Previously on MoreLiver’s:
16-Nov Weekender: Weekly Support (updated!)
Credit - The Omnipotence Paradox
"The omnipotence of evil has never resulted in anything but fruitless
efforts. Our thoughts always escape from whoever tries to smother
them." - Victor Hugo
"The word "Omnipotence" derives from the Latin term "Omni Potens",
meaning "All-Powerful" instead of "Infinite Power" implied by its
English counterpart." - source Wikipedia.
While we recently delved into the consequences of the unlimited pledge
in Quantitative Easings by the Fed and the continuous game of global
"easiness" provided by most Central banks around the world in our
conversation "QE - To infinity...and beyond", as well as "Zemblanity",
(being "The inexorable discovery of what we don't want to know"), we
thought this week our title should be the Omnipotence paradox. Beliefs that "omnipotence" of Central Banks exist in any form can arguably be disproved.
In similar fashion, the financial crisis and the consequent burst of the housing bubble which had taken aback the beliefs of some forefront central bankers such as Alan Greenspan; have clearly shown that Central Banks are not omniscient either (omniscient being the capacity to know everything that there is to know).
In similar fashion, the financial crisis and the consequent burst of the housing bubble which had taken aback the beliefs of some forefront central bankers such as Alan Greenspan; have clearly shown that Central Banks are not omniscient either (omniscient being the capacity to know everything that there is to know).
"Those of us who have looked to the
self-interest of lending institutions to protect shareholder's equity
(myself especially) are in a state of shocked disbelief." - Alan Greenspan - October 2008.
Looking at the additional raft of
economic data indicating the strength of the deflationary forces at play
(one should never underestimate the powers of Evil Emperor Zurg aka
deflation). For instance, a simple look at the margin pressure faced by
Supermarkets, which are facing falling prices and rising costs (Fixed
Income - Floating Expenses...), is clearly indicative of the
deflationary forces at play as displayed by the below graph from
Bloomberg relating to Food Inflation Rates:
"Containership lines have increased rates five times by a total of $2,200
along west-east routes from Hong Kong to Los Angeles. The latest was a
$500 peak-season surcharge effective Aug. 7. This has helped prop up
rates by 63% ytd. In the Bear Case, excess capacity and a weak global economy may drive rates down even with price increases, pressuring margins." - source Bloomberg
"The relationship between container shipping and consumer spending, traffic is indeed driven by consumer spending" - Macronomics - August 2012
We have been sounding the alarm for a while when it comes to the importance of maintaining credit conditions in Europe to avoid a deflationary spiral and the fact that LTROs amounted to "Money For Nothing" but overly ambitious budget deficit targets" in conjunction with accelerated bank deleveraging courtesy of the stupid EBA (European Banking Association) requirements of reaching a Core Tier 1 ratio of 9% before June 2012 have had the desired destructive effect. Well done...
"The deteriorating economic situation in Europe, together with BASEL III capital requirements, have led to a number of shipping banks with large portfolios to exit the sector. High profile restructurings and payment defaults have started to take their toll on the few remaining lenders. This comes at a time when we have significant capital expenditures to finance our dry bulk and tanker new building programs. The lack of liquidity is further exacerbated by falling assets values, which continued to decline during the quarter." - Dryships Financial Report - George Economou, Chairman and Chief Executive Officer of the Company.
The term omnipotent has been used as
well to connote different religions. We believe the term omnipotent can
be used as well to rebuke some economic school of thoughts, namely the
Keynesian school of thought and the Monetarist School of thought. We
have argued in our conversation "Zemblanity",
when looking at the evolution of M2 and the US labor participation rate
that both were indicative of the failure of both theories:
"Supermarket chains may soon suffer
as lower retail prices limit their ability to deal with surging
food costs, according to Bob Summers, an analyst at Susquehanna
Research Group.
As the CHART OF THE DAY shows, grocery inflation slowed
from year-earlier levels through the first nine months of the
year, according to data compiled by the Labor Department. The
streak ended last month, when the rate rose to 1 percent from
0.8 percent.
October’s increase was too small to offset a 2.4 percent
advance in prices charged by food producers. The chart displays
the gaps between the inflation rates since 2001, as Summers did
in his report.
Deflation may occur by year-end as U.S. economic weakness
leads to more intense competition in the supermarket industry,
the New York-based analyst wrote.
“Food inflation could return and accelerate meaningfully
in the first half of 2013,” he wrote, because of higher costs
for commodities affected by this year’s drought in the Midwest.
This would weigh on profit margins and earnings at supermarket
owners, the report said." - source Bloomberg.
We have on numerous occasions discussed shipping as being not only a
leading credit indicator (with the collapse in European structured
finance) but as well a leading economic growth indicator (on that
subject please refer to "The link between consumer spending, housing, credit and shipping"),
the recent collapse of container shipment from Shangai to Spain or
Italy, which has cratered by 46% to 955 USD in five months according to
ICAP Plc and as reported by Bloomberg is yet another sign of the evident
deterioration of the economic outlook for Europe as we move towards
2013. As reported by Niklas Magnusson in his Bloomberg article from the
15th of November entitled - Container Rate Plunge Shows Mediterranean Cast Adrift:
"Europe’s sovereign-debt crisis has led to a collapse in the rates
container lines charge on routes from China to the Mediterranean,
creating a two-tier price structure as they boost fees for destinations
further north. The cost of a container shipment from Shanghai to
Spain or Italy has tumbled 46 percent to $955 in five months, according
to ICAP Plc, with the spread between south- and north-European rates
widening to $436 as of Nov. 2 from $42 a week earlier. “Fundamentals
on the Asia-Med are dire and we’re hearing demand is very, very low,”
said Richard Ward, an analyst at ICAP, which provides ship broking
services. “That’s led to the decline in rates as carriers look to secure
what cargo they can.” While the holiday season typically marks a
boom in consumer goods deliveries, households in Greece, Italy, Portugal
and Spain are cutting back on gifts amid rising unemployment and
public-sending reductions. The plunge in south-European rates may weigh
most on A.P. Moeller-Maersk A/S, CMA CGM SA and other lines with
multiple Mediterranean container services. “The Mediterranean area
has experienced a much sharper drop than north Europe,” A.P.
Moeller-Maersk Chief Executive Officer Nils Smedegaard Andersen said in a
phone interview on Nov. 9. “Consumers in northern Europe are cautious,
while consumers in the south are in an outright crisis.” Shares of
Copenhagen-based Maersk have gained 8 percent so far this year, valuing
it at 175.3 billion kronor ($30 billion)."
"The relationship between container shipping and consumer spending, traffic is indeed driven by consumer spending" - Macronomics - August 2012
We have been sounding the alarm for a while when it comes to the importance of maintaining credit conditions in Europe to avoid a deflationary spiral and the fact that LTROs amounted to "Money For Nothing" but overly ambitious budget deficit targets" in conjunction with accelerated bank deleveraging courtesy of the stupid EBA (European Banking Association) requirements of reaching a Core Tier 1 ratio of 9% before June 2012 have had the desired destructive effect. Well done...
"The deteriorating economic situation in Europe, together with BASEL III capital requirements, have led to a number of shipping banks with large portfolios to exit the sector. High profile restructurings and payment defaults have started to take their toll on the few remaining lenders. This comes at a time when we have significant capital expenditures to finance our dry bulk and tanker new building programs. The lack of liquidity is further exacerbated by falling assets values, which continued to decline during the quarter." - Dryships Financial Report - George Economou, Chairman and Chief Executive Officer of the Company.
"Both theories failed in
essence because central banks have not kept an eye on asset bubbles and
the growth of credit and do not seem to fully grasp the core concept of
"stocks" versus "flows"."
"Credit growth is a stock variable and domestic demand is a flow variable" as indicated by Michael Biggs and Thomas Mayer in voxeu.org entitled - How central banks contributed to the financial crisis.
As far as our "Generous Gamblers"
or Central Banks "deities" are concerned, such as Europe's top Central
Banker Mario Draghi, too many have faith the "omnipotence" of Central
Banks. We would like to challenge these believers hence our title.
"1. A deity is able to do absolutely anything, even the logically impossible, i.e., pure agency.2. A deity is able to do anything that it chooses to do.
3. A deity is able to do anything that is in accord with its own nature (thus, for instance, if it is a logical consequence of a deity's nature that what it speaks is truth, then it is not able to lie).
4. Hold that it is part of a deity's nature to be consistent and that it would be inconsistent for said deity to go against its own laws unless there was a reason to do so.
5. A deity is able to do anything that corresponds with its omniscience and therefore with its worldplan." - source Wikipedia.
"The gazing populace receives greedily, without examination, whatever soothes superstition and promotes wonder". - David Hume
Back in our conversation "The Uneasiness in Easiness" we concurred with David Hume's approach when discussing the latest ECB OMT (Outright Monetary Transactions):
"People often lie, and they have good reasons to lie about miracles occurring either because they believe they are doing so for the benefit of their religion or because of the fame that results.
People by nature enjoy relating miracles they have heard without
caring for their veracity and thus miracles are easily transmitted even
where false."
In early Freudianism, early childhood analysis has shown that children
can live in a feeling of omnipotence for a long period, given at birth
the baby is everything as far as he knows - "all powerful" but every
steps he takes towards establishing his own limits and boundaries are
painful because he has to lose his original megalomania of infancy,
namely that "god-like" feeling of omnipotence. While "good enough"
mothering is essential in enabling children to cope with the immense
shock of loss of omnipotence, lack of "good governance" and lack of
leadership in both Europe and in the US mean that "the gazing populace"
continues to live in complete denial and continues to trust their
"deities" and have faith in the pretentious omnipotent powers of Central
Banks. So until we reach the "Zemblanity" moment, as
far as economic school of thought or "religions" are concerned, we
agree with Dan Ariely' argument from his book "Predictably Irrational"
(chapter 2 - The Fallacy of Supply and Demand), namely that demand, the
determinant of market prices, can be easily manipulated but we ramble
again...
So while everyone and their dog is focused on the consequences and the
risk of the "Fiscal Cliff" could have on the US economy, we would like
to focus this week on more important subjects, one being the "Profits
Cliff" which has been clearly indicated by Albert Edwards from Societe
Generale and reported by Cullen Roche from Pragmatic Capitalism in his
post "Stepping Off the Profit Cliffs", the other subject being the broken credit transmission mechanism in the Eurozone. But first a quick credit overview!
An indicator we have been monitoring has been the 120 days correlation between the German Bund and its American equivalent, namely the US 10 year Treasury notes. On the subject of asset correlation (see our post "Risk-Off Correlations - When Opposites attract"), in "Risk Off" periods we have noticed that the 120 days correlation had been close to 1 in 2010, 2011 and 2012, whereas in "Risk On" periods, the correlation was falling to significantly lower level. Currently the correlation is now rising towards 80%, indicative of the recent weaknesses witnessed in the equity space, which is validating somewhat a switch towards "Risk-Off" - source Bloomberg:
The current European Bond Picture - source Bloomberg:
Both the Eurostoxx and Itraxx Financial Senior 5 year CDS index representative of financial risk (25 European financial institutions risk gauge) have been converging indicative of a deteriorating picture - Top Graph Eurostoxx 50 (SX5E), Itraxx Financial Senior 5 year CDS index, German Bund (10 year Government bond, GDBR10), bottom graph Eurostoxx 6 month Implied volatility. - source Bloomberg:
Back in our previous conversation "The Uneasiness in Easines" we argued:
"The lag in European stocks given the very recent negative tone in
Europe has made them much more volatile. Should the "Risk-On" scenario
persist in the coming weeks it should lead to an outperformance of
European stocks versus US stocks."
This is exactly what has happened and in fact the negative stance on
Europe has meant US stocks have been more vulnerable than their European
peers. We have been tracking over the months the growing divergence in
the performance of the Standard and Poor's 500 index and the Eutostoxx
in conjunction with Italian 10 year government yields - source
Bloomberg:
Could we be wrong on our US outlook? We are starting to wonder. As we indicated recently in our conversation "The year of the empty hand",
the divergence of growth between the US economy and the European
economy is reflected in credit prices such as the US leveraged loan cash
price index versus its European peer - source Bloomberg:
The US growth in 2013 might indeed be weaker than expected we think.
It will depend on the credit conditions for small market firms given credit conditions for commercial and industrial loans were tightened both for small and large companies during the crisis as indicated in a recent report by Dr Torsten Slok from Deutsche Bank - Do Small businesses worry about the fiscal cliff - published in November:
"Facts:
- Firms with less than 20 employees make up 90% of all companies in the US
- Small and medium-sized firms employ half of all workers in the US
- Small and medium-sized firms generate half of all revenue in corporate America
- Small firms create around 3mn jobs every year
- Job growth during this recovery has mainly come from small and medium-sized companies
- Global total employment in S and P 500 companies is only 17% of total employment in the US
- S and P 500 companies have been hiring significantly over the past 2 years but mainly outside the US.
Bottom line:
Small businesses are a critical part of the US economy and have been a very important source of the US recovery over the past three years. The reason is likely that the US is a closed economy where small businesses worry less about macro risks, including the fiscal cliff."
- source Deutsche Bank - Credit Conditions for commercial and industrial loans.
Given credit investors are anticipatory in nature, in 2008-2009, credit spreads started to rise well in advance (9 months) of the eventual risk of defaults as indicated by the below graph from UBS in their European Credit Strategy 2013 Outlook entitled - All yields are not created equal:
The uncanning similarity between the US leveraged loan cash price index versus its European peer and the US PMI and European PMI index - source Bloomberg:
"The empirical relationships between lagged economic indicators (e.g. global PMIs) and defaults suggests zero growth should move default rates up towards the 5-8% context over the next 12 months" - source UBS:
With the Eurozone technically back in recession with GDP contracting in Q3 by 0.1% q-o-q following a 0.2% q-o-q contraction in Q2, not only the contraction in the Eurozone is going to last but it will as well accelerate in the last quarter of the year. In that context, default rates will undoubtedly rise in 2013 given the surge in recent profit warnings. Q4 will therefore be worse than Q3.
Moving on to the subject of the risk of the "Profits Cliff", we believe the biggest risk is indeed not coming from the "Fiscal Cliff" but in fact from the "Profits Cliff". The increase productivity efforts which led to employment reduction following the financial crisis means that companies overall have reached in the US what we would call "Peak Margins". In that context they remain extremely sensitive to revised guidance and earnings outlook as we moved towards 2013. As we discussed in June in "River of No Returns", 56.5% of discretionary stock have a Beta greater than 1.1 and consensus for 2013 were the highest in discretionary stocks. We quoted Morgan Stanley's research note at the time of this conversation: "Earnings, like trees, don't grow to the sky".
We would like to repeat last week's conclusion namely that:
"high expectations + strong consensus = danger".
As indicated by Citi's recent credit research note "Strong growth requires more than just liquidity":
Fixed Income, Floating Expenses...We are more concerned about the
"Profits Cliff" or "Peak margins" effect given that companies can't
figure how to make use of their cash hence the flurry of buy-backs which
we greatly dislike. Indeed, the "unintended consequences" of the zero
rate boundaries being tackled by our "omnipotent" central banks
"deities" is that capital is no longer being deployed but destroyed
(buy-backs being a good indicator of the lack of investment
perspectives):
- Source CITI
Not only this but Private Equities power house so apt at raising money are struggling in finding ways of deploying their cash stash.
For instance, 3i Group Plc the private equity house announced in June it was restructuring its private equity business and that it would cut a third of its workforce. 3i Group Plc is planning to more than double its debt-management unit moving away from investing in buyout deals as reported by Bloomberg by Patricia Kuo - 3i Boosting Debt Business:
"New private-equity investments have shrunk in a “subdued”market for mergers and acquisitions, 3i said today in an earnings statement. The firm spent 138 million pounds ($219million) on new investments compared with 448 million pounds in the same period a year earlier, it said. It reduced headcount by 104 employees and closed offices in Barcelona, Copenhagen, Hong Kong, Milan and Shanghai, according to the statement. 3i will avoid mezzanine financing, distressed debt and real estate, as well as asset-backed deals for the time being. “I am not convinced there is room for growth for real mezzanine financing, ” Ghose said. “It will become more difficult to get buyout firms to see the merit of using mezzanine debt now that required returns almost match that of equity.”" - source Bloomberg
- Source CITI
So not only the Zero Rate policies induced by our "omnipotent" Central Banks are destroying capitalism in the sense that capital because of lack of return cannot be deployed efficiently, but it is as well to some extent neutering volatility as indicated by the volatility in Japan which has returned to pre-quake levels - graph source Bloomberg:
"The CHART OF THE DAY shows the Nikkei Stock Average
Volatility Index, a gauge of how much it costs to buy options
protecting against swings in the country’s main stock-price
measure, fell to a 21-month low yesterday. The lower panel
tracks how the price of one-month contracts protecting against
declines in the Nikkei 225 also dropped to the lowest level
since February 2011 on Nov. 9.The chart’s upper panel shows how on Nov. 7
the Nikkei volatility gauge dropped below its U.S. counterpart, the
Chicago Board Options Exchange Volatility Index, for the first time
since May. A 24 percent rally in the so-called VIX since an Aug. 17 low
signals that demand for protection against U.S. stock losses is
intensifying. Japan’s benchmark equity gauge rose 2.4 percent this year
through Nov. 13 compared with a 9.3 percent gain by the U.S.’s Standard
and Poor’s 500 Index. - source Bloomberg
The other subject of conversation is the broken credit transmission mechanism in the Eurozone. Eurozone companies are, according to CreditSights recent note (Eurozone Corp Debt - Broken Banks or Weak GDP?) net of borrowing, repaying bank debt for only the second time on record and yet net bond issuance is at close to record levels. Why is so?
Banks in Europe are "broken" and unable to lend, or unwilling given the weak outlook for companies revenues which is as well undermining the demand for credit:
"The Eurozone's latest national economic accounts show that over the past year non-financial corporates have been repaying loans, but borrowing near record amounts of bonds. Over the past year, companies in the euro area have repaid a net €45 bn of loan debt and increased their use of bond financing by €90 bn, respectively equivalent to -0.5% of GDP and 1% of annual GDP. Euro area companies have only made greater use of bond financing than they are currently making in 2010 when loans were shrinking dramatically following the banking crisis, and in 2001 when the euro-denominated credit markets were still developing and the dotcom and euro high yield boom were in their final days.
The most obvious explanation for this shift in funding from loans to bonds is that banks are broken and unable to lend and therefore these companies are large enough to turn instead to the bond markets are using that option. The rest are being forced to deleverage or default. If that is the case, then the obvious answer must be to fix Europe's banks in order to ease the pressure on corporates and allow those too small to access to the bond markets to rely once again on the banks. But there are reasons to doubt that fixing European banks alone will be enough. While it is a necessary condition of returning European Corporates to borrowing and investing it is not by itself, a sufficient condition. And although the financing conditions of Europe's smaller and medium-sized companies may seem irrelevant to investors in bonds, it should be remembered that these SMEs are the suppliers to those large companies, the distributors of their products and the employers of their customers. If European SMEs are cutting spending, that will redound to the detriment of large European companies revenues."
On a final note revenue shortfalls as indicated by Bloomberg's chart of the day does indeed bring Profit-Margin caution:
"Growing disappointment with U.S.
companies’ revenue may be a harbinger of lower profit margins,
according to Myles Zyblock, chief institutional strategist at
RBC Capital Markets.
As the CHART OF THE DAY shows, the gap has widened this
quarter between the percentage of companies in the Standard and Poor’s 500 Index that are exceeding analysts’ sales projections
and those coming out ahead on earnings. The figures are based on
comparisons with average estimates in Bloomberg surveys.
Fewer than 30 percent of S and P 500 companies are delivering
so-called positive surprises on revenue, according to the data.
The proportion has fallen from 52 percent a year earlier. S and P
500 earnings surprises have been more consistent, falling to
64.5 percent from 69 percent during the period.
“The heat is on for companies to preserve margins,”
Zyblock wrote yesterday in a report. Their success will depend
on pricing power, or the ability to raise prices without losing
business, the Montreal-based strategist wrote.
Broadcasters and cable companies, business-service
providers, homebuilders and tobacco producers are most likely to
sustain profitability, the report said. Zyblock based his
conclusion on an analysis of industry price indexes and net
margins, or net income as a percentage of sales.
Automakers, chemical companies, paper producers and
software makers are most at risk, he wrote. These industries
suffer from a combination of reduced pricing power and falling
net margins." - source Bloomberg
We think we have reached "Peak margins" as far as US earnings are concerned. so "Mind the Gap"...
So, we do not really care about the "Fiscal Cliff", we'd rather much care about the "Profits Cliff", but then again, we might be lacking faith, trust, or both, in our "Omnipotent" Central Banks and governments altogether.
"Omnipotence is not knowing how everything is done; it's just doing it."- Alan Watts, English Philosopher.
It will depend on the credit conditions for small market firms given credit conditions for commercial and industrial loans were tightened both for small and large companies during the crisis as indicated in a recent report by Dr Torsten Slok from Deutsche Bank - Do Small businesses worry about the fiscal cliff - published in November:
"Facts:
- Firms with less than 20 employees make up 90% of all companies in the US
- Small and medium-sized firms employ half of all workers in the US
- Small and medium-sized firms generate half of all revenue in corporate America
- Small firms create around 3mn jobs every year
- Job growth during this recovery has mainly come from small and medium-sized companies
- Global total employment in S and P 500 companies is only 17% of total employment in the US
- S and P 500 companies have been hiring significantly over the past 2 years but mainly outside the US.
Bottom line:
Small businesses are a critical part of the US economy and have been a very important source of the US recovery over the past three years. The reason is likely that the US is a closed economy where small businesses worry less about macro risks, including the fiscal cliff."
Given credit investors are anticipatory in nature, in 2008-2009, credit spreads started to rise well in advance (9 months) of the eventual risk of defaults as indicated by the below graph from UBS in their European Credit Strategy 2013 Outlook entitled - All yields are not created equal:
The uncanning similarity between the US leveraged loan cash price index versus its European peer and the US PMI and European PMI index - source Bloomberg:
"The empirical relationships between lagged economic indicators (e.g. global PMIs) and defaults suggests zero growth should move default rates up towards the 5-8% context over the next 12 months" - source UBS:
With the Eurozone technically back in recession with GDP contracting in Q3 by 0.1% q-o-q following a 0.2% q-o-q contraction in Q2, not only the contraction in the Eurozone is going to last but it will as well accelerate in the last quarter of the year. In that context, default rates will undoubtedly rise in 2013 given the surge in recent profit warnings. Q4 will therefore be worse than Q3.
Moving on to the subject of the risk of the "Profits Cliff", we believe the biggest risk is indeed not coming from the "Fiscal Cliff" but in fact from the "Profits Cliff". The increase productivity efforts which led to employment reduction following the financial crisis means that companies overall have reached in the US what we would call "Peak Margins". In that context they remain extremely sensitive to revised guidance and earnings outlook as we moved towards 2013. As we discussed in June in "River of No Returns", 56.5% of discretionary stock have a Beta greater than 1.1 and consensus for 2013 were the highest in discretionary stocks. We quoted Morgan Stanley's research note at the time of this conversation: "Earnings, like trees, don't grow to the sky".
We would like to repeat last week's conclusion namely that:
"high expectations + strong consensus = danger".
As indicated by Citi's recent credit research note "Strong growth requires more than just liquidity":
Not only this but Private Equities power house so apt at raising money are struggling in finding ways of deploying their cash stash.
For instance, 3i Group Plc the private equity house announced in June it was restructuring its private equity business and that it would cut a third of its workforce. 3i Group Plc is planning to more than double its debt-management unit moving away from investing in buyout deals as reported by Bloomberg by Patricia Kuo - 3i Boosting Debt Business:
"New private-equity investments have shrunk in a “subdued”market for mergers and acquisitions, 3i said today in an earnings statement. The firm spent 138 million pounds ($219million) on new investments compared with 448 million pounds in the same period a year earlier, it said. It reduced headcount by 104 employees and closed offices in Barcelona, Copenhagen, Hong Kong, Milan and Shanghai, according to the statement. 3i will avoid mezzanine financing, distressed debt and real estate, as well as asset-backed deals for the time being. “I am not convinced there is room for growth for real mezzanine financing, ” Ghose said. “It will become more difficult to get buyout firms to see the merit of using mezzanine debt now that required returns almost match that of equity.”" - source Bloomberg
So not only the Zero Rate policies induced by our "omnipotent" Central Banks are destroying capitalism in the sense that capital because of lack of return cannot be deployed efficiently, but it is as well to some extent neutering volatility as indicated by the volatility in Japan which has returned to pre-quake levels - graph source Bloomberg:
The other subject of conversation is the broken credit transmission mechanism in the Eurozone. Eurozone companies are, according to CreditSights recent note (Eurozone Corp Debt - Broken Banks or Weak GDP?) net of borrowing, repaying bank debt for only the second time on record and yet net bond issuance is at close to record levels. Why is so?
Banks in Europe are "broken" and unable to lend, or unwilling given the weak outlook for companies revenues which is as well undermining the demand for credit:
"The Eurozone's latest national economic accounts show that over the past year non-financial corporates have been repaying loans, but borrowing near record amounts of bonds. Over the past year, companies in the euro area have repaid a net €45 bn of loan debt and increased their use of bond financing by €90 bn, respectively equivalent to -0.5% of GDP and 1% of annual GDP. Euro area companies have only made greater use of bond financing than they are currently making in 2010 when loans were shrinking dramatically following the banking crisis, and in 2001 when the euro-denominated credit markets were still developing and the dotcom and euro high yield boom were in their final days.
The most obvious explanation for this shift in funding from loans to bonds is that banks are broken and unable to lend and therefore these companies are large enough to turn instead to the bond markets are using that option. The rest are being forced to deleverage or default. If that is the case, then the obvious answer must be to fix Europe's banks in order to ease the pressure on corporates and allow those too small to access to the bond markets to rely once again on the banks. But there are reasons to doubt that fixing European banks alone will be enough. While it is a necessary condition of returning European Corporates to borrowing and investing it is not by itself, a sufficient condition. And although the financing conditions of Europe's smaller and medium-sized companies may seem irrelevant to investors in bonds, it should be remembered that these SMEs are the suppliers to those large companies, the distributors of their products and the employers of their customers. If European SMEs are cutting spending, that will redound to the detriment of large European companies revenues."
On a final note revenue shortfalls as indicated by Bloomberg's chart of the day does indeed bring Profit-Margin caution:
We think we have reached "Peak margins" as far as US earnings are concerned. so "Mind the Gap"...
So, we do not really care about the "Fiscal Cliff", we'd rather much care about the "Profits Cliff", but then again, we might be lacking faith, trust, or both, in our "Omnipotent" Central Banks and governments altogether.
"Omnipotence is not knowing how everything is done; it's just doing it."- Alan Watts, English Philosopher.
Stay tuned!