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| A pretty good financial stress indicator: the spread between Libor and secured (repo) rate |
Very quiet. Too quiet. The plans and the rumors are in place, but belief and conviction are in short supply. Did anyone notice the US-EU summit? Are we going to notice this week's summits, or are we still waiting for the 9-Dec for delivery of something a bit more, eh, real?
There are some minute signals that maybe they are getting it now: at first a mini- or bilateral fiscal union and heavy support from ECB, and later a full fiscal union for the willing (and able), with euro bonds and full backstop by ECB.
What happens if they agree on the first step, but the second step becomes another forever-fiasco that never gets done properly? Even worse, what happens if they cannot agree even on the first step?
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| Italian bonds due |
Quote of the day: "I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity."
– Radek Sikorski, Polish foreign minister 28-Nov
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| Spanish bonds due |
Quote of the day 2: "Life is what happens to you while you're busy making other plans"
– John Lennon
Happy times,
- MoreLiver
News (Tue evening) – BTH
Recap 29-Nov – Global Macro Trading
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
Another European "Solution" Coming? – Tim Duy’s Fed Watch
Bottom Line: European policymakers understand they need faster and bolder action. But the situation has many, many moving pieces. It is increasingly difficult to pull the brakes on this runaway train.
Even more intriguing – Draghi is being summoned to the Ecofin meeting and news reports suggest he will also attend the EU heads of State meeting on the 9th December. A deal where Germany forces through fiscal measures, followed by the “independent” ECB buying bonds/ embarking on QE, looks like the deal that is being attempted/ organised.
The most likely effect of strengthening political union in the eurozone would be to give Germany the power to control the other members’ budgets and prescribe changes in their taxes and spending. This formal transfer of sovereignty would only increase the tensions and conflicts that already exist between Germany and other EU countries.
Can austerity be self-defeating? – Daniel Gros / voxeu.org
With European governments cutting back on spending, many are asking whether this could make matters worse. In the UK for instance, recent OECD estimates suggest that ‘austerity’ will lead to another recession, which in turn may lead to a higher debt-to-GDP ratio than before. As the debate heats up, this column provides some cool economic logic.
Nomura on European bank deleveraging and US loans – alphaville / FT
They have entrusted the continent's most important economic institution to a group of ideological zealots who are infatuated by the sight of low inflation rates, even as whole economies collapse in ruins and tens of millions of people needlessly go unemployed.
Flow Chart For The EFSF – Peter Tchir / The Big Picture
Here is our best attempt at a flow chart for the EFSF that tries to capture everything it does. If it looks complicated, that is because it is complicated.
Bank recap, PSI agreement in Greece and EFSF. All failed. Epic fail.
Family Feud – Bill Gross / PIMCO
Investors should recognize that Euroland’s problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt.
ECB
ECB as Pawnbroker of Last Resort (POLR) – alphaville / FT
The ECB’s less fussy nature when it comes to the type of collateral it accepts makes it, de facto, the dumping ground for all collateral that the public market has deemed unacceptable and is no longer prepared to fund against.
ECB Sterilization Effort Fails As Banks Hoard Cash – Marketbeat / WSJ
Shorter: Though banks could get higher returns by depositing at the central bank, they are putting money instead in short-term instruments that they can use at the ECB as collateral to refinance, he said.
Shorter: Though banks could get higher returns by depositing at the central bank, they are putting money instead in short-term instruments that they can use at the ECB as collateral to refinance, he said.
Longer: IFR: The only reason we can think of to explain the inability of the ECB to get the necessary deposits is that banks prefer to keep things very liquid and park funds o/n as opposed to over the week – implying that SMP is potentially constrained.
PIIGS-BF
The decline and inversion of Italian bonds – alphaville / FT
The yield level is still unsustainable. Meanwhile, Tesco loans money at 2%.
Italian Bond Conundrums – The Source / WSJ
Yield curve inversion – it is not (only) about default fears, it is about deflation. The bond prices suggest a breakeven annual inflation of -0.55% for the next five years: But if Italy is deflating, this suggests it hasn’t resolved its problems through default and consequent departure from the euro zone. Rather it suggests a semi-permanent state of austerity for Italy.
How much is there left to sell? – alphaville / FT
900bn of Italian held by foreigners, 10% have been sold, more to come. Total foreign EZ debt holdings 4trn. In a stressed scenario, around 400bn could be sold, but if central banks join in, it could be around 1trn.
OTHER
Are Earnings Cyclical? – The Big Picture
Everyone agrees that earnings are cyclical except when they are at a high. So are earnings at a peak?... If the economy goes into recession, earnings forecasts are not 10% to 12% too high. Instead they might be 20% to 40% too high. In other words, if the economy goes into recession, the earnings forecasts are horribly wrong.
All About Exchange-Traded Funds by Frush – Reading the Markets
Book review
DIVERSION
Twenty Questions and a Box of Matches, Please – Macro Man
Entertaining multiple choice. My line tomorrow. What's yours?
The Con Man’s Lament: Equity vs Commodity Firms – The Big Picture
It was a point of pride amongst equity con men that they did not merely steal. They cajoled, wheedled, scammed, and cheated, but they never stole.