Don’t like a tax on Cypriot depositors? No problem – we’ll pretend to scrap it.

It got too much play. The proposal to levy an across-the-board tax on deposits in Cypriot banks, for good reason, was being called theft.

So in order to quell the uprising and avoid setting a precedent everyone around the world could fear, Cyprus has agreed to a deal different only in semantics.

Here is Reuters:

Swiftly endorsed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank".

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalize Bank of Cyprus through a deposit/equity conversion.

The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.

Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.

An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned.

We can all rest assured a tax will not be levied on depositors. Instead, a portion of uninsured deposits will simply be confiscated to pay off debts of a failed bank and raise enough money to satisfy bailout conditions.

Already there has been a limit of 100 euros put on ATM withdrawals. And come Tuesday, when banks are scheduled to reopen, additional capital controls will likely be needed. Parliament has given government the all-clear to apply capital controls if and when necessary.

All these last-minute antics are being categorized as a solution.

I suppose, considering the nature of the eurozone’s previous solutions, it is a solution. After all, they pulled the contagion card again. More precisely, they warned that if these drastic measures were not taken, the inevitable conclusion would be Cyprus withdrawing from the Eurozone.

Ahhh, say it ain’t so. Please no.

Officials are not hiding their motives anymore – they are acting in order to prevent financial market sell-offs. An exit by Cyprus, insignificant when measured by GDP, would open the door for other problem countries to escape the Eurozone, devalue and move towards a meaningful, albeit painful, recovery.

The thing is: any recovery in Cyprus will be painful no matter what. And this deal does very little to ensure depositors around the Eurozone their money won’t also be subject to confiscation. And potential capital controls would serve only to legitimize their concerns.

I suspect the kneejerk reaction of markets could be positive but very short-lived. I don’t see a meaningful difference between the recent deal and the proposals that have shaken markets to-date. I would suspect the Troika, namely the European Central Bank, will need to further maneuver so that Cypriot banks can be recapitalized, freed up to generate sufficient collateral and avoid the unintended consequences of capital controls.

Otherwise, this could all turn ugly very fast.


-JR Crooks


Intermediate-term currency drivers: growth & yield!

“I have bought golden opinions from all sorts of people.”  

- William Shakespeare  

1. Growth: US (orange line) vs. Eurozone (purple line):  US at 57.3 and rising; Eurozone at 48.7 and falling ...        032312 global pmi                  

2. Yield: US versus Eurozone 10-year benchmark yield spread now favors the US by 35 basis points and is rising. 

032312 10y notes

If growth and yield, in their typical feedback loop, are still considered key drivers of currencies over the intermediate-term (and I think they are), it suggests the dollar should be well supported relative to the euro in the months ahead. 

Happy Friday!    


Are stars aligning for a big break in commodities?

mining truck“According to analysts at Credit Suisse, the consensus has "severely" underestimated the amount of housing supply set to hit the market in coming years. Chinese developers own enough land to build almost 100,000,000 new housing units. Together with the sale of some empty apartments, this would be enough to satisfy China's housing demand for up to 20 years, the analysts have warned."  

Financial Times, 22 March 2012  

I woke up this morning and checked my charts, as always. I have been expecting a downturn in risk appetite to manifest in crumbling asset prices, at least until correction happened.  

I’ve been getting a bit discouraged with this call, as most everything has stayed relatively buoyant. But today after looking at the commodities I think we could be getting very close to a substantial and playable drop, technically speaking.  

CRB Commodities Index, daily: a convincing break below critical support at its 50-day moving average today? It seems so ...      

032212 crb resized 600

And the newswire this morning suggests global growth expectations could add pressure and break the camel’s back. Let’s go to Reuters:  

The euro zone's economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity that even the most pessimistic economists failed to predict, business surveys showed on Thursday.  

The purchasing managers indexes (PMIs), which capture how thousands of companies have fared over the month, effectively quashed any lingering hopes the euro zone might avoid falling into a new recession.  

Most worryingly, the surveys suggested business activity in economic heavyweights France and Germany is starting to flag, with job losses mounting across the bloc at the fastest pace since March 2010.  

Markit's Eurozone Composite PMI fell to 48.7 in March from 49.3 in February, slipping further below the 50 mark that separates growth from contraction and capping the first quarter of the year in disappointing style.  

The “resolution” that secured Greece’s second bailout brought more calm to the market than I expected ... up to, during and after the process. Thus, it seemed it would take a noticeable downturn in growth numbers to change the sentiment ... since all the PR measures will certainly fall short of actually stopping recession.  

Back to Reuters:  

The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6. New orders sank to a four-month low, an expected rebound in export orders failed to emerge and new hiring slumped to a two-year low.  

Clearly, China has been on a steady and gradual downward growth trajectory. But thanks to eurozone commotion and a gravity-defying US stock market, the slower growth in China has not been met with much scrutiny.  

These PMI numbers, however, are a favorite among analysts considering China’s lasting dependence on manufacturing. PMI reports do not go unnoticed, especially when they are south of 50. Granted, this is the HSBC number and not the “official” number reported by China which usually comes in a smidge higher. Nevertheless, here is a chart that encapsulates it all: 

032212 china pmi stuff

This theme of the eurozone falling into recession followed by lower-than-expected Chinese growth has been part of our fundamental story for some time now. And for those who follow me more closely, and those who subscribe to my Commodities Essential newsletter, know, I expect this dynamic will ultimately hit commodities hard.  

Another take away is the improving US growth differential. With investors of an increasingly international mindset, investing has become very much a relative game at times (note: it’s always a relative game in the FX market.) That said, we could continue to see a relative outperformance in US assets relative to those in Europe and Asia.  

US jobless claims fell to their lowest level in four years, as reported this morning, for what it’s worth.

This means US stocks could continue to outpace foreign stocks on the upside. I am just waiting to find out if US stocks will ever succumb to any downside.   We could be close.


Is this China’s last ditch effort to avoid the hard landing?

shop“We will improve policies that encourage consumption.”

- Wen Jiabao

Let me ask: what have China’s central planners now admitted is integral in supporting sustainable Chinese economic growth?  

  1. New emphasis on consumption-led growth to rebalance the lopsidedness of investment growth that’s currently compensating for softer export growth

  2. The need to cool speculative bubbles within the economy so as to reduce the inflationary pressures and manage social perceptions

I agree. But easier said than done, of course.  

We talk a lot about why the shift to sufficient levels of consumption will be tough for China to achieve with any efficiency. Basically, the consumer faces pressures from inflation and redirected capital flows, from the central government to local government investment projects, which prop up the current system, despite the need for a shift.  

Amidst the puzzle pieces China is using to put together an economic rebalancing, commentators have sought to expose the main obstacles to achieving that goal. Real estate is certainly among the largest obstacles. It is certainly worth watching.  

While we don’t get as much bubble talk as we once did, China’s housing situation is still fragile ... and it is still an important piece in China’s economy.  

It is among the reasons we see comments from the Chinese Premier today regarding a revised growth target lower than the all-important 8% level, a need to stem rising home prices, a commitment to making credit accessible, and:  

He also said the government would defuse rising local government debt, regarded by many investors as the key risk to fiscal sustainability. Government figures show about 10.7 trillion yuan ($1.7 trillion) was owed by local governments at the end of 2010.  

That was from Reuters. So is this:  

China's big four state-backed banks will lend more to qualified property developers to boost entry level housing supply, a statement in the central bank's newspaper on Friday said, a signal that they are ready to ratchet up real estate lending.


According to the statement published on the front page of Financial News, a paper run by the People's Bank of China, the big four banks "will proactively support qualified property developers to develop common commercial housing that is in demand to boost effective supply of common commercial housing."  

There are a lot of conflicting winds blowing through the Chinese economy. Some measures may achieve their intended goal; but much of the policy jawboning amounts to setting perceptions, conveying to the public just what Chinese officials want its people, and investors, to expect.  

When it comes to China’s revised GDP target, it’s anticipated that they are just setting the bar low so they look better once they clear it. Until now 8% marked the floor at which China believed it could achieve growth necessary to keep social concern from boiling over.  

Apparently lowering the growth target offers policymakers room to reform the system and encourage businesses all at the same time. Reuters:  

Lower growth will allow Beijing to reform key price controls without causing an inflation spike, so monetary policy can stay broadly expansionary to ensure a steady flow of credit to the small and medium-sized firms the government wants to encourage.  

In a nutshell, that’s the familiar stop-and-go policymaking Chinese officials have become known for over the last 4 years.  

China has succeeded in recent months to bring inflation down. And CPI out later this week will probably reveal prices are stable around 4%. This opens the window for China to take supportive action aimed at growth numbers, and they know it.  

But one has to wonder if this is China last chance to dance. Besides the internal risks to growth, China continues to tug with a Europe that’s heading into recession and a US that’s fighting to stay above water. If they are able to stabilize investor expectations, their efforts could be supportive for markets through to the end of Q2 or into Q3 assuming there is not some inescapable external shock.  

The Shanghai Composite Index began reflecting the Chinese growth downturn back in the second quarter of 2011; it has since rallied back in 2012. But will we see Chinese stocks foreshadow a renewed downturn in the Chinese economy that is deep enough to disappoint?        

030512 ssec

We might get some near-term selling that is technical in nature. But as I said, China is working overtime to keep things going. That may mean it is still a couple more months before we see real fallout in Chinese stocks and global risk appetite.  

For good measures, here is the Shanghai Composite and the S&P 500:  

030512 ssec spx

Seems like some sort of correction is due.


Can China 'steel' the risk spotlight from Europe?




"The responsibility of tolerance lies in those who have the wider vision." 

-George Eliot


So we have witnessed a roughly streak of risk appetite across the markets. A whopping 10 out of the last 13 weeks the S&P 500 has closed higher than the prior week’s close.  

US stocks have undergone a tight and steady ascent, aided and abetted by optimism (rather, the lack of renewed pessimism) in the eurozone and an ongoing corrective rally in the euro.    

022712 eur

I mean, there has been plenty of real reason to be pessimistic; but it’s almost as if investors have revisited an obviously irrational and fundamentally careless mindset. My diagnosis of this condition goes a little something like this:  

==> I’m fatigued by the slow-speed train wreck of deliberations aimed at rescuing the eurozone ...

==> The amount of coverage lent to the Sovereign debt crisis and Greece is sickening, even if it is warranted ...

==> I don’t want to miss the bus on another global central bank liquidity-induced market rally ...

==> If there is actually a Greek default or some other systemic trigger of global market contagion, I’m sure I’ll hear about it ...

When the time comes I’ll be able to take the needed steps to secure my money efficiently ...  

In fact, I think I’ve written about this ‘mindset’ before ... in explaining the potential for “black swans” post credit crunch 2008. (Of course, it is a contradiction of terms to be able to identify potential black swan events.) Bottom line: investors are willing to take on risk because they have become so saturated with warnings and forecasts that they’ve developed a sense of complacency, a false sense of security.  

Well, consider this another warning!      

022712 vix

Above is the VIX, a volatility index use to gauge investor fear and uncertainty. It’s back to low levels that have marked the floor since the 2008 financial crisis sent the vix into uncharted highs. In other words, investors are about as comfortable (complacent) as they’ve been in this era of risk.  

Moving to economics, consider this ...  

LONDON, Feb 24 (Reuters) - Global steel production is experiencing its sharpest contraction  since the dark days of 2009, when the industry was gripped by the manufacturing freeze that followed the 2008 financial crisis.     

Global output in January shrank by 8 percent year-on-year as the slowdown evident over the closing stages of 2011 accelerated and deepened.  


In the euro zone itself output in January was down by 6 percent year-on-year with that in the region's largest producer, Germany, tumbling by 9 percent.   

Steel – what’s the big deal?  

Obviously, it is a raw material that is critical to so many manufacturing applications. And obviously, contraction in manufacturing is not a welcomed event for investors betting on economic growth. But the steel story alone isn’t going to be a catalyst for risk-aversion that sends investors fleeing the markets.  

It is, however, a China story. And it is an example of the headwinds the Chinese economy (and the rest of the world) faces.  

China is at a point where they must build a substantial consumer class to make up for softening in external demand. Because while we see steel capacity shuttered in Europe as they enter recession, China also wrestles with overcapacity across many sectors that have been artificially buoyed by government investment initiatives.  

And now that the residential real estate bubble is deflating – intentionally or unintentionally – there will be a headwind pressing hard against the demand for steel, among other things. Oddly enough, the hope for the steel industry and continued production rests on the demand from social housing initiatives aimed at providing affordable housing to so many citizens who were priced out of the market as the real estate bubble inflated, despite the massive amount of vacant housing.  

Ultimately, China is experiencing a slowdown in growth and they are pinning growth hopes on the Chinese citizens’ capacity to increase consumption. But when purchasing power is diminished from inflation and a controlled currency, and when households bear the burden of the government’s investment strategy that funnels money into superficial investment projects instead of the consumer sector, the weight of this new responsibility appears even heavier.  

I do think investors are awaiting an actual default in Greece, or hard and irreversible evidence that the Sovereign debt crisis cannot be contained as expected, before they run for the exits. But I also think their complacency or indifference at this stage blinds them to the risk that China will majorly disappoint.  

To wit, there is another mindset out there:  

China always pulls through despite the warnings of imminent economic collapse; I’ll believe it when I see it.  

I hate to be cliché and say ‘this time is different’ ... so I’ll just say ‘keep your eyes open this time.’


Euro rally: Point, Counterpoint, and Guesses

foolCaptain of our fairy band,

Helena is here at hand,

And the youth, mistook by me,

Pleading for a lover's fee.

Shall we their fond pageant see?

Lord, what fools these mortals be!

- A Midsummer Nights Dream Act 3, scene 2


It is said that markets discount the stuff we do know and run on the stuff we don’t.  Let’s take a look at what we do know, might know, and some best guesses about the future (called forecasts by “serious” analysts), as it relates to the rally in EUR/USD:  

1. Euro short rates relative to the US have turned higher again, i.e. the yield differential in favor of euro is improving.

Question: Will this continue? 

Best Guess: I don’t think so because euro supply may begin to overwhelm demand (see #2 below).  And if US growth is for real, and a the 10 nation Eurozone recession is for real, one would expect US 3-month benchmark rates to drift higher relative to the euro.  

2. European Central Bank expected to flood banks with more credit next week; euro seemed to rally sharply on the last round of Long-term Refinancing Operations (LTRO) by the European Central Bank, i.e. three-year term loans to the European banking system. 

Question:  Will we see the same type of rally in the periphery debt this time around?

Best Guess: Unlikely, in fact it might be a good time for those who bought last time to sell into the next round of ECB Long-term Refinancing Operations.  If so, if the EUR/USD rally shows signs of stalling next week, it could be time to start looking the other way.  

3. There is a lot of Fed jawboning about the potential for QE3.

Question: Is QE3 baked in the cake?

Best Guess: I don’t think so.  Two points here: 1) If the US recovery is for real, it doesn’t make sense that Fed Governors are so boisterous about the potential for QE3; and 2) Even Ben Bernanke (going out on limb here) has to understand that monetary policy stimulus has limits that become counterproductive at some stage and many, including me, think we are into the counterproductive territory.  Plus, how will QE3 that sits on US banks' balance sheets help any more than the pledge to hold Fed Funds rates low into 2014, in and of itself an incredible act by a central bank chief? It is what a rational person, assuming Ben is rationale, may ask himself.

Bottom line: Though the recent move in EUR/USD is powerful, I think it is a relatively near-term event. Here’s why:  1) If the US is really growing, the dollar at some point wins on growth and yield relative to euro.  Growth and yield are the intermediate-term drivers for currencies, and 2) if the US goes back into recession, a case we made in our latest Global Investor monthly issue; Europe goes into an even deeper one and China is in trouble too.  This means the US dollar, for all its warts, gets a big risk bid.  

We watch and see how reality plays out against our best guesses ...   

EUR/USD Daily:      

describe the image


130 billion bad reasons to think the euro's foundation has changed.

crushed taxi“So what?” he asked. “Things will only get worse. We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.”  

-Anastasis Chrisopoulos, Athens taxi driver (from Reuters)


130-billion-euro here, 130-billion-euro there, and pretty soon you have to start finding some growth!

One adage that seems to work as much as anything else, and why it is an adage I guess, is “buy the rumor and sell the news.”  I won’t bore you with the behavioral aspects of why this works, I think you know.  We are seeing it a bit this morning on display on news a Greek default has been averted: the euro is lower, and ditto for most Eurozone bonds since the announcement of a deal that gives Greece another 130-billion-euro it can pour down the rabbit hole with the rest of the money funneled in by Eurozone taxpayers.   

Of course, sooner or later financial engineering reaches the limits of its public relations effect and there must be some underlying payoff from said engineering besides getting funds to follow banks chasing into periphery debt for a trade.  It’s not that rising periphery bond prices, i.e. lower yields, isn’t helpful; it is.  But even at current rate levels, it will be mighty hard for many countries to maintain austerity pledges; all attempts to do so will likely accentuate the trend we see in the chart below:      

022112 ez gdp

And of course, this chart is the mirror image of the domestic adjustments periphery countries have to make because they do not have a free-floating currency available to help them make these adjustments:      

022112 ez unemployment

Thus, periphery economies desperately need some growth.  Rising unemployment and tighter budgets will not produce revenues needed to pay debt; instead it produces a self-feeing vicious spiral downward.  This view seems completely at odds with the Troika program even though the Greek economy provides them with live test case of abject failure stemming directly from the implementation of their own flawed theories.     

And here is why it will likely get worse for Greece and other periphery countries whose growth is heading lower—the real economy will be starved.   

We have already witnessed this economic/money/manipulation phenomenon in the US, from the WSJ this morning:  

“The eight giant European banks that have disclosed their annual results in recent weeks reported holding a total of about $816 billion in cash and deposits at central banks as of Dec. 31.  That is up 50% from a year earlier, when the same banks were holding roughly $543 billion.”  

Does any of this sound familiar?  You can lead a horse to water, in fact you can force-feed said horse with massive amounts of reserves, but you can’t make him lend any of it to the real economy where real people build real businesses and hire other real people who need real jobs.   

Just in case you forgot just how tightly US banks have held on to their Fed sponsored reserves via the massively steep yield curve that impoverishes savers to subsidize bank healing, here is a look.  This chart shows reserves in the US banking system ... hmmm ... three years and counting so far since Bernanke and Company decided this is the only viable strategy for the economy.  Viable for financial assets, but the other side of the economy is still starved ...    

022112 fed reserves 

The point is, despite the new Greek rescue (I am losing count how many we have had so far), it appears the Eurozone, now clearly a two-track world with Germany bathing in credit and low rates and low unemployment (which adds to more angst and animosity toward Germans amongst the PIIGS), appears collectively heading into deeper recession.  

One wonders if now, finally, EU leaders have run out of rabbits of financial engineering to pull from their hats.  Financial engineering is a lot easier than real growth.  If you don’t believe me, go ask Goldman; after all it is their fun and games that caused much of this Greek problem in the first place.  

022112 eur vs gdp     

Hmmm ...