Look Out Below, Italian Edition
Good Monday morning.
Systemic contagion is the order of the day. We awake to find Italy, the 3rd largest economy in Europe the EU, slipping into crisis. The EU has called emergency meetings to respond to yet another banking/credit crisis, which may be beyond the EU’s ability to throw money at. The European rescue fund now in place does not have enough assets to cover Italy’s problems. The cost of insuring against default on Portuguese, Irish and Greek government debt rose to records.
In a classic act of misdirection, Italy is ordering short sellers to disclose their positions, because after all, the entire European credit crisis was caused by analysts who identified over valued stocks. A whiff of desperation hangs over this diversionary action, reminscent of similarly foolish attempts done in 2008 in the US.
US futures have been falling all morning, looking like 0.75% drop.
The wild card in the US has been government rescues and the implicit (some say explicit) targeting of asset prices by the Fed. This has skewed the Trading action — there is a very rational fear amongst the short community of yet another ill-advised bailout of undeserving fools.
Sell offs have been shallow and contained, as we saw Friday after a simply god-awful jobs number. However, that may be coming to an end. Markets have risen on especially light volume, and the quarter ending window dressing we saw the half of June is suspect. Expectations for earnings seasons could be too high as well.
The bottom line remains: The Low hanging fruit in this rally appear to have been picked, and a modest correction appears to be underway. Markets have been modestly overbought, and in need of some corrective action. Whether this turns into anything more than a pullback off of recent highs will be determined in the coming days . . .
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July 11th, 2011 at 7:56 am
Bloomberg says that Italian bonds are yielding 5.40% today, for a spread of nearly 2.7 percentage points over German sovereign debt.
This margin of 2.7 percentage points is roughly equal to the future economic growth that Italy needs to achieve. With Italian debt at 110 percent of GDP, excess interest costs will eat up all the growth margin and leave the Italian economy treading water, as debt-to-GDP carries on rising.
Europe’s statists can engineer rescues, but they cannot command market-set sovereign interest rates to decline. In the longer run, there is no escape for a country whose nominal interest rate exceeds its nominal growth rate, while its debt exceeds its GDP.
GLOBAL JUBILEE 2020 — be there, or be square!
July 11th, 2011 at 8:04 am
Italy is the 4th largest economy in Europe, 3rd largest of countries on the euro.
http://en.wikipedia.org/wiki/Economy_of_the_European_Union
~~~
BR: Oops! I’ll fix above.
Keep in mind that the UK is a) not in the EU; 2. Not on the continent mainland, and often referred to separately.
Regardless, Italy is much bigger than Greece, Ireland, and Portugal
July 11th, 2011 at 8:12 am
Very eloquently stated, BR. As opposed to the call on the Hindenberg disaster…
July 11th, 2011 at 8:30 am
Now that mainstream news is cozying up to Greek default (with Irish default as a well-me-too-then?) and Italy is on deck its time to guess what happens next.
1) Shrinkage of the Euro Zone? or fragmentation into Drachma-Euros, Polska-Euros and Teutonic-Euros?
2) Americas 2nd Marshall plan? The US generously prints enough for everybody?
3) Somebody tries gold/silver/oil backed currency?
July 11th, 2011 at 8:33 am
The FTSE MIB peaked on May 18 2007 at 44,364. Right now it sits at 18,426. That’s a 58.5% haircut off the top.
If the S&P500 was off 58.5% since its October 9 2007 peak it would sit at 649 today!
One is not like the other…
July 11th, 2011 at 8:35 am
meanwhile, more human jobs are lost to robots:
http://cryptogon.com/?p=23438
July 11th, 2011 at 8:49 am
Are we at a Creditanstalt moment? http://en.wikipedia.org/wiki/Creditanstalt
Is there an Ivar Kreuger to be found dead of a self-inflicted gunshot (Branson is the closest modern day figure I can think of but he is puny in comparison)? http://en.wikipedia.org/wiki/Ivar_Kreuger
Fun times indeed.
July 11th, 2011 at 8:50 am
If the Black Swan arrives under cover of darkness, will anyone know? Is the Black Swan so large that we have mistaken its shadow for night?
We have failed to address the very real structural problems of our economy. We have built our economic house on a foundation of sand. The foundation has sunken and cracked, but those on the upper floors are unconcerned, because they don’t have to deal with the immediate, proximal results of their shoddy workmanship. They seem to believe their very presence at the top will hold the structure up (interesting that Atlas had to stand under the earth in order to hold it up).
We watch the European debacle/tragedy unfold as if we are outside the movie — believing that when it is over, we will go to dinner and then spend a relaxing evening at home (in our mortgaged 5,000 s.f. home on a postage stamp lot).
July 11th, 2011 at 9:00 am
Moderately over bought/sold are meaningless in this market riding on hopes. wishes and better than expected skewed data every other day. Insider trading, front running, HFT, momentum trading all makes the market a big CASINO! Fundamentals have discarded or ignored in favor of kick the can down, extend and pretend and short term irrespective of long term adverse consequences by the vested interests in and out side the Govt, along with funny accounting accepted as the new normal!
Of course, when the crash comes, there will be chorus of gasps ‘ No one saw this coming’ AGAIN!
July 11th, 2011 at 9:20 am
Practically every country in the World is flat broke, why are we pretending this is not happening?
July 11th, 2011 at 9:22 am
You can pay me now or you can pay me later.
signed,
deflation and the Mcjobbers
July 11th, 2011 at 9:25 am
Fiat currency is supposed to prevent deflationary collapse. Why isn’t it?
July 11th, 2011 at 9:46 am
I wondered when the contagion spread to Italy or Spain what the response would be. It looks like due to their size, the road ends on can kicking. Since all the developed economies are in competitive currency devaluation to pay off debt( a default really), won’t all the Piigs have to leave the Euro zone, get their own currency and do the same thing? The ECB raising rates when the Piigs need low rates show they’ll have to leave. I can’t figure out if this will be deflationary or inflationary for the Euro zone.
July 11th, 2011 at 9:47 am
Petey – LOVE IT! “Is the Black Swan so large that we have mistaken its shadow for night?” great quote.
July 11th, 2011 at 9:53 am
Absolutely Petey
http://www.youtube.com/watch?v=5-syO7eV5lw
July 11th, 2011 at 9:57 am
issues we are not addressing and maybe 1/10 Petey’s answer .. credit and defaults on that credit .. that credit and sounds-good schemes, and the jobs created / that are nothing but fluff to the EDP (exportable domestic product) – EDP needed to balance against import needs – like oil .. fluff jobs burn resources for what ? .. oh right – a sovereign job
our financial capital of the world sold our country out for its own temporary gain .. we’ll go back to a more normal credit to production ratio someday .. near* balanced budgets to keep eyes, wallets and promises in check will come back someday
oh a big AND MIC – paid from the USA workers wallet to police the world into peace for the Butters (and the Guns)
*coda – near but never balanced bc theres money to make on credit
July 11th, 2011 at 10:08 am
Petey Wheatstraw said: “Fiat currency is supposed to prevent deflationary collapse. Why isn’t it?”
There is a hard and impenetrable lower bound to interest rates otherwise known as zero. Monetary policy fails at this point. (For the scientific minded it is kind of like a singularity in physics.) Helicopter money fails at this point. Sorry but you have been misled. Only fiscal policy can accomplish anything at that point. Keynes showed this back in 1936 and the track of the economy since 2008 has proven Keynes once again to be correct.
July 11th, 2011 at 10:18 am
mark:
Fiscal policy is correct. Only, its not only how much fiat we issue, its where we inject it into the system. If the only access to money is by debt, debt will never be settled. Asking the question another way: If all money in the system is fiat, why is there interest charged in the first place? Why has an elite group of “citizens” been chosen to perpetuate debt slavery for the vast majority and wealth for themselves? We have foolishly made kings when there was no need to do so.
July 11th, 2011 at 10:22 am
mark:
One other point:
I saw the helicopters, and I saw the cash being dropped. It was dropped into an ivory tower on the hill, out of reach of those who need it, and that is exactly where it stayed.
July 11th, 2011 at 10:53 am
Petey – you’ve changed the subject to a political one and ask largely rhetorical questions that I have no answers for. I’m too busy trying to deal with the world as I find it as best I can.
July 11th, 2011 at 11:02 am
One nation that seems to be flying under the mainstream media’s debt radar screen is Italy. As holder of the world’s third largest nominal debt, it has a debt-to-GDP ratio of nearly 120 percent, second only to Greece in the Eurozone.
Here is an examination of the formidable fiscal battle facing Italy:
http://viableopposition.blogspot.com/2011/07/italy-and-their-debt-bronze-medal.html
July 11th, 2011 at 11:06 am
Last comment for a while (y’all are welcome).
mark:
I didn’t intend my comments as challenges. Yes my comments asked rhetorical questions, and as such, I was not expecting answers or solutions. Policy IS political. My point is that our economic “world” is a construct. Instead of arguing from within that construct, as one would do with religion, I ask why we need the construct at all, as it is surely flawed to the point of being useless. No offense intended.
July 11th, 2011 at 11:08 am
To the extent that you want to engage in Keynesian policy, helicopter money drops must be directed to economic actors who will actually spend it.
But to the contrary, the bulk of the Bush and Obama Looterfests (bailouts), as well as the Fed’s vast QE frauds, went straight into the capital of banks and Treasury dealers. These capital and reserve injections are not being lent, and thus have no stimulative effect.
The waste of trillions is now water under the bridge. But impeaching Geithner, Bernanke and O’Bummer would certainly offer some catharsis as the economy crashes and burns. Sacrifice the scapegoats to an angry god!
July 11th, 2011 at 11:13 am
Excellent lead piece and comments. If Italy gets real desperate, it should try to monetize the fact that Italian is perhaps the easiest language to write rhymes in, hence the good old hexameter villanelle.
http://www.poets.org/viewmedia.php/prmMID/5796
July 11th, 2011 at 3:49 pm
One of these days Ben and the boys are going to wind up their kick to kick the can down the road and it will be one of those scenes where it looks like the can is nailed to the ground. Instead of kicking the foot will be stopped by the can and the foot will be broken.
There will be tears