Category Archives: Economy and Meltdown

Japan's Population Now So Old That Sales Of Adult Diapers Exceed Those For Babies

As we noted in 2009, Japan has an incredibly old population … which will put an increasingly heavy  burden on the economy:

Franco Modigliani won the Nobel Prize in Economics 1985, partly for his “life cycle hypothesis“, which states that spending and savings patterns are predictable and largely a function of age demographics. In other words, Modigliani’s hypothesis is basically that age demographics largely determine the health and robustness of an economy.




Specifically … the basic health of any country’s economy is largely driven by the number of its citizens who are in their peak spending years.

For example, the peak Japanese spending range has been estimated to be comprised of 39-43 year olds. The more 39-43 year olds Japan has at any given time, the more consumer spending there will be, as these are the folks who are the big spenders in Japan. Dent argues that the Japanese economy will tend to grow when the number of 39-43 year olds grows, and to shrink when it shrinks.




Countries with a large percentage of elderly people and a small proportion of productive workers will have less productive output and a larger demand for social services than those with a higher percentage of workers. It should also be obvious that this will tend to drag down the economy.




Japan has the worst demographics of all, with a staggering percentage of elderly who need to be taken care of by the young:


Chart 2: Old Age Dependency Ratios for Selected Countries

clip image0025 thumb The OTHER Economic CrisisSource:

Business Week gives an update:

Last year, for the first time, sales of adult diapers in Japan exceeded those for babies.

Given its quickly-aging population, Japan will have a hard time competing with younger countries like China, Brazil or India.

Here's China:

ch all2 The OTHER Economic Crisis

Brazil has a much younger age demographic.

And India’s is even younger than Brazil’s.

Russia Sends Warships To Gaza Coast

For the entire 8 day duration of Operation Pillar of Defense, there was one major geopolitical player who had been largely quiet and certainly absent from the scene: the same player whose unflinching position over the Syria conflict has so far prevented any intervention in the civil war torn country: Russia. The same Russia which has a military base in the Syrian port city of Tarsus, and thus in its own eyes, a very substantial “national interest” role to play in the middle east, one that is certainly opposing that of the US and the pro-NATO forces, a tension that will surely boil to the surface now that war between Iran and Israel is always at most “hours away” depending on who is asked, and which one day will be more than just a war of words. Today, Russia decided that it had kept quiet for too long over the Gaza conflict, with Voice of Russia reporting, courtesy of Al Arabiya, that Russian warships anchored off the eastern coast of the Mediterranean Sea will be put on military alertness should the conflict in Gaza escalate and brought in proximity, according Russian Navy Command source on Friday.

Sure enough, there is a diplomatic reason for the escalation: evacuation preparedness. To wit: “The detachment of combat ships of the Black Sea Fleet, including the Guards missile cruiser Moskva, the patrol ship Smetliviy, large landing ships Novocherkassk and Saratov, the sea tug MB-304 and the big sea tanker Ivan Bubnov, got the order to remain in the designated area of the Eastern part of the Mediterranean Sea for a possible evacuation of Russian citizens from the area of the Gaza strip in case of escalation of the Palestinian-Israeli conflict”, the spokesperson said. He added that ship crew members will continue routine combat training, maintenance of equipment and weapons along with other military services.

A missile cruiser, which just happens to be the flag ship of the Russian Black Sea naval fleet, and whose purpose is “to destroy hostile surface ships” in order to aid evacuation? Odd…

Naturally, only very naive people would buy this “explanation”, which does nothing to mitigate the factor that Russia, too, is now implicitly involved in the Gaza conflict. How soon until China sends a few of its own warships to the region. Just in case China nationals needs evaluation too.

And if indeed evacuation is the catalyst, it may happen soon, because the tenuous cease fire between the two nations may not last long following another reflaring of hostilities between Israel and Gaza:

Hundreds of Palestinians approached the border fence Friday in several locations in southern Gaza, testing expectations Israel would no longer enforce a 300-meter-wide (300-yard-wide) no-go zone on the Palestinian side of the fence that was meant to prevent infiltrations into Israel. In the past, Israeli soldiers routinely opened fire on those who crossed into the zone.


In one incident captured by Associated Press video, several dozen Palestinians, most of them young men, approached the fence, coming close to a group of Israeli soldiers standing on the other side.


Some Palestinians briefly talked to the soldiers, while others appeared to be taunting them with chants of “God is Great” and “Mursi, Mursi,” in praise of Egyptian President Mohammed Mursi, whose mediation led to the truce.


At one point, a soldier shouted in Hebrew, “Go there, before I shoot you,” and pointed away from the fence, toward Gaza. The soldier then dropped to one knee, assuming a firing position. Eventually, a burst of automatic fire was heard, but it was not clear whether any of the casualties were from this incident.


Gaza health official Ashraf al-Kidra said a 20-year-old man was killed and 19 people were wounded by Israeli fire near the border.


Mansour, the Palestinian U.N. observer, said Israeli forces fatally shot Anwar Abdulhadi Qudaih in the head and injured at least 19 other Palestinian civilians in a border area east of Khan Younis.


During the incidents, Hamas security tried to defuse the situation and keep the crowds away from the fence.


Moussa Abu Marzouk, a top Hamas official at the ongoing negotiations in Cairo, told The Associated Press that the violence would have no effect on the ceasefire.


The crowds were mainly made up of young men but also included farmers hoping to once again farm lands in the buffer zone. Speaking by phone from the buffer zone, 19-year-old Ali Abu Taimah said he and his father were checking three acres of family land that have been fallow for several years.


“When we go to our land, we are telling the occupation (Israel) that we are not afraid at all,” he said.


Israel’s military said roughly 300 Palestinians approached the security fence at different points, tried to damage it and cross into Israel. Soldiers fired warning shots in the air, but after the Palestinians refused to move back, troops fired at their legs, the military said. A Palestinian infiltrated into Israel during the unrest, but was returned to Gaza, it said.

As we previously showed the Brent market priced in a ceasefire for about 10 minutes last week, before sending Brent to its weekly high, on the realization that the peace between Israel and Gaza is merely lip service until at least one more foreign political entity figures out some way to benefit from a re-escalation of hostilities. Only this time the Russians will be there too.

Goodbye Petrodollar, Hello Agri-Dollar?

When it comes to firmly established, currency-for-commodity, self reinforcing systems in the past century of human history, nothing comes close to the petrodollar: it is safe to say that few things have shaped the face of the modern world and defined the reserve currency as much as the $2.3 trillion/year energy exports denominated exclusively in US dollars (although recent confirmations of previously inconceivable exclusions such as Turkey’s oil-for-gold trade with Iran are increasingly putting the petrodollar status quo under the microscope). But that is the past, and with rapid changes in modern technology and extraction efficiency, leading to such offshoots are renewable and shale, the days of the petrodollar “as defined” may be over. So what new trade regime may be the dominant one for the next several decades? According to some, for now mostly overheard whispering in the hallways, the primary commodity imbalance that will shape the face of global trade in the coming years is not that of energy, but that of food, driven by constantly rising food prices due to a fragmented supply-side unable to catch up with increasing demand, one in which China will play a dominant role but not due to its commodity extraction and/or processing supremacy, but the contrary: due to its soaring deficit for agricultural products, and in which such legacy trade deficit culprits as the US will suddenly enjoy a huge advantage in both trade and geopolitical terms. Coming soon: the agri-dollar.

But first, some perspectives from Karim Bitar on CEO of Genus, on what is sure to be the biggest marginal player of the agri-dollar revolution, China, whose attempt to redefine itself as a consumption-driven superpower will fail epically and very violently, unless it is able to find a way to feed its massive, rising middle class in a cheap and efficient manner. But before that even, take note of the following chart which takes all you know about global trade surplus and deficit when narrowed down to what may soon be that all important agricultural (hence food) category, and flips it around on its head.

Karim Bitar on China:

Structurally, China is at a huge disadvantage as it accounts for 20% of the world’s population, but only 7% of arable land. Compare that with Brazil which has the reverse of those ratios. What that does for a country like China is to incentivise the adoption of technification. Let’s look at their porcine market, which represents 50% of global production and consumption. In China, to slaughter roughly 600 mn pigs per year, which is about six times the demand in the US, they have a breeding herd of about 50 mn animals. In the US, the comparable number is only about 6 mn so there is a huge productivity lag.


Owing to its structural disadvantages, China is much more focused on increasing efficiency. For that, it needs to accelerate technification. So, we’re seeing a whole series of government incentives at a national level, a provincial level and a local level, focusing on the need to move toward integrated pork production because that’s a key way to optimise total economics, both in terms of pig production, slaughtering, processing and also actually taking the pork out into the marketplace.


The Chinese government is important as a customer to us because of its clarity of vision on food security. It has seen the Arab Spring, and it is cognisant of the strong socio-political implications of higher food prices. Pork prices could account for about 25% of the CPI, so it knows it can be a major issue. It’s because of all these pressures, that China is more focused on responding to the food challenge. It’s a sort of a burning platform there.


…Take milk production in China and India. China is basically trying to leapfrog and avoid small-scale farming by adopting a US model. In the US, you tend to have very large herds. Today about 30% of US milk production is from herds of 2,000 plus, and we expect that to reach 60% within the next five years. Today in China, there are already several hundred dairy herds of over 1,000. However in India, there’ll be less than 50. The average dairy herd size is closer to five, so it’s very fragmented. So the reality is that a place like China, because of government policies, subsidies and a much more demanding focused approach to becoming self-sufficient, has a much greater ability to respond to a supply challenge rapidly.

The problem for China, and to a lesser extent India, however one defines it, is that it will need increasingly more food, processed with ever greater efficiency for the current conservative regime to be able to preserve the status quo, all else equal. And for a suddenly very food trade deficit-vulnerable China, it means that the biggest winners may be Brazil, the US and Canada. Oh and Africa. The only question is how China will adapt in a new world in which it finds itself in an odd position: a competitive trade disadvantage, especially its primary nemesis: the USA.

So for those curious how a world may look like under the Agri-dollar, read on for some timely views from GS’ Hugo Scott-Gall.

Meaty problems, simmering solutions

What potential impacts could a further re-pricing of food have on the world? Why might food re-price? Because demand is set to rise faster than supply can respond. The forces pushing demand higher are well known, population growth, urbanisation and changing middle class size and tastes. In terms of economic evolution, the food price surge comes after the energy price surge, as industrialisation segues into consumption growth (high-income countries consume about 30% more calories than low income nations, but the difference in value is about eight times). Here, we are keenly interested in how the supply side can respond, both in terms of where and how solutions are found, and who is supplying them. We are drawn towards an analogy with the energy industry here: the energy industry has invested heavily in efficiency, and through innovation, clusters of excellence, and access to capital has created solutions, the most obvious of which are renewable energy and shale. The key question for us is, can and will something similar happen in food?

It’s hard to argue that the ingredients that sparked energy’s supply-side response are all present in the food supply chain. In food, there’s huge fragmentation, a lack of coordination, shortages of capital in support industries (infrastructure) and  only pockets of isolated innovation. We suspect that the supply-side response may well remain uncoordinated and slower than in other industries. But things are changing. Those who disagree with Thomas Malthus will always back human ingenuity. As well as looking at where the innovators in the supply chain are (from page 10), and where there are sustainably high returns through IP (e.g., seeds, enzymes etc.), we need to think about the macro and micro economic impacts of higher food prices, and soberingly, the geo-political ones.

Slimming down

Could the demand destruction that higher energy prices have precipitated occur in food? There are some important differences between the two that make resolving food imbalances tougher. Food consumption is very fragmented and there is less scope for substitution.

Changing eating habits is much harder than changing the fuel burnt for power. And, ultimately, food spend is less discretionary that energy, i.e., the scope for efficient consumption is more limited and consumers will not (and cannot) voluntarily delay consumption, let alone structurally reduce it. This means that higher food prices, especially in economies where food is a greater portion of household spending, will lead to either lower consumption of discretionary items or a reduced ability to service debt (with consequent effects on asset prices). When oil prices spiked in the late 1970s, US consumers spent c.9% of their income on energy vs. an average of 7% over the previous decade. And yet, the total savings rate rose by c.2% as they overcompensated on spending cuts on other items. 2007-09 saw a similar phenomenon too. Even the most cursory browse through history shows that high food costs can act as a political tinderbox (so too high youth unemployment), and we believe there is a degree of overconfidence with regard to the economic impact of food prices in the West: food costs relative to incomes may look manageable, but when there is no buffer (i.e., a minimal savings rate) then there are problems. Food spend as a percentage of total household consumption expenditure is a relatively benign 14% in the US, versus c.20% for most major European nations and Japan. This rises to c.40% for China and 45% for India. Of course, as wages rise, the proportion of food within total consumption expenditure falls, but that is only after consumption hits a ceiling. Currently, India and China consume about 2,300 and 2,900 calories per capita per day, compared to a DM average of about 3,400. If the two countries eat like the West, then food production must rise by 12%. And if the rest of the world catches up to these levels then that number is north of 50%.

The scramble for Africa’s eggs

In terms of ownership of resources, food, like energy, can be broken into haves and have-nots. While there are countries  that have been successful without resources, it is quite clear that inheriting advantages (in this case good soil, climate and water) makes life easier. But that, of course, is only half the battle; what is also required is organisation, capital, education and collaboration to make it happen. Take Africa. It has 60% of the world’s uncultivated land, enviable demographics and lots of water (though not evenly distributed). Basic infrastructure, consolidation of agricultural land and minimal use of fertilisers and crop protection could do wonders for agricultural output in the region. But that’s easier said than done. Several African economies also need better access to information, education, property rights and access to markets and capital. Put another way, it needs better institutions. If Africa does deliver over the coming decades, rising food prices will alter the economics of investing in the region. The next scramble for Africa should be about food (while it is about hard commodities now and in the late 19th century it was about empire size). Fertiliser consumption has a diminishing incremental impact on yields, but Africa (along with several developing economies elsewhere) is far from touching that ceiling. Currently, Africa accounts for just 3% of global agricultural trade, with South Africa and Côte d’Ivoire together accounting for a third of the entire continent’s exports. But if the world wants to feed itself then it needs Africa to emerge as an agricultural powerhouse.

Higher up the production curve is China, which has been industrialising its agriculture as it seeks to move towards self sufficiency. Power consumed by agricultural machinery has almost doubled over the last decade, while the number of tractors per household has tripled, driving per hectare output up by an average of more than 20% over the same period.

Even so, in just the last 10 years China has gone from surplus to deficit in several meat, vegetable and cereal categories. So a lot more needs to be done, and a shortage of water could also prove to be an impediment, especially in some of its remote areas.

The power of the pampas

With significant surpluses in soybeans, maize, meat and oilseeds, Brazil and Argentina have led the Latin American  continent in terms of food trade. Current surpluses are 6x and 3x 2000 levels, versus only a 30% increase in the previous decade, and are rising. A key impediment to boosting exports is infrastructure. Food has to travel a long way just to reach the port, and then further still to reach other markets. Forty days is possibly acceptable for iron ore to reach China on a ship from Brazil, but that would prevent several perishable food items from being exported. And hence, solution providers in terms of durability, packaging, refrigeration and processing will be in demand. Also, while you could attribute a lot of the agricultural success of LatAm economies to good conditions, they have also benefitted from the adoption of agricultural innovation. For instance, more than a third of crops planted in the region are as seeds that are genetically modified, versus more than 45% in the US and about 12% in Asia. Genetically modified crops are not new. They provide solutions to some of the most frequent constraints on agricultural yields (resistance to environmental challenges including drought and more efficient absorption of soil nutrients, fertilisers and water) or add value by enhancing nutrient composition or the shelf life of the crop. And while the adoption of GM crops and seeds is far from wholehearted, particularly in Europe, it’s most certainly a key part of the solution in economies that are set to face a more severe food shortage.

The last mango in Paris?

Europe’s deficit/surplus makes for interesting reading. Seventeen of the 27 EU countries face a food trade deficit, and yet, the EU overall recorded a surplus (barely) in 2010 for only the second time in the last 50 years (see chart). Broken down further, the UK is the largest food importer, followed by Germany and Italy, while the Netherlands and France lead exports thanks to their very large processing industries. If Europe’s future is one of relative economic decline, then reduced purchasing power when bidding for scarce food resources is an unappetising prospect. Therefore, it needs all
the innovative solutions it can muster, or import substitution will have to increase. It’s important to note that being in overall surplus or deficit can mask variety at the category level, i.e., Europe is a net importer of beef, fruit & vegetables, and corn, while its exports are helped by alcohol and wine specifically. Japan, in particular, is very challenged. It is the only country in the preceding table to show a deficit in every single food category.

We conclude our trip around the world in North America. Large-scale production, access to markets, a home to innovation
and favourable regulation has meant that the US (and Canada) continues to dominate some of the key agricultural resources such as soybeans, corn, fodder, wheat and oilseeds. Put this self sufficiency together with the medium-term potential for energy self sufficiency and relatively good demographics (better than China), and a rosier prognosis for the  US, versus the rest of the Western world and parts of Asia, begins to fall into place.

Agri-dollars on the rise

Before we conclude, we need to devote a few lines to the geo-political and macro economic consequences of higher food prices. It’s likely that countries will act increasingly strategically to secure food supply, and that protections (e.g., high export tariffs) may well rise. It is also likely that there are special bi-lateral deals to access stable and secure food supply.

This could obviously damage the integrity of the WTO-sponsored system. Another consequence might be the emergence of agri-dollars, in the same way that petro-dollars emerged in the 1970s. This may seem far fetched (the value of the world’s energy exports is US$2.3 tn compared to US$1.08 tn for agriculture) but it’s important to think through the consequences. The big exporters, especially those with the scope to grow their output, may well have sustainable surpluses that can be reinvested into their economies (or extracted by a narrow part of society). Similarly, the consequence of being a net importer will be an effective tax on consumption: disposable income in the US would jump if oil was US$25/bbl.

As we have said, we would expect the big gainers of a meaningful rise in food prices in real terms to be Brazil, the US and Canada, while Japan, South Korea and the UK would face challenges. The top chart is important: look how China’s surplus has turned to deficit. What will happen if the Chinese middle class swells as it is expected to? And that’s  the rub; what we have been used to in terms of food’s importance is set to change. How food moves around the world is likely to change, and the flow of currency around the world will also likely be impacted.

Shuffle Rewind 19-23 Nov " The Only Way Is Up " (Yazz, 1988)

Shuffle Rewind 19-23 Nov " The Only Way Is Up " (Yazz, 1988)

This week in review (compared to Fri 16 Nov COB):

Click on day for related post, on title for song.

If the prior week was marked by some kind of awakening (essentially on the Fiscal Cliff), The week ending 16 Nov was more about finding a direction, which was mostly downwards, but always in jumps, marked by tentative rebounds. Europe seemed lost, so unused not to be the focal point anymore, waiting for US input. In absence of Fiscal Cliff discussions, and in absence of further news out of the Periphery, we seemed to have

"No Direction" (Bunds 1,32% -2; Spain 5,86% +5; Stoxx 2429% -2,1%; EUR 1,27 -10). But we were to find one…

Friday 16 Nov was eventually mostly boring, but it ended reaaally trashy with a dismal European close."That's The Way (I Like It)" (Bunds 1,32% -2; Spain 5,86% -3; Stoxx 2429 -1,2%; EUR 1,27 -90). 5 minutes after EU close, the US market was spun around 180 degrees by some Boehner comments, interpreted as ways could be found on the Fiscal Cliff issue. A huge Bear Trap. Last time we heard about Fiscal Cliff for a couple of days as well.

Monday had European equities ripping away and squeezed after Friday’s dismal close. Credit the same and, as more often than not lately, overdoing the equity move. EGBs remained rather muted with the Core pretty much where it stood throughout the prior week – with exception of Friday afternoon. Spain came back on the radar. Europe remained under US influence direction-wise. A huge relief. From what and why exactly remains unclear. In the meantime: "Rip And Tear" (Bunds 1,35% +3; Spain 5,88% +2; Stoxx 2495 +2,7%; EUR 1,281 +110). Shocker on Tuesday morning: France downgraded overnight to Aa1 by Moody’s. Uh… Very uncomfortable. This would have been a killer a year ago. Not so anymore. Not surprising per se, but uncomfortable. Hurt ALL EGBs, but the Periphery. As everyone else’s contingent costs seemed now to be counted, too. European Risk (Equities & Credit), however, oblivious and taking rising yields as a sure sign for Risk On. "A Tout Le Monde" (Bunds 1,41% +6; Spain 5,79% -9; Stoxx 2509 +0,6%; EUR 1,281 unch). And the week kept a detached tone from harsh realities, as yet another Help Greece summit ended with no conclusion, sending light shivers through Asia on Wednesday morning. But Europe went: Greece? Sorry, what’s with Greece? French downgrade. Unexpected, but then again not that much. So what? Fiscal Cliff? As no one speaks about it, it can be ignored. Risk? If it doesn’t fall, it has to rise. "Rise To The Occasion" (Bunds 1,43% +2; Spain 5,7% -9; Stoxx 2518 +0,4%; EUR 1,282 +10).The US were sent into an extended fooding and shopping weekend and closed fine. Having done so, and with Asia closing ok as well, Thursday started in line. PMI numbers came all a tick better than expected. Fine. Spanish auction fine. Greek bonds fine. All fine and light Risk On. Fine. Fine, fine, fine… All was good. Could have been the right opportunity to show some mercy: "Free Bird" (Bunds 1,43% +0; Spain 5,64% -6; Stoxx 2534 +0,6%; EUR 1,288 +60). Closing a strong Risk On week on Friday with markets opening unchanged (US and Japan closed, EU budget a fail, but Greece problem about to be solved) and staying put, despite yet again better German IFO numbers. Finally, yet another light ROn close of the day, crowning a ROn of a week. Worries put aside on Greece (and Cyprus) and the Periphery (and the Fiscal Cliff). Sentiment data all for the better. Last week’s nightmare obviously obliterated. It’s not like things have really changed, though. Those “Free Bird” who escaped the 46m annual Thanksgiving slaughter could now "Fly Like An Eagle" (Bunds 1,44% +1; Spain 5,6% -4; Stoxx 2552 +0,7%; EUR 1,296 +80). US markets kept the drive and added a quarter point higher than European COB at +1.3% on the day. UST unchanged at 1.69%.

If we lacked Direction last week, this week was a strong case for “The Only Way is Up!” with Risk assets soaring. Quite a cleansing process over the last weeks: weak longs stopped out, weak shorts stopped out. Volatility crushed nevertheless.

"The Only Way Is Up" (Bunds 1,44% +12; Spain 5,60% -26; Stoxx 2552 +4,8%; EUR 1,296 +260)

We felt EGBs to be on the lacklustre side after several weeks of strong performance and trading sideways throughout last week (with the exception of some reluctant tightening on Friday afternoon, as European equities fell out of bed). Market mood definitively changed tack this week. Exactly why and how seems unclear, but the trigger was actually France’s downgrade, for once, which shook investors less on French bonds as such, but triggered some realization that at the end of the day all European paymasters would end up paying for the Periphery’s contingent risks. So bye bye to last week’s historic lows for swaps and the Soft Core… Hard Core hit most (Bunds and Netherlands +12 & 11), but the move was pretty even throughout the EGB curve. France eventually tightened to Bunds. Belgium holding best (ex Periphery) and tightening further to Bunds (from 93 to 85) and ending the week 13 over France.

German Schätze back to around flat from last week’s excursion in negative territory.

In reversal, Spain (+2, -9,  -9, -6 & -4) and Italy (+3, -5, -1, -6 &  -3) fared really well, tightening by 26 and 12 bp on the week, pushing further away from last week’s brush with the symbolic 6 and 5%-levels. Spreads to Bunds compressed strongly to +416 (from 454) and +331 (from 355). Strong EGB-Periphery compression on Tuesday, following the French downgrade.

Strong performance of short Italians, now well through the 2%-mark, which had been quite a bit of a resistance (-24 to 1.82%). Italian 2-10 steepening to 292 (from 281) with Spain’s 2-10 YRS spread stable at 266 (from 264).

Spain’s auction on Thursday fared well, although one couldn’t shake off once more the impression that there’s some orchestrated sponsorship behind the latest results. Spain now pretending (The BoS is less certain than the government about numbers.) to pre-found for 2013, for which further details are still lacking (Spain itself, plus most probably the Spanish regions, locked out of the market, as well as further contingent capital consumers within the official scope).

We’ll note the compelling performance of Greek bonds, comforted by the “They will fix it and pay for it”-spirit reigning this week. This week’s can-kicking exercise being obviously on track with a rumoured buy-back Greek bond yields tanked to 16.25% for 2023s and 13.50% for 2042s from last week’s 17.25% and 14.50% (already 75bp tighter from the prior week’s close) and 25 bp off Thursday’s tightest levels.

There’s just one thing to keep in mind: daily turnover in Greek bonds is about EUR 1m. So things can move fast…

Need to see how that buy-back story pans out. Or if someone suddenly were to take offense at buying those off, realizing they’d come from hedge-funds…

EUR swap curve off last week’s historic lows. 2-10s back to 131 after 127, having flattened only in the last hours of the prior week. 10-30s unchanged at 61. It actually ought to tighten back, if Risk On is confirmed.

Credit totally over the top, still over-performing equities in either direction, but doubly supported by the Periphery tightening next to the equity rebound (+4.4%). While it had widened by some 5% last week (on equities off 2%), and with seemingly no own dynamic to boot, this week showed the Main tightening 13%, Financials over 14% and the Crossover 13%, as well, in line with the others and closing again through 500.

Having closed the prior 2 weeks down 2.4% in equities and then another 2.1% with a dismal Friday, the mood was turned around (after the US’s 180-degree shift, minutes after the European COB) starting Monday with a 2.7% rebound, which never let go as the following days added 0.6%, 0.4% and yet again 0.6% (with closed US markets) to end Friday on yet another +0.7%. +5.1% on the week and volatility crushed (VIX down from 18.3 to 15.1). Hefty 3-week cleansing process: Weak longs stopped, weak shorts squeezed. Vol crushed.

All is good!

European 50 & 100d averages: EStoxx 2511/2441, DAX 7277/7053, CAC 3449/3398, MIB 15628/15020, IBEX 7849/7441.

US 100 & 200d averages: INDU 13130/12992, S&P 1406/1383, NASDAQ 3017/2985 with AAPL 100/200d at 626/597.

After having already shaken off is function as Risk Off indicator last week, the EUR became full Risk On, up 260 pips on the week. Happily enjoying its new ROn indicator function, it is now back to 01 Nov levels, over the 50d average and Fibo retracement from Summer to Fall. Next stop 1.315-1.317 area.

EUR: 50d 1.291, 100d 1.266 & 200d 1.280. Fibo retracement (of May 2011 1.494 & Jul 2012 1.204 down-leg) at 1.273& 1.315, then 1.349 (50%). Jul 2012 to Sep rebound levels: 1.231 – 1.247 – 1.261 – 1.274 – 1.291 -1.317 .

Commodities were again not the most exciting thing on a weekly basis. Oil duly did reacted to the Middle-East situation, but not exactly in the wildest manner. Up 2, down 2 and back to bed. CRB is up 1.7% on the week with nothing especially standing out. Gold tackling the 1750-mark (+2.2%). Copper +2.6%.

The activity in New Issues was similar to last week with EUR 13.3bn in 17 trades, although with an axe tending to financials from last week’s corporates. Diversified EUR 3.5bn covered bond offers from Belfius (issuing the first-ever Belgian Pfandbriev), BPCE and especially Intesa. Senior issues added to nearly EUR 3.5bn, mainly by ING and BNPP in 2 YRS FRNs. Standard Chartered 12 YRS LT2 paper. Danone, Volvo, Statkraft in household name corporates. Italian utility A2A. Note another Irish borrower with Bord Gais Eireann (met with EUR 6.5bn orders for EUR 500m 5 YRS). SSA issuers were uninspiring with EIB next to the German Länder of Hamburg and Brandenburg for a total of EUR 1.5bn.

The big missing candidate was the EFSF, which had announced a 3 YRS deal, subsequently pulled after the French downgrade.

Tons of roadshow announcements (Air France, Lottomatica, Generali, Telenor, Bilfinger, KBC Pfanbriev, SNS, Eandis Rio Tinto), so the market will remain active.

Outlook: Need to check election results in Catalonia, although realistically independence seems a very far-away thing, if at all. Still, a strong support for Mas might just make life more difficult for the central government.

Greek buy-back details (if).

Light macro supply initially out of Europe: will mainly see if consumers are as upbeat (despite rising unemployment and austerity everywhere). Equities are seemingly en route to retest the post-Summer 2011 double-top about 2-2.5% away, as last week’s break to the downside didn’t materialize.

Still EGBs remained quite resilient given yet another ROn drag to the upside. Hard Core wider out, Soft Core tightening, pushed by the Periphery with Belgium getting nearer and nearer to France (+13), which in turn closed at 72 to Bunds from 75 last Friday (and shrugging off Moody’s downgrade spread-wise). Decompression.

On the week (compared to Fri 16 Nov COB):

10 YRS Yields: Germany 1,44% (+12); Luxembourg 1,55% (+8); Netherlands 1,69% (+11); Finland 1,69% (+9); Swaps 1,74% (+8); EU 1,78% (+8); Austria 1,84% (+7); EIB 1,94% (+8); EFSF 2,07% (+9); France 2,16% (+9); Belgium 2,29% (+4); Italy 4,75% (-12); Spain 5,60% (-26).

10 YRS Spreads: Luxembourg 11bp (-4); Netherlands 25bp (-1); Finland 25bp (-3); Swaps 30bp (-4); EU 34bp (-4); Austria 40bp (-5); EIB 50bp (-15); EFSF 63bp (-3); France 72bp (-3); Belgium 85bp (-8); Italy 331bp (-24); Spain 416bp (-38).

EUR swap curve 2-5 YRS 48bp (+2,0); 5-10 YRS 83bp (+2,0) 10-30 YRS 61bp (unch).

2 YRS German BKOs closed -0,002% (+4) and 5 YRS OBLs 0,44% (+10), on the week. UST, heavy too, at 1,69% (+13).

Swiss 2-YRS were somehow in line with Schätze, closing at -0.225% from -0.25%.

Main at 121 from 139 (-12,9% tighter); Financials at 161 after 188 (-14,4% tighter); Cross at 496 from 572 (-13,3% tighter).

Stoxx Futures at 2552 / +5,1% from 2429 with S&P minis at 1402 / +4,3% from 1344, at European COB last week.

VIX index at 15,1 after 18,3 last week.

Oil 88,2/111,0 (WTI/Brent) from 86,9/108,2 (+1,5%/+2,6%). Gold at 1748 after 1711 (+2,2%). Copper at 352 from 343 (+2,6%) . CRB closes 298,0 from 293,0 (+1,7%).

After rebounding 10.2% last week, the BDIY kept adding on a daily basis and closed the week at 1090, up 54 (+5.2%).

Intermediate 2012 high (post-Chinese New Year) was at 1165 early May after a 10-year low at 647 early Feb, before dipping to 872 in June, rising back to 1162, retesting lows at 661 mid-Sep, re-testing highs at 1109 before sliding back to 916 in the last down-leg.

EUR 1,296 after 1,270 last Friday

Greek guesstimate: Greek bonds near tightest levels of 16.25% for 2023s and 13.50% for 2042s, down 100bp on the week (after closing 75bp tighter last week), 25 bp off Thursday’s tightest levels.

Need to see how that buy-back story pans out. Or if someone suddenly were to take offense at buying those off, realizing they’d come from hedge-funds…

All levels Friday COB 17:30 CET


Fast-forward Macro and Events:

European end of month data drought.

Busy data Tuesday in the US. Need to see whether housing will really turn around the economy.

Govie supply: Mon Germany EUR 3bn 12m bills & France EUR 6.8bn 3 6 12m bills, final 2012 Belgium auction for up to EUR 3.2bn 2017 / 2019s / 2022. Tue EUR 3bn Dutch 3 YRS, Spanish 3 & 6m bills, Italian 2 YRS zeroes. Wed EUR 3bn OBLs in Germany & Italian bills. Thu Italian bonds.

US Tue $35bn 2 YRS, Wed $35bn 5 YRS and Thu $29bn 7 YRS

EC: Tue OECD outlook; Wed M3; Thu Biz Climate and Consumer Conf; Fri CPI

GE: Mon Consumer Conf fcst 6.2 after 6.3; Wed CPI fcst 2% after 2.1%; Thu Unemployment; Fri Retail Sales

FR: Tue Consumer Conf fcst 83 after 84; Wed Unemployment; Fri PPI and Consumer Spending

Italy: Mon Consumer Conf; Tue Wages; Thu Biz Conf; Fri Unemployment, CPI & PPI

Spain: Mon Mortgage; Tue Budget Balance; Wed Retail Sales fcst -10.7% after -10.9%; Thu Housing Permits; Fri CPI

US: Mon Dallas & Chicago FED; Tue Durable Goods, Case Schiller, House Px & Consumer Confidence; Wed New Home Sales & Beige Book; Thu Q3 GDP 2nd revision, Claims, Pending Home Sales; Fri Personal Income & Spending, NAPM and Chicago PM.


Click link under title or below for today’s musical support:

We been broken down

The lowest turn

And been on the bottom line

Sure ain't no fun

But if we should be evicted from our homes holdings

We'll just move somewhere else

And still carry on

Hold on, Hold on, Hold on


Lehman Brothers Rears Its Ugly Head In Germany

Wolf Richter

Another Lehman Brothers kerfuffle has erupted, this time in Germany, in broad daylight. With a stunning amount: up to €800 million ($1.04 billion) in fees for the insolvency administrator. It blows away the prior German record of €70 million paid to the insolvency administrator of Arcandor AG, the parent of department store and mail-order retailer KarstadtQuelle.

Hedge funds, which have massively bought up claims of the original Lehman creditors, are raising a ruckus. Apparently, they want to shame insolvency administrator Michael Frege, a partner at CMS Hasche Sigle, Germany’s largest law firm, into backing off his demands. As insolvency administrator, he is at the center of the case and is personally liable for willful or grossly negligent errors. He “must not receive a success premium, especially since he made some bad decisions by having sold assets below market value,” hedge funds postulated. More than €250 million would be out of the question.

It worked. Almost.

“€800 million in fees for processing a scrapped bank,” Sahra Wagenknecht chimed in. As deputy chairperson of the Left Party with an anti-capitalist agenda, she has jumped on the hedge-fund bandwagon. Employees or retirees, she said, “could only shake their heads” (her solution wouldn’t please the hedge funds: “We need a 75% tax bracket for income millionaires”).

But now CMS counterattacked with its own publicity campaign. And allegations. When Lehman went bankrupt in September 2008, only €100 million in liquid assets were available in the accounts of Lehman’s German operations, according to CMS Managing Partner Hubertus Kolster. To chase down and sell every possible asset, CMS put 100 lawyers and insolvency experts on the case. Now €5.6 billion could be paid back to the Bundesbank, and between €9 and €10 billion could be distributed to the remaining creditors, including the German deposit insurance fund and hedge funds. Creditors would receive about 80% of their claims—a lot more than originally expected.

(He didn’t mention that massive money printing and asset purchases by central banks around the world have created an epic credit bubble that inflated asset values and bailed out just about everyone, not just Lehman creditors.)

“Creditors who have been there from the beginning are all highly satisfied with the proceedings,” Kolster said. But the 100 lawyers and experts that CMS had assigned to the case already billed over €200 million. The court would make the decision over the final amount based on the complexity of the case and the amount of the assets. He conceded that it would likely be less than €800 million. On the other hand, he refused to say how much Frege would receive, but a success premium would be included.

Then Kolster fired his broadside: Hedge funds were creating a public outcry over the fees to pressure Frege into prioritizing and accelerating service of their claims. “But there was nothing to negotiate,” he said.

Frege lashed out against the hedge funds as well. In his function as insolvency administrator, he was solely concerned with the fundamental principle of German bankruptcy law that all creditors were to be treated equitably, he said, but for hedge funds that principle was “a foreign word.” What they wanted was preferential treatment.

At the creditors’ meeting on November 29, he’d propose a plan to complete the insolvency process in two to three years, which he considered extremely fast. If that failed, the courts could be working on this case for five to ten years, he said. It was the ultimate threat: if the hedge funds threw a monkey wrench into his grand plan, they might have to wait a long time to see the benefits of their bets.

But the fight, regardless of how it will turn out, demonstrates that big rotten banks can be unwound. It’s messy and unfair. It’s a corrupt smelly process with a lot of strong-arming. Bondholders, counterparties, stockholders, and others re-learn the notion of risk, re-experience the consequences of their decisions, and re-discover that there is a market for every crappy asset—even claims for the detritus of a collapsed house of cards—as long as it’s still an asset. If the price is low enough.

The alternatives to that messy cleansing process of failure are endless bailouts, the nonsensical horror show of TBTF, markets that no longer function freely but are controlled or manipulated by central banks, and untouchable bankers who get to propagate a profoundly corrupt system.

These bailouts that continue to this day are costly: by keeping Greece in the Eurozone, eurocrats or better “euro morons” have avoided a weak drachma and hyperinflation in Greece, writes George Dorgan. Instead, they have created stagflation. Read…. Euro Morons: Hyperinflation Successfully Avoided, Stagflation Successfully Created.