BY TECH CRUNCH

From David Rosenberg of Gluskin Sheff

“The Europeans are living in a world of denial that they can continue to give funding to Greece as it continuously refuses to meet its fiscal targets

Well, once again a leaked press report from a pro-EU newspaper (the Guardian) has cooked together a new strategy that leverages up the EFSF and insures bondholders against first losses on their sovereign bond holdings has the markets in a brand new giddy mood. Equities are rallying across the planet (check that — what is with China down now two days in a row?) and safe-havens like the U.S. dollar and high-quality bonds are selling off (and we ask, why in this pro-cyclical buying of stocks and selloff in Treasuries and bunds is copper of all things down three days running? The red metal is down 1.2% today!). Again, not even gold is rallying, and we admit that we are becoming a tad perturbed over how the yellow metal is trading of late.

It’s an open question as to whether this is the deal breaker at this weekend’s EU leaders’ meeting but there is reason to be skeptical that nirvana has just been discovered with respect to this complex European debt crisis — involving governments, banks and all locked into a single currency zone. And nobody wants to pay the price for bad decisions made, so why not end up going through the back door by penalizing the taxpayers of the rich countries? In terms of commitments, Italy and Spain account for 30% (it’s interesting that Italy is committing to a program that will be used to backstop Italian bonds, no?). As one of the co-managers of our hedge fund, Michael Isenberg put it, “It is a quasi-euro bond — without constitutional, legal, historic, linguistic, cultural or political backing — so it’s weak.” Yet, the market sees a headline: wow, 2 trillion euros in a new fund — that’s QE — I better cover and get out of the way. So we have to recognize this and understand that we’re playing in a game where rules change every day.

I remember people saying the agreement to expand the power and funding for the EFSF on July 21st was going to be the panacea — the Dow actually swung +185 points that day (the amount it rallied yesterday), only to be totally erased in the next three sessions. How cool is it that we live in a world where complicated financial engineering in a radically overleveraged system forms the cornerstone of the solution to these debt problems. I would not be surprised at all to see stories coming out in the next few days that contradict this plan. In fact, now we see German Finance Minister Schaeuble saying that the EFSF firepower will be expanded to 1, not 2, trillion euros. Go figure.

Both Dow Jones and Reuters have run with ‘denial’ articles from EU officials, but don’t you see, it’s always like this with the equity market crowd — react first, worry about the details and repercussions later. At this stage, the surprise is that we have another ‘leak’ on our hands with no credibility, like all the noise someone in the media created ahead of last weekend’s finance minister meeting and we ended up with nothing but policy discord.

In fact, what is interesting is to go back and see how the markets reacted to each of the brave new plans unveiled during this crisis. The DAX, for example, surged 5.3% when the EFSF was first introduced back in May 9, 2010 and then rallied 1% on the July 21st agreement to expand the bailout fund; each rally faded. I have no reason to believe this one will be different.

Or just go back to the ‘leak’ late in the afternoon (these always happen about an hour before the close in New York — have you noticed that too?) on September 12th that China and other Asian sovereign wealth funds were going to line up and start to bailout out the Eurozone bond market. The very next day the DAX rallied 2% and over 3% the day after that and euphoria reigned … for about a week.

All these leaks are doing is generating more market volatility, though as we are told, one of them is bound to come to fruition at some point. Better to be a spectator here than a participant.

Let’s look at what else is happening that deserves attention that is not exactly validating this new announcement-led risk-on rally.

1. First, Spain’s credit rating was cut by Moody’s for the third time in the past 13 months to Al from Aa2 (note the two-notch downgrade and the ‘negative’ outlook was retained). This is actually big news because what it shows is that Spain’s vulnerability to market stress and event risk remains acute, and leaving the ‘negative’ outlook is a sign that there is no confidence in the country’s economic, fiscal or political prospects. Indeed, have a look at Spain Hit by Downgrade, Falling Home Prices on page A8 of the WSJ — home prices are deflating now for three quarters in a row and at an accelerating pace.
2. Second, and this is buried in the small print because the big print is all about the Guardian’s “extra extra!” but Standard & Poor’s, to little fanfare, downgraded 24 Italian banks and financial institutions last night (and people are buying the euro at levels that are 20 points above where the IMF pegs ‘fair-value’. What a bizarre world this is). Have a look at Martin Wolf’s column on page 11 of the FT—There Is No Sunlit Future For The Euro.
3. Third, there has been no relief so far in the Eurozone bond market, with Italian yields still backing up (now just lbps shy of 5.9%) even though apparently this new plan is intended largely to bring down debt-service costs in countries like that (Spain as well).
4. Fourth, France-German spreads have not reacted anything close to what the global stock market has as they remain near historically wide levels of 107 basis points (see Ratings Firm Warns on French Debt on page A8 of the WSJ as well). The spread of the problems to France is relatively new and as such makes ‘leaks’ necessary to buy time and adds extra pressure for a quick solution; a French downgrade would deal a huge blow as it would mean that the EFSF would lose one-third of its AAA-rated firepower.
5. Fifth, there is no sign of meaningful improvement in the fiscal situation and in the next two days Greece is going to be experiencing the most intense protests against austerity since the deficit-reduction plans were unveiled. In other words, the Greeks have had it with years of economic implosion and, as such, the risk of outright default is high and rising from a political standpoint. Will bailout money continue to flow in if the fiscal targets are deliberately abandoned?

Why are we so skeptical? Well, when you go back to the opening months of 2010, it was all about Greece and the prime goal was to prevent contagion to Portugal and Ireland. We know how that went. Then that fall, the risk was Greece, Ireland and Portugal and this was when the term PIG was coined. At that time, the goal was to protect Spain and Italy. And we know how that went. Then just this past July, the crisis moved beyond just Greece, Ireland and Portugal to include Italy and Spain (and this is where PUGS was coined). At this point it was about preventing contagion to the banks, but nothing has worked. The contagion has merely spread, and this is not the first time a late-day press release or policy announcement was leaked to juice the market.

The Europeans are living in a world of denial that they can continue to give funding to Greece as it continuously refuses to meet its fiscal targets. Ditto for Portugal. How will France be able to avoid a downgrade? And how do the banks not take a big haircut in all this? It’s not as if the countries have refrained from tough measures — they simply aren’t tough enough. In the meantime, creating a vicious cycle of deflationary and recessionary pressures that makes it impossible to maintain the fiscal austerity and hence the quality of credit continues to erode, alongside that, the quality of the assets in the European banking system.

The reason why EU kingmakers are in a rush is because even with all the ECB support, Italian bond yields are heading back to 6%, a level consistent with high and rising default risks. France and Belgium are now tarred with Dexia support. The dangerous game of not allowing a Greek default has continued because of the fear of triggering a CDS, and we have Tim Geithner convincing the Europeans that allowing Greece to default outright and have the bondholders take the pain invoke a “Lehman moment” (it’s not even clear that things would have turned out to be better if Lehman had been propped up … it’s not as if allowing WaMu to fail produced any long-lasting effects on anything and that was a biggie too).

So, we are still living in a world were levering up is somehow deemed to be a solution to a world of excessive credit and all this will do, again, is just kick the can down the road. Unfortunately, post-Lehman the concept of cramming down debt holders to arrive at a more sound financial position has been thrown out the window. Causing pain to bond-holders or equity holders is a sin right now, believe it or not. There will be a price to be paid down the road for failing to allow bad risky decisions to be penalized. Instead we paper over our issues with QE and financial engineering that may make things worse down the road.

It is truly hard to believe that a Greek default could produce any worse results than what we have already seen from all these bailout attempts. This too-big, or too-important to fail strategy has got to come to an end if we are ever to fully emerge from this increasingly unstable global debt cycle”.

WOW, congrats to the “Elite”… and they want to solve ALL problems with more DEBT… The END GAME is approaching fast and furious

http://finance.yahoo.com/video/cnbc-22844419/leading-economic-indicators-26787810

Bloomberg news :

Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting advanced economies to stall over the next year with Europe sliding into recession, underscoring mounting investor concern about the global economic outlook.

There will be little to no economic growth in industrial nations during the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El-Erian, chief executive officer of Newport Beach, California- based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the International Monetary Fund and World Bank held their annual meetings. The Dow Jones Industrial Average suffered its biggest loss since 2008 last week as the U.S. Federal Reserve said risks to its economy had increased and Europe’s debt crisis went unresolved.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” El-Erian said in a Sept. 24 interview in Washington. “Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

Former U.S. Treasury Secretary Lawrence Summers said he has been to 20 years of IMF meetings, and “there’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy.”

Meanwhile our politicians keep dreaming …

Courtesy of Zero Hedge

Courtesy of Dough Short ( dshort.com )

“James Ross, the University Architect at UNC Wilmington and an avid student of the economy, called my attention to Martin Wolfe’s recent essay at the Financial Times explaining that we’re not at risk of a double-dip recession because the one that began in late 2007 hasn’t ended.

Of course, the National Bureau of Economic Research (NBER) declared June 2009 as the end date for the last recession, a decision they announced in September of the following year. You can read their rationale here. According to the NBER’s analytical method, which focuses on major peaks and troughs as boundaries, the June 2009 end for the last recession makes perfect sense. But if you expect the end of a recession to be a return to some semblance of economic normality, then, to paraphrase the immortal words of Yogi Berra, the last recession “ain’t over ’til it’s over.”

Bill McBride, the economics wizard at Calculated Risk, is a master at graphing data series to illustrate troughs and recoveries to new highs. See his August 30th update on recession measures for some excellent examples.

With a hat tip to Bill, here are some charts of troughs to peaks that show why so many people believe the U.S. is still mired in a recession. For those of us who do accept the NBER recession call, the charts support the characterization of our current economic condition as, in the words of economist Kenneth Rogoff, The Second Great Contraction — its predecessor being the Great Depression.

The first chart is a look at Real GDP since 1950 with recessions highlighted. As we can see, at present, more than two years after the end of the last recession, real GDP is still 0.5% off the all-time high set in the last quarter of 2007. The recession officially began in December of that year.

Click for a larger image

My preferred GDP metric is the per-capita variant. I take real GDP and divide it by the mid-month population estimates from the Census Bureau, which has reported this data from 1959 (hence my 1960 starting date). By this measure, Q2 2011 GDP is 3.4% off its peak.

Click for a larger image

For most people, GDP is an economic abstraction that has little meaning. Employment levels, on the other hand, are a more compelling measure of the economy. Here, then, is a chart of total nonfarm employment, which peaked in January 2008, a month into the last recession. As of last month, nonfarm employment was a painful 4.9% off the peak.

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Let’s close with an overlay of these three metrics.

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The recession of 2007-2009 was by far the most savage economic decline over the time frame of these charts. Prior to the last recession, real GDP hit a new peak within a quarter or two of the official recession end. Per capita real GDP usually lagged an additional quarter before hitting its post-recession peak; the one exception was in 1990-1991, when the per capita variant required an extra three quarters to set a new peak. Employment has historically been slower to hit new highs following recessions.

The so-called double-dip recession of 1980-1982 had a non-recessionary interlude of four quarters. All three of our indicators hit new peaks within in the second quarter after the first of the double dips. Where are we today? We’re now in the ninth quarter after the last recession. Real GDP is within shouting distance (0.5%) of a new peak. But real GDP per capita is less than halfway from its trough to a new peak, and, twenty-six months after the recession ended, nonfarm employment is only a bit over 20% of the way from its trough to a new peak.

Since the beginning of quarterly GDP data, which has been tracked since 1947, the U.S. has never had an official recession without having achieved new highs in Real GDP and nonfarm employment. Let’s hope that record continues. But ultimately the debate over recession boundaries is a minor quibble in the ongoing economic reality of The Second Great Contraction. “

Courtesy of Ron Griess ( The chart store )

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FOOD FOR THOUGHT…

( Source : Der Spiegel )

THAT´S WHY MARKETS ROCK AND POLITICIANS FOLLOW…