand his latest, via ZeroHedge caught my eye:

As usual, some prudent market observations from Rosie.

A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen.

First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.

Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).

Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).

Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?

Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs....

Bottom line: Stronger U.S. dollar. Rising bond yields. Lower commodity prices. Slower growth. And the stock market is flirting at post-crisis highs. Bond yields are rising temporarily and this will very likely prove to be a good buying opportunity; however, over the near-term, higher yield activity may well persist and the question is how the equity market is going to handle this backup in market rates....MORE

*A couple links from that post "Société Générale's Albert Edwards: "Stocks Drop May Turn Into ‘Rout’ as Economy Peaks":

May, 2008: "This Week’s Advice: Canned Food, Guns and a Ham Radio"

June, 2008: "Société Générale: “We see a y-shaped global recession. We are going down before looping backwards”'

October 7, 2009: "Climateer Line of the Day (Société Générale's Albert Edwards edition)":

“Investors think this is a sweet spot, but it is in fact a putrid boil that has not been properly lanced”

Ya gotta love it. And just so you know he isn't all grins and giggles:

***Alert****Economic and equity market meltdown imminent****Alert***

--September 5, 2008, ten days before Lehman failed, AIG became a wholly owned sub. of the U.S. Treasury, WaMu etc., two days before Fannie and Freddie were nationalized."Meltdown"-Société Générale"

"BIS records startling collapse of eurozone interbank loans"

Professor Krugman may have a comment or two on this.
Evans-Pritchard at the Telegraph:

Cross-border lending is falling drastically across the western world as banks slash exposure to Europe and bend to tougher capital rules, according to data from the Bank for International Settlements. 

Foreign bank loans fell by $472bn (£311bn) in rich countries in the fourth quarter of last year, contracting at an 8pc annual rate. The retrenchment was led by a collapse of interbank loans in the eurozone, where lenders in the creditor states continue to pull back from periphery countries.

Volumes fell by $284bn across the eurozone, a 20pc rate of contraction. Belt-tightening by banks is a key reason why the region remains stuck in recession for the seventh quarter in a row.

The BIS said in its quarterly report that the markets are “under the spell of monetary easing”, convinced that central banks will keep the asset boom going despite signs of “broad deceleration” in the US economy and fatigue in China.

Jaime Caruana, the BIS’s managing director, said last month that the authorities should refrain from further stimulus to keep growth alive, warning that excessive liquidity is distorting the financial system without achieving much. “If a medicine does not work as expected, it’s not necessarily because the dosage was too low,” he said.

The BIS was the only major watchdog to warn of a bubble before the Lehman crisis, and it has once again begun to fret over junk bonds and frothy asset prices....MORE 

See also:
May 17 
BIS General Manager: "Loose Central Bank Policies Looking Increasingly Dangerous"
May 17
More on The BIS and The End of QE
May 19 
Evans-Pritchard: "BIS and IMF attacks on quantitative easing deeply misguided warn monetarists"

Is The Big Money Looking for a Credit Anstalt in Italy? (GS; JPM)

I've mentioned Credit Anstalt a few times. Both Ambrose Evans-Pritchard and I were thinking about counterparties and bank runs. The collapse of CA brought on the second, nastier phase of the Great Depression.
Before the current bull move, Feb. 16, 2009:

Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown

I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.
From the Telegraph:

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung....

Well, other than that Generalfeldmarschall Paulus, how's the weather?
Creditanstalt failed in May 1931. From Kindleberger's "World in Depression: 1929-1939":

In 1929, the Bodenkreditanstalt was fused overnight with the Creditanstalt. The Bodenkreditanstalt brought to the Creditanstalt large loans to industrial concerns which could be maintained only by the device of ignoring market values...

Hmmm, sounds familiar.
Unicredit now owns Creditanstalt.

After the rescue of the bankrupt corpus and a couple mergers CA became part of Italy's Unicredit in 2006.
And today, from ZeroHedge:

Here Are The Most Actively Traded Names In Goldman's Dark Pool (Or Why Is The Big Money Fascinated With Italy?)

Courtesy of recent disclosures, the common man (as in anyone who does not pay millions in kickbacks, er, soft dollar fees to GS) can now observe what is being traded on Goldman's Dark Pool, better known as Sigma X. Why is this important? Because as Themis Trading presented last week, only 30% of all trading occurs on open exchange venues, meaning the bulk of actual shares change ownership behind the scenes, in places such as Sigma X, Chi X, and the dark pools of Credit Suisse, Citi, and various other banks, not to mention numerous other secondary ATS, where very little if any of the daily trading detail is released for general observation. This means that while HFT algos drive up the volume of numerous top 10 stocks merely for the sake of collecting rebates, the real action is in the most actively traded dark pool names, where the big boys are actively trading risk, where HFTs are non-existent, and the companies that represent the top 5 is what investors, speculators, and vacuum tubes should be focusing on. Not surprisingly, today's most active names are Banca Monte dei Paschi di Siena, Unicredit and Intesa Sanpaolo. Translation: someone is actively positioning for serious action in Italy shortly. 

The Realpolitik of Quantitative Easing (the Fed throws down the glove)

Although I poke gentle fun at Ambrose Evans-Pritchard's dour outlook:

Our old pal, The Telegraph's Ambrose Evans-Pritchard, writes on a continuum that ranges from morose to suicidal. Here he is at his despondent best...

the guy has sources that other writers would kill for.

Our post on Thursday "Peoples Daily: "World needs to stay vigilant about active depreciation of the dollar'" combined with A E-P's latest are scary.
From the Telegraph:
Currency wars are necessary if all else fails

The overwhelming fact of the global currency system is that America needs a much weaker dollar to bring its economy back into kilter and avoid slow ruin, yet the rest of the world cannot easily handle the consequences of such a wrenching adjustment. There is not enough demand to go around.

Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.

The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.

They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1pc on the latest U6 index and rising again.
Each country is doing so for understandable reasons: Japan to avoid a deflationary crisis, China to hold together a political order that is more fragile than it looks. In both these cases they are trapped because they clung too long to a mercantilist export strategy, failing to wean themselves off American demand when the going was good.
Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.

The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.

This is what QE2 means, though Fed officials prefer to talk of their “mandate” of supporting employment. It is nothing like QE1, which was emergency action to halt the economic free-fall of late 2008 and early 2009. This time the Fed is using QE as a long-term tool to manage America’s chronic ailments....MORE

"Deflation on the prowl as Bernanke shuts down his printing press" (FNM; FRE)

As I said last week in "Markets: What's Big and Bad and On the Horizon?":

I usually don't have much time for Gluskin Sheff's David Rosenberg. His pig-headed refusal to listen to the market as the averages advanced more than 70% was not only arrogant but expensive for his firm's clients.

I can handle arrogant as long as you're right; hell I can tolerate a fat guy in a grass skirt and spike heel Manolo Blahniks if he's right.
It would be fun to watch him tottering around.
But Mr. Rosenberg hasn't been right for a while and he's not funny.

Funny is important if you're doing the Angel of Death schtick. Here's our thinking:

Unlike his fellow gloomster David Rosenberg, Société Générale's Albert Edwards amuses* as he forecasts gloom, doom and despair. They both bow to the master, the Telegraph's international business editor, Ambrose Evans-Pritchard whose writing I once described as a "continuum that ranges from morose to suicidal.
Here he is at his despondent best...

Now here's funny. Mr. Edwards' comment that won him the prestigious Climateer 'Line of the Day' last October:

“Investors think this is a sweet spot, but it is in fact a putrid boil that has not been properly lanced”

On Sunday evening (6:35 p.m.) Mr. Evans-Pritchard hit a walk-off home run with the sub-head of the headline piece:

The most audacious monetary experiment in modern history ended on April Fools' Day. America must walk without crutches, on gangrenous legs.

Here's the rest, from the Telegraph:

The US Federal Reserve has completed its purchase of $1.7 trillion (£1.1bn) of mortgage securities, agency debt and US Treasuries, the conjuring trick of "credit easing" that allowed Ben Bernanke to create stimulus equal to 12pc of GDP.

The Fed's money creation has been more or less the size of Washington's borrowing needs for the last year, as Beijing notes with suspicion.

We will never know whether it was wise to go nuclear. My view – anathema to readers, I fear – is that Ben Bernanke and Britain's Mervyn King saved us from potential calamity. We were all too close to the tipping point illustrated in Irving Fisher's Debt Deflation Causes of Great Depressions, the moment when the sailing ship catches water and capsizes instead of righting itself by natural rhythm.

Work by Berkeley Professor Barry Eichengreen shows that global trade, industrial output, and stock markets all crashed at a faster rate over the six terrifying months after the Lehman crisis than during the early 1930s. How quickly we forget, and how easily we are seduced by a 76pc stock rally into thinking it was a storm in a teacup. Just wait until the day fiscal retribution comes.

The $1.7 trillion created out of nothing will vanish as the bonds are sold on the open market. Not too quickly, let us hope. Easy money must cushion the blow of spending cuts. Even talk of ending QE amounts to tightening. While the US economy has begun to create jobs again – plus 114,000 in March, stripping out short-term census workers – there were false dawns in 2002 and 1982. The broader U6 jobless rate nudged up to 16.9pc.

Bond vigilantes ask who will step into the Fed's shoes to soak up the flood of debt from Washington, whether from the Obama Treasury or from Fannie Mae and Freddie Mac – the mortgage giants on death row.

Yields on 10-year Treasuries have jumped 30 basis points in two weeks to 3.94pc. Alan Greenspan called it "the canary in the mine" for US sovereign debt.

The yield spike is happening even though core inflation (trimmed mean PCE) has been dropping like a stone, touching a record low of 1.04pc in February. The Fed's Monetary Multiplier is languishing at 0.815, a flat tire.

The basic 30-year fixed mortgage has risen to 5.08pc from 4.71pc in December. The US housing market looks too sickly to withstand this. New home sales have fallen for four months in a row, dropping to a half-century low in February. The inventory of unsold homes has jumped to 8.6 months supply. Some 24pc of mortgages are in negative equity.

Mr Bernanke is taking the fateful decision to knock away the props of the mortgage market even though the M3 broad money supply has been contracting at an epic pace of 6pc since September. If M3 gives early warning of six to 12 months, beware.

Mr Bernanke does not look at M3, disdaining such monetarist eccentricities as medieval sorcery. The M3 signal has certainly been erratic over the years. It can be distorted by portfolio shifts. But the refusal to even look at it has been the root of much trouble over the past four years....MORE

For the record, regarding that bolded bit, on Mar. 24 we posted Uh oh: "Treasury Chief Rules out GSEs as Buyers of MBS" (FNM: FRE):

This seems like rather a big deal. Who will buy my MBS's now?
From Structured Finance News...

"Europe stumbles blindly towards its 1931 moment"

We haven't checked in with Ambrose Evans-Pritchard in a while, here goes:

It is the European Central Bank that should be printing money on a mass scale to purchase government debt, not the US Federal Reserve.

Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.

If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.

“Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece....MORE

The last time Ambrose brought up Credit Anstalt was in February 2009:
Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown

I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.
From the Telegraph:

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point.
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East....MORE

Well, other than that Generalfeldmarschall Paulus, how's the weather?
Creditanstalt failed in May 1931. From Kindleberger's "World in Depression: 1929-1939":

In 1929, the Bodenkreditanstalt was fused overnight with the Creditanstalt. The Bodenkreditanstalt brought to the Creditanstalt large loans to industrial concerns which could be maintained only by the device of ignoring market values...*

Hmmm, sounds familiar.
Unicredit now owns Creditanstalt.

Royal Bank of Scotland uber-bear issues fresh alert on global stock markets

I swung by the Telegraph to see why our old pal Ambrose Evans-Pritchard wasn't writing much. Turns out he has been, we just missed it.
From the Telegraph (August 12):

Three-month slide could hit record lows, Royal Bank of Scotland chief credit strategist Bob Janjuah predicts.

Britain's Uber-bear is growling again. After predicting a torrid "relief rally" over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears.

"We are now in the middle of a parabolic spike up," he said in his latest confidential note to clients.

"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."

The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice.

He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.

Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a "very nasty period is soon to be upon us" as – indeed it was. Lehman Brothers and AIG imploded weeks later.

This time he expects the S&P 500 index of US equities to reach the "mid 500s", almost halving from current levels near 1000. Such a fall would take London's FTSE 100 to around 2,500. The iTraxx Crossover index measuring spreads on low-grade European debt will double to 1250.

Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September....MORE

Also from Mr. Evans-Pritchard this month:

August 11- Credit tightening threatens China's 'giant Ponzi scheme'

August 15- There's no quick fix to the global economy's excess capacity

August 18- Morgan Stanley issues alert on corporate bonds after explosive rally

August 18- Germany braces for second wave of credit crunch

Such a cheery sort. If it wasn't for the fact that he's been more right than wrong for the last two years, I could barely stand to read him.

Totalitarian Europe: "The great euro Putsch rolls on as two democracies fall"

Ambrose Evans-Pritchard is pissed and I'm a bit spooked.
Compare his headline to the one I crafted yesterday.
Yikes.
I'm channeling Ambrose!

This has happened before. I once did an intro that referred to the distant sound of cannons. Two days later Evans-Pritchard has the same August 1914 imagery. But better, backwards and in heels.
From the Telegraph:

Europe’s scorched-earth policies have begun in earnest. The inherent flaws of monetary union have created a crisis of such gravity that EU leaders now feel authorized to topple two elected governments. 

As I long feared, the flood of cheap credit into Southern Europe and the slow death of Club Med industry by currency asphyxiation have together created such a dangerous situation for world finance that informed opinion is willing to turn a blind eye to EU sovereign trespass. Some even applaud.

The Greeks were ordered to drop their referendum on measures that reduce their country to a sort of Manchukuo, with EU commissars "on the ground", installed in each ministry, drawing up lists of state assets to be liquidated to pay foreign creditors.

Europe had the monetary and fiscal means to contain the EMU debt crisis long enough for Greeks to give or withhold their crucial assent to this ultimatum in December.

It chose - under German-Dutch pressure - not deploy those means. Instead it forced Greece to capitulate by cutting off an agreed loan payment. 

In Italy, the European Central Bank has engineered the downfall of Silvio Berlusconi by playing the bond markets, switching purchases on and off to enforce compliance with its written dictates ("La Lettera"), and ultimately allowing 10-year yields to spike to 7.45pc to drive him out.

Europe’s president Herman Van Rompuy swooped in to Rome to clinch the Putsch. "Italy needs reforms not elections," he said.

We are not that far from use of EU judicial coercion, and then EU police power, and ultimately EU "border troops" - for those old enough to remember Soviet methods of fraternal assistance.

Chancellor Angela Merkel tells us that peace in Europe can no longer be taken for granted, and she is right. Her own Gothic actions and her inflexible imposition of 1930s Gold Standard contraction and debt-deflation on Southern Europe is itself preparing the ground for Europe’s civil war (hopefully pacific), a rebellion by the South against the North....MORE

HT: Macro and Other Market Musings who writes:

...What a sobering interpretation of recent events.  It brings to mind the famous 1997 Martin Feldstein article titled "EMU and International Conflict."  Here is the first paragraph...

See also yesterday's:

Shitzkreig: In the Past Two Weeks Goldman Sachs Has Taken Over Both the European Central Bank and the Italian Government

Except for the Urban Dictionary entries Climateer Investing has the highest ranked use of the word shitzkreig.
We're so proud.

1914 Redux: Watching Austria, Hungary

In a 2008 post, "Why the heck should I care about Iceland?" I said:

...Reading Mr. Evans-Pritchard's Balkan reference, you can almost hear a muted drumbeat of 1914. Spooky.

During his time at Trinity College, Cambridge Mr. Evans-Pritchard probably read a bit of European history; in April of this year he got me going again when I said:

Gather round kids while Uncle Ambrose tells us about the spring of 2010....

A very obscure evocation of a Solzhenitsyn title, "August 1914".
This meandering was prompted by this morning's headlines:

MarketWatch:
Report: Hungary official says economy 'grave'

MarketBeat:
Really? Now We’re Worried About Hungary?

ZeroHedge:
Europe's Core Is Burning, As Austria Next On The Implosion Radar; German, France CDS Blow Out

Here's hoping that I don't have to trot out Tuchman's "The March of Folly" as my next reference.
Or worse, her "The guns of August".

"Five years of financial crisis through the eyes of Ambrose Evans-Pritchard"

From the Telegraph:

Ambrose Evans-Pritchard, the Telegraph's international business editor, has followed the global financial crisis from the credit crunch to the eurozone debt crisis. Here is a selection of news and views from his stories, blogs and columns over the past five years.

9 August, 2007: Dow crashes 387 as contagion spreads after the European Central Bank provides emergency liquidity to the credit markets for the first time since the 9/11 terrorist attacks, acting to prevent contagion from the US sub-prime mortgage slump spreading through the German, French, and Dutch banking systems.

Anybody who has been on holiday has come back to face a different world. It's the Wild West right now," said David Bloom, chief currency strategist at HSBC. "Investors can't decide whether we're looking at a fundamental crisis." 
 

22 December, 2007: Crisis may make 1929 look a 'walk in the park'

The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor. "The sub-prime mortgage crisis hit a vital nerve of the international financial system."
-----
Ambrose: The risk for Britain – as property buckles – is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers.

Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front.
------

Ambrose: The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.

...MORE

Econ: Nouriel Roubini Is Troubled

 From Project Syndicate, June 30:

The Looming Stagflationary Debt Crisis

Years of ultra-loose fiscal and monetary policies have put the global economy on track for a slow-motion train wreck in the coming years. When the crash comes, the stagflation of the 1970s will be combined with the spiraling debt crises of the post-2008 era, leaving major central banks in an impossible position.

NEW YORK – In April, I warned that today’s extremely loose monetary and fiscal policies, when combined with a number of negative supply shocks, could result in 1970s-style stagflation (high inflation alongside a recession). In fact, the risk today is even bigger than it was then.

After all, debt ratios in advanced economies and most emerging markets were much lower in the 1970s, which is why stagflation has not been associated with debt crises historically. If anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed rates, thus reducing many advanced economies’ public-debt burdens.  

Conversely, during the 2007-08 financial crisis, high debt ratios (private and public) caused a severe debt crisis – as housing bubbles burst – but the ensuing recession led to low inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to aggregate demand, whereas the risks today are on the supply side.

We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.

But in the meantime, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic aging in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the balkanization of global supply chains....'

....MUCH MORE  

Our most recent links to Mr. Roubini (who seems even gloomier since he left NYU Stern): 

June 5

Nouriel Roubini: "Leaders and Laggards in the Post-Pandemic Recovery"

 April 21 

Roubini: "Is Stagflation Coming?"

And an old favorite, from September 2015:
Roubini Dismisses China Scare as False Alarm, Stuns With Optimism

We seem to have entered a phantasmagorical vortex of shape-shifting market madness.
Or something.
It's not the headline, it's the self-appointed messenger.*
As for Roubini, we've never been all that impressed**
From Ambrose Evans-Pritchard writing at the Telegraph, Sept. 4, 2015:....

***** 

*I used to joke "Our old pal, the Telegraph's Ambrose Evans-Pritchard, writes on a continuum that ranges from morose to suicidal. Here he is at his despondent best...

** The last time Nouriel was like this, January 2014:

Yikes! Nouriel Roubini Gets Bullish on Global Economy 

To be fair, Roubini is better at economics than he is at business or investments. See links after the jump....