Steen's Macro brief: Enron-i-sation - 5th final wave down could have started.

Dear All,

 

I am making a longer Chronicle later today but the latest 48 hours deserve a few comments:

 

The Enron-i-sation of Europe – finding solutions through SPV’s speak for themselves. Apart from the inability to being implemented (if German constitutional court is heard) it’s also a slippery road towards permanent aid. Hiding debt in more and more obscure vehicles (EIB et al) is similar to Enron having 1000s of SPV hiding the “real issue”. Debt is debt. It needs to be paid back or someone needs to take a loss!

-          New financial tax:  This is major game changer – this is in my opinion the beginning of the end for Europe – the “new new” in this scenario is that G-20/EU seems to have found an academic documentation that the tax may not need be applied “universally” – they mention domestic taxes in India(not freely trading market) and UK. This is simply wrong – banks are now meeting around Europe to move their operation outside the EU – this will not work, but it will be implemented by populous demand. Socialism is good as long as there is money to be taxed. Government created/printed money, banks took them and now government will tax is the logic. The suggested (not confirmed) level of taxes are 0.1 pc on shares and bonds (1 mio. EUR equals “tax” of 1.000 EUR) and 0.01 on derivatives or 1.4 pips on each side of EURUSD! This is MASSIVE tax……. And as such shows that my Maximum Intervention concept is now operating a top speed.

 

I am extremely depressed about the above – we are no longer doing two steps forward, three steps back, but one step forward and ten back. Furthermore the so called “Plan” for saving Europe is not reality. All my sources confirm, again and again, that is desperate attempts to find the right path through this mess. The people in the know, realize there are no longer any good solutions only pain. The pain from here is either 2-5 years of recession or 10-15 years. Enron-i-sation & tax makes this week the new low in solidarity, rationality and solution seeking.

 

Strategy:

 

Cash is king – and cash in UK, Switzerland, Singapore, and US even more King-ish. I remain EXTREMELY bearish on this – seeing the tax as the catalyst for the final 5^th wave down in the market, although it will take one-two-or even eight weeks before market realize it. It is not about ‘return on your money’ but whether you get your money returned.

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Maximum Intervention meets Crisis 2.0 - Negative outlook

Dear Friends,

Latest thought. Steen

 

Maximum Intervention to take us to Crisis 2.0

We'll start with our conclusion: We took profit on the long risk position from August 24th  @ 1152-00 SPX – and move to a net negative position (done @ 1190-00 in SPX in the immediate wake of the FOMC) based on our disappoint that the US & EU debt crisis is moving into the next phase with little good news – Operation Twist in the US and an uncertain EFSF ratifying period in Europe.

The long position in August was based on my dominant macro theme: 'Maximum Intervention' which is a fancy way of saying: policy makers will have at least one more – and massive – go at trying to save the world through macro intervention, though in essence is more of the same: an extend-and-pretend exercise of buying more time. The call has been successful despite the serious deterioration in the political climate surrounding the EU debt crisis.

Herein lies an important lesson regarding policy makers: 'It is at the time when you least expect the risk of 'intervention' that it will happen' – the policy makers go from finding no common ground to suddenly agreeing on something new and often drastic. The history of the EU since World War II has been like that.

The first big step was taken last night at the US FOMC meeting – as the Fed moved to Operation Twist and decided to roll it mortgage bonds into new ones. The next policy responses could include the following:

• Extending Greek debt
• The Fed indicating a move towards nominal targets for inflation- and unemployment. Following up on Bernanke's 2002 speech detailing his view on how to avoid Japanisation through bigger and more explicit policy targets.
• Potential for further move from the SNB forcing the EUR/CHF rate higher (1.2500 floor?)
• A European Monetary Fund or similar (already being discussed openly)

This is all well and good – but considering an economist like me with limited knowledge and contacts can pre-announce the expected policy responses we get something similar to the Heisenberg uncertainty principle in quantum mechanics, namely: the more you know and observe the present positions and policies and the current situation, the less certain you can become of where it is all leading.

Combining these two principles – the knowledge of the inevitability of the next intervention with the uncertainty of where it will take us will likely be disappointing for the near term: We do expect Germany to come through on the last minute of the last day to "save the system". We recognise the political willingness to keep the system going is higher than generally perceived. We also know that the ECB will ultimately move to QE/money printing. But nevertheless, we also realise that time is running out on any best or even second best solution for Europe as the timeline for the politicians is far behind what the financial markets wants to see implemented.

Even with all the good intentions, which are not always obvious, the politicians need dramatically to secure a medium- and long-term solution that is in line with both the Maastricht agreement, but also the German constitutional court in Karlsruhe. This is not something that can be done overnight or even from quarter to quarter and it is an increasingly dicey proposition from a legal standpoint.

We had a unique chance in 2008, when the financial crisis created havoc and turbulence, to facilitate a "new contract" with labor markets and the banks to recreate a competitive labor units cost level and a re-solvency of the banks.

The term re-solvency is a German one, and goes to explain a process where someone drowning in debt re-sets themselves to deal with the debt and liquidity at a tolerable level to re-establish solvency.

This is exactly what is needed in today's Europe. If we agree to 'democratise the loss' as we 'socialised the debt' in 2008, then we are moving forward. What happened from 2008-2011 was an attempt to keep things going and deny the problems laid bare by the crisis with money printing, chiefly in China and the US. In Europe, we indirectly did the same thing by expanding the fiscal imbalances in order to prop up a banking system full of liabilities and non-tradable assets.

At no point have we come closer to "moving on", where we stop dealing with past mistakes and move towards new measures for securing the jobs and growth needed for getting ourselves out of this debt crisis. Only through activating the 'lost generation' of youth across Europe will we have the dynamic societies enabled to implement lasting structural changes.

We need Crisis 2.0 to facilitate these changes – when Chancellor Kohl in 1998 was asked by German reporters how he would convince the Euro-sceptic German voters to embrace the Euro – he took a long pause, clearly thinking and then responded: 'Die Realiteten': reality.

The reality is that we need to break down the walls that are impeding our progress, whether these are constitutional or otherwise. But before we reach that moment of realization and take the next leap,  I think there is an increased risk of seeing one more ugly risk off scenario  - one that actually helps to align the currently too-complacent political calendar and potential solutions with the market calendar. Maximum Intervention is the name of the game at present, but the solution is Crisis 2.0 – getting these two to meet is what the next 90 days is about.

--
Steen Jakobsen
New work e-mail: sj@saxobank.com (please use if possible)

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Steen's Macro Brief: The week that defines all weeks to come

Well, this week-end we had another exercise of extend-and-pretend with absolutely no new solutions on the table:

 

-          Germany rejects using ECB to life EFSF:  Germany rejects using ECB to life EFSF

-          Greece holds emergency meeting and the rhetoric gets tougher: Greece

-          Obama to propose “Buffet tax” : Buffet tax

 

And a little known fact: The 22. September is the day recognized by the legendary trader W.D. Gann as the most likely to reverse than any other day of the year. Today is the 19^th J  (Click on 22 September for link to article)

 

Later today I will most likely initiate a net short from net long in the Strategy Advice – the point of no return is here – Greece will escalate still with the a last minute rescue the most likely, but between now and the installment paid out in October we have major risk.

 

Looking forward to the FOMC Tuesday and Wednesday one needs to realize that there is big expectations – looking at a chart it is clear that the ‘expected’ new measures has had an impact:

 

          Source: Seekingalpha by Eric Parnell

 

The expected announcement will include: Operation Twist, something we have talked about since May, where you extend the maturity of FOMC holdings by selling more in the short-end and buying more in the long-end – The most likely sector (buying) being 10-30 years. This is a monetary experiment repeated from the 1960s where it by the way led to the “great inflation” of the 1970s – but Bernanke has already said in early academic papers that the reason for it failing last time was: too small in size and with no pre-announced target for interest rates. The usual approach from Fed and the Americans – if it does not work, it’s because it’s not big enough! J

 

The market is prone to underestimate the willingness of the Euro-zone to make things work – this week will tell if FOMC comes to rescue or we start the hard part of Crisis 2.0 – the deconstruction of capital needed to create the political will to do proper economic- and political changes.

 

Safe travels,

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Steen's Macro brief: All on RED........INTERNAL NOTE

Dear All,

 

All eyes on Wroclaw, Poland today as the world policy makers tries one-more-time to save the world by making promises which will start sometime before the end of this decade -  it should be seen for what it is: A manipulation and a circling of the wagons in good old Western movie style:

 

 

The EU program can be found here: http://pl2011.eu/en/content/informal-meeting-finance-ministers-and-central-bank-governors-wroclaw

 

The comments are already coming out of the pre-meeting interesting to note that:

 

Former Prime Minister Brown says: 'European grossly under-capitalized' and 10 minutes before Belgium Finance Minister Reynders says: 'European banks don't have a problem with solvency" ….also note how Finland, again, does not play by book: "Urpilainen sees no collateral solution at Wroclaw meeting"..

 

All in all the hopes are high for an easy solution – market will get: "extend-and-pretend" as per usual, the market reaction Monday will be interesting – if, that's if the EU can get something done it would be positive, but it needs to be solid, big and take care of underfunded banks and access to capital markets for countries which are presently closed out: Italy, Greece, Ireland, Portugal – that number is north of 2.000 mio. EUR and not the small amount of "leverage suggested by Geithner and embraced by weak European countries.

 

I am still long on the "Maximum Intervention' macro theme, but…. This afternoon I will update the strategy note, and it's likely to force a move to neutral, but more on this later.

 

Finally,

 

Quite a few people ask me to explain the complex potential solutions/path from here in EU debt crisis. It's relative simple in my view considering we know the tendency of politicians and policy makers to opt for the easiest solution, so here comes the Steen Jakobsen guide to EU debt crisis (it's incomplete but 90 per cent explanation better than zero!)

 

There are three major ways of dealing with this crisis:

 

1.       Japanisation – do like Japan – accept deflation, slow gradual restructuring, massive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50 per cent of its peak in 1987 – the slow death.

2.      The Crisis 2.0 – my favourite scenario – 'the forest fire'  - deleveraging, political- and economic changes created by necessity and need for moving forward. A deep one-to-three year recession followed by better debt to equity, more realistic future expectations, a public sector under control.

3.      Monetization – the extend-and-pretend forever solution, buying time – more of the same, patch work solutions, slowly forcing Europe towards fiscal consolidation not changing the Maastricht but the ECB charter to allow it to be lender-of-last-resort .This is what I call the final phase of 'Maximum Intervention' – bigger and bigger direct support on liquidity(as seen today) and no impact on the solvency. Solving debt with debt the main nature of this exercise.

 

Any solution 'permanent' in nature is in violation of German Constitutional Court – meaning pretty much Euro-bonds is out. (As Germany would have to be lender-of-last-resort when everyone else goes bankrupt)……Any solution temporary could fly vis-à-vis the Constitutional Court but ONLY if approved by full parliament.

 

Everything else coming to the table is talk, talk and more talk. American "experts" fail to understand the above and …. Most importantly as you have heard me say 1000x of times: 'Never underestimate the political will of politicians to make this work/survive' – Never!

 

Prodi even predicted this early on saying a Euro-crisis would force into place the fiscal consolidation: "When the euro was born everyone knew that sooner or later a crisis would occur. It was inevitable that, for a such a bold and unprecedented project, in some countries (even the most virtuous ones), mistakes would be made and unforeseeable events occur. It was also clear that the stability and growth pact was – as I have said before – "stupid", not because it was mistaken in its objectives, but because it was founded on purely mathematical parameters without any discretionary powers or political instruments to enforce it. Germany and France were the first countries to violate it, although not in a destabilising way: their finance ministers decided to ignore the objections of the European Commission (possibly because they were "too big to fail").

Due to political difficulties it was not possible to protect the euro. I was warning years ago that, through no one's fault in particular, extraordinary events could occur that would force joint co-ordination of fiscal policies. Then the Greek crisis arrived – serious in terms of the sins that caused it but easily solvable, considering the modest size of the country's economy"

Safe travels,

Steen

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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FW: Trading loss in UBS - a first warning like in 2000 and 2008?

 

INTERNAL USE ONLY – NOT FOR PUBLICATION

 

1992: Nick Leeson:  Barings… è Ending Barings life…. http://en.wikipedia.org/wiki/Nick_Leeson

 

2008 : (Januar) -  Soc .Gen. Jerome Kerviel 4.9 billion loss    è Makes tanks later 2008..   link: http://en.wikipedia.org/wiki/January_2008_Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale_trading_loss_incident

 

September 2011: UBS Loss/Fraud 2 billion è http://www.20min.ch/finance/news/story/30822450

 

Think this is random? Hardly! Next is some HF – high profiled going under (I could easily imagine one specific one in the media often) and we have an almost repeat of 2000, 2007/08 …..

 

Let me stress for good orders sake: I remain focused on ‘Maximum Intervention’ as main theme for Q4 – which means more extend-and-pretend and probably slight risk-on environment despite the odds.

 

Alan P send me this pic:

 

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10th anniversary of 9/11: Let's look forward as well as back | TradingFloor.com

Dear All,

I wrote this piece the day before 9/11 10 th anniverisary. It's a 100.000 feet perspective on how we moved towards Entitlement societies and got scared.

I hope the piece has the right message and tone on this day.

http://www.tradingfloor.com/blogs/steens-chronicle/10th-anniversary-of-911-lets-look-forward-as-well-as-back-1261429725

Sincerely,

Steen Jakobsen
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Steen's Chronicle: Why SNB floor could be important

This chart shows why SNB new floor could be of importance. I am just back from yet another trip to Zürich and I found people EXTREMELY bullish on CHF – there is talk of corporate wanting to sell etc etc but..

 

-          SNB has ‘unlimited ability to print money’

-          SNB sees deflation – hence need to monetize

-          Bias way too strong for strong CHF  - Bigger than 95 per cent conviction

-          SNB is clearly committed and feels there is no alternative plus and this is important – they have 100 per cent political backing

 

 

 

Source: Bloomberg LLP and Saxo Bank Strategy and Research

 

 

I have two strong view for 12 month plus:

 

1.       A much stronger US Dollar  è DXY in 125 (now 75.00)

2.       A much higher EUR vs CHF è 1.40/1.5000

 

 

Scenario for much stronger US dollar:

 

Based on  too low consensus on US growth, better than ‘announced’ jobs + consumer spending data, and finally US will become competitive inside next two years on unit labor costs + fat tail risk of HIA 2 being introduce- and the all of G-20 moving to QE Extreme. (see below)

 

Scenario for much stronger EUR/CHF

 

SNB have no alternative, Switzerland going into Japanisation without “extreme measures” – major change in ‘expectation curve’ when we see 1.3000 plus people will have to cover massive EUR calls selling and finally inside next 12 month we have “resolution” on EU debt crisis.

 

 

There are really only three ways to deal with this crisis:

 

1.       Accept Crisis 2.0 – deleveraging and pain, but restructure – unlikely accepted by policy makers but likely from market position.

2.       Accept Japanisation – deflation, slow-growth and no structural changes.

3.       Go to QE Extreme – betting the ‘weather’ will improve by spending money making very gradual structural changes. The Keynesian economists/advisors again getting upper hand as they now can claim (wrongly!) that the reason we did not get back on track is because we did too little, too late – similar to Japan. This is the route G-20 will move to. I see all  major nations in QE Extreme in by half-year in 2012.

 

Greece going bankrupt is not a fat fat-tail event(Black Swan) it’s the most expected outcome ever!

 

IF – Greece leaves it will lead to major RISK-ON scenario as Europe will have regained initiative, so if Euro-zone’s next development is a break-up from the weak (Greece) then it’s good for risk – if it’s a break-out from the strong (Finland or Germany) it’s Crisis 2.0 extreme. Chances? 50/50

 

Off to Spain and the Vuelta and some facts finding,

 

Nice week-end

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
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by mistake), please notify the sender immediately and destroy this
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