So now it is official, Berlusconi is out. End game scenarios have gained a quiet acceptance in Germany and France, but Brussels and the eurocrats are having none of that – at least not yet. Their time will come later. The biggest obstacles to a crisis solution have been the adherence of ECB to its now hopelessly irrelevant mandate and the holy cows of “no defaults”, “no competitive devaluations or exits from EZ”. I believe we will see all of them very soon – maybe already this year, but definitely latest early next year (only because of can-kicking and good old SMP by ECB coupled with the approaching holiday season and thinner markets). The talk on euro bonds, EFSF expansion etc. has died down, and hopefully the Great Leaders realize this and stop developing pre-agreed constructions that do not serve their original purpose anymore. Somebody should teach the eurocrats the idea of sunk costs.
Instead of backstopping the crisis, the only thing the ECB has been doing is peeing in the pants in the winter to keep warm – or perhaps even worse. With a less dim fellow leading the ECB and the rot spreading to the core, the odds of at least a partial, albeit temporary solution, is increasing.
Joke of the week: EFSF is trying to raise money to “save Europe” – their latest bond auction was not that hot, so they resorted to buying some of their own bonds in the auction.
Have a good weekend,
– MoreLiver
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"”Weekender” is republished with permission of MoreLiver’s Daily."
Past
News (Fri evening) – BTH
Today in Euromess (Fri) – Wonkblog / WP
Week in review – DealBook / NYT
Weekly Scoreboard – BTH
Weekly Scoreboard – BTH
Macro: Summary for Week – Calculated Risk
Credit: Weekly Update – Danske Bank (pdf)
EMEA Weekly – Danske Bank (pdf)
Politics this week – The Economist
Business this week – The Economist
Weekly Bull/Bear Recap – Rational Capitalist Speculator
Succinct summation of week’s events – The Big Picture
Future
Macro: Schedule for the week – Calculated Risk
This week in EU – euobserver.com
Weighing the week ahead – A Dash of Insight
Next week’s Tape – MarketBeat / WSJ
Weekly Focus – Danske Bank (pdf)
US Weekly Kickstart – Goldman Sachs / ZH
FX Outlook Nov 2011 – Saxo Bank (pdf)
FX Outlook Nov 2011 – Saxo Bank (pdf)
Calendars
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT
Standard
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
And Now, A Short Break From EuroZone Dominated News – The Big Picture
Kiron Sarkar’s long text on the eurocrisis.
Greece and Italy are in the process of acquiring technocratic governments the stated purpose of which is to ensure that the Brussels Agreement is implemented. If my analysis above is right, their task is hopeless. Technocrats may serve a purpose when working from a rational engineering plan.
Chart Of The Day: The EFSF Is Already Trading As AA+, Or Why The French AAA Rating No Longer Matters – ZH
S&P October 20 Eurozone "Stress Test": Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios.
S&P October 20 Eurozone "Stress Test": Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios.
EFSF Bail-Out Fund Buys Its Own Debt Because Not Enough Others Will – Mish’s
Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.
What we’ve learned from the euro crisis, part I – Marginal Revolution
..10. Don’t have government regulators let the banking system treat all government securities as riskless assets.
The recent huge revisions witnessed in Greek data have raised concerns also about the credibility of the EU’s fiscal data reporting system. This column argues that initially published fiscal-deficit figures tend to be to revised towards an increased deficit at subsequent publication dates, and that the proximity of elections and the business cycle explain data revisions. It says that the EU should strengthen the role of Eurostat, the EU’s statistical agency, in auditing individual countries’ fiscal accounts and encourage EU countries to adopt more stringent fiscal rules.
ITALY
For the euro to survive, Italy must succeed. For Italy to succeed, its squabbling politicians must find unaccustomed reserves of unity and courage. That depends on ordinary Italians being willing to make sacrifices, the ECB backing Italy, and France and Germany standing resolutely behind the euro. It is a dauntingly long list of things to go right.
Italy 2020: Debt reduction is the order of the day – DB Research
Understanding the euro crisis: It's not about Berlusconi – Free exchange / The Economist
The worry, then, is that as each new turn of the austerity screws fails to produce the hoped-for relief in the markets, more austerity will be prescribed, until the Italian political system rebels, making default and exit from the euro unavoidable.
"Sold To You": European Banks Quietly Dumping €300 Billion In Italian Debt – ZH
Banks to dump more Italian debt – IFR
END GAME
Three endings to the European debt crisis – Wonkblog / WP
Best: everything works out, Less bad: one or two drop out, Armageddon: half-a-dozen members are wobbly
Sorry, there is no euro break-up plan – yet – Evans-Pritchard / The Telegraph
What Germany cannot continue to do is to refuse to leave EMU, and refuse to reflate. This is not a policy. The rest of the world is entirely entitled to make its irritation known.
The endgame for Europe (in its current form) probably has started. Like birth, nobody what comes next. Will the process be easy or difficult? Fast or slow? Produce an angel or monster? Here we make some guesses. Pay attention, as Europe’s travails mirror those to come for the world.
Europe’s great-and-good, at bay – The World / FT
The true European federalists are even more convinced than ever that the only way out of this is true political union. Fischer argued that either we proceed to a political union, or the euro and then the EU itself begins to break up, and we lose the accumulated gains of sixty years.
The true European federalists are even more convinced than ever that the only way out of this is true political union. Fischer argued that either we proceed to a political union, or the euro and then the EU itself begins to break up, and we lose the accumulated gains of sixty years.
Does the ECB really have a silver bullet? – Gavyn Davies / FT
Neither Germany not the ECB wants to fire the silver bullet. That represents powerful opposition – even if they are wrong.
Neither Germany not the ECB wants to fire the silver bullet. That represents powerful opposition – even if they are wrong.
The trouble with seigniorage – alphaville / FT
Comments the above
The ECB to the rescue? – Pragmatic Capitalism
If the ECB came out and said: “we are a buyer of Italian bonds at 6%”, then yes, this will work. But they won’t do that. Instead, they’ll likely repeat what they did in August where they buy EUR20B+ bonds, yields sink and then EMU leaders crawl back into their corner where they can watch everything start to meltdown again.
Merkozy's Frankenstein – Peter Tchir / ZH
Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.
Making things more complex primarily in reaction to previous moves with limited understanding of what you are getting into is a recipe for disaster, and Europe has followed this policy for years now, it is a shame they don't see it before it is too late to fix.
In short, the European project is failing at precisely the point that it had been attempting to solve — nationalism. The ability of leaders to make deals depends on authority that is slipping away. The public has not yet clearly defined the alternatives, but that process is under way.
PORTFOLIO / ASSET ALLOCATION
Researching Equity Managers and Mutual Funds – Masters Fund
Litman Gregory ’s due diligence philosophy and process to users of Litman Gregory ’s research service, AdvisorIntelligence, and also to their investment advisory clients
Risk-Managed Momentum – Turnkey Analyst
Last week we discussed the possibility that “momentum is finished.“ Astute readers of the blog generally agreed with the concept, but also pointed out that risk management techniques can potentially save momentum strategies.
The Short of It: Investor Sentiment and Anomalies – SSRN
First, each anomaly is stronger - its long-short strategy is more profitable - following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
Momentum Crashes – SSRN
The returns to momentum strategies are highly skewed; they experience infrequent but strong and persistent strings of negative returns. These momentum \crashes" are forecastable: they occur following market declines, when market volatility is high, and contemporaneous with market \rebounds." The low ex-ante expected returns associated with the crashes appear to result from a a conditionally high premium attached to the the option-like payouts of the past-loser portfolios.
Is Momentum Really Momentum? – Chulalongkorn University (pdf)
Momentum is primarily driven by firms’ performance twelve to seven months prior to portfolio formation, not by a tendency of rising and falling stocks to keep rising and falling…but over the last forty years strategies based on recent past performance do not contribute significantly to the investment opportunity set of an investor already trading momentum based on intermediate horizon past performance and the three Fama-French factors.
Cheaper than Value – SSRN
Value strategies appear to provide an extra source of return. Academic literature provides two competing theories on what drives the value premium: exposure to risk factors or mispricing of the securities. Existing empirical studies have not conclusively rejected one in support of the other… we conclude mispricing is likely a more significant portion of the value premium.
The Merit of High-Frequency Data in Portfolio Allocation – SSRN
HF data offers gains over daily data and more importantly these gains are maintained over longer horizons than previous studies have shown.
EMERGING
Bursting the MENA credit bubble – alphaville / FT
Citi’s research piece from Friday: there seems to be no premium for geopolitical risk in the pricing of Middle Eastern credits. This is because a track record of shaking problems away quickly, rise of oil price compensating any shocks and US stabilizing as the world police.
Citi’s research piece from Friday: there seems to be no premium for geopolitical risk in the pricing of Middle Eastern credits. This is because a track record of shaking problems away quickly, rise of oil price compensating any shocks and US stabilizing as the world police.
Easy Money – The View from the Blue Ridge
Fed tightening ultimately busted the US housing bubble, but subsequent easing hasn’t had much of an impact. The oversight in this argument is sentiment. Once Chinese buyers awaken to the reality that house prices can move in two directions, we believe the genie is out of the bottle.
OTHER
Global Economic Prospects and Policy Challenges – IMF / scribd
Report prepared for the previous G-20 meeting, summary by ZH here.
Goldman Lists What To Expect In FX For The Remainder Of The Year – ZH
World Energy Outlook 2011 – International Energy Agency
Mercenary – Esquire
If you learned that the man in this photo -- a professional assassin -- was the head of security at one of our nation’s most vulnerable nuclear facilities, would it trouble you? Or would it sound like one hell of a story?