AUSTERITY - Over in Europe Before it Was Every Implemented

France Declares Austerity Over as Germany Offers Wiggle Room 05-06-13 Bloomberg

French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies.

“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said yesterday on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”

Coalition lawmakers in Germany are pushing back against the two-year extension for France to meet European Union deficit rules floated by Olli Rehn, the EU economic and monetary affairs commissioner.

“We made it clear to our government, the chancellor and finance minister that in the case of France a one-year delay to 2014 to fulfill the euro’s deficit rules is the absolute limit for us,” Norbert Barthle, budget-policy spokesman for Schaeuble’s Christian Democratic Union, said in a May 3 telephone interview from his constituency in southwestern Germany. “France must show that it’s willing to tackle structural reforms.”

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SUPPLY EFFECT - Shortage of Investable Assets

There's A Major Shortage Of Assets To Invest In 04-28-13 Citi via Cullen Roche, Pragmatic Capitalism via BI

Fantastic chart and data here from Citi Research showing the issuance of various securities over the last 10 years in the Eurozone, US and Japan.  It’s interesting to note the surge in treasuries that has occurred since the collapse in the GSEs and the so-called AAA bubble in real estate.  It’s also interesting to note the decline in net issuance.  In other words, the supply of asset issuance continues to run at a level well below pre-crisis levels.  That might explain at least some of the broad upward pressure on assets in general.

Here’s more excellent commentary from Citi:

“The blue/grey bars quantify the net issuance of securities across broad asset classes on a rolling 4-quarter basis in the Eurozone, the US and in Japan. The orange bars capture the effects of central bank interventions. The red line is the net amount of issuance left after those interventions – in other words, it is a proxy for the change in the size of the universe of securities that investors can buy.

As you would expect, the chart shows a surge in net government debt issuance in 2009-10 as fiscal deficits ballooned. These have fallen back over the last couple of years but remain significantly higher than before the crisis.

The surge in corporate issuance of bonds since 2007 is perhaps less intuitive, considering that companies have generally run their balance sheets very conservatively, cutting capex and M&A. However, a big shift from loan to bond funding has more than compensated for that. Net equity issuance remains a relatively small component. There was a brief flurry of equity issuance in 2009-10, but as leverage has come down corporates have reverted to the more normal pattern of retiring shares on a net basis.

The biggest shift has been the drop in net issuance from financials and GSEs (like Fannie Mae and Freddie Mac). Having dominated securities markets before the crisis, their net issuance has dwindled to next to nothing in recent years.

Adding up the bars (still ignoring CB interventions in orange) shows that the growth in the investible universe has slowed from around $3.5-4tn annually before the crisis, to less than $2.5tn over the last couple of years. In other words, the rate of expansion of financial securities has slowed by more than $1tn. That’s a pretty penny, when you think about it.

When the effect of central bank interventions (quantitative easing and LTROs3) in orange is subtracted, the reduction in the supply of new assets available to financial investors becomes even more dramatic:

Apart from a brief period in H1 2011 (where markets incidentally did not perform particularly well), the investible universe of financial assets has grown by less than $2tr per year over the last three years – half the run-rate that we were used to. In fact, in some quarters net issuance of securities been virtually zero.  We think this ‘supply effect’ on financial markets of central bank interventions is widely underestimated.”

LEVERAGE - Elevated Levels

S-t-r-e-t-c-h-e-d! 05-02-13 Diapason Commodities via ZH

Things in the 'economy' must be good - investors are nearing their most levered long to US equities ever. As Sean Corrigan notes, Net Margin (defined as NYSE Margin Debt minus Mutual Fund Liquid Assets) is within a hair of its all-time record high and relative to the March 2000 peak in the Wilshire 5000 (broadest US equity market cap), we are rapidly approaching 'peak' exuberance levels.

Indicatively this should make sense since the market is at all time highs, but it is so because of central banks, not because of individual investors. So why would the investors themselves be just as stretched as the global central banks, and how does this leverage upon leverage unwind in the end?

Source: Diapason Commodities

CENTRAL BANKS - $10 Trillion In and $10 Trillion to Go

The "Price" Of Record High Markets: $10 Trillion In Seven Years 05-02-13 JPM Asset Management CIO Michael Cembalest via BI

By now everyone, even CNBC, admits that the only reason stocks are where they are is due to the G-7 central banks. What many may not know, however, is how we got here, and where we will be at the end of this year. The answer, as provided by JPM Asset Management CIO Michael Cembalest in the chart below, is at the dot in the top right. This will represent the addition of $10 trillion in liquidity, or alternatively the conversion of the "planetary nebula" of central bank balance sheet expansion, in the past seven years. And considering that, as we explained yesterday, there is another $10-11 trillion in scarce "quality collateral" that has to be injected into the financial markets via central banks collateral transformations, the number in yet another 7 years will be at $20 trillion if not exponentially higher, or higher than where US GDP will be.

Cembalest's take:

The planetary nebula of central bank balance sheet expansion (last chart), which we expect to hit $10 trillion later this year, is still the most important factor underpinning an uneven global recovery. It makes sense to have some patience right now. Global equities are up 8%-9% year to date, which is a pretty good return for a time when the profits expansion is slowing, global growth is closer to 3% than 5%, Chinese growth continues to cool down despite rapid increases in the use of credit, and when it is practically impossible to disentangle how much central banks are affecting asset prices. I read a research report that showed that returns on consumer staples stocks are now correlated 75% with the returns on Treasury bonds, by far the highest level since 1929. Usually, the correlation is close to zero.... Note to Fed: uh, congratulations?

Luckily, nothing bad happened in 1929.

The difference this time, as is now very obvious, is that in the event the central banks fail at preserving the perpetual growth of what may truly be the final bubble (yes, a preposterous assumption), the central banks are already all in, unlike all previous credit, risk-asset, and housing bubbles. So who becomes the "bad bank" to the central banks when confidence in the "lender of last resort" finally gives way? Full note here

SENTIMENT - "Don't Fight the Fed"

What Is Obvious About This Market? 05-05-13 OfTwoMinds Charles Hugh Smith

What is "obvious" to those embedded in the conventional, MSM/state-manufactured worldview is not the same as what is obvious to those outside the asylum.

To a considerable extent what follows is an essay in stating what I take to be obvious. It is obvious that the social world situation is endangering the future of all life on this planet. To state the obvious is to share with you what (in your view) my misconceptions might be. The obvious can be dangerous. The deluded man frequently finds his delusions so obvious that he can hardly credit the good faith of those who do not share them.