Nomura’s uber-bear Bob Januah is uber-bearish on the European bailout deal, and he predicts the S&P could go as low as 700.
From his note:
We all have reams of commentary on the latest eurozone „deal‟ to digest. I want to keep my contribution to a minimum. In summary, this latest round of eurozone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set-up an even worse final outcome. With respect to the Greek debt „write off‟, the bank „recap‟, and the structured credit technology being applied to ESFS, my takeaway is fudge, fiction and fantasy. The eurozone leadership know they can‟t really put in any meaningful amount of new money to fix things, yet are lacking in courage when it comes to forcing proper debt write offs and debt relief, ditto forcing genuine bank recapitalisation and financial sector restructuring, and we have a humiliation and tragedy of epic proportions when we consider that the ESFS leverage „plan‟ seems to rely on convincing a largely poor country where GDP per head is close to USD5k to bailout out a bloc where GDP per head is larger by a factor of x6/x8.
I spend a fair bit of time in China. Chinese policymakers on the whole impress me with their ability to understand what the real issue are. If my experience and read of China is right, Mr Regling is going to come back to Europe with lots of kind and supportive words, but little or no real hard cash. China wants military technology, nuclear technology, access to European corporates (ownership!), and it wants Europe fully on its side vs. the US with respect to human rights, the currency/the trade surplus, and in terms of IMF, WTO, and UN „status‟. It does not want to buy eurozone government bonds for the sake of it (bunds are the major exception) and I suspect the first question Mr Regling will need to address is something along the lines of: „If your bond/ESFS deal is so good, why aren‟t the financial markets biting your hands off for a piece of the action?‟. After all, financial markets are pretty good at spotting give-away bargains when they present themselves! So in reality we are continuing with the policy of creeping fiscal union and kicking the can down the road, hoping that somehow growth with magically appear and bail out all (not just eurozone) heavily indebted nations. I think such hope is extremely misplaced. This latest bailout relies on the market not calling what I see is a huge „bluff‟, because if the market does call it, the bailout simply won‟t be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can‟t believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.
And to some extent it seems as if the market is already agreeing with him.
The spread between Italian and German bonds blew massively wider today, as the market puts the defenses to the test.
Meanwhile the Dow is off nearly 200.