Month: September 2014

Back in June, when the political career of Eric Cantor came to a sudden, stunning end at the hands of an unknown “tea-partier”, we commented that the biggest losers from Cantor’s ignoble fall from Congressional grace were his biggest donors. As showed back then, these were as follows:

 

Less than three months later, their loss is Cantor’s gain, who after a long auction process has finally, and very expectedly, sold himself off to the highest bidder which as the WSJ reported overnight was none other than boutique M&A advisory firm, Moelis & Co. Per the WSJ, “Mr. Cantor, 51 years old, will be a vice chairman and board member at the firm, effective this week, he and Moelis founder Ken Moelis said in a joint interview on Monday.

 

At Moelis, Mr. Cantor will help the firm, which was formed in 2007 and has offices overseas, compete for business and advise corporate and investor clients on takeovers and other deals.

 

Mr. Moelis said he is hiring Mr. Cantor for his “judgment and experience” and ability to open doors—and not just for help navigating regulatory and political waters in Washington. Still, expertise in such matters is likely to be valuable given how heavily they can weigh on the minds of corporate executives contemplating deals.

 

“I have no need for a political figurehead,” Mr. Moelis said. “What I want is a partner.”

That surely has to be tied for one of the funniest lines of the day.

The rest of the story is well-known, and was extensively covered here previously: “Mr. Cantor has long been seen as a liaison of sorts between the GOP and Wall Street, which also has been a big campaign contributor. Since 2012, he has raised nearly $1.4 million from financial firms and their employees, according to the Center for Responsive Politics, the most of any industry. Big donors to the former congressman include investment bank Goldman Sachs Group Inc. and private-equity firm Blackstone Group LP.

During his congressional tenure, Mr. Cantor cultivated close ties with the heads of several large companies, including in the financial sector.

 

Moelis & Co. is coming of age as more mergers-and-acquisitions business is migrating away from larger firms such as UBS AG, where Mr. Moelis was an executive, and toward a newer crop of smaller investment banks that pitch themselves as independent of the conflicts of interest that can arise at larger institutions competing in multiple lines of business.

 

Mr. Moelis took his firm public in April, and in a sign of investors’ enthusiasm for the boutique model, its shares have risen nearly 40% since then, giving it a market value of nearly $2 billion.

 

Messrs. Moelis and Cantor, who have known each other for more than three years, began discussing the possibility of working together shortly before July Fourth, Mr. Cantor said. They were having brunch with their wives in Los Angeles and Mr. Moelis, also a Republican, was giving Mr. Cantor career advice when it occurred to him that the two should work together.

 

The talks intensified in late July, said Mr. Cantor, who noted that he held discussions about joining several other organizations—on Wall Street and off—though none as serious as those with Moelis.

 

Mr. Cantor, who will continue to live in Virginia, will open a new office for the firm in Washington, in addition to having an office at the company’s headquarters in New York City. His compensation wasn’t immediately known.

The final question – how much:

Group LP has agreed to pay Mr. Cantor an annual base salary of $400,000. Group LP has also agreed to pay Mr. Cantor an initial cash amount of $400,000 and grant Mr. Cantor $1,000,000 in initial restricted stock units (“RSUs”), based on the average closing price of the Company’s common stock on the five trading days prior to his start date. The initial RSUs will generally vest in equal installments on each of the third, fourth and fifth anniversaries of his start date. For calendar year 2015, Group LP has agreed to pay Mr. Cantor minimum incentive compensation of $1,200,000 in cash and $400,000 in incentive RSUs, payable in equal quarterly installments. The incentive RSUs will generally have the same vesting schedule as incentive RSUs granted to Group LP’s other Managing Directors.

And now sit back and wait as one after another Wall Street firm, primarily those which had invested millions in Cantor over the years, upgrades Moelis to “Strong Buy”

via Zero Hedge http://ift.tt/1rd0YY3 Tyler Durden

• Ukraine Shifts to Defense Against Russian Incursion (WSJ)
• U.S. forces carry out operation against al-Shabaab in Somalia (Reuters)
• Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed (BBG)
• Another “unexpectedly” – Swiss Economy Unexpectedly Stalls as Euro Area Takes Toll (BBG)
• Japan’s ‘Abenomics’ feared in trouble as challenges build (Reuters)
• Germany Imposes Nationwide Ban on Uber’s Cab-Hailing Service (WSJ)
• Japan’s ‘forward guidance’, the GPIF, has “already begun a highly anticipated portfolio reshuffle” (WSJ)
• Detroit Brings Bankruptcy Plan to Court With Billionaires (BBG)
• Burger King has maneuvered to cut U.S. tax bill for years (Reuters)
• JPMorgan Operating Risk Rises With Past Seen as Prologue (BBG)
• Apple Investigating Reports of iCloud Vulnerabilities (WSJ)
• U.S. Firms Feel Unwelcome in China, According to Survey (WSJ)
• Compuware Nears Deal to Sell Itself (WSJ)
• Angelo Mozilo Speaks: No Villainy at Countrywide (BBG)

 

Overnight Media Digest

WSJ

* Ukraine is shifting the focus of its military operation from rooting out pro-Russia rebels in the east to warding off a broader incursion by Russia, following major setbacks for Kiev’s forces in fighting in recent days. (http://on.wsj.com/1uciNGM)

* Accounting firm Arthur Andersen collapsed more than a decade ago in the wake of the Enron Corp scandal, but a group of former Andersen partners are convinced there’s still gold in the Andersen name. A San Francisco-based tax-consulting firm run by former Andersen partners is buying the rights to the Andersen name and plans to rename the firm Andersen Tax. The move is expected to be announced Tuesday. (http://on.wsj.com/1Cl3tfP)

* As Portuguese lender Banco Espirito Santo SA neared collapse this summer, it found a Wall Street ally to help it raise funds: Goldman Sachs Group Inc. Through a Luxembourg financing vehicle created by Goldman, Banco Espirito Santo received $835 million in July, according to a prospectus reviewed by The Wall Street Journal, a time when it was nearly impossible for the troubled lender to borrow directly in the capital markets. (http://on.wsj.com/1x1BQIu)

* French telecommunications company Iliad SA said it isn’t giving up its pursuit of T-Mobile US Inc and is considering teaming up with partners possibly to make a better offer for the U.S.’s fourth-largest mobile operator by subscribers. (http://on.wsj.com/Z5fGpz)

* Apple Inc said it is investigating reports that vulnerabilities in its iCloud service were exploited to hack the accounts of celebrities, leading to the publication of nude photos and videos. Initial media reports suggested that the hacks stemmed from individual accounts on iCloud, an online service to store photos, music and other data from Apple devices. (http://on.wsj.com/1pkmBQL)

* European Union antitrust officials have sent a second wave of extremely detailed questions to the competitors and customers of Facebook Inc and messaging service WhatsApp Inc, an unusual move that might call into question the proposed $19 billion acquisition of the latter by the California-based social network. (http://on.wsj.com/Y7lQ8q)

* Eric Cantor plans to join boutique investment bank Moelis & Co, as the recently defeated House majority leader embarks on a new career on Wall Street. Cantor, 51 years old, will be a vice chairman and board member at the firm, effective this week, he and Moelis founder Ken Moelis said in a joint interview on Monday. (http://on.wsj.com/1A14khC)

 

 

NYT

* SolarWorld Americas, the largest manufacturer of solar panels in the United States, has asked the Commerce Department to investigate claims that Chinese military personnel broke into the company’s computers and stole documents important to its business and its long-running trade dispute with China. (http://nyti.ms/1q54sM5)

* The next round of strikes by fast-food workers demanding higher wages is scheduled for Thursday, and this time labor organizers plan to increase the pressure by staging widespread civil disobedience and having thousands of home-care workers join the protests. (http://nyti.ms/1lv2Wm5)

* The shipbuilding and engineering arms of the Samsung Group announced a plan on Monday to merge by the end of the year, in another sign that restructuring is gaining speed at the company, South Korea’s largest conglomerate, in apparent response to the faltering health of its leader. (http://nyti.ms/1ozc447)

* Public pension funds have major stakes in American companies moving overseas to cut their tax bills. But they are saying little about the strategy, which could hurt the nation’s tax base. (http://nyti.ms/W4bdBD)

* Neil Woodford, an influential fund manager in Britain, said on Monday that he had sold his stake in the British bank HSBC Holding Plc over concerns about rapidly escalating fines by regulators in the banking industry. (http://nyti.ms/1q2jhyU)

* The Dutch brewer Heineken said on Monday that it had agreed to sell its Mexican packaging operations to Crown Holdings Inc in a deal that valued the business at about $1.2 billion. (http://nyti.ms/W1d6io)

 

 

Canada

THE GLOBE AND MAIL

** Mexico’s state-owned development bank is forging alliances with Canadian financial institutions to boost the stunted levels of commercial lending in the country, especially in the newly reformed energy sector where increased investment is sorely required. (http://bit.ly/1q5WOB9)

** Canadian forces veteran David MacLeod, who served for 27 years in Afghanistan, Bosnia and Kosovo, wants to take on veteran Conservative MP and former defence minister Peter MacKay in his Central Nova riding, setting up a tense dynamic for the 2015 general election. (http://bit.ly/1luRarZ)

** Canadian Prime Minister Stephen Harper is heading to a crucial summit of NATO leaders where the Western military alliance will give itself the power to respond to threats more quickly in the face of Russia’s continued effort to destabilize and break up Ukraine. (http://bit.ly/1lFCJS4)

NATIONAL POST

** The Ontario Securities Commission’s (OSC) fraud allegations against Sino-Forest Corp and five of its former executives are as spectacular as they come in market prosecutions: fraudulent overstatement of assets, falsified evidence of ownership, secret control over both suppliers and customers. Starting Tuesday, those allegations will finally be tested in a much-anticipated OSC tribunal hearing. (http://bit.ly/1pkIrU8)

** The risk that comes with international expansion weighed heavy on the latest results from Canada’s biggest banks, but investors better get used to it. Canada’s biggest banks continue to derive most of their earnings domestically, but a growing percentage of their profits comes from operations south of the border and other international markets. (http://bit.ly/1tq42Co)

** After suffering engine failure over northern England, Canada’s own Avro Lancaster – one of only two airworthy specimens of the iconic Second World War bomber – remains effectively stranded in the UK as its crews scramble to overhaul the stricken 70-year-old warplane. (http://bit.ly/1vHmCXz)

** Thousands of people marched Monday in Toronto’s annual Labour Day Parade to show their support for local unions, with more than 30 labour organizations taking part in the festivities. Joining them was federal Opposition Leader Tom Mulcair, who took shots at Canadian Prime Minister Stephen Harper and Liberal Leader Justin Trudeau for what he called their shortfalls on the labour file. (http://bit.ly/1pCTz4M)

 

 

China

CHINA SECURITIES JOURNAL

– China’s financial institutions are estimated to have extended 700 billion yuan ($114 billion) in new loans in August amid concerns over rising non-performing loans, deposit outflow and tightened supervision towards commercial banks.

– An executive of the National Equities Exchange and Quotations Corporation (NEEQ) said it would introduce financing tools such as privately issued bonds by small companies and preferred stocks soon.

SHANGHAI SECURITIES NEWS

– China National Offshore Oil Corp plans to leave its AEGON-CNOOC insurance joint venture with Dutch insurer Aegon NV by transferring its shares, with IT firm Tsinghua Tongfang currently its most likely replacement, the newspaper reported citing unidentified sources.

SECURITIES TIMES

– State-owned China Construction Bank’s Chairman Wang Hongzhang denied that the bank had a “5321 plan,” denoting levels of pay cuts for different levels of personnel.

21ST CENTURY BUSINESS HERALD

– Six companies have launched IPO subscriptions which is expected to lock up over 660 billion yuan ($162.69 billion) of funds.

CHINA DAILY

– The number of foreign offenders receiving legal aid jumped 20 percent to more than 800 cases last year after a law was amended to require the government to provide free help to foreigners facing life sentences or the death penalty.

– The decision to vet candidates standing in Hong Kong’s chief executive elections is ultimately intended to maintain the rule of law in the special administrative region and it is up to “pan-democrats” candidates to win support to stand for election, China Daily said in an editorial.

 

Britain

The Times

DIAMOND’S FUND AIMS FOR AFRICAN BANKING HAT-TRICK

Atlas Mara Co-Nvest Ltd, the London-listed acquisition vehicle set up by Bob Diamond, the former chief executive officer of Barclays, and Ashish Thakkar, a Ugandan billionaire, said yesterday that it had extended an option agreement to buy a stake in an unidentified Nigerian financial services company. (http://thetim.es/1pjMdx2)

VODAFONE BECOMES LATEST NETWORK TO HANG UP ON PHONES 4U

Phones 4U, the mobile phone retailer, has been left reeling after Vodafone Group Plc became the latest network to cut ties with the company. (http://thetim.es/1lupzaf)

The Guardian

EU-US TRADE DEAL COULD ADD 10 BLN STG TO UK ECONOMY A YEAR, CLAIMS MINISTER

UK’s minister of state for trade and investment Lord Livingston said the Transatlantic Trade and Investment Partnership could add as much as 10 billion pounds ($16.61 billion) to the UK economy a year. (http://bit.ly/1uaz3rG)

TESCO’S NEW BOSS PROMISES TO BRING FRESH PERSPECTIVE

Tesco Plc’s new Chief Executive Dave Lewis said it needs a “fresh perspective” and that his lack of shopkeeping experience did not mean he was the wrong person to turn the ailing supermarket around. (http://bit.ly/W31lZ4)

The Telegraph

‘BORIS ISLAND’ AIRPORT PLAN DUMPED BY DAVIES COMMISSION

Boris Johnson’s plans for a new four-runway airport in the Thames Estuary have been categorically dumped by the government-backed Davies Commission. (http://bit.ly/1B9cOFK)

GOLDMAN SACHS LENT BANCO ESPIRITO SANTO $835 MLN A MONTH BEFORE BAIL-OUT

Goldman Sachs lent over 500 million pounds to Banco Espirito Santo just a month before the Portuguese government was forced to bail out the crisis-hit bank, it has emerged. (http://bit.ly/1oyTVTX)

Sky News

UK INDUSTRY EXPORT ORDERS HIT EURO HEADWINDS

New manufacturing order growth plunged in August, according to the CIPS/Markit Purchasing Managers’ Index, with overall activity at a 14-month low. (http://bit.ly/1nooL2p)

QUINDELL BUYS RAC STAKE IN BLACK BOX VENTURE

Quindell Plc will inform the stock market that it is that it is acquiring RAC’s stake in their fledgling joint venture, Connected Car Solutions. (http://bit.ly/1qVzxOx)

The Independent

RUSSIA LAUNCHES CONSTRUCTION OF GAS PIPELINE TO CHINA IN $400 BILLION DEAL

Russian president Vladimir Putin launched the construction of what will be one of the largest gas pipelines in the world, stretching from China to the Russian Far East, in the village of Us Khatyn in Yakutia. (http://ind.pn/W4hSLZ)

LEN BLAVATNIK IN 700 MLN STG BUYOUT BID FOR PERFORM

Britain’s fourth-richest person, Ukrainian-born tycoon Len Blavatnik is offering to buy Perform Group at 260 pence cash for each share, which values the online sports rights group at 702 million pounds.(http://ind.pn/Z4qHrb)

 

Fly On The Wall Pre-market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
Markit manufacturing PMI for August at 10:00–consensus 58.0
ISM manufacturing PMI for August at 10:00–consensus 57.1
Construction spending for July at 10:00–consensus up 0.9%

ANALYST RESEARCH

Upgrades

Cabot Oil & Gas (COG) upgraded to Buy from Hold at Stifel
Groupon (GRPN) upgraded to Sector Perform from Underperform at RBC Capital
Life Time Fitness (LTM) upgraded to Overweight from Neutral at Piper Jaffray
Northrop Grumman (NOC) upgraded to Outperform from Sector Perform at RBC Capital
Progressive (PGR) upgraded to Buy from Neutral at Goldman
RCS Capital (RCAP) upgraded to Buy from Neutral at Citigroup
SandRidge Energy (SD) upgraded to Buy from Hold at Stifel
Statoil (STO) upgraded to Buy from Hold at Deutsche Bank
Tenaris (TS) upgraded to Neutral from Sell at UBS
Tesla (TSLA) upgraded to Buy from Hold at Stifel
Volkswagen (VLKAY) upgraded to Outperform from Neutral at Exane BNP Paribas
Waddell & Reed (WDR) upgraded to Buy from Hold at Jefferies
Willis Group (WSH) upgraded to Outperform from Market Perform at Keefe Bruyette

Downgrades

American Water (AWK) downgraded to Market Perform from Outperform at Wells Fargo
AutoZone (AZO) downgraded to Neutral from Overweight at JPMorgan
BancorpSouth (BXS) downgraded to Equal-Weight from Overweight at Evercore
Emerge Energy (EMES) downgraded to Neutral from Outperform at RW Baird
Exelixis (EXEL) downgraded to Hold from Buy at Stifel
Exelixis (EXEL) downgraded to Market Perform from Outperform at Cowen
Finisar (FNSR) downgraded to Hold from Buy at Jefferies
OSI Systems (OSIS) downgraded to Perform from Outperform at Oppenheimer
PulteGroup (PHM) downgraded to Market Perform from Outperform at FBR Capital
Republic Services (RSG) downgraded to Hold from Buy at KeyBanc
Smith & Nephew (SNN) downgraded to Hold from Buy at Jefferies

Initiations

Arista Networks (ANET) initiated with a Buy at SunTrust
Auris Medical (EARS) initiated with a Buy at Jefferies
Endo (ENDP) initiated with an Outperform at RBC Capital
Flowserve (FLS) initiated with an Overweight at Barclays
Green Bancorp (GNBC) initiated with a Hold at Jefferies
Green Bancorp (GNBC) initiated with a Neutral at JPMorgan
Green Bancorp (GNBC) initiated with an Outperform at RBC Capital
Hoegh LNG (HMLP) initiated with a Buy at Citigroup
Hoegh LNG (HMLP) initiated with a Neutral at UBS
Hoegh LNG (HMLP) initiated with an Equal Weight at Barclays
Independence Contract Drilling (ICD) initiated with an Outperform at Cowen
Independence Contract Drilling (ICD) initiated with an Outperform at FBR Capital
Independence Contract Drilling (ICD) initiated with an Outperform at RBC Capital
Loxo Oncology (LOXO) initiated with a Buy at Stifel
Loxo Oncology (LOXO) initiated with an Outperform at Cowen
T2 Biosystems (TTOO) initiated with a Neutral at Goldman
iDreamSky (DSKY) initiated with an Overweight at Piper Jaffray

COMPANY NEWS

Dollar General (DG) increased proposal to board of Family Dollar (FDO) to $80 per share
Select Income REIT (SIR) to acquire Cole Corporate Income Trust for $3B
Luxottica (LUX) said Andrea Guerra leaves as CEO
Moelis (MC) appointed Eric Cantor as vice chairman, member of board
Exelixis (EXEL) announce a 70% workforce reduction after COMET-1 phase 3 trial did not meet primary endpoint
Barclays (BCS) sold Spanish businesses to Caixabank (CAIXY) for EUR 800M
Novartis (NVS) heart failure drug LCZ696 showed superiority to enalapril in study
Orbitz (OWW), American Airlines (AAL) reached deal to return fares to sites

EARNINGS

FormFactor (FORM) raises Q3 revenue outlook to $71M-$75M from $68M-$73M
uniQure (QURE) reports Q2 EPS (EUR 0.51) vs. (EUR 80) last year

NEWSPAPERS/WEBSITES

Compuware (CPWR) in advanced talks with PE buyer to sell itself, WSJ reports
Microsoft (MSFT) given deadline to answer antitrust questions in China, WSJ reports
Norwegian Cruise Line (NCLH) in talks to acquire Prestige Cruises for $3B, Reuters reports
Apple (AAPL) has discussed $400 price tag for wearable device, Re/code reports
Apple (AAPL) investigating hack relating to violation of iCloud accounts, Re/code says
Iliad (ILIAF) said to consider PE partner on improved T-Mobile US (TMUS) bid, Bloomberg reports
Time to exit Hertz (HTZ), Barron’s says
Discover (DFS) still looks attractive, Barron’s says
USG (USG) shares could jump 30% with revaluation, Barron’s says

via Zero Hedge http://ift.tt/1rd0Yad Tyler Durden

Just when we thought centrally-planned markets could no longer surprise us, here comes last night’s superspike in the USDJPY which has moved nearly 100 pips higher in the past few trading days and moments ago crossed 105.000. The reason for the surprise is that while there was no economic news that would justify such a move: certainly not an improving Japanese economy, nor, for that matter, a new and improved collapse, what the move was attributed to was news that Yasuhisa Shiozaki, who has been advocating for the GPIF to reduce allocation to domestic bonds, may be appointed the Health Minister when Abe announces his new cabinet tomorrow: a reshuffle driven by the fact that the failure of Abenomics is starting to anger Japan’s voters. In other words, the GPIF continues to be the “forward guidance” gift that keeps on giving, even if the vast majority of its capital reallocation into equities has already long since taken place. As a result of the USDJPY surge, driven by a rumor of a minister appointment, the Nikkei is up+1.2%, which in turned has pushed both Europe and Asia to overnight highs and US equity futures to fresh record highs, with the S&P500 cash now just 40 points away, or about 4-8 trading sessions away from Goldman’s revised 2014 year end closing target.

Oh, for whatever reason but probably just because “banks are providing liquidity”, both gold and silver were summarily pounded to multi-month lows seconds ago.

In other Asian markets, the Hang Seng, Shanghai Composite, and the KOSPI are 0%, +1.4% and -0.8%, respectively. European stocks advance amid speculation that slower growth will prompt policy makers to accelerate stimulus. German and Italian shares outperform. The yen came close to a five-year low against the dollar, while the pound falls after a survey showed support for Scottish independence increasing. Treasuries drop ahead of reports this week that economists predict will show U.S. manufacturing and employment expanded in August. Oil and gold fall.

Those seeking de-escalation headlines will have to wait: the tension between Russia and Ukraine continues to build with more finger-pointing seen yesterday. Ukraine’s Defence Minister apparently posted on his Facebook page that Russia has threatened on several occasions across unofficial channels that, in the case of continued resistance, they are ready to use a tactical nuclear weapon against Ukraine. He also added that “a great war has arrived at our doorstep – the likes of which Europe has not seen since WWII”. Russia on the other hand has repeatedly denied these accusations.

In other overnight stories, bank sector lobbyists have warned the Basel Committee on Banking Supervision that its proposed Net Stable Funding Ratio requirement could make it more expensive for banks to facilitate equity market transactions. A letter to the Basel Committee sighted by the FT goes on to say that “By unnecessarily increasing the funding cost for banking organisations’ equity market intermediation activities, the revised NSFR would also potentially force such activities into the largely unregulated shadow banking system, increasing systemic risk.”

Looking at the day ahead, all eyes will be on US manufacturing PMI and ISM manufacturing, as well as any comments from ECB’s Knot.

Bulletin Headline Digest from Bloomberg and RanSquawk

• European equities trade firmly in the green, following on from their Asian counterparts as the Nikkei 225 printed a 5 week high after USD/JPY printed its highest reading since January.
• GBP has underperformed throughout the session amid concerns over the growing momentum in the Scottish referendum ‘Yes’ vote campaign, while the strong UK construction PMI modestly trimmed GBP losses.
• Looking ahead, attention now turns towards, US manufacturing PMI and ISM manufacturing, as well as any comments from ECB’s Knot.
• Treasuries decline, led by long end, curve spreads steepen; markets awaiting ECB meeting and Draghi press conference Thursday, U.S. nonfarm payrolls Friday with Fed meeting set for Sept. 16-17.
• As the ECB gears up to buy “simple, transparent and real” asset-backed debt, the success of its bid to breathe life into the market will depend on how regulators  from Basel to Brussels define those terms
• Ukraine warned of an escalating conflict in its easternmost regions as Obama touches down in Estonia tonight to deliver reassurance to Baltic nations and a direct warning to Putin that NATO stands by its military commitment to alliance security
• Japan’s Abe pledged an upgrade of economic and security ties with India, saying Japan would double investment and expand defense cooperation amid concerns about China’s growing influence in the region
• Pakistan’s parliament was holding an emergency session today to try to defuse two weeks of protests that have turned deadly as demonstrators step up efforts to force the resignation of Prime Minister Nawaz Sharif
• Support for Scottish independence rose before this month’s referendum, with a YouGov Plc poll showing the lead for the 
• No campaign down to six percentage points as nationalists said the momentum is behind them
• Jack Ma is preparing to list Alibaba Group for an IPO during a  record rally for U.S. stocks after doing the same thing seven years ago, when Alibaba.com Ltd. went public in Hong Kong a week after the Hang Seng Index hit an all-time high. By the end of 2008, the Hang Seng had slumped 55% and the company lost more than $20b Sovereign yields higher.

US Event Calendar

• 9:45am: Markit US Manufacturing PMI, Aug. final, est. 58 (prior 58)
• 10:00am: ISM Manufacturing, Aug., est. 57 (prior 57.1); ISM Prices Paid, Aug., est. 58.9 (prior 59.5)
• 10:00am: Construction Spending, July, est. 1.0% (prior -1.8%)
• 10:00am: IBD/TIPP Economic Optimism, Sept., est. 45.5 (prior 44.5)
• 11:00am: U.S. to announce plans for auction of 4W bills
• 11:30am: U.S. to sell $28b 3M bills, $24b 6M bills, $15b 11- day cash management bills

FIXED INCOME

Fixed income markets are seen lower alongside the move higher in equities with Bunds said to have been placed under further pressure after MS closed their long Bund position. Morgan Stanley closed their position as they say that ECB bets look overblown ahead of the ECB’s policy meeting on Thursday, adding that markets may have moved too far in pricing in further ECB accommodation as valuations become increasingly demanding. Finally UK Gilts are also seen lower following the highest UK construction PMI reading since January.

EQUITIES

European equity markets trade with their third consecutive session of gains as volumes pick-up after the extended US weekend. US stock futures have hit all-time highs (E-mini S&P 2006.25) well ahead of the first Wall St. open this week, alongside the European equity market strength. Markets continue to eye Thursday’s critical ECB rate decision, as traders bet that the ECB could take further easing action. The DAX tops the board, with Volkswagen shares rising over +1.5% after being upgraded at Exane on attractive valuation and a solid earnings pipeline. Financial names are the outperformers, with the sector provided support following a note from JP Morgan who said that EU banks have around 10% upside as they anticipate a positive outcome to the upcoming ECB stress tests.

FX

USD-index gained following a sharp technical move higher in USD/JPY attributed to larger than usual buying at the Tokyo fix, as the pair tripped touted option barriers at 104.50, to print its highest level since January at 104.89. Furthermore, traders eyed the re-shuffling of Japanese PM Abe’s cabinet, due tomorrow, where Abe is expected to reinforce his pro-Abenomics government with some critical ministerial appointments. AUD/USD remains below the 0.9300 handle after the RBA kept its interest unchanged at 2.50% as expected and reiterated its neutral policy. Today’s main release for the session came in the form of UK construction PMI which exceeded expectations (64.0 vs. Exp. 61.5) and thus saw a modest tick higher in GBP/USD, although the pair remains firmly in the red amid concerns of the growing momentum for the ‘Yes’ vote in the Scottish referendum which has seen 1-month GBP/USD volatility reach its highest level since April. The move lower in GBP/USD is also said to have been provided further traction from a UK clearer selling the pair since the open.

COMMODITIES

Gold fell to near a 1-week low overnight and broke below the 200DMA at USD 1285.82 as broad USD strength outweighed any safe-haven demand concerning tensions in Ukraine. Further price declines in gold could eventuate over the course of the week as investors continue to buy USD ahead of Thursday’s ECB meeting and the possibility of bullion traders remaining sidelined ahead of Friday’s NFP report. In the energy complex, both WTI and Brent crude futures are seen lower amid the stronger USD and a lack of fundamental newsflow elsewhere.

* * *

In conclusion, here is the traditional Jim Reid overnight event recap

Markets were also hibernating a bit yesterday as US Labor Day generally helped keep things fairly quiet. It was also quite clear from my train journey in that not everyone is back to work yet from holidays. However schools are slowly going back so there’s likely only a few more days of not being packed in like sardines on my commute.

One of the more interesting stories of yesterday was a €1bn 50 year private placement bond issued by the Spanish Government with a 4% coupon. It’s a measure of how far things have come in a couple of years that such a deal could be launched. It was also a day when 2 year French yields traded below zero for the first time ever. We still live in remarkable financial times. Back to the Spanish deal, although current low levels of inflation make this deal look optically attractive on a real yield basis we thought we’d look at the rolling average 50 year level of inflation in Spain to highlight what real returns might potentially be over the lifetime of the bond. I hope I survive to see it mature but I hope I won’t be writing about it then. Anyway the average annual inflation over the last 50 years in Spain is 7.0% and as the graph in today’s pdf shows the last time the 50-year rolling average was below 4% was in 1956. Clearly prior to this the average rate of inflation was constantly below this level as inflation has been a modern day (last 100 years) phenomenon tied to the evolution of central banks (the Fed started in 1913) and the gradual demise of precious metal currency systems. So it’s a measure of how buoyant fixed income markets are that investors are prepared to ignore that last half century’s inflation record and the current fiat currency world when pricing long-term bonds. This is not a Spain-specific issue but on a slow news day the story stood out. The same would be true for most countries issuing similar long-dated debt today. Indeed yields elsewhere would likely be even lower.

Herein lies our dilemma with bonds. We’ve been a member of the lower yields for longer camp for a number of years now due to our near-term growth and inflation outlook and our belief that financial repression is rife. However we also think that debt restructuring or inflation will eventually be the only way of successfully reducing debt burdens for many countries with the latter route the most likely. As such whilst bonds are a near-term safe haven they are also likely to be very poor real investments longer term. Timing the big switch in view on this will be one of the defining investment moments of the next few years. Let’s hope we’re lucky.

Back to more near-term events yesterday’s trading session was dominated by the various manufacturing PMIs around the world. Following on from a soft Chinese PMI (as we detailed in yesterday’s EMR), the final August euro area manufacturing PMI was also a little disappointing. The headline reading was revised 0.1ppt lower to 50.7 (lowest in 13 months). Subcomponents were also softer with new orders and new export orders both weaker than their flash readings. Italy’s manufacturing PMI (49.8 vs consensus of 51.0) also disappointed after dipping below sub-50 for the first time since June 2013. Spain’s manufacturing activity declined for the second consecutive month in August but still managed to stay in expansionary territory (52.8 vs consensus of 53.3). Germany was also weaker than expected but one silver lining was that France surprised on the upside. Following on from this, with the US back from the long weekend, we’ll get ISM manufacturing and the Markit US manufacturing PMI reading today. Markets are expecting both readings to be broadly unchanged over the month at 57.0 and 58.0, respectively. The Prices Paid sub-component of the ISM report is expected to decline to 58.8 from 59.5 though.

Data flow aside the main focus this week will still be on ECB. There was a headline yesterday noting that a phone call between Draghi and Merkel had taken place. No further details were released other than reaffirmation by German government’s spokesperson that the ECB’s independence is extremely important to the country. This comes after a weekend Der Spiegel report which said that Merkel was unhappy with Draghi for apparently proposing a greater emphasis on fiscal stimulus over austerity in order to boost growth.

Meanwhile the tension between Russia and Ukraine continues to build with more finger-pointing seen yesterday. Ukraine’s Defence Minister apparently posted on his Facebook page that Russia has threatened on several occasions across unofficial channels that, in the case of continued resistance, they are ready to use a tactical nuclear weapon against Ukraine. He also added that “a great war has arrived at our doorstep – the likes of which Europe has not seen since WWII”. Russia on the other hand has repeatedly denied these accusations.

Turning to markets the strength in the Nikkei (+1.5%) and the weakness in the JPY (104.8) are a standout as far as overnight markets are concerned. The market seems to be rallying on news that Yasuhisa Shiozaki (who has been advocating for the GPIF to reduce allocation to domestic bonds) may be appointed the Health Minister when Abe announces his new cabinet tomorrow. The market is also outperforming the rest ahead of a two-day BOJ meeting starting tomorrow and there are some chatter of more stimulus on the back of further sales tax hikes.

In other markets, the Hang Seng, Shanghai Composite, and the KOSPI are -0.5%, +0.3% and -0.8%, respectively as go to print. In other overnight stories, bank sector lobbyists have warned the Basel Committee on Banking Supervision that its proposed Net Stable Funding Ratio requirement could make it more expensive for banks to facilitate equity market transactions. A letter to the Basel Committee sighted by the FT goes on to say that “By unnecessarily increasing the funding cost for banking organisations’ equity market intermediation activities, the revised NSFR would also potentially force such activities into the largely unregulated shadow banking system, increasing systemic risk.”

Looking at the day ahead, all eyes will be on the ISM data as well as how US markets will resume following the Labour Day long weekend.

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And for tonight’s menu of disastrous Japanese economic data, we have (drum roll please)… Auto sales. Overall auto sales fell 9.1% YoY to 333,471 – the lowest in 3 years. Minicars dropped a stunning 15.1% YoY according to the Japanese auto dealers association. The response – rather obvious by now – to this terrible news… a 35 pip vertial ramp in USDJPY which can mean only one thing – the Nikkei 225 rallied 150 points… On a side note, following disappointing PMIs, China fixed the Yuan at 4-month lows.

 

Car Sales collapse….

 

So buy stocks and sell JPY…

 

Charts: Bloomberg

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Alarmed at the anti-Russian hysteria sweeping Washington, and the specter of a new Cold War, U.S. intelligence veterans one of whom is none other than William Binney, the former senior NSA crypto-mathematician who back in March 2012 blew the whistle on the NSA’s spying programs more than a year before Edward Snowden, took the unusual step of sending the following memo dated August 30 to German Chancellor Merkel challenging the reliability of Ukrainian and U.S. media claims about a Russian “invasion.”

Via AntiWar and ConsortiumNews, highlights ours

MEMORANDUM FOR: Angela Merkel, Chancellor of Germany
FROM: Veteran Intelligence Professionals for Sanity (VIPS)
SUBJECT: Ukraine and NATO

We the undersigned are longtime veterans of U.S. intelligence. We take the unusual step of writing this open letter to you to ensure that you have an opportunity to be briefed on our views prior to the NATO summit on September 4-5.

You need to know, for example, that accusations of a major Russian “invasion” of Ukraine appear not to be supported by reliable intelligence. Rather, the “intelligence” seems to be of the same dubious, politically “fixed” kind used 12 years ago to “justify” the U.S.-led attack on Iraq. We saw no credible evidence of weapons of mass destruction in Iraq then; we see no credible evidence of a Russian invasion now. Twelve years ago, former Chancellor Gerhard Schroeder, mindful of the flimsiness of the evidence on Iraqi WMD, refused to join in the attack on Iraq. In our view, you should be appropriately suspicions of charges made by the US State Department and NATO officials alleging a Russian invasion of Ukraine.

President Barack Obama tried yesterday to cool the rhetoric of his own senior diplomats and the corporate media, when he publicly described recent activity in the Ukraine, as “a continuation of what’s been taking place for months now … it’s not really a shift.”

Obama, however, has only tenuous control over the policymakers in his administration – who, sadly, lack much sense of history, know little of war, and substitute anti-Russian invective for a policy. One year ago, hawkish State Department officials and their friends in the media very nearly got Mr. Obama to launch a major attack on Syria based, once again, on “intelligence” that was dubious, at best.

Largely because of the growing prominence of, and apparent reliance on, intelligence we believe to be spurious, we think the possibility of hostilities escalating beyond the borders of Ukraine has increased significantly over the past several days. More important, we believe that this likelihood can be avoided, depending on the degree of judicious skepticism you and other European leaders bring to the NATO summit next week.

Experience With Untruth

Hopefully, your advisers have reminded you of NATO Secretary General Anders Fogh Rasmussen’s checkered record for credibility. It appears to us that Rasmussen’s speeches continue to be drafted by Washington. This was abundantly clear on the day before the U.S.-led invasion of Iraq when, as Danish Prime Minister, he told his Parliament: “Iraq has weapons of mass destruction. This is not something we just believe. We know.”

Photos can be worth a thousand words; they can also deceive. We have considerable experience collecting, analyzing, and reporting on all kinds of satellite and other imagery, as well as other kinds of intelligence. Suffice it to say that the images released by NATO on August 28 provide a very flimsy basis on which to charge Russia with invading Ukraine. Sadly, they bear a strong resemblance to the images shown by Colin Powell at the UN on February 5, 2003 that, likewise, proved nothing.

That same day, we warned President Bush that our former colleague analysts were “increasingly distressed at the politicization of intelligence” and told him flatly, “Powell’s presentation does not come close” to justifying war. We urged Mr. Bush to “widen the discussion … beyond the circle of those advisers clearly bent on a war for which we see no compelling reason and from which we believe the unintended consequences are likely to be catastrophic.”

Consider Iraq today. Worse than catastrophic. Although President Vladimir Putin has until now showed considerable reserve on the conflict in the Ukraine, it behooves us to remember that Russia, too, can “shock and awe.” In our view, if there is the slightest chance of that kind of thing eventually happening to Europe because of Ukraine, sober-minded leaders need to think this through very carefully.

If the photos that NATO and the US have released represent the best available “proof” of an invasion from Russia, our suspicions increase that a major effort is under way to fortify arguments for the NATO summit to approve actions that Russia is sure to regard as provocative. Caveat emptor is an expression with which you are no doubt familiar. Suffice it to add that one should be very cautious regarding what Mr. Rasmussen, or even Secretary of State John Kerry, are peddling.

We trust that your advisers have kept you informed regarding the crisis in Ukraine from the beginning of 2014, and how the possibility that Ukraine would become a member of NATO is anathema to the Kremlin. According to a February 1, 2008 cable (published by WikiLeaks) from the US embassy in Moscow to Secretary of State Condoleezza Rice, US Ambassador William Burns was called in by Foreign Minister Sergey Lavrov, who explained Russia’s strong opposition to NATO membership for Ukraine.

Lavrov warned pointedly of “fears that the issue could potentially split the country in two, leading to violence or even, some claim, civil war, which would force Russia to decide whether to intervene.” Burns gave his cable the unusual title, “NYET MEANS NYET: RUSSIA’S NATO ENLARGEMENT REDLINES,” and sent it off to Washington with IMMEDIATE precedence. Two months later, at their summit in Bucharest NATO leaders issued a formal declaration that “Georgia and Ukraine will be in NATO.”

Just yesterday, Ukrainian Prime Minister Arseny Yatsenyuk used his Facebook page to claim that, with the approval of Parliament that he has requested, the path to NATO membership is open. Yatsenyuk, of course, was Washington’s favorite pick to become prime minister after the February 22 coup d’etat in Kiev. “Yats is the guy,” said Assistant Secretary of State Victoria Nuland a few weeks before the coup, in an intercepted telephone conversation with US Ambassador to Ukraine Geoffrey Pyatt. You may recall that this is the same conversation in which Nuland said, “Fuck the EU.”

Timing of the Russian “Invasion”

The conventional wisdom promoted by Kiev just a few weeks ago was that Ukrainian forces had the upper hand in fighting the anti-coup federalists in southeastern Ukraine, in what was largely portrayed as a mop-up operation. But that picture of the offensive originated almost solely from official government sources in Kiev. There were very few reports coming from the ground in southeastern Ukraine. There was one, however, quoting Ukrainian President Petro Poroshenko, that raised doubt about the reliability of the government’s portrayal.

According to the “press service of the President of Ukraine” on August 18, Poroshenko called for a “regrouping of Ukrainian military units involved in the operation of power in the East of the country. … Today we need to do the rearrangement of forces that will defend our territory and continued army offensives,” said Poroshenko, adding, “we need to consider a new military operation in the new circumstances.”

If the “new circumstances” meant successful advances by Ukrainian government forces, why would it be necessary to “regroup,” to “rearrange” the forces? At about this time, sources on the ground began to report a string of successful attacks by the anti-coup federalists against government forces. According to these sources, it was the government army that was starting to take heavy casualties and lose ground, largely because of ineptitude and poor leadership.

Ten days later, as they became encircled and/or retreated, a ready-made excuse for this was to be found in the “Russian invasion.” That is precisely when the fuzzy photos were released by NATO and reporters like the New York Times’ Michael Gordon were set loose to spread the word that “the Russians are coming.” (Michael Gordon was one of the most egregious propagandists promoting the war on Iraq.)

No Invasion – But Plenty Other Russian Support

The anti-coup federalists in southeastern Ukraine enjoy considerable local support, partly as a result of government artillery strikes on major population centers. And we believe that Russian support probably has been pouring across the border and includes, significantly, excellent battlefield intelligence. But it is far from clear that this support includes tanks and artillery at this point – mostly because the federalists have been better led and surprisingly successful in pinning down government forces.

At the same time, we have little doubt that, if and when the federalists need them, the Russian tanks will come.

This is precisely why the situation demands a concerted effort for a ceasefire, which you know Kiev has so far been delaying. What is to be done at this point? In our view, Poroshenko and Yatsenyuk need to be told flat-out that membership in NATO is not in the cards – and that NATO has no intention of waging a proxy war with Russia – and especially not in support of the ragtag army of Ukraine. Other members of NATO need to be told the same thing.

For the Steering Group, Veteran Intelligence Professionals for Sanity

•     William Binney, former Technical Director, World Geopolitical & Military Analysis, NSA; co-founder, SIGINT Automation Research Center (ret.)
•     David MacMichael, National Intelligence Council (ret.)
•     Ray McGovern, former US Army infantry/intelligence officer & CIA analyst (ret.)
•     Elizabeth Murray, Deputy National Intelligence Officer for Middle East (ret.)
•     Todd E. Pierce, MAJ, US Army Judge Advocate (Ret.)
•     Coleen Rowley, Division Counsel & Special Agent, FBI (ret.)
•     Ann Wright, Col., US Army (ret.); Foreign Service Officer (resigned)

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Submitted by David Stockman via Contra Corner blog,

Capitalism gets into deep trouble when the price of financial assets becomes completely disconnected from economic reality and common sense. What ensues is rampant speculation in which financial gamblers careen from one hot money play to the next, leaving the financial system distorted and unstable—a proverbial train wreck waiting to happen.

That’s where we are now. And nowhere is this more evident than in the absurd run-up in the price of European sovereign debt since the Euro-crisis peaked in mid-2012. In that regard, perhaps Portugal is the poster-boy. It’s fiscal, financial and economic indicators are still deep in the soup, yet its government bond prices have soared in a triumphal arc skyward.

Unfortunately, the recent crashing landing of its largest conglomerate and financial group (Espirito Santo Group) is a stark remainder that its cartel-ridden, import-addicted, debt-besotted economy is not even close to being fixed. Notwithstanding the false claims of Brussels and Lisbon that it has successfully “graduated” from its EC bailout, the truth is that the risk of default embedded in its sovereign debt has not been reduced by an iota.

At the time of the 2011-2012 crisis, its central government was already sliding rapidly into a debt trap with a ratio of just under 100%. Self-evidently, the nation’s so-called EC bailout has only made its public debt burden dramatically worse. Today Portugal’s debt to GDP ratio is 129% and there is no sign of a turnaround.

But that has not deterred the rambunctious speculators in peripheral sovereign debt. Since mid-2012 and Draghi’s “whatever it takes” ukase, the price of Portugal’s public debt has soared. This means that leveraged speculators—-and they are all leveraged on repo or similar forms of hypothecated borrowings—-have made a killing, harvesting triple-digit gains on the thin slice of non-borrowed capital they actually have at risk in these carry trades.

As shown below, in response to this central bank induced bond buying campaign by fast money speculators, the 10-year Portuguese government bond yield has experienced a stunning plunge from 15% to 4% during the last 24 months. Among other things, this dramatic improvement virtually overnight in its fiscal financing costs has taught Portugal’s government a dangerously false lesson. Namely, that in the face of unsustainable fiscal profligacy all its takes is a little budgetary sleight of hand and fake austerity. In fact, nearly all of its fiscal improvement is owing to the one-time sale of state assets including the airport operator and various public utilities under financial arrangement which amount to little more than off-budget borrowing.

Moreover, regardless of the quality of its fiscal recovery measures, the sharp drop in its bond yield would ordinarily at least imply that Portugal has turned its chronic fiscal deficits on a dime, but that is not remotely the case, either.  Portugal has been burying itself in red ink for decades and despite being down from their crisis peak of 10% of GDP in 2010-2011, government deficits are shown are still running at the historic rate of 5% of GDP and will be lucky to break below that level in 2014 or anytime soon thereafter.

Needless to say, when a country’s nominal GDP is stuck on the flat-line, it can’t add 5% of annual output to the public debt each and every year without quickly being doomed by sheer arithmetic. That baleful fiscal math, in fact, is exactly the reason its bonds sold off so sharply in the first place, and why in the absence of massive central bank distortion of bond prices, Portugal would still be under the thumb of crushing yields on its monumental public debt.

So what is at work here is the opposite of is honest price discovery of the type that occurs on a genuine free market. There is virtually no logical basis for the bond market rally in Portuguese or other European sovereign debt. As detailed below, the whole thing is a central bank driven wave of short-term speculation and inflows of hot money which can reverse as quickly as it arrived following Draghi’s ukase.

in the meanwhile, the Wall Street and London sell-side continues to promote hairline and often transient  improvements as justification for the rally, which is to say, purchase of bonds and derivatives from their trading desks. In truth, the dismal facts of Portugal’s stunted economy and profligate fiscal practices have barely improved, but that does not prevent sell side ballyhoo from breaking out all over.

During recent quarters, for instance, Portugal’s real GDP has turned slightly upward, but the magnitude of improvement is laughably marginal—-certainly not remotely consistent with the massive gain in its bond prices. Thus, after three quarters of hairline gains, its real GDP in the Q2 2014 was a barely measureable 0.8% larger than the same quarter a year ago. And these rounding error gains, of course, have not yet made up a fraction of the deep shrinkage that occurred in the prior two years.

Indeed, despite all the sell-side drum-beating, Portugal’s real GDP is still 6% smaller than it was on the eve of the financial crisis in 2007. In that context, the galloping bond market rally during the past two years is insensible: a slight uptick from the bottom of a deeply depressed trend is no evidence whatsoever that Portugal’s battered national economy is being sustainably rejuvenated national economy, or that its capacity to service its spiraling debts has been improved in the slightest.  In short, the entire bond rally has noting to do with the fundamentals of Portugal’s fiscal and economic circumstances.

The real problem, of course, is that all sectors of the Portuguese economy buried themselves in debt during the years after it joined the EC and was able to access the cheap funding available in the euro bank and bond markets. Indeed, the explosive growth of debt was so extreme that it could be fairly labeled as a sheer financial orgy.  As shown below, during the 14 years between 1996 and 2010, for example, household sector debt increased by 6X at a time when the nominal GDP grew by less than 2X. Even after some modest liquidation during the last 4 years, household debt is still 5X larger than it was in the mid-1990s, yet Portugal’s nominal GDP has actually declines since the 2010 debt peak, meaning that the household leverage ratio is now worse than ever.

The same holds for non-financial business debt, which also soared by 6X after the turn of the century. As is evident below, there has been no progress whatsoever in reducing the enormous burden on the business sector.

Toss on top of this the still rising government debt burden and the implication is obvious. During the halcyon years of Europe’s debt orgy, Portugal went whole hog attempting to borrow its way to prosperity. Now its economy is crushed by the resulting balance sheet fiasco, and shows no signs that its devastating leverage ratios have been reduced by its so-called austerity program.

indeed, what all this fantastic borrowing did was to allow Portugal to finance a wholly unsupportable national life-style by importing vastly more goods and services than it exported, and financing the difference by means of the above borrowings in the euro debt markets.  During the decades leading up to it financial crisis, its current account deficit averaged between 6% and 12% of GDP—surely a dead-end trend if there ever was one.

Once again, however, the sell-side propaganda about the “turn” in Portugal’s current account is just another case of grasping at straws. In order to liquidate its towering debts, Portugal actually needs to run large trade surpluses for years to come in order to generate the means of pay down. But despite a modest uptick in exports which is inherently constrained by the faltering condition of the EC economies and the general world slowdown, it has barely made a dent in its level of imports. Stated differently, the Portuguese economy continues to live high on the hog as is its debt crisis had never really happened.

The fact is, away from Wall Street’s fatuous focus on superficial, hairline signs of recovery, Portugal’s real economy is still deep in the doldrums. Its industrial production index, for example, is down 5% from 2010 levels and 18 percent from turn of the century levels.

But the most telling indicator is its plunging labor force participation rate. As shown in the graph below, the dramatic plunge since 2000 is even more severe than the ballyhooed decline in the US figure. The reason is that Portugal’s work force has been out-migrating in droves or tumbling into its over-burdened social safety net.  Like, in the US, its recent hairline gains in the unemployment rate—still above 15%—are essentially attributable to a shrinking work force.

This is the crux of the matter. With a declining level of labor input and the unavoidable need for nominal wages—which were vastly inflated during the debt boom—to shrink in absolute terms to more sustainable levels, Portugal’s national income growth rate will flat-line for years to come under the best of circumstances, and will continue to decline in the face of another European and global recession.

Accordingly, there is no relief in sight for its towering leverage ratios in all sectors—government, households and business. In these circumstances, a 4% sovereign debt yield is nothing short of absurd.

The truth of the matter is therefore quite simply. Draghi ignited a short-term buying stampede with his mid-2012 pronouncement. This caused a hot money inflow—especially from dollar based Wall Street speculators and hedge funds. It certainly helped that the latter were drowning in liquidity owing to the Fed’s $85 billion per month of QE purchases and the ready availability of essentially zero cost repo financing. Indeed, the combination of QE3 and Draghi’s “whatever it takes” amounted to a bugle call to the financial hounds.

In short order, the impact was to drive both Euro bond prices and the Euro/USD exchange rate dramatically higher. In fact, between July 2012 and spring 2014, the euro rocketed from 120 to 140 or by nearly 17 percent. Not only did the resulting combo of a rising euro and soaring peripheral bond prices result in a tsunami of hot money into the euro markets, but it also laid the planking for today’s pathetic excuse that Europe is suffering from an economic affliction that can only be solved with an even more fantastic increase in ECB monetary intervention—-even beyond the financial repression it has in place today including negative deposit rates.

But there is no structural deflation in Europe—just the short-term impact on the rate of price change owing to a spike in the exchange rate that, ironically, resulted from Draghi’s pledge that he would run the printing press at some future date at whatever speed might be necessary to “save” the euro and prop up the sovereign debt of the EC periphery.

In truth, the current “deflationary” scare will soon abate as the euro moves through the 130 mark, and dollar-based speculators are forced to sell their peripheral bonds in order to avoid losses. The trend level of euro area inflation has been, and will remain, in the order of 2.2% per annum since 2000 as shown below. Other than the short-run exchange rate effects on the  rate of price change, the idea that Europe is suffering a deflationary crisis is absurd.

 

Accordingly, bond yields everywhere throughout the euro area are distorted beyond recognition.  In a recent post, EconMatters laid this out quite explicitly.  The data for all of the major European countries shown below truly describe the mother of all bond bubbles. This is central bank destruction at work on a monumental scale.

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