Macro Man

We are nearly at the end of 2011 and another year of mayhem behind. We will be judging our 2011 Non-Predictions and trying to dream up some new ones for 2012 in the next fortnight or so but this week we have been able to get some long needed admin done. With it came a realisation that even if the financial industry is suffering the creative management community has been in full swing dreaming up new terms and phrases to camouflage the blindingly obvious. The evolution of ‘management speak’ means some phrases die and some survive and flourish. TMM really don't know what determines the success of one term or phrase over another other than, as with the arts, adoption and patronage by the most respected in the field. TMM hope that this year’s rash of newcomers all die off naturally but we would like to help with a shove into their deserved obscurity.

TMM have noticed that every cause nowadays needs an "Awareness" campaign and though we feel that "doing" is of much greater importance than "awaring", we will go along with the fashion and launch a Management Talk Awareness Week with the list of phrases and terms we have found most irksome this year.

So here are TMM's top ten annoying phrases of 2011 (even if some are older) that we would like to see the back of.

10 - Internalise - As in "What you have all failed to internalise is that there has been a paradigm shift. As a result you are all now behind the curve when it comes to the multi-lateral interoperability needed to realise the supra-organisational mission statement”. Even though there is an awful lot to detest in that statement "Internalise" is the word we most object to. It appears to just mean learn or remember but as telling someone to learn or remember something appears instructive, suggesting they internalise it will sound more empathetic, but at the severe cost of sounding like a clone-monkey.

9 - Hi, I hope all is well - With the birth of the email there came an awkward period when the formality of letters, with their "Dear Sir / Yours sincerely" had to be detuned to fit in with the new immediacy and informality. After a stuttering start the world passed through an embarrassed joint squirm and settled on "Hi" for anything other than legal representations. But 2011 has seen a pernicious ingress of a new form of insincerity with the addition of "I hope all is well" to the "Hi". Rather than questioning either the validity or sincerity of that statement, we would just ask that the bulk senders of such missives consider where they are sent to, as for many recipients things are blindingly obviously not well. We suggest the only time this greeting is appropriate is when addressed to bore-hole companies.

8 - Weaponise price opacity - As the scarcity of new Himalayan Pink Salt in the financial market takes its toll on the bottom lines of financial institutions it is becoming more important for them to make sure that they maximise the profitability of existing basic products. Opacity of price is critical in this process but weaponising it? Wow.

7 - Ideation - What happened to good old "have a think" or "come up with some ideas"? Even running things up flag poles is less irksome than "ideation" which sounds as though it should involve radioactive iodine.

6 - Stakeholder Community - Not a Transylvanian village but the new plural of stakeholder. Theoretically a stakeholder is anyone who can affect or is affected by your decisions and so could be a lowly minion in your company, but deference only ever seems to be made to "stakeholders" when they are either your bosses, investors or regulators. Please let's call them who they really are.

5 - Socialise - When issues got out of hand in the old days you would normally either just tell the boss or perhaps "take it upstairs". But now a cunning adaptation of the old mantra of "My profit, our loss" has invoked a caring sharing attitude to screw-ups by "socialising" them. As in "I think we should socialise this issue with senior management and the stakeholder community".

4 - Complementary - Odd one this, and it's really down to our own stupidity, but we have regularly opened emails this year expecting some nice free service only to re-read it and find it's not "complimentary" but something expensive and homeopathic. We expect the marketing world to soon be jumping on this and emailing multitudes of complementary not-at-all-free offers. Such as Ryan-Air offering "Complementary Flights" which sound as though they are free but are actually expensive and just "complement" what a decent service should be by being dreadful. Or have they done that already? "Complementary" should be banned from subject lines so that the vaguely dyslexic amongst us shouldn't be taken advantage of.

3 - Bandwidth - The adoption of IT geeky words into mainstream fashion is nothing new but the latest over-usage of "Bandwidth" by management is particularly grating. Just as "spending more time with my family" has become the acceptable expression of "Just been fired/stiffed/shafted/backstabbed/found out but have photos" so has "I'm sorry I can't action that, I don't have the bandwidth” become the generic replacement for "I don't have the time/resources/authority or inclination". But the saddest part is the way it's used under the false allusion that "bandwidth" is new and fashionable. Our grandmothers, thanks to broadband adverts and home routers, know what bandwidth is so please, unless you are the type of person who still uses "groovy" in the boardroom, please drop "bandwidth".

2 - Geosourcing - Why you lose your job to someone in a different part of the world. "The support function has been geosourced" or "How's the front office geosourcing project going?” It's the sharp end of a simple belief of ours that if there is someone able and willing to do your job for less than you, you are toast. But the use of "geo", which has connotations of environmental friendliness married to "source", which conjures images of babbling fresh springs in the mountains, results in a super-eco word which actually means "You're fired".

1 - Reaching out - TMM first came across 2011's winning term in July and since then it has spread like wildfire, which has us looking like Irish Riverdancers as we try to stamp it out as fast as we can. The origins and epidemiology of this disease has us suspecting it's the product of some Class of 2011 Management School somewhere. It really is complete and utter rubbish. If you are about to call an investor for some documents you don't "reach out to the client", you phone or mail them. If you want to know why a trade hasn't settled you don't "Reach out to Bangalore" you "call back-office". So let's just kill that one right now before someone gets accused of molestation.

And with that we open up "Management Talk Awareness Week". We are sure you all have your own experiences to share and we look forward to the comments column acting as a joint cognitive pan-cohesual empathy forum leading to textualisation of common goal and achievement recognition programs.

Happy New Year


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As markets are so quiet, TMM have been leafing through their copy of the latest Radio Times to see what's on TV this Christmas. Hmmm... let's see...

Sunday, 25th December

07:00 - Prayer for today. With George Osborne.

07:10 - The One Show. Start your Christmas morning on the couch as Matt and Alex discuss what will next trade through parity. Live from Brussels, a class of 12 yr olds who are short EUR/USD for their school, are setting up a street party for the big day. Rolf Harris will be in the studio with a collection of his paintings depicting each time the Aussie Dollar has been through parity. There are the sad stories too, as we join the Beeteepee family who have little chance of ever trading at par again.

09:30 - The Poseidon Adventure. The Reverend Draghi leads nine survivors; an elderly couple, Nic and Angela who are trying to head to the Promised Land. An Italian ex-president detective and his ex-pro wife trying to have a second honeymoon in Italy; A young couple of auditors on their way to meet Papa in Greece; A builder from Spain, a pop singer from Finland, and a waiter from the ECB. They travel from the grand ballroom struggling through, steam, fire and rising water in the up-side-down ship to reach the bottom which they are convinced is actually the top. Unfortunately, as usual, they are mistaken and it ends in disaster.

10:30 - Low rents of Arabia. Kirsty Alsop follows a couple she encouraged to borrow to invest in 10 buy-to-let properties in 2007. Now looking to run away from their huge debts, Kirsty advises the distressed couple on where they can find affordable housing. Kirsty's expertise leads them to low rent properties in Syria, Baghdad and Kabul.

11:00 - Wonderful Life. An Angel helps a compassionate but despairingly frustrated banker by showing him what life would have been like if he never existed. Fred Goodwin finds the vision so compelling he vows never to exist. A moving tale with a very happy ending.

12:30 - Deal or No Deal. US politicians present a multitude of boxes, each containing a different debt level. Can the Democrat pick out the largest one and outwit the Republican negotiating on the end of the phone?

13:00 - Who wants to be a Millionaire. J Corzine, a salesman from New York, fails to answer the simplest of questions but still walks off with the millions.

14:00 - Countdown. S+P and Moodys battle it out in the final as they have 30 seconds to make up numbers and rearrange letters into ratings in the most disorderly fashion possible.

15:00 - Only Fools and Horses. Del and Rodney come up with a scheme to make a quick buck in the lofty financial markets that they can see from their tenement blocks in Peckham. Del swiftly realises that all he has to do is cut and paste bad news onto chat services and he not only will be paid large sums as a financial salesperson but can also earn money on the side from what Rodney calls "sure'd" positions as they always make money. Of course it all comes unstuck when Bensy reveals a load of strong data he had been keeping in a lock-up with hilarious results.

15:30 - The Merkel and Wisemen Christmas Special. Merkel and Wisemen lead us through a show of festive comedy japes. This year's promises to be the funniest yet with guest appearances from Mario Monti and his Jazz Men (playing Suwannee River), the Mommas and Papas from Greece, and Sarko their performing monkey.

16:00 - Family Fortunes. The Gaddafi family are up aganst the West family as they try to pick the most popular answers selected by their peoples in order to protect their fortunes, Three XXX in a row and it's curtains.

16:30 - The Nativity. Dramatisation of the Biblical story. King Howard of Funds orders all Europeans to register to pay their Sovereign CDS dues. Upon reaching Brussethlehem, Merky & Sarkoseph ask for help, but are turned away by each of the G20 nations. As all hope seems lost they manage to find shelter in yet another broken down summit where the baby Eltiaro is born. European banks come to pay their respects, leaving gifts of billions of worthlesss periphery debt, whilst leaving with piles of freshly printed cash to take home to their balance sheets. 12 Days later, the Three German Wisemen arrive, bringing Bundesbank Gold, Frankfurters & Myrrhobonds.

17:00 - Songs of Praise. Join us in the Cathedral of Gold where the choirs of the church to the end of fiat money, the church of inflation and the church of Apocalypse join together in praise of our God Au.

17:30 - X-factor finals. The auditions started last year in Tunisia. The judges have auditioned hundreds of acts in Cairo, Bahrain, Tripoli and throughout the major cities of the Arab world. But now we are back in Cairo for the finals. Live from Tahrir Sq the public will be voting for the last time. Have the bookies' favourites "Total Democracy" got what it takes to pip "Military Rule" and "Benign Dictatorship" to the title this year and release their own version of "I did it my way" to make it to Xmas No 1.

18:30 - Inflating with the Stars Christmas Special. Mervyn King, Mario Draghi, Ben Bernanke & Zhou Xiaochuan battle it out for the Glitter Ball Trophy. This week they will be dancing the competitive devaluation. Head Judge Moody Essenpi breaks precedent by awarding Mervyn King the highest ever score of 40000000000000.

19:30 - A Euromas Carol. Emerkozy Scroodraghi, a mean-spirited miserly old Eurocrat sitting in the Bundesbank is visited on Christmas Eve by Kohldelors, the ghost of Euro past, Jens Weidmann, the ghost of Euro present, and ISDA, the ghost of Euro future. The spirits try to make him mend his sadomasochistic ways and help poor Tiny Timonti by printing money. Starring Morgan Freeman as Kohldelors, Alan Alder as Jens Weidmann, Ronald Reagan as ISDA and Alan Rickman as Scroodraghi.

20:30 - Mr Bean goes on Holiday. So there is no rate decision from the MPC today. Instead, we will be broadcasting "The King and I" a musical about a population who accept the job of living with Mervynflation.

21:00 - Agatha Christie's Poirot. When Bundesbank President Jens Weidmann is found murdered in a Frankfurt backstreet, the sleuth is led through a web of intrigue that stretches from Rome to Paris. Poirot's toughest assignment yet when he identifies 350million suspects but no witnesses.

22:00 - The BBC Ten O'Clock News. Robert Peston explains why bankers were responsible for the death of the dinosaurs 65 million years ago whilst John Humphrys justifies his salary.

23:00 - Close Down. All the banks are closed down.

We guess that Christmas officially starts now. Most of the City will be nursing headaches after the most popular work party night of the year leaves its mark on the general consciousness. TMM however are mostly untouched having decided that a soft duvet, cool crisp sheets and an early night for ONCE was more attractive than ribald banter, bonding and bacchanalian pleasures. Must be getting old.

Momentum in the markets seems to have vanished in a puff of excitement and the tug of war between bull and bear may see more comfortable non-resolution if both sides just put down the rope and have a rest. We cannot really see ourselves writing anything of consequence until the new year as we wander off to various lunches, family events, or just doze in the traditional way at our desks trying to do as little as possible. Instead it may be time for a little introspection as TMM wind down for the year.

TMM, as you may have detected, is more positive on the outcome for Europe than many others in the market. Especially in the short term as we feel the issue with how to play Europe is really in the timing. To be fair TMM's long term view on Europe is pretty bleak, with most scenarios ending up with brick chucking and social unrest. But, much as one has to with one's own mortality, we have to look not at what the end game is but how we get there. We would like think there is time to enjoy what we have before our worlds end. That is why we don't just yet buy gold for the apocalypse trade or coffins because one day we will die and so it is we really cant play the Euro-cataclysm trade just yet. The timing isn't right. This is why we keep bleating on about the short term LTRO Euro fix. It may be an opiate for a cancer sufferer but in a high enough dose it could even produce a smile on the face of the patient.

If we consider that Europe's immediate issue is the funding of Italy an Spain then the LTRO goes a long way to plugging that gap in the short term. Draghi's comments couldn't get much more pointed towards their intentions and yesterdays comments that these special operations could be considered as QE were particularly pertinent in our eyes. Now if price is marginal then any solution to solve just part of the problem should see price recover and today the opiate appears to be working:

The argument against this is that the problem isn't actually solved and is rather just being stored up for the future. but we feel that the more that reasons to be short euro are hung on longer and longer term arguments, as the short term concerns are defused, then the more likely we get a relief rally. Whether the LTRO can successfully compost the toxic waste it takes in into nice fresh loam in the long term is yet to be seen.

Gold suffers the same fate, the more that short term reasons to hold it are unwound, the more the "hold" rests on the end of fiat money/coming of a gold barter system trade. For shorter term positions, longs either have to bail or push out the positional time frames. Haven't we all known/ done that where short term positions become long term ones as the price doesn't perform? TMM have therefore wondered what happens when the life of the position finally gets extended beyond the life of the holder. Well we actually have first hand experience of this. Back in the 1970s one of TMM's grandparents predicted that the UK Labour party, combined with the cold war and oil crisis would mean that gold was the only thing to hold to secure survival and so he bought gold sovereigns which were secreted, together with pallets of spam, sugar and curry powder (for when straight spam got boring), in the attics of his rambling house. His example to we grandkids has stuck and though we may appear anti-spamchucker, to this day our spouses are frustrated by our tendencies to procure for the future. But, despite this, when dear old Grandpa finally died in the early 90's having outlived the disaster he was preparing for, did we or the rest of the family re-secrete our share of sovereigns under our own floor boards? Like hell we did! That gold was instantly sold and used for more pressing deposits on apartments, new cars or school fees.

So we wonder, as the divide in attitude and wealth between old and young widens, can the inheritors of the last generation's positions really afford or want to run them? So just as with Grandpa's gold, Europe can push the problem as far forward as they like, but when the position outlives those that instigated it we should expect sudden change. Now then .. When are the next European elections?

Something has been bugging TMM for a couple of weeks. Various bits of the market have been behaving in odd ways, that could have many different explanations in isolation. But when seen together, TMM reckon they have figured out what is going on.

First, as readers will know, the recent explosion of CVA desks, one-way CSAs and the like have resulted in large, relatively price-insensitve flows in many markets - but particularly in Euro 10s30s (see below chart). At first, TMM thought the recent sharp flattening was merely more of the same. But yesterday an unwind of a large and old asset swap drove 10s30s to the flattest it has been since 2008. This is very unusual behaviour for December when liquidity is not great.

Second, despite the very large take-up in the now very cheap Fed/ECB 3m $ Swap Facility last week, the 3m EURUSD Basis has rewidened (see below chart). As readers will know, TMM are of the opinion that the USD funding crisis is overhyped, but the new attractive terms have encouraged substitution from French banks (who issue their own USD CP in the US). As TMM's mates in the FX Forward market point out, there are still many smaller banks that are unable to access the Swap Facility due to a lack of collateral. Additionally, TMM remember from their old days working at investment banks that at year end, European real money - in particular Dutch pension funds - tend to do quite a lot of funding of their foreign assets via the FX Forward market. Again, at a time when liquidity in the FX Forward market is diminished due to most banks now either funding directly in the US or via the Swap line, this has not helped things, and when dealers have put on basis tighteners post the $ auction (catching them out). But it still does not completely explain why there has been pressure across the FX Forward curve. It seems that at least one bank has been somewhat price insensitive.

Third, even funding markets in places with relatively strong banking systems like Japan and Sweden have seen FRA-OIS basis widening (see chart below of Swedish FRA-OIS basis).

Fourth, usage of the ECB's Marginal Lending Facilty (see chart below) has spiked over the past few weeks. In the absense of other information, markets would not be incorrect in concluding that "something is very wrong"/"a bank is in trouble".

Now, TMM have scratched their collective heads, and suggest the following as an explanation...

TMM would ask readers to cast their minds back to February. Usage of the ECB's Marginal Lending Facility spiked (see the above chart), and it soon became clear that this was related to the winding down of the Irish banks and their transition to ELA funding. With the restructuring imminent, the usage of the ECB's lending facility turned out merely to be a stop gap until everything was in place for the transition.

The reason TMM bring this up, is that the splitting and wind down of Dexia - announced a couple of months ago - is of a completely different magnitude to that of the Irish banks. Dexia's balance sheet only recently still sat at over EUR 400bn (see below chart), and has quite large international exposures. It doesn't take too much to make the intellectual leap that a bank that is in the process of being split in two and wound down, that is quite big internationally, might have quite a large amount of international hedging/cleaning to do (which would explain a good chunk of both the cross-currency and FRA-OIS basis move). Dexia was also the rumoured counterparty unwinding the above mentioned asset swap at not-particularly-price sensitive levels. And given the bank was well-known to be having funding problems, but whose restructuring is imminent, it would not be a surprise to TMM if that ECB lending facility usage was in fact Dexia, as a stop-gap until its restructuring is completed. It is worth noting that when Depfa was wound down, Dexia's "sister" institution never had to go through this process, as it's a bad bank wholly owned by the Germans (FMS Wertmanagement now), who don't really have their own funding issues.

This is all speculation, but TMM reckon the latest market basis/funding worries could very well merely be part of Dexia's pre-restructuring clean up of the books ready for split-up and wind down. In which case, the deposit facility usage should soon come down, and perceived funding stresses roll-off.

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TMM have lost track of which particular version of the Europlan this is, but would guess it is probably something like Plan K (plus or minus a letter or three). Having now digested the events of last week, TMM will attempt below to decipher what it all means.

But first, we cannot resist commenting upon the UK veto and the press reaction in the UK to it. As we have often noted before, the UK press are prone to covering geopolitical events in a self-doubting way, as if the country were losing influence, power and prestige. Well, tell us something new - it is not 1904. However, the uniform broadsheet reaction was one of UK isolation within Europe given that supposedly the other 26 nations are likely to sign up to the new agreement. Well, maybe they will, maybe they won't - there are plenty of reasons to suggest the Finns, Irish & Swedes will not. But does it really matter? This was a treaty that was, essentially, a power grab by the Germans. Clearly, it is not in the interests of the UK to sign up to something that goes further with transferring financial regulation to Brussels & imposes a financial transaction tax EU wide. Let's be honest, and call it the "UK Tax" and before you label us as Tea Party-ers, TMM are not against taxes full stop. If France & Germany were not willing to remove the FTT and provide assurances on financial regulation, then in TMM's view, it was quite right to use the veto. The reality of the situation is that, despite annoying a few civil service types & journos (who will have less jaunts to Brussels) and some disgruntled Eurocrats in Brussels, the EU still needs the very large contribution the UK provides to its budget. Rumours of the UK's demise have been greatly exaggerated for at least the twentieth time in TMM's careers.

But what TMM found exceptionally amusing was that the left-wing press in the UK (the BBC, Guardian & Independent etc), along with the Labour Party - a function of having to argue against the Tories - have been forced into arguing for more European integration (not a position an opposition party in the UK ever wants to be in, seeing the post-veto polls painting broad-based support for the use of the veto). But not only that. They have also found themselves arguing in favour of a treaty that would have capped the structural deficit at 0.5% of GDP and also triggered automatic sanctions for breaching a 3% budget deficit and a debt brake requiring fiscal consolidation. In essence, they have found themselves arguing for a fiscal policy going forward that is far tighter than the current government's and one that would tie Labour's hands permanently going forward. If that is not irony, TMM do not know what is.

But we digress. Back to Europlan K...

Over the weekend the press, blogosphere and emails that TMM received were uniformly critical of last week's summit and the ECB's actions, with the word "failure" bandied about in many places. And certainly, relative to even the lowered expectations it seems to be something of a disappointment given the ECB dugs its heels in further with respect to government bond purchases. TMM were also disappointed, but must admit that this has been somewhat an emotional response. After digesting both the ECB's actions and the result of the EU summit they cast their minds back to February 2009, and it all seems very familiar... in recession, markets and policymakers searching for "the bazooka", and the frequent refrain that TARP was not big enough etc...

And that got us thinking. Because it wasn't a single silver bullet that led to the rebound in the US and final acceptance that the policy response had been enough. It was a combination of a multitude of policy actions, ranging from TARP to the TALF, to ARRA, to liquidity guarantees for bank funding and eventually to Ben Bernanke's "Greenshoots" fireside chat. Note that these all occurred and the stock market had bottomed well before the FOMC began buying USTs under QE1. Readers may recall TMM have thought along these lines before, but it turned out that the numbers were not big enough.

So, in place of the standard "Mickey Mouse" analysis TMM found in their mail boxes from most places, we are actually going to have a go at seeing if the measures in place are big enough to cover the conditions necessary to end the crisis, which TMM believe are:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,

(ii) Incentives to longer term investors to buy Eurozone government bonds,

(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,

(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

First let's get the bad news about growth [condition (iv)] out of the way. While the Composite Eurozone PMI has bounced from its November low and economic surprises have turned less-negative, it is too late to avoid a recession in Europe. Should financial conditions stabilise, TMM's view is that the current US reacceleration should result in a new global inventory cycle which will aid Europe's stabilisation. Q1 thus seems a reasonable expectation for the cycle low though, of course, this is a difficult view to have any confidence in but should the next batch of PMIs confirm last month's base, TMM would be encouraged.

Now, onto the other three conditions.

(i) The funding of Spain & Italy. This has been, in particular, the problem that has to be fixed "Now" in the view of markets, not unreasonably. But in demanding a bazooka - similar to early-2009 - TMM reckon both commentators & markets have missed the wood for the trees. To see this, consider the following European battalions:

- EFSF: About EUR 250bn left in its unleveraged form (and call it 750bn if they can leverage it 3x).

- ESM: Now to be operational from July 2012, size EUR 500bn.

- ECB: Currently purchasing around EUR 5bn/week which adds up to about 250bn/year.- EU/IMF Bilateral loans: The Summit-announced EUR 200bn of bilateral loans to the IMF to increase its firepower.

- IMF: Current space capacity sits at about EUR 300bn.

Totalling that up gives EUR 1.75trn over the next two years. Include the EFSF leveraging and that number starts with a EUR 2trn-handle. Even stripping out the ECB and not leveraging the EFSF in this case would proved EUR 1.25trn, an amount TMM believe sufficient to finance Spain & Italy and more. And even if the IMF is not able to lend its full capacity to Europe for political reasons, there is still well over EUR 1trn of firepower.

Now before anyone starts pointing out that core Europe is about to lose its AAA rating, and thus the lending capacity of the EFSF etc is diminished, TMM would say that this is not new news. What is important to medium/long term investors is a clear institutional framework, not necessarily the presence of a AAA-rating (after all, there aren't many places sporting such a rating these days...). In short, TMM do not think that it really matters that much.

(ii) Incentives to purchase Eurozone bonds. One of the most difficult problems to balance in any crisis is moral hazard - something discussed at length in many places. With respect to the Eurozone, the Greek PSI undoubtedly spooked many long term holders of Eurozone government bonds, with the subordination to the ECB resulting in larger losses upon banks than would otherwise have been necessary to return Greek to solvency. Additionally, the way Eurocrats went out of their way in order to avoid triggering Sovereign CDS (and one of the key reasons TMM reckon it is an ex-product), further reduced confidence both in policymakers and the rights of bondholders within Europe. TMM thus think it is particularly interesting the lengths the A-Team have now gone to in order to reverse from the PSI stance in ESM to that more of the IMF. Now, cynics would obviously point out that the IMF has often been in favour of PSI in the past, but the softening of the position to being on a "case by case" basis, is certainly one that will lessen the view from the bondholder perspective that they are subordinated. This is key to restoring long term confidence in Spain & Italy, nations that appear to TMM to be illiquid but still solvent.

Related to incentives to purchase Eurozone bonds, TMM move to the ECB's exceptionally generous liquidity facilities that were dramatically loosened on Thursday. Banks can now post collateral on LTRO for 3yrs, and hedge their duration risk vs. EONIA for just 0.73%. As Sarko pointed out:

"Italian banks will be able to borrow [from the ECB] at 1 per cent, while the Italian state is borrowing at 6-7 per cent. It doesn’t take a finance specialist to see that the Italian state will be able to ask Italian banks to finance part of the government debt at a much lower rate."

Given the ECB cut its reserve ratio, freeing up capital, posting short-medium term BTPs yielding 6-7% to the LTRO (with just a 1.5% haircut) with funding locked up for the entirety looks like a particularly good trade for Italian banks that are essentially screwed if Italy goes bust anyway. This not only takes a good chunk of Italian funding, but also results in building capital at Italian banks (reducing the need for the State to inject equity). This is the Bank/Sovereign feedback loop working in a positive way.

Note also that EU banks in general are now likely a large buyer of EFSF paper which can be used as collateral at the ECB. TMM would also note that banks can help achieve their new capital targets by purchasing these types of assets and taking the RWA improvement. TMM note that insolvent but liquid banks do not go "bang".

(iii) Structural measures. The EU Summit clearly went a long way to addressing the problems with EMU in terms of aligning fiscal policy, implementing national debt brakes and structural deficit constraints. Additionally, Italy is enacting more broad-based structural reforms. These types of things take years to have an effect, but eventually they will. And it seems that Super Mario is pretty happy with them. That doesn't necessarily mean the ECB will step up, but it is certainly a necessary condition to preventing these problems from arising in the future. The agreement is now like a pre-nuptial, and it is certainly vulnerable to difficulties in being passed. But TMM would view the only countries that matter here as Germany, France & Italy. Monti's package that is being voted upon on Wednesday already contains the debt brake legislation, leaving only France to pass it. No doubt this will be difficult, given that the Socialists are against the package and an election is shortly coming. But there is now a convenient guy to give the blame to - David Cameron & the UK. TMM are optimistic on this front as it also furthers Sarko's wish for Eurozone-17 integration at the (supposed) expense of the UK.

To sum up, TMM reckon markets have misread the events of the past week. Sufficient firepower does actually appear to exist, with many of the other perquisites for the end of the crisis. TMM reckon looking for a bazooka is the wrong approach, and have just noticed the infantry columns marching from several directions. The above is probably just about sufficient to remove the systemic effects of the crisis globally, making TMM more optimistic broadly on global growth. But at the end of the day, it will be clarity on Europe's growth outlook that finally puts the issue in Europe to bed.

Simply said, the World isn't ending just yet, friends.

European Commision (EC) - What is this? It looks like a bomb!

ECB - But it cannot be a bomb! Our analysts tell us that it cannot be! The data does not support it! It is clearly a figment of all of our collective imaginations or more likely a bowl of roses.

Markets - [in diminishing voices as they leave the scene] "RUUUuunn...".

France - OK, well say it IS a bomb then what do we do? Is there a protocol for this?

All - [Reading from the Holy Book of EU policy] We tell the world it is not a bomb and then it will not be a bomb!!!

France - It's still ticking! And the numbers are getting smaller on the display.

Italy - (faints).

EC - Well stop the display!!!

[EU bans short selling and covers the display with a towel]

EC - Do you think the bomb knows that it has to stop its countdown now that the display is invisible?

France - I'll have a peek... Oh Zut! The numbers! They are getting smaller they are at 00.01.10 now!

ECB - Well, if, and only if it is a bomb and if and only if we had to stop it. how would we do it?

EC - Well, we should have a meeting to discuss the options. Can I suggest we hold one in, say, one minute's time?

All - Good idea!

[1 minute and 1 second later.]

EC - So that is agreed then. We will all work together showing commitment and a single-minded determination to defuse this bomb that we now agree may indeed exist.

EC - As we have told the bomb that we are going to defuse it, it should therefore have realised that its purpose no longer exists and defused itself. But just check...

ECB - WHAT?!?! It is still counting down! And it is now at 00.00.01!!!

EC- Argghh... Quick! Do something! And probably best for transparency, broadcast our thoughts and suggestions live to the world so they can witness our resolute decisive oneness and be in awe of the way we deftly solve this problem.

[Global media linked up live to proceedings]

France - OK, stand back, I am going to cut the red wire, pass me the wire cutters.

ECB - I'm not allowed to.

France - Come on!

ECB - Yes, it clearly says in my mandate that I cannot pass you the wire cutters as wire-cutters will never be needed.

Germany -Yes, he is right, he cannot pass you the wire-cutters. We specifically made sure that he never could.

France - Oh, Sacre Bleu...! Come onnn! I'll do it myself then.

Germany - I'm sorry we cannot allow you to do that , it is against our principles. But we could talk about alternatives - Like the blue wire.

France - If I let you cut the blue wire will you let me cut the red wire at the same time?

Germany - No, the red wire is non-negotiable.

EC - What about that wire down at the bottom? The yellow wire?

ECB - There may be a way I could do it using the green wire as long as no-one sees that I am involved.

IMF - Don't look at me!

Germany - You can forget the green wire too. I can see what you are trying to do behind my back! Enough! I don't care what you all want, I am going to cut the Blue wire and if any of you try to stop me I will cut ALL the wires.

EC - I can see we have made some real progress here, folks, but perhaps we should see if we can reclassify the bomb under a new agreement? Maybe as an Apple? Perhaps we could have a meeting to decide....

[Ka ...............................BOOOOOM!!!!]

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First up, the ECB's 3m USD tender today produced a take up of $50bn, not an insignificant sum. The Fundingeristas are already arguing that this indicates that the stresses were even worse than we thought. But TMM take a less pessimistic interpretation: the stigma for using this facility has been removed as it becomes a more "normal" part of central bank liquidity operations and that it is significantly cheaper than market-based options. For example, the basis in the FX Forward market is still quite large, but many French banks in particular issue USD paper directly. And to compare Natixis (as a typical French bank issuing in the US) 3 month USD CP at 0.74% (see chart below), it is clear that 0.59% from the Fed/ECB was attractive. This was a cheap auction, so we should not be surprised at the take up.

With little else to talk about ahead of the meetings tomorrow and Friday, TMM decided to do some of their homework ready for 2012...

Chinese inflation is trending down and that has allowed H-shares to rip much to the chagrin of China bears and to the benefit of TMM’s performance. This has largely been driven by food as seen below and some of the China cheer squad are getting pretty bulled up at the moment as the talk of interest rate liberalization heats up.

TMM are definitely of the view that China needs rates liberalization and that an awful lot of China’s problems can be attributed to having negative real rates for too long – overinvestment, people using apartments as term deposits and the like. Michael Pettis and most other sand individuals have argued that for a country with an overinvestment problem negative real rates are a bad idea. However, TMM think that while this is the biggest distortion in the Chinese economy it is not the only one – energy prices are almost as important.

TMM have a snapshot below of the typical cost structure for a 400MW coal fired power station in Australia and China. China imports a lot of its coal so pays a higher coal price but otherwise they are pretty similar except in how power is priced.

Firstly, retail power prices in China are roughly a third of those in Australia despite facing higher fuel costs and fairly similar capital charges. That is odd enough, it is when you take the margins of IPPs and pool level data in Australia and back out the grid services and system operator charges that things look really nutty. Retail power consumers in Australia pay about 19c of their power bill in, say, Victoria to pay for the grid whereas in China that is closer to 1.6c.

Colour TMM sceptical but while wiring up China should be cheaper due to higher population density it can’t be that cheap – the ex-fuel charges for Hong Kong retail power are about 7c and there they really cram them in. That is how TMM get a very rough “fair” price for power in China of 17c per kWh and an implicit subsidy of 54.7%. Despite the IPPs having atrocious mid single digit ROEs most of the cost here is borne by State Grid and China Southern Grid, both of which are wholly state owned and are clearly a long way away from anything that looks like profitability.

This has been a long time building and is best shown by comparing power prices to coal prices as can be seen below. All three series are rebased to July 2003 in RMB...

...which has had a pretty clear impact on IPPs which are languishing with their Return on Assets below best lending rates and their cost of debt which is around 4% as of LTM 2011 numbers.

All this leads TMM to the conclusion to the China macro dilemma of energy and monetary reform:

TMM think that given the lack of any easy options here politicians will do what they tend to do when faced with two bad choices: pretend it is not there. To that end, the credit tap will gradually come on and none of these issues will be resolved with steel bumbling along and hopefully delivering and IPPs getting just enough in price hikes to stay in business. While some of the HSCEI might have a real growth story (consumer, banks at a price) heavy industry and IPPs do not.

There is however one sector that is an unequivocal short in all this and that is Chinese solar companies. According to the latest and greatest from Solarbuzz commercial sized solar installations now have a cost per kWh of 17c or so – plenty appealing for, say, an Ikea in Arizona. That would be a great business were it not for the fact that much like the state owned sector solar companies in China get el cheapo loans as discussed by John Hempton and could quite readily be locked out of the US market before too long. This would not be a huge issue if the solar glut was in, say, Australia because 17c is cheaper than retail – in theory, everyone should put them on their warehouse / depot / office block etc. The problem for China is that is going to produce 4 GW of cells and gets locked out of the international market that is a lot of supply to soak up. 4000 MW x 365 days x 24 hrs x 20% capacity factor = 7 TWh of power. Multiply that by the feed in tariff you’d need to get that capacity competitive – say, 10c per kWh or $100 per MWh and you get $3.5bn per annum for this year’s capacity alone or 1/3 of Chalco’s debt. Without major electricity price reform, China’s solar sector is not too big to fail but too big to save.

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There used to be an advert in UK for the TSB (a nice old-fashioned bank, pre short-term money days, now part of Lloyds) which went: "The bank that likes to say... YES".

My how times have changed. Now every time S&P open their mouths TMM think their advert should be "S&P, the ratings agency that likes to say... Fuck you".

This morning we woke to the Econo-lovvies (media folk with pretence to financial reportage) on the Radio and TV wetting themselves over the latest S&P downgrades. We were expecting to see flames on the horizon as we approached the City. Not surprisingly the world is still alive despite some quanto-suits stating the obvious. TMM, however would like to look at it through rose tinted specs as a S+P negative watch on core Europe serves to (i) force Germany/Netherlands/Finland off their high ground, (ii) exerts more pressure on policymakers into Thursday/Friday - which can only be a good thing, and (iii) irritatingly, means that UK economic policy is yet again validated, remaining the only "large" country with a AAA not on negative watch. Whowuddathoughtit. Finally (iv) We've seen this movie before in August and the World did not end - there is no shock value now.

But if a AAA rating is going to be as rare as a bull in a zero hedge shop, then as Alphaville point out, its going to make Basle III a touch difficult for the banks as they rush into the small amount that is left. TMM find it most ironic that the UK deficit ends up being funded by European bank capital at ludicrously low rates all because of Global regulation.

With everything resting on the outcome of this week's meetings there is really little else left to say. TMM, as noted in yesterdays comments, threw some VaR behind their "no-commentometer" and bought some risk correlators on the London open.