Around the Globe 05.07.2013

What’s Beyond the S&P 500’s Relentless Rally.

Fed QE versus SP500

From ZeroHedge

The chart above shows the effect of the Fed’s successful attempts to stoke asset price inflation in the stock market.  The answer to the question and headline “What’s Behind (sic) the S&P 500’s relentless rally” is Fed’s money printing as is made painfully obvious in the chart above.

Here’s What Is Really Behind Home Price Gains.

Special Report: Subprime bond bounces back, leaving behind a subprime borrower | Reuters.

Housing Prices 2008 to 2013

When I read the headline to the article, I thought that finally the mainstream media would admit that there is no housing recovery, just a lot of cheap Fed money.  No such luck.

The Fed’s purchases of mortgage bonds have increased their prices regardless of the fact that many of the borrowers are still in shaky condition.  While TBTF banks are earning huge windfall profits on their bond holdings, the people who borrowed the money remain busted and without help from their supposedly liberal administration.  The banks were bailed out, and the people have been left behind.

The CNBC article points to increased demand and lower supply for the recent housing price rises.  TBTF banks have gotten their hands on cheap Fed money and are investing it wherever they can.  This has raised the demand for housing.  Supply remains constrained due to a clogged foreclosure pipeline and underwater home owners.  These are hardly the hallmarks of a healthy market.

Insight: Italy came to brink before being saved by King George | Reuters.

Giorgio NapolitanoThis is a very interesting article about the behind-the-scenes machinations that led to the formation of a new Italian government after a two month stalemate.  The most important fact that may be gleaned from this piece is that Italy has had 64 governments in the 68 years since the end of WWII.  That’s a new government once every year and three weeks.  A crazy political situation is normal for Italy, so if you want to get rich trading Italian bonds it will be a white-knuckle ride.  Let’s pray that the Italians can straighten this situation out.  The president is 88 and will be 94 if he must serve the entire term.  Clio and the grandkids may be waiting longer than they think on the enchanting Isle of Capri.

Letta says Italy can boost growth without increasing debt | Reuters.

Italy Annual GDP Growth and Trend

European leaders say a lot of things, but this statement is accurate.  Italy can boost growth without increasing its debt, but that feat will require draconian economic reforms and a return to the lire.  Italy will not willingly accomplish either task, so only a crisis will spur change here.

France urges quick progress on EU banking union | Reuters.

German Finance Minister softens stance on EU bank union | Reuters.

Wolfgang Schaeuble

As astute readers of Dareconomics understand, there will be no banking union until the rich Northern tier countries decide that they will pay for it.  Schaeuble lifting his opposition to a banking union without a new treaty is just empty talk.  The Germans will not commit money to any project while Merkel is busy campaigning.  What they will do is talk and participate in the negotiation process, and even a little birdie knows what to call talk.


Greenspan-Era Faith in Fed Seen With Bernanke: Chart of the Day – Bloomberg.

US Bond Volatility 05.07.2013

BoA via BBG

In this jam-packed issue of Around the Globe, we have already discussed the Fed’s money printing and its effect on the housing and stock markets.  Let’s now switch to the US Treasury market, where we see a similar effect.  Large-scale purchases by the Fed have pushed down volatility and increased prices (decreased yields).  We have been in experimental territory for quite some time here.  The time to get nervous would be when yields begin rising despite the Fed’s best efforts to ramp up it purchases.  No one can tell you when that day will come.

Portugal Selling 10-Year Bonds for First Time Since Bailout – Bloomberg.

Portuguese 10YR Bond 05.07.2013

The Fed is not alone in its madness. While the major central banks are all in, the Bank of Japan has ratcheted up the money printing to a degree that is giving everyone pause.  Since the BoJ announced its 2-2-2 plan, peripheral sovereigns have rallied with the Portuguese 10 year yield dropping almost 100 bps.  That, ladies and gentlemen, is the reason that Portugal is able to reenter the bond market.  Remember this whenever the financial press spins this story into the infamous Recovery Meme.

Africa Enthralls Goldman With Record Bond Sales: Credit Markets – Bloomberg.

Here is all you need to know about the African bond sales succinctly stated in a quote from GSAM’s Jim O’Neill:

The only thing one has to be a little bit careful of are many of those markets are still very undeveloped and suddenly there’s a lot of people around the world regarding Africa to be sort of fashionable and trendy.

So, the only thing we have to worry about is that the whole thing is a bubble, and what has caused this bubble? Don’t make me write the answer.

BTW, I wonder how many of those bonds the underwriters will hold for their own account.  This is the second most important question you should ask the salesperson pitching African sovereign bond.  The most important question is RU FKM.

Southern Europeans Flock to Germany –


Germany already benefits from its euro membership by selling debt at record low rates and maintaining a huge trade surplus.  Now, it is also the recipient of a brain drain from the periphery.  Young professionals are taking their skills to Germany, where they will be unable to help their countries recover from ongoing recessions and depressions.

If you can’t beat them, join them.

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