Noisy Truth

“We think we want information, when we really want knowledge.”

-Nate Silver


Within the context of the always-on tweeter-net, I thought that was a really thoughtful quote from the introduction to Nate Silver’s new book, The Signal and The Noise. I’ll be reviewing his framework for forecasting in the coming weeks.


Silver says the “signal is the truth” and “the noise is what distracts us from the truth” (page 17). Without having read the bulk of the book yet, I can already assure you that doesn’t hold when attempting to proactively predict Risk Ranges in real-time markets.


Our most immediate-term risk management duration (TRADE) is, by definition, noisy. Whereas our intermediate and long-term (TREND and TAIL) work can often be mistaken as truth when the noise isn’t confusing our confirmation biases.


Back to the Global Macro Grind


Whether we like hearing it or not, we all have confirmation biases. That’s because we are human. At a bare minimum, I think Nate Silver and I agree on that. Thinking, Fast and Slow’s Daniel Kahneman would too.


Our risk management day involves grinding quantitative economic realities (data) with behavioral finance (timing). In order to make a probability-weighted forecast (taking a long or short position) we always look back, across durations, before looking ahead.


For us, the signal (and the noise) is real-time market prices – here’s what they did last week, across asset classes:

  1. US Dollar Index =up +0.4%, closing up for the 3rd week in the last 4 at $79.65 (bullish on both TRADE and TAIL durations)
  2. EUR/USD = down -0.7%, looking like the upside down of the USD Index (bearish on both TRADE and TAIL durations)
  3. CRB Commodities Index = down -0.3% (down -4.7% from the Bernanke Top, printing to Infinity & Beyond)
  4. Oil (blended Brent and WTIC) = up +2% (WTIC down -4.3% from the Bernanke Top)
  5. Gold = down -1.4%, as it continues to make a series of lower long-term highs (vs the 2011 Bernanke Bubble top)
  6. Copper = down -2.2% (bearish on both TRADE and TAIL durations)
  7. SP500 = down -2.2% (bearish TRADE resistance = 1448; bullish TREND support = 1419)
  8. Nasdaq = down -2.9% (bearish TRADE resistance = 3129; bullish TREND support = 3022)
  9. US Equity Volatility (VIX) = up +12.6% (bullish on both TRADE and TAIL durations)
  10. US 10yr Treasury Bond Yield = down -5% to 1.66% (bearish on both TRADE and TAIL durations)

In other words, there were plenty of signals and noises, across durations, in last week’s closing prices. There is also a confirmation bias in attempting to describe what happened because I, unlike Keynesian policy makers, believe that central planners are the primary causal factor in driving currency values and market correlations.


In the private sector, it’s ok to have a confirmation bias – you just have to be right more than you are wrong. If you’re wrong more than you are right, it’s ok - just go work for the government.


What do you do when you are wrong? For us, it’s pretty simple – we hold ourselves accountable to the mistake, try to learn from it, and grow. What other people do when they face adversity is up to them.


With the SP500 not having an up day in the last 6, what is the truth? Do growth and #EarningsSlowing matter? Or did it from the price where a lot of people thought Bernanke’s money printing meant the “fundamentals don’t matter”?


What are the fundamentals?

  1. US GDP Growth of 1.26% in Q2 2012, or consensus expectations of +3-4% growth 6 months ago?
  2. Global GDP Growth of 1.3% (Singapore just reported that for Q3 2012) or +3% as far as the excel model can see?
  3. The worst preannouncement ratio (4:1) of #EarningsSlowing misses since Q3 of 2001, or stocks are “cheap”?
  4. US Technology Sector (XLK) down -3.5% in the last month, or what it’s “up YTD”?
  5. US Financials Sector (XLF) down -1.6% last week on JPM/WFC earnings, or what they are “up YTD”?
  6. Chinese inflation down sequentially to +1.9% (SEP) or India wholesale inflation up sequentially to +7.8% (SEP)?

Some might say all of this doesn’t matter, and all you need to do is know where a 1-factor/1-duration simple moving average model tells you where the market is and everything is either fine. Some might say that all of it matters and is measurable. That’s closer to the Noisy Truth.


Our signals say all this noise adds up to us having 12 LONGS and 9 SHORTS for this morning’s US stock market open. Provided that the SP500 doesn’t close > 1448, we’ll likely sell on green bounces, and buy on red corrections closer to 1419.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $112.68-115.08, $79.34-80.05, $1.28-1.30, 1.61-1.71%, and 1, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Noisy Truth - Chart of the Day


Noisy Truth - Virtual Portfolio


The Economic Data calendar for the week of the 15th of October through the 19th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Takeaway: New data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term.



  • All told, new data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term.
  • Specifically, the latest Singapore GDP report, rhetoric from Chinese policymakers and the latest occurrences involving the China/Japan territorial dispute are all in support of this view.
  • As such, we maintain our bearish TREND-duration bias on “risky assets”, broadly speaking. Like he did in mid-to-late 2007, Ben Bernanke has lulled international investors to sleep with his aggressive monetary easing – perpetuating systemic risk for a rude awakening across asset classes if and when the data fails to meet inflated expectations over the intermediate term.


If you look past what many are labeling as a desperate attempt domestically to embellish recent consumer-facing (i.e. voter-facing) economic data ahead of the NOV 6 election (Unemployment Rate; Jobless Claims; UMich Consumer Confidence), one would easily arrive at the conclusion that global growth continues to slow. We’ve been calling for this explicitly since mid-MAR, so this topic is nothing new for clients of our Macro research. What is new, however, are our increasing concerns that the global economic growth slowdown could morph into an outright economic contraction over the intermediate term. As we pointed out in our OCT 1 note titled, “ASIA’S NOT HELPING THE GROWTH BULLS”:


“The list of potential negative TREND-duration economic catalysts is long and their respective probabilities are all rising, not falling. To recap:

  1. Some combination of fiscal tightening in the US if the Fiscal Cliff is not completely skirted;
  2. An incremental slowdown in global industrial production activity due to continued weakness in the Chinese economy (i.e. Chinese demand fails to match hopeful expectations that anticipate some degree of large-scale stimulus);
  3. Outright tightening of Chinese monetary policy or incremental tightening in its property market;
  4. A resurgence of European sovereign debt and banking risk (that crisis is far from over);
  5. A meaningful acceleration of global geopolitical risk (Israel/Iran? Syria? US consulates?);
  6. An accelerated bout of protectionism due to the Sino-Japanese tensions and/or due to Obama/Romney China bashing.
  7. A potential Japanese sovereign debt scare; and
  8. A noteworthy deterioration in the US labor market as corporations reduce headcount amid cost-cutting initiatives in a desperate attempt to meet lofty consensus EPS forecasts in a slowing top line environment (2007-08 re-do?).”


We will continue to provide updates on each of those catalysts – specifically whether their respective probabilities are rising or falling – in our written work. For a collection of the recent, relevant notes or to engage in a deeper discussion with our team, feel free to reach out to us anytime.


Jumping ship, we thought we’d flag a few more noteworthy data points that came across our screens this AM during our daily Global Macro grind:



Overnight we learned that Singapore’s Real GDP growth slowed to +1.3% YoY in 3Q12 from +2.3%; QoQ SAAR: -1.5% vs. +0.2% [revised up from -0.7%]. Excluding 2Q11’s +1.2% YoY pace, this is slowest rate of YoY Real GDP growth in Singapore since 2Q09.


A topic we’re written extensively on in recent years is the relationship between Singaporean economic growth and global economic growth – specifically in that Singapore is one of the better barometers out there (see our latest note: GLOBAL GROWTH UPDATE – WHAT GROWTH?):


  • At 211% and 223% of GDP, respectively, Singapore and Hong Kong are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy exporters (China: 29.6%; South Korea: 52.4%; Japan: 15.2%; Thailand: 71.3%; and Taiwan: 58.9%);
  • The ratio of Singapore and Hong Kong’s share of world exports to their individual shares of world GDP are 7.1x and 7.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by at least 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 28,431,100 and 23,669,242 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities. 


Since the turn of the century, Singapore has registered a positive correlation to World Real GDP growth of r² = 0.69. Per this polynomial regression model, Singapore’s incremental growth slowdown implies global growth could come in around +1.4% in 3Q12 on a YoY basis – roughly in line with our +1.3% forecast we initially published in our 3Q12 Macro Themes presentation back on JUL 11th (slide 6):




It’s worth noting that Bloomberg Consensus for 3Q12 World Real GDP was at +2.2% YoY then; it has since come down by -50bps to +1.7% YoY. Chaos theory/embracing uncertainty continues to be the most effective way to stay ahead of the Street on modeling the marginal deltas in GROWTH/INFLATION/POLICY. Our updated world GIP outlook is highlighted in the chart below:




Elsewhere in Singapore, the Monetary Authority of Singapore refrained from easing monetary policy today (out of line with our expectations for easing), citing a “build-up of inflationary pressures”. “Core prices will face upward pressure from higher food and services costs, while overall inflation will remain elevated for some time,” officials remarked.


With domestic economic growth slowing to near ~3YR lows and overseas demand for their exports continuing to soften, it’s interesting to see the MAS resist the urge to ease as Singapore continues to import the U.S.’s #1 export in recent years – commodity price inflation. This is 100% in line with what we have been forecasting in recent months – specifically in that the trend in global disinflation has concluded, with inflation poised to accelerate on a reported basis over the intermediate term. For more details on this topic, refer to our SEP 6 note titled: “GLOBAL INFLATION WATCH: ARE BERNANKE AND DRAGHI WEARING THE SAME JERSEY?”.






Perhaps the biggest red flag from Singapore’s latest economic data is that a country home to the world’s #1, #7 and #8 healthiest banks (per a Bloomberg index which takes into consideration comparisons of Tier 1 capital to risk-weighted assets and the share of nonperforming assets, among other factors) and which the World Economic Forum rates as the #2 most competitive economy in the world in its 2011-12 Global Competitiveness Index (behind #1 Switzerland and ahead of the U.S. at #5) is only growing at +1.3% YoY on an inflation-adjusted basis. That’s simply not good; nor does it bode well for places like Western Europe and the U.S., where the influence of and reliance upon central planning has accelerated to generational highs in recent months.



Overnight, China reported its SEP New Loans figure, which slowed to CNY632.2 billion MoM from CNY703.9 billion. On a YTD run-rate basis, new bank loan growth accelerated to +18% YoY from +16.8% in AUG. On an system-wide basis, total domestic financing growth (including bank loans, trust loans, corporate debt/equity issuance, etc.) accelerated to +19.5% YoY in the YTD through SEP from +7.4% YoY in the YTD through AUG.




While those certainly are headed in the right direction, we’d be remiss not to flag official concern over the pace of loan growth in mainland China. While Chinese playmakers haven’t officially announced a 2012 full-year target for lending to our knowledge, it is being floated around the press that they are eyeing a CNY7.5-8 trillion figure. That leaves roughly CNY1.5 trillion through year end (YTD through SEP = CNY6.7 trillion), which suggests the pace of loan growth in China is actually poised to slow in 4Q – a key risk to consensus forecasts that are calling for Chinese economic growth to v-bottom in the third quarter and accelerate well in to 2013.




The following two quotes, sourced directly from the Chinese brass today, draw attention to the systemic risks embedded in the Chinese banking system that we have been flagging in recent months:


  • “China’s central bank is worried about a rebound in bad loans. Worsening bank loan quality is associated with the condition of the Chinese economy. [The] outlook for Chinese economic growth is full of uncertainties.” – PBOC Vice Governor Liu Shiyu
  • "Unsurprisingly, although Chinese banks' non-performing loans are at a low level of 0.9%, the potential risks are worse than the official data suggest.” – Chairman of the Board at Bank of China (and potential successor to Zhou Xiaochuan as PBOC Governor) warning of the risks associated with off-balance sheet assets for Chinese banks


For our detailed thoughts on this subject, refer to our latest notes on China:



Taken in conjunction, those two notes should help bring you up to speed with our extensive, long-held expectations for China’s murky long-term TAIL GROWTH, INFLATION and POLICY dynamics – specifically in that investors should not anticipate a meaningful rebound in rates of Chinese economic growth or a substantial fiscal and/or monetary stimulus package amid an oft-dismissed, policy-led drive to rebalance the Chinese economy:


“As of 2010, gross domestic capital formation contributed nearly half of all of China’s economic growth (48.6%) – 1,360bps higher than India, which we’d argue is a comparable country in both size and economic development. Additionally, at nearly half of GDP, modern-day China is more levered to gross domestic capital formation as a means of economic growth more so than Malaysia, Thailand, Indonesia, South Korea, and Hong Kong were in the years leading up to the 1997-98 Asian Financial crisis.


Given the long-term headwinds facing both China’s property market and banking sector (which we have quantified in recent notes; email us for copies), it’s likely that the peak in these ratios is in the rear-view or within reach. 


Whether China will be able to gracefully rebalance its economy towards a more consumer-driven growth model in the process – as outlined in the current 5yr plan which calls for only +7% economic growth rates – will go a long way towards determining the slope of global economic growth over the long-term TAIL – particularly given the debt, deleveraging, demographics, property market, and structural unemployment headwinds facing the U.S. and parts of the E.U. Obviously this has major implications for a great [number of] corporations and investor portfolios worldwide.


Indeed, that is a TAIL risk worth pondering for any long-term investor. As the law of large numbers reminds us, as China continues to grow larger (now the world’s second-largest single-nation economy), a structural downshift in rates of Chinese economic growth is not at all out of the band of probable outcomes over the long term.”



It appears to us that Chinese policymakers are more or less content with the current pace of economic activity. For example, PBOC Board Member Yi Gang recently said full-year growth should come in around +7.8% YoY – equivalent to the 7.8% pace established in 1H12. That means no major reflation is likely to be pursued – in line with Gang’s view that recent “policy fine tuning” measures to support growth with begin to show in 4Q12.


It’s worth noting that only CNY275 billion of the CNY700 billion road and subway construction projects approved by the National Development & Reform Commission in the YTD has been accounted for; the rest needs to come front Chinese banks – institutions who appear hesitant, to say the least (Bloomberg reports they haven’t been taking advantage of the recently-announced 30% discount to official lending rates when extending credit, maintaining the previous up-to-10% discount on new loans underwritten).


In this light, it literally blows our mind that local governments in China have allegedly (according to JPMorgan) announced investment plans totaling CNY19 trillion (~37% of 2012E GDP) from MAY-SEP. If Chinese banks and Chinese banking regulators are officially concerned about the specter of rising NPLs and inflationary pressures emanating from the property market, where do local governments plan on getting the funding from? Local governments in China are only allowed to issue municipal debt on a trial basis in select municipalities and land sales are off -16.2% YoY (a key source of their revenues).




All told, Chinese stimulus talk remains just that – talk. When expectations on the sell-side and at the corporate level worldwide are for Chinese policymakers to act, the lack of meaningful action could be a negative catalyst in and of itself as incremental orders and backlogs start to dry up amid rising inventories for industrial equipment and/or industrial commodities. Some ~400YRS since William Shakespeare’s death, expectations remain the root of all heartache.



A day after Noda publically called for diplomatic talks to assuage Sino-Japanese tensions, Japan and China agreed to talks aimed at reducing tensions a day after Japanese Prime Minister Yoshihiko Noda warned that the world’s #2 and #3 largest economies would incrementally slow amid rising protectionism. Specifically, Japan's foreign ministry said last night that officials from both countries agreed to hold vice-ministerial level discussions at an unspecified date.


The dispute is playing out exactly as we had anticipated in our SEP 19 note tiled: “ARE CHINA AND JAPAN HEADING FOR WAR?”, specifically in that the clash has caused a severe amount of economic hardship – mostly experienced by Japan, which we outlined as having more to lose on that front. The SEP China sales figures from the large Japanese auto manufacturers were all down YoY in the range of -35% to -45%. Moreover, Japan’s Cabinet Office earlier today downgraded its assessment of the economy for the third-consecutive month – the longest streak since 2009.


SEP Vehicle Sales in China (per StreetAccount):

  • Toyota: -49% YoY
  • Nissan: -35%YoY
  • Honda: -41% YoY
  • Suzuki: -43% YoY
  • Mazda: -35% YoY
  • Mitsubishi: -63% YoY


After seeing the ratty China sales numbers from each of the Japanese auto manufacturers, Noda is likely feeling political pressure to ease up and acquiesce to China’s stern position on the  islands. It’s important to note that the automotive industry remains an important part of Japan's economy; data from Research and Markets shows carmakers and automotive suppliers together employ over 5.3 million workers, which is equivalent to 8.5% of the country's total workforce and that the industry generates 10% of the country's tax revenues and makes up 15% of the manufacturing sector, which, in total, generates roughly 20% of Japan's GDP.


That said, however, Noda bowing down to China ahead of a parliamentary election (by AUG ’13) could spell political disaster for the DPJ. Bloomberg data shows Noda’s approval rating was a lowly 34% in a Yomiuri newspaper poll published OCT 3, compared with 65% when he took office 13 months ago. Support for his DPJ was at 18%, while that of the LDP was 28%. Almost 45% had no party preference.


As such, we continue to believe that the uncertainty over the future leadership of both countries (pending Japanese parliamentary elections; Chinese leadership transition) is contributing to what we’d highlight as a delayed response to diplomacy – in spite of the recently agreed-upon talks (i.e. “vice-ministerial discussions at an unspecified date” are probably not going to cut it)! Moreover, we continue to envision accelerating protectionism (either de facto or de jure – same result) and further economic pain as leaders from both nations are in a bind both culturally and politically – at least for now. Weakness likely won’t be tolerated by either populace and, from a behavioral perspective, pride often trumps economic logic in the decision-making process of most men.


To this tune, Japan’s new Economy Minster Seiji Maehara, proclaimed that “Japan has no intention of backing down in a damaging spat with China over the disputed islands regardless of the negative impact it might have on economic ties with its largest trading partner.” The FT article, from which the aforementioned quote was sourced, said Maehara's comments reflect the determination of a handful of hard-line Japanese policymakers to stand firm against pressure from China to acknowledge its claim to the string of islands. Growth Slows as Pride Accelerates?



All told, new data suggests the world economy could potentially experience an outright contraction in real GDP over the intermediate term. As such, we maintain our bearish TREND-duration bias on “risky assets”, broadly speaking. Like he did in mid-to-late 2007, Ben Bernanke has lulled international investors to sleep with his aggressive monetary easing – perpetuating systemic risk for a rude awakening across asset classes if and when the data fails to meet inflated expectations over the intermediate term.


Have a wonderful weekend with your respective families,


Darius Dale

Senior Analyst

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Takeaway: No recovery in slot volume in the near-term

  • Las Vegas Strip slot volume could continue to decline through Q1 2013.  2012 slot volume is expected to fall 2.5% YoY.
  • Slot revenue has outpaced slot volume growth for years as the player payout continues to decline 
  • We blame demographics – younger generations are just not interested in slot machines.  Unfortunately, those baby boomer gamblers won’t live forever.



CAT, Sany and Chinese Land Sales

Takeaway: Executive shake-ups at $CAT & Sany not a positive sign. China land sales off ~50% by value. $CAT 2013 sales guidance likely below street.

CAT, Sany and Chinese Land Sales

  • CAT Management Changes: While it is hard to read the tea leaves in CAT’s management shake-up, it is unlikely that business unit heads would seek (or be encouraged) to retire if results were coming in above goals.
  • Sany Heavy Management Changes:  In a late Friday night regulatory filing, Sany Heavy appears to have announced significant changes at the top, with Mao Zhongwu leaving the Chairman role to work in the mining truck unit, which is not a promotion.  CEO Zhou Wanchun is leaving the CEO role, another demotion.
  • Two Management Shake-ups?  Turnover at two major heavy equipment producers in as many days is not a positive sign.  Boards and corporate owners tend not to fire managers that are producing excellent results and encourage top performing executives to stay on. 
  • Chinese Land SalesMunicipal land sales in China are off roughly 50% in Yuan terms in the top 4 cities and nearly 20% in square meters in recent months country-wide (see chart below from Darius Dale on our Macro team).  That should impact Chinese demand for construction commodities, like iron ore, and construction equipment.  Lower land purchases suggest less development activity on the commercial and residential side, while lower municipal revenues from land sales may impact local infrastructure spending.  Weak construction activity in China is a driver of lower expectations for CAT and Sany.

CAT, Sany and Chinese Land Sales - land



  • CAT Guidance:  We should get CAT’s guidance for 2013 top line when the company reports a week from this Monday.  We may see consensus for 2013 trend lower into the report as we suspect management may guide to a 2013 revenue decline. 


Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



Weekly European Monitor: The IMF Is All In!

Takeaway: The IMF and ECB hold hands to manipulate markets; investors must weigh global CB intervention versus challenged fundamentals.

-- For specific questions on anything Europe, please contact me at to set up a call.


Positions in Europe: Long German Bonds (BUNL)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -1.7% week-over-week vs +2.1% last week. Bottom performers: Cyprus -8.7%; Ukraine -4.4%; Spain -3.8%; Sweden -3.2%; Ireland -2.9%; Belgium -2.9%; Denmark -2.8%; Italy -2.3%; Germany -2.3%; Russia (MICEX) -2.2%.  Top performers: Turkey +3.3%; Hungary +0.1%. [Other: France -2.0%; UK -1.3%; Greece -0.6%].
  • FX:  The EUR/USD is down -0.74% week-over-week vs +1.33% last week.  W/W Divergences:  HUF/EUR +1.01%; RUB/EUR +0.35%; GBP/EUR +0.35%; CHF/EUR +0.31%; NOK/EUR +0.15%; RON/EUR +0.08%; CZK/EUR -0.44%; ISK/EUR -0.47%; PLN/EUR -0.52%; SEK/EUR -0.68%.
  • Fixed Income:  The 10YR yield for sovereigns were mostly lower on the week.   Greece declined the most week-over-week at -79bps to 18.21%, followed by Portugal -27bps to 8.05%, Spain -10bps to 5.68% and France -10bps to 2.18%. Italy fell -9bps to 4.97% and Germany was UNCH at 1.48%.  

Weekly European Monitor: The IMF Is All In! - 22. yields


Weekly European Monitor: The IMF Is All In! - 22. EUR


Weekly European Monitor: The IMF Is All In! - 22. cftc data



The IMF Is All In!

The IMF was heavily in the headlines this week:

  • It cut global growth forecast for 2013 from 3.9% to 3.6% assuming the U.S. will avoid the fiscal cliff and Eurozone governments will follow the ECB’s plan to buy sovereign debt by committing to reforms
  • It said several Eurozone governments will not hit the budget deficit targets agreed to with the European Commission (EC), specifically:
    • Expects France's deficit to be 4.7% of GDP in 2012 and 3.5% in 2013. (France has vowed to cut its deficit to the EU-mandated 3% in 2013).
    • Expects Spain's deficit to hit reach 7% of GDP in 2012 (vs EC target of 6.3%) and 5.7% of GDP in 2013, well above the 4.5% target recently maintained by Madrid and the EC.
  • It warned of Eurozone capital flight from periphery to the core and said that European banks may need to sell as much as $4.5 trillion in assets through 2013 (+18% above April estimate) if the crisis is not contained, and
  • IMF Managing Director Christine Lagarde urged countries to put a brake on austerity measures due to concerns about the impact of government spending cuts on growth. She stressed that it no longer makes sense for governments in Europe to stick to budget deficit targets if growth disappoints. She also noted that struggling Eurozone countries should be given more time to close their budget gaps, specifically Greece should be given two more years before facing its fiscal consolidation program, and concessions should be made in Spain.

While our read through is that Lagarde is further joining hands with global central bankers and is attempting to add confidence to the market alongside Draghi’s “unlimited” put in September, comments late Thursday and early Friday from Germany (namely Chancellor Merkel and her Finance Minister Schaeuble) showed the lack of a united voice across Europe. Schaeuble backlashed at Lagarde’s words saying they are contradictory to her recent statements in which she said that high debt levels threatened economic growth.  In short, the fiscally conservative Germans holding the reins in the Eurozone are not comfortable giving peripherals carte blanche on fiscal concessions. Surprised by their response?  We’re not.


All in, we think this further demonstrates the lack of a united voice from Eurocrats on the back of a highly compromised framework. Add to that a sterner voice from the UK this week that it wants no part in a Banking Union (overseen by the ECB) and the powder keg of risk across the Eurozone is further revealed – there is surely a long a rough road ahead to crafting a path forward on such issues as bank recapitalizations, a banking union, and a fiscal union.


So all chips in? 


We remain of the opinion that while the ECB and Fed are supporting asset prices, we’re not jumping head first into equities in Europe. Our main focus is the numerous tail risks that exist across Europe. Here’s what gives us pause:

  • There is no historical precedence for what the ECB or Eurocrats will propose
  • The ECB can change the rules mid-way through, like for example shifting bond seniority status
  • Debt and deficit targets, to judge risk and fiscal health, have become less meaningful as concession are reached at every corner
  • Ball under water risk: given the loop of risk between the sovereign and its banks and the cross border asset ownership links, domino risk remains a clear and present danger

Further Juxtapositions


This week the S&P downgraded Spain by 2 notches to BBB- (one notch above junk) with a negative outlook (which is now in-line with Moody’s rating).  This comes following reporting from the London Times that U.S. hedge funds took down about 25% of the Spanish paper issued in September. Given both announcements we have some unanswered questions:

  • Will Spanish bonds face a selloff by investors worried that the country's credit rating will be cut to junk? (Moody’s still has Spain on review for a potential downgrade and is scheduled to conclude its review by the end of the month). 
  • How will bond pricing be influenced given the wildcard on when Spain requests a formal bailout? Will it not be until after regional elections on Oct 21 (in Basque Country and Galicia) or Catalan elections on November 25th?

We don’t have an answer on when Spain will ask for a bailout, but believe it is no longer a question of “if”. Next week on Oct 18-19 EU leaders will join for a summit. We are less than optimistic that leaders will agree on the scope of the ESM (for recapitalization) and sure nothing besides discussion will govern such key topics as a banking and fiscal union.



The European Week Ahead:


Sunday: Oct. UK Oct. Rightmove House Prices


Monday: Aug. Italy General Government Debt


Tuesday: Oct. Eurozone Zew Survey; Sep. Eurozone EU27 New Car Registrations, CPI; Aug. Eurozone Trade Balance; Oct. Germany Zew Survey; Sep. UK PPI Input, PPI Output, CPI, Retail Price Index; Aug. UK ONS House Price; Aug. Bank of Italy Releases, Trade Balance


Wednesday: Aug. Eurozone Construction Output; Germany Government Releases New Macro-Economic Forecasts


Thursday: EU leaders' summit begins (Oct 18-19); Sep. UK Retail Sales; 3Q Spain House Price Index, Trade Balance; Aug. Italy Current Account


Friday: Aug. Eurozone Current Account; Sep. UK Public Finances, Public Sector Net Borrowing; Aug. Italy Industrial Orders, Industrial Sales



Call Outs:


Financial transactions tax (FTT) - in a somewhat surprising development, eleven Eurozone countries agreed on Tuesday to push forward with a financial transactions tax (the minimum threshold was nine countries). Spain and Italy decided to support the measure following heavy pressure from Berlin. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain will present a model for how the tax would work by the end of the year, and it’s probably realistic to expect the tax to be implemented by 2014.


Italy - former Prime Minister Berlusconi has begun to signal that he may be ready to scrap his attempt at a political comeback. Berlusconi told the daily Libero that “I want unity of the moderates and I am ready to give up my candidacy, if needed, to achieve a united front." Elections are scheduled for the spring 2013.


Italy - Italian government approved a Stability Law for the 2013-2015 period. It is a package of stimulus measures and spending cuts worth ~€11.6B. The package included an income tax cut of 1% in the two lowest tax brackets that is expected to cost €5B. It also reduced a planned 2% increase in the VAT due to come into effect next June to 1%. Savings from a new financial transactions tax and unspecified fiscal interventions on banks and insurance companies were estimated to eventually amount to €3.5B a year.


ESM Launch – The fund was finally opened on Tuesday and can now lend as much as €200B, while its capacity will increase to €500B over the next 18 months. Until then, ~€192B of leftover EFSF funds will still be available. Recall that the ESM can provide bailout loans to governments, buy bonds in primary and secondary markets and lend money to facilitate bank recapitalizations. However, it cannot directly recapitalize troubled banks until the establishment of a single supervisory mechanism.

  • Fitch was the first ratings agency to assign a rating to the permanent bailout mechanism on Monday. It rated the ESM AAA with a stable outlook.

Ireland - Irish central bank lowers 2012 growth forecast to +0.5% vs prior forecast +0.7%. And lowered its 2013 forecast for GDP to +1.7% from +1.9%



Data Dump:


Eurozone Sentix Investor Confidence -22.2 OCT vs -23.2 SEPT

Eurozone Industrial Production -2.9% AUG Y/Y (exp. -4.1%) vs -2.8% JUL   [0.6% AUG M/M (exp. -0.4%) vs 0.6% JUL]


Germany Industrial Production -1.4% AUG Y/Y vs -1.3% JUL   [-0.5% AUG M/M (exp. -0.6%) vs 1.2% JUL]

Germany Exports 2.4% AUG M/M (exp. -0.6%) vs 0.4% JUL [rose for a second month]

Germany Imports 0.3% AUG M/M (exp. 0.2%) vs 0.3% JUL

Germany Wholesale Price Index 4.2% SEPT Y/Y vs 3.1% AUG

Germany CPI Final 2.1% SEPT Y/Y [unch]


France CPI 2.2% SEPT Y/Y vs 2.4% AUG

France Industrial Production -0.9% AUG Y/Y vs -2.8% JUL

France Manufacturing Production -0.4% AUG Y/Y vs -2.6% JUL

France Bank of France Business Sentiment 92 SEPT vs 93 AUG


UK Industrial Production -1.2% AUG Y/Y vs -0.8% JUL

UK Manufacturing Production -1.2% AUG Y/Y vs -0.7% JUL


Italy Deficit To GDP (YTD) 5.0% in Q2 vs 7.3% in Q1

Italy CPI 2.9% SEPT Y/Y vs 3.2% AUG

Italy Industrial Production WDA -5.2% AUG Y/Y vs -7.2% JUL


Spain CPI Final 3.5% SEPT Y/Y [unch]


Switzerland Unemployment Rate 2.9% SEPT vs 2.9% AUG

Switzerland CPI -0.3% SEPT Y/Y vs -0.5% AUG


Portugal CPI 2.9% SEPT Y/Y vs 3.2% AUG

Portugal Industrial Sales -1.6% AUG Y/Y vs -4.0% JUL

Ireland Construction PMI 41.9 SEPT vs 40.7AUG

Ireland CPI 2.4% SEPT Y/Y vs 2.6% AUG

Netherland Industrial Production -0.6% AUG Y/Y vs -0.3% JUL


Greece CPI 0.3% SEPT Y/Y vs 1.2% AUG

Greece Unemployment Rate 25.1% JUL vs 24.8% JUN

Greece Industrial Production 2.5% AUG Y/Y vs -5.0% JUL


Sweden Industrial Production 3.2% AUG Y/Y vs -0.9% JUL

Sweden Industrial Orders -6.5% AUG Y/Y vs -5.4% JUL

Sweden CPI 0.4% SEPT Y/Y vs 0.7% AUG

Norway CPI 0.5% SEPT Y/Y vs 0.5% AUG

Norway PPI including Oil Prices 1.4% SEPT Y/Y vs 4.4% AUG


Finland Industrial Production -1.4% AUG Y/Y vs 2% JUL

Denmark CPI 2.5% SEPT Y/Y vs 2.6% AUG


Czech Republic CPI 3.4% SEPT Y/Y vs 3.3% AUG

Czech Republic Unemployment Rate 8.4% SEPT vs 8.3% AUG

Czech Republic Industrial Output -3.1% AUG Y/Y vs 4.2% JUL

Russia Light Vehicle and Car Sales 10% SEPT Y/Y vs 15% AUG


Hungary Industrial Production Final 1.4% AUG Y/Y [unch] vs  -2.2% JUL

Hungary CPI 6.6% SEPT Y/Y vs 6.0% AUG

Romania CPI 5.3% SEPT Y/Y vs 3.9% AUG


Turkey Industrial Production -1.5% AUG Y/Y vs 3.3% JUL



Interest Rate Decisions:


(10/9) Serbia Repo Rate HIKED 25bps to 10.75%


Matthew Hedrick

Senior Analyst



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