To all European Fiefs and Vassals: 

Beware if you breach the Limit: budget deficits cannot exceed 3% of GDP.

To foreign (?) sovereign currency issuers: Don't meddle! or else. 

Kingdom of Europe

Merkel-Sarkozy (random order :)
Date: 


Today's announcement foretells the coming of the Kingdom of Europe. One wonders who the terrible duo are and what legitimacy founds their pretension. Wonder! were the United States to voice such a position. European sovereign issuers or any sovereign issuer. Is this History or the loud boast that speaks the vacant mind...the boast of a florid vigor not their own! Now let's put your money where your mouth is- does the ECB-Draghi print money or not? Does it keep on lending and purchasing bonds?

The United States Secretary of the Treasury Geithner will certainly go back to Europe soon in order to ensure mutual understandings of the intent.

Heaven spare the democracies. Oliver Goldsmith's The Deserted Village is worth the read.

Mr. Niall Ferguson: Stick to History

I just finished reading Mr. Niall Ferguson's prediction of Europe 2021. I usually enjoy Mr. Ferguson's ideas and his craftmanship. This time around, both were wanting; the article in the Wall Street Journal was soft on craft and poor on fantasy.  Maybe his projection in 2012 on 2022 will have cleared up some of the blind spots in his vision. We should all stick to Malachi, Mother Shipton, Nostradamus and Cayce. They're more entertaining.

Leave the Future's Foundations to Isaac Asimov

Bernanke: Not Responsible for the Collapse of Markets of Sept 21-22, 2011

The announcement following the FOMC meetings of September 20-21, 2011 was expected. The infrequent decision to 'Twist'- swap short-dates Treasuries against longer date securities, particularly the very long dates, was expected.

Obviously, the respective underlying intention was to promote the consumer and housing sector with inexpensive mortgage financing, and flatten those yield curves and reward tradeoffs across the Treasury spectrum.  Whether those markets react will depend on whether or not the consumer generates demand for either new homes or refinancing existing homes. In both latter cases, the intended consequence is to alleviate pressure on household debt and unlock consumer spending into the economy.

Chairman Bernanke had nothing to do with the markets' collapse world-wide.

At first, the market reacted positively to the obvious, concluding that it had already discounted the Fed's intervention for all intents and purposes. That didn't last long. Some of the more enlightened participants realized that the most important statement had been skimmed over by the markets.  Mr. Bernanke had emphasized in explicit terms the dire prediction on the global economy that was unexpected in the announcement  and, de facto, lent a deaf ear, dismissing the GOP leadership's political rhetoric of the previous day.

Chairman Bernanke,  previously informed by Secretary of the Treasury  Mr. Tim Geithner's return from the meeting of European Finance ministers in Poland last week, characterized his caution on the world economy in the following manner: 

Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. 

The markets tumbled when players realized that the global economic situation was not tepid but turbid.  Financials leading the slide, dropped across the board, catalyzed by a Moody's downgrade of Bank of America, Citigroup and Wells Fargo on their debt. The only anomaly was Hewlett Packard rallying on a rumour that their CEO had been ousted. Talk about quality trading, as if a new, yet unidentified CEO will reverse macroeconomic circumstances. The morning should reverse the ridicule and ratify the quality of its governance.

All markets in Asia and Europe tumbled overnight. The additional information from Europe and China that the Purchasing Manager's Index (PMI) is contracting, followed by market commentaries that it may suggest deterioration in manufacturing output,  is sending signals globally to investors that the only viable route is away from equities for now- a rush to safety and US Treasuries. In fact, all currencies, except USD, all commodities including gold,  and Treasuries were down or short dates unchanged with the exception of the 6mth yield rising.

But why are BRIC indexes dropping? Fundamentally, there is no structural demand within those economies that can permeate the level of manufacturing and production that has been underlying their respective growths. Until further ado, BRIC depends on Western economies and spending. Suffice it to follow the Russian equity market this day after. Significant is to realize that BRIC cannot, at this moment of their development, drive the global economy out of its slowdown. If Japan could never act as the world engine, why should BRIC assume the role. The same is true of Europe; its lame-duck behaviour is unjustified under the conditions. Europe must put its condos in order, if the investment is to be successful.

What the headlines suggest as Mr. Bernanke's Market Debacle is absolute nonsense!

The nonsense was the GOP's leadership criticism of the Federal Reserve decisions. Boehner, Cantor & Associates' understanding of basic economic realities is unreliable and incomprehensible for that level of leadership. They should simply acknowledge that without employment there is no spending and there are no sources of Treasury revenue; and without revenue sources, there is no deficit reduction. If they persist on professing that deficit myth: that deficits matter for the US economy, they will make matters worse. They should recognize their own shortage of viable solutions, and grasp the moment to support fiscal spending programs. As for Rating Agency downgrades, they don't  matter at this moment.  Recently, they have been shrugged off by all sovereign levels.

Unless the US economy is activated, and this won't happen as a result of Federal Reserve monetary policy, the global economy will remain in a state of stagnation for a long time. It is obvious that any solution must come out of Washington. A reasonable start is to couple that  result from flattening long date yields with an aggressive mortgage refinancing program for the suffering homeowners and well-intentioned consumers.

Fitch winks a AAA...

On August 16, 2011, Fitch Ratings confirmed its AAA rating for the US sovereign debt. Whether it was an anti-climactic no-brainer after witnessing the fiasco of the S&P downgrade, or Fitch corporate insight that it may just be too early to throw the towel in on US sovereigns given the response the markets gave to the rival's downgrade is irrelevant except to seers and their jury. In fact,  the sequitur- Treasuries rose in price and equities tumbled,  the dollar surged as capital flowed into the US for the short term was predictable. Meanwhile, an overly cautious European financial system and European AAAs tried to make sense of their own regional fiasco in light of this US resurgence. It was a perfect storm for Fitch to stall on, without sinking.

Analysts Messrs. Riley, Olert, Renwick and Fitch management should be commended for their approach and narrative: 

"The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of US's exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks'."

The narrative accompanying the affirmation reflects a humble appreciation of the mission of the Rating Agencies, a subtle recognition that the US financial structure can accommodate internal and external tensions and 'shocks', support the demands of its financial and trade partners, and a realistic understanding of the US position as underpinning the global economic system. It was a reasonable call in the case of the United States- a sovereign that could not default, although Fitch nudged away from that premise by mitigating the controversy with ' the risk of sovereign default remains extremely low.'  Notwithstanding the wink,

...Fitch also wagged the finger

Ten days later,  on  August 25, 2011, Fitch London Research Paper  released its conclusions on the global consequences of a hypothetical "double-dip recession" in the US.  At the time of  the original affirmation, August 16, 2011, Fitch had also confirmed its intentions to review the fiscal state and projections of the US economy in light of the latter's own commitment to reduce its deficit. The position Fitch advocates by its affirmation of the maximum rating is not as daring as some observers would judge. The reserve status of the US currency, the depth of the US markets, and the intrinsic ability of the US to satisfy its monetary obligations vis-a-vis its creditors, even in light of slowing economic growth and domestic political tension-all warrant the Fitch AAA affirmation and the ensuing qualified caution as to an imminent review, given the integral role the US plays in sustaining global economic stability. In this context, the Fitch London Research report is a timely and welcome sequitur to the affirmation of AAA.  It reiterates and confirms the soundness of those fundamental considerations that Fitch tabled and examined in the first instance to arrive at its maximum rating. It also interposes a scenario testing the consequences of a major slowdown in the US economy.  The analysis quantifies the direct, and to a much more limited extent, warns of the second round effects , including inter-financial sector effects, of a hypothetical 'double-dip' recession in the US. Fitch concludes that no country will be insulated from the adverse impact of a further deterioration in US economic activity. First, but not foremost, is China and the combined domino impact of a slowdown in the US and a commensurate drop in GDP in China on world economies will be formidable. The greatest effect of the US slowdown will be on its adjoining geographic trade partners Mexico and Canada, and seemingly the consequence will be 'severe'. The most intense will be to small and open economies. That the healthy state of the US economy is a sine qua non catalyst for any global recovery is emphasized to the point that Fitch underscores that the US dip could tip the major advanced economies into recessions, and this includes a fragile Europe and a taxed Japan. The Fitch announcement out of London preceded the prouncements by the world's leading financial figures at the 2011 Economic Policy Symposium sponsored by the Federal Reserve Bank of Kansas City and held in Jackson Hole, Wyoming  from August 25, 2011 through to August 27, 2011. Not only did it assemble central bankers and senior policymakers, but it also gave the world an opportunity to listen to a battered field's rising stars with daring visions among which named: Mr. Dani Rodrik and Mme.Esther Duflo.

The Fitch release set a balanced and cautious mood for the world's markets and audience, thereby permitting global policymakers to ponder the complexity of a situation that required serious reflection and sound discernment in a reserved setting. 

FitchRating acted very responsibly and very professionally.

h/t Fitch