Strands of Information

As we recently mentioned, we are spending a lot of time every day absorbing large amounts of information. There is a certain danger of 'information overload' when doing this, but the idea is that by immersing oneself in lots of  information from numerous sources, one can often pick out developing trends in investor mood. Sometimes certain pieces of information stick out, and one realizes that they are perhaps of greater importance than is generally realized.

In the current time period, there are two conflicting strands of information that  seems likely to play a role for the financial markets in the immediate future (weeks to months).

One is the growing expectation of more central bank intervention. This idea has recently become a center of attention, as Ben Bernanke once again mentioned the imminent deployment of the Fed's 'tools'. Brazil's central bank meanwhile implemented a surprise rate cut and markets in the euro area have begun to price in an ECB rate cut.

This is probably the one factor that lends the greatest support to stocks and other 'risk assets' at the moment. Additional 'positives' exist of course: a general conviction that stocks are cheap (regardless of whether this is or isn't correct, it is a widespread conviction), strong growth of the money supply, the market's recently oversold state, a spate of insider buying near the recent lows and generally more subdued expectations.

The other important strand of information concerns of course the causal factors  driving the expectation of imminent new monetary pumping measures. This strand we would at the moment regard as quite negative, with economic data generally weakening and the euro area's debt problems continuing to make waves.

The question therefore becomes, which strand of information will exert more influence on investment decisions, and when. A number of sequences are possible – for instance, risk assets may find themselves supported into the next FOMC meeting and weaken thereafter (a 'buy the rumor, sell the news' type situation); they may be weak in the run-up to the meeting, as economic data continue to deteriorate and rally thereafter once the concrete measures have been revealed.

Alas, there is at present also a considerable additional risk posed by the growing realization of the troubles the euro area's banking system potentially faces. This could eventually lead to a 'discontinuous event' – a situation where panicked liquidation of risk assets and a rush into cash and 'safe haven' instruments trumps all other considerations in the short term.

We don't want to dismiss this possibility, as there is a steady flow of increasingly worrisome information with regards to the euro-area's difficulties and therefore a 'tipping point' could be reached sooner than most people seem to expect.

The daily chart of the S&P 500 does very little to dispel the idea that all kinds of outcomes must continue to remain under consideration, even those that normally have low probability.

The same holds true for other charts that describe the current situation in euro-land. We see zero evidence that stresses in the financial system have decreased.



The S&P 500 Index, daily. Try as we might, we don't really like the looks of this chart – click for higher resolution.



It doesn't help that the fundamental economic backdrop keeps deteriorating as well. Euro area PMI data show that a contraction is now well underway – and it is noteworthy that expectations ahead of the release were still too optimistic:

Manufacturing activity in the 17-nation euro zone contracted more than initially thought in August, sending the purchasing managers index for the sector to a two-year low, according to data released Thursday. The final August Markit purchasing managers index for manufacturing dropped to 49.0 from 50.4 in July, and came in below a preliminary estimate of 49.7. National PMI readings in Germany, the Netherlands and Austria remained above the no-change 50.0 level, while data signaled contractions for Ireland, France, Italy, Spain and Greece. "With GDP having risen just 0.2% in the second quarter, there is a growing risk that the euro zone could slide back into recession in the second half of the year," said Chris Williamson, chief economist at Markit.”


Among the news items that clearly should have everyone concerned is the recent spat between the IMF and the eurocracy over the former's estimate of how much money euro area banks will need to raise to be properly capitalized. The IMF's estimate is € 200 billion, which the eurocrats insists is way overblown. This is probably an excellent example of a case of 'never believe anything until it has been officially denied'.

As noted at CNBC in a reprint of an FT article:

“International Monetary Fund staff have provoked a fierce dispute with eurozone authorities by circulating estimates showing serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt.

The analysis, which was discussed by the IMF’s executive board in Washington on Wednesday, has been strongly rebutted by the European Central Bank and eurozone governments, which say it is partial and misleading.

The IMF’s work, contained in a draft version of its regular Global Financial Stability Report (GFSR), uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bailouts – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium.

Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about 200 billion euros ($287 billion), a drop of 10-12 percent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks.”

The ECB and eurozone governments have rejected such estimates.

Elena Salgado, Spanish finance minister, told the Financial Times on Wednesday that the fund was mistaken in looking only at potential losses without also taking account of holdings of German Bunds, which have risen in price.

“The IMF vision is biased,” she said. “They only see the bad part of the debate.”


(emphasis added)

The ECB and European government ministers may reject the IMF's estimates  but Goldman Sachs actually seems to think that they are too low. Way too low, in fact. In a research note to its hedge fund clients, GS inter alia remarks – according to the WSJ:

“A top Goldman Sachs Group Inc. strategist has provided the firm's hedge-fund clients with a particularly gloomy economic outlook and suggestions for how these traders can take advantage of the financial crisis in Europe.

In a 54-page report sent to hundreds of Goldman's institutional clients dated Aug. 16, Alan Brazil—a Goldman strategist who sits on the firm's trading desk—argued that as much as $1 trillion in capital may be needed to shore up European banks.”


(emphasis added)

Now, we haven't seen Mr. Brazil's analysis, so we don't know how he arrived at that number. We do however know a thing or two about euro area banks from the EBA stress test and their share price performance since it was released. We also know that a fractionally reserved banking system is always teetering on the edge of insolvency – that is simply in its nature, as it can not possibly pay out all, or even a fairly small portion, of its demand deposits on demand. Too many of these deposits consist of fiduciary media – uncovered money substitutes that can only be paid out with central bank help in the case of a bank run.

The important thing about the GS report is actually not even whether the estimate it uses is or isn't correct. The important thing is that the report exists. As is the source and destination of the report. It adds to the information strand that says: 'the probability that a statistically rare non-linear, several sigma event will strike the markets again is rising' (in other words, crash risk remains high).

Add to this the fact that the political class in the euro area has a well-worn tradition of shooting the messenger, as has just happened again in Greece. This method is of course self-defeating – it increases the nervousness of market participants, as it smacks of an attempt to suppress transparency, which means that there must in fact be something to hide. As to the Greek version of messenger termination,  Reuters reports:

The chief of an independent Greek budget committee resigned on Thursday after the country's finance minister attacked the group for saying debt dynamics were 'out of control', sources said.  The resignation may further complicate debt-choked Greece's already difficult negotiations with its international lenders about the disbursement of further aid tranches under a 110 billion euro ($156 bln) rescue package agreed last year.

The parliamentary experts' committee, headed by economist Stella-Savva Balfousia, said on Wednesday that Greece's debt dynamics were out of control and that the government was failing to restore public finances.  The committee also urged the government to redouble efforts to fight tax evasion and reduce primary deficits, in view of a recession that was worse than expected – a demand also likely to be made by the inspectors from the European Union and International Monetary Fund currently in Athens.

Finance Minister Evangelos Venizelos on Thursday scathingly attacked the committee. "Yesterday's report lacks elements of credibility of other international reports," he said in a statement. "All necessary measures will be taken to upgrade and improve the credibility of the committee," he added.  Balfousia stepped down later on Thursday after Venizelos's comments, parliamentary and top government sources said. "She has submitted her resignation to the parliament speaker," one official said.


(emphasis added)

It is no wonder that European stock markets have found it difficult to get a good bounce going. Germany's DAX index continues to just look bad. The idea that the recent formation off the August low is merely some sort of running correction is one that it has not been able to dislodge as of yet.



Germany's DAX index – the recent bounce attempt looks very weak indeed – click for higher resolution.



Greece's Athens General Index had one its strongest one day rallies ever on Monday. Most of it has been given back already. The 'hopium bounce' in Greek bank stocks has been almost entirely eradicated in the meantime.



The Athens General Index – one swallow didn't make a summer – note yet, anyway – click for higher resolution.



Of course it should be pointed out that all these markets continue to sport MACD buy signals and are already deeply oversold. So a bigger rally should normally be expected to soon commence. What is worrisome is that it hasn't happened yet.


Gold  Disparaged By Multiple Sources

As none other than Alan Greenspan noted in his 1967 essay 'Gold and Economic Freedom':

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.”


“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”

Well, the 'hysterical antagonism' and the 'tirades against gold' are back in full force (hat tip to GATA).. We have already mentioned Nouriel Roubini's anti-gold hysteria, but other mainstream economists have begun to join in. This is no wonder – virtually all modern-day mainstream economists are at their heart central planners. Most of them rely on the State for their funding and their services would likely fetch far less in the free market than they feel they are entitled to in their role as advisors to the ruling class. The fact that gold is currently signaling that the markets are increasingly disenchanted with the antics of said ruling class and its institutions, the fact that it is increasingly indicating that the central planning experiment of the past four decades may be coming ever closer to a catastrophic failure, has many statist intellectuals up in arms.

As one  recent example consider e.g. 'Beyond the bond and gold bubbles' by David Malpass in the WSJ, which is a plea for the central bank to restore faith in the flailing fiat money system and as such at least acknowledges that central bank policy has been in error. Alas, while this is no doubt correct, the problem we have with this is that the author ultimately seeks to rescue the central planning idea instead of recognizing that the central bank-led fiat money system cannot be 'reformed'. He is a bit like Gorbachov trying to save communism by 'doing it right'. 

Another hit piece has been published in (where else) the New York Times. In 'How to Deflate a Gold Bubble', Steven Davidoff first discusses the question of whether gold is a 'bubble' (reciting a litany of canards we have heard a thousand times over the past decade), and while he notes initially that one can not really tell for sure, he then seems to conclude that indeed, it must be a bubble, since he finally veers off into demanding a whole host of market interventions designed  to bring the gold price down. In short, it is a proposal discussing how the 'authorities' might best go about shooting the messenger. What makes the article so disingenuous is that similar to Roubini's recent anti-gold frenzy, it suggests that the alleged 'bubble' might be as damaging and dangerous as the housing bubble or the Nasdaq bubble were. It should be obvious why this can not possibly be the case (inter alia, hardly anyone seems to be invested in gold – the percentage of global financial investment assets devoted to gold is less than 1% of all financial assets , with estimates ranging from 0.2% to 0.8% on the high side).

In this context we would note that Bill Fleckenstein recently remarked:

“[..]for those who say gold has had a huge parabolic, bubble-like move. Question: back in the stock mania, would anyone have noticed if a stock traded from $16 to $19 in a month?”

In fact, one need not go back to the stock mania. If a stock trades up from $16 to $19 in a month, a week, or even a single day, today, almost no-one will  take any notice.



Gold still in its rebound from the recent two day sell-off. It seems to be building a triangle, but it is still not certain whether the correction is going to become deeper or not – click for higher resolution.



Euro Area Charts

Below is our usual collection of charts of CDS, bond yields and euro basis swaps. As can be seen, things remain unsettled. Italian and Spanish yields are once again rising (if slowly), and so are a number of CDS spreads (specifically on the PIIGS and the euro-land core). Euro basis swaps remain deeply in negative territory. One can not even really speak of a pause in the crisis yet. By all indications, the crisis is ongoing. Prices in basis points, color-coded where applicable.



5 year CDS on Portugal, Italy, Greece and Spain – all turning up again – click for higher resolution.



5 year CDS on Ireland, France, Belgium and Japan – ditto – click for higher resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for higher resolution.


5 year CDS on Latvia, Lithuania, Slovenia and Slovakia  – these are still in correction mode, building triangles – click for higher resolution.



5 year CDS on Romania, Poland, Slovakia and Estonia – click for higher resolution.



5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – click for higher resolution.



5 year CDS on Germany,  the US and the Markit SovX index of CDS on 19 Western European sovereigns. SovX still looks like it's soon going to break out – click for higher resolution.



3 month, one year and five year euro basis swaps – this looks bad, with the shorter term ones plumbing fresh depths – click for higher resolution.



10 year government bond yields of Ireland, Greece, Portugal and Spain – All a bit better, except Spanish yields, which look like they are making a bottom – click for higher resolution.



10 year government bond yields of Italy and Austria, UK gilts and the Greek 2 year note – Italian yields are turning back up – click for higher resolution.



5 year CDS on the 'Big Four' Australian banks –  a big pullback in those – likely some profit taking in the wake of slightly stronger stock markets and the release of some better than expected economic data in Australia (manufacturing remains in the dumps, but consumer spending has improved somewhat) – click for higher resolution.




Charts by: Bloomberg,



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7 Responses to “Market Observations – Stocks, Gold, Euro Area Charts”

  • Dionysos:

    I read this site almost every day now, and I always look forward to reading it.
    I have a question. Does anyone think it is politicly possible to have a TARP(-ish) program in Europe instead or on top of a EFSF. A certain fund witch can polish the banks their capital ratio instead of funding PIIGS? By example the ECB and the EU creating a Euro TARP somewhere between 200bn and 1 tr euros?

    • It may become ‘unavoidable’ if the stresses in the interbank funding markets continue and become more severe. I think we can be reasonably certain that the political and bureaucratic classes in Europe won’t sit idly by if major banks are threatened by insolvency. So a ‘TARP’ like program may well come down the pike at some point. At the moment, money supply growth in the euro area is actually negative, but I expect that to change dramatically in coming months.

  • amun1:

    PT, you mention the rapidly growing money supply. Could you possibly give a succinct description of the component differences between Austrian TMS2 and official M2? It would be greatly appreciated.

  • amun1:

    I said in an earlier comment on this blog that it would be difficult for commodity prices to drop as long as gold prices were rising. After all, gold, and to a lesser extent silver, are basically the market’s perception of the true value of fiat money. Central bankers once understood that relationship, and will again I predict.

    At any rate, our central planners may have printed themselves into a very tight corner. Despite evidence of slowing economic fundamentals, commodities have shown no inclination to break down yet. In fact, the grains seem to be breaking higher, which will eventually result in more hoarding by desperate governments, shortages, etc.

    As for gold, I don’t see a break as long as either stocks or bonds are rising. Those paper asset prices are being supported by loose monetary policy and hard money will always be the beneficiary. The slope of the gold price is starting to track the inverse of bond yields. That is, as treasury yields approach zero across the curve, the slope of the gold price curve moves closer to infinity, or vertical. Stated another way, when dollars are free for 10 years and beyond, their value in terms of hard money approaches zero. Other commodity prices will eventually follow gold, albeit at a slower pace.

  • It’s an excellent idea, and amounts to an admission that ‘gold is the ultimate extinguisher of debt’ as A. Fekete likes to say.

  • uneasy:

    your blog is geting higher every day in my bloglist.
    What do you think about this?:

    ECB Doesn’t Rule Out “PIIGS” Gold as Collateral for Gold Backed Eurobonds, Sends Gold Soaring

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