Here are the
cherry-picked treats from my ending week’s posts since the last Best of The Week
EURO CRISIS
The respected economist and Telegraph columnist
summarises the argument for an orderly break-up of the eurozone if a struggling
member was forced to leave that won him the Wolfson Economics prize.
The EZ crisis – born as a debt crisis (Greece) – has grown up into
a banking crisis (Ireland, Cyprus, Spain, …). This column argues that Spain is symptomatic of
larger banking problems, so the EU Summit decisions on banking union are
welcome and critical to any long-term solution. Yet someone must pay for
Spanish bank losses. Spanish politics is shielding Spanish creditors, European
politics is shielding EZ taxpayers, so the Spanish government will pay – and in
doing so may go the way of Ireland. This crisis is far from over.
…the combination of a current account deficit
plus a budget surplus meant that Goldilocks was going to get murdered by the
necessary balancing item—an unprecedented sustained private sector deficit… Any
EMU nation can be blown up by its banks even while running a current account
surplus.
For the time being, the forces formally supporting
a “Fixit” are in the minority, but there is now significant internal debate on
the pros and cons of membership.
Neither Grexit, Nor Spexit, It’s Fixit or Fexit – A
Fistful of Euros
Huge post from
Edward Hugh: discusses ESM, what the summit really meant, and what options are
left for the euro area.
Acronym
dictionary from Goldman Sachs.
1. Europe has to stop lying and start telling
the truth in the first instance.
EURO CRISIS: BANKS
Big banks: From Greek bailout to Hamlet's castle – euobserver
A lobby group for the world's biggest banks,
the International Institute of Finance became a key EU player when it negotiated
the debt cut accompanying Greece's second bailout.
Their world of rented castles and sopranos shows the losses were bearable.
the general and very realistic uncertainty in European
banking, which is exacerbated by the aggregate nature of this report. We have
no new insight and fears about what may lie-beneath still linger.
EURO CRISIS: SUMMIT
The Eurogroup provides a reality check – re-define
a good reality check for those who may have got
carried away after the better than expected (only because expectations were
managed so low) results from the European Council meeting in June.
The Eurogroup provides a reality check – re-define
a good reality check for those who may have got
carried away after the better than expected (only because expectations were
managed so low) results from the European Council meeting in June.
Are all euro summits the same? Market perceptions before and after – bruegel
First, it is true that government bond yields
mostly revert to their level five days before the summit after 5 days. In
particular in Italy and Spain, no systematic improvement is visible in any of the five summits…We
also observe that the pattern of yield developments is rather heterogeneous on
the five summits.
EURO CRISIS: SPAIN
draft memorandum of understanding for Spain’s bailout…Featuring
bank bail-ins for subordinated debt, notably
Spanish Financial Sector MOU - Analysis – TF
Market Advisors
Spanish periodic government auctions have been
quite small in recent months - about €2bn each…Spain will need to step these up
dramatically (double or triple the amount) in order to raise the funds it
needs for the rest of the year…And who is going to buy this incremental debt?
Lying LIBOR Banks, Spanish
MOU, & Earnings
– TF
Market Advisors
Bad medicine
– Free
exchange / The Economist
this is incredibly counterproductive. The
Spanish economy is imploding. Without the ability to offset these cuts with a
very aggressive monetary policy, the multiplier on this austerity will be
substantial…The aim is to demonstrate a willingness to suffer great enough to
convince Germany you're worth sharing risks with.
Longer
article summarizing other pieces, with the same main points as the ones above.
Nice longer
report on what went wrong by good authors.
The memorandum fails to understand or
acknowledge the link between the macroeconomic policies being pursued by Spain, for example on
cutting its fiscal deficit, and the stability of the financial sector. In fact,
many of the new austerity measures adopted by Spain will undermine the
objectives of its bank bailout program. It also fails on take note of the
social and political realities. Crucially, it makes no reference whatsoever to
the direct injection of equity by the European crisis funds, now or in the
future.
The logical path, and the one the Troika is
pushing, would be to wipe out equity and haircut sub debt and if need be, the
next senior layer of bondholders. But depositors were pressured into buying
preference shares and subordinated debt. Reuters reported that62% of bank
subordinated debt investors are depositors at the same institution.
CENTRAL BANKING
The negative carry universe – alphaville
/ FT
The battle is no longer about liquidity but
about preventing the negative carry universe from impairing bank profitability
forever.
If the nominal yield cannot fall then the only
way the real rate can decline is through increasing inflation, as expressed by
the Fisher equation. In fact, increasing inflation expectations are just as
good, as long as they become entrenched; however this is where we are falling
short.
The Puzzling Pre-FOMC Announcement “Drift” – FED
NY
Our findings suggest that the pre-FOMC announcement
drift may be key to understanding the equity premium puzzle since 1994.
However, at this point, the drift remains a puzzle.
In the bitterest of ironies, Mr Bernanke is
giving America a Japanese recovery. He is doing so, seemingly, because pushing
inflation temporarily above an arbitrary target is an unthinkable prospect,
even though doing so would almost certainly, by his own convincing argument,
have a huge impact on America's enormously costly unemployment problem.
CREDIT MARKETS
The (Other) Deleveraging – IMF
Deleveraging has two components--shrinking of balance
sheets due to increased haircuts/shedding of assets, and the reduction in the
interconnectedness of the financial system. We focus on the second aspect and
show that post-Lehman there has been a significant decline in the
interconnectedness in the pledged collateral market between banks and nonbanks.
Sovereign Debt and Default: A History (Mar 2012) – CoBank
(pdf)
In the end the losses are taken, one way or
another. And life goes on. Things are written off, some people fail, some
people survive. But life goes on.
What’s In A Name? – Bill
Gross / PIMCO
Not only banks and insurance companies but
sovereign nations as well cannot all be counted on to guarantee a return of principal,
let alone a return on investment. An authentic debt crisis – which the world is
now experiencing – can only be ultimately cured in two ways: 1) default on it,
or 2) print more money in order to inflate it away.
STOCK MARKETS
Q2 Earnings Trends – Some Worrisome Developments – PragCap
The key point is that earnings growth is
slowing substantially, margins have likely peaked, and without a boom in investment
or a surge in government spending the risk lies to the downside (via Zacks)
Analysts currently expect second-quarter
earnings growth for S&P 500 companies to come in at a negative 2.1% rate
The forefathers of Europe’s single currency argued that rather
than devalue their currencies to restore competitiveness, countries could
devalue ‘internally’. Against the current of bad press, this column presents a
novel way of recording competitiveness and argues that Ireland, Spain, Latvia, and Lithuania have all managed these adjustments – but not without paying a huge toll
in jobs lost.
Why Capital's Defeat of Labor Means Fat Profit Margins Are Here to Stay – Minyanville
The end of the age of consumption and the
decreasing need for labor are intertwined, and we have just begun to come to
grips with this.
OTHER
Clueless: Meet the Overprecise Pundits – The
Psy-Fi Blog
Most short-term opinions on markets or any
system that includes human beings as part of the machinery are generally worthless
in a financial sense.
The Rules, Part XXXIII – The
Aleph Blog
When politicians don't have answers, they blame
speculators, financiers (Wall Street), or foreigners. They do anything to
take the spotlight off their culpability or ineptitude.
Things That Make You Go Hmmm – Grant
Williams / ZH
Another
excellent 28-page magazine-like roundup and commentary. Better than “The
Economist”.
…while the world focuses on the China hard vs. soft landing
debate, I am thinking about the longer path for Chinese growth. They will slow
down. When the next downturn hits, we could see a classic negative GDP growth recession.
Financial repression the new buzzword – Saxo
Bank
Steen
Jakobsen: No form of repression works!
Look for massive outflow from the Eurozone to the non-Eurozone countries. Sweden is the new Switzerland. Look for equities to be gradually more loved as dividends offer better
returns than repressive government bonds.....and look for a summer of
discontent, before the low is seen.
Some observers have suggested this is a new
front in the currency wars. While recognizing the competition between
countries, this formulation seems to be an over-generalization. There seems to
be at least three different reasons that have driven rates so low.
The most important charts in the world – BI
we reached out to some of the world's most
influential analysts, economists, hedge-funders and traders and asked them a
simple question: what charts are you always keeping your eye on?
OFF-TOPIC
The Century Of The Self
Part 1: The Happiness Machines – The
Big Picture
Part 2: The Engineering of Consent – The
Big Picture
Part 3: The Policeman Inside Our Heads – The
Big Picture
Part 4: Sipping Wine – The
Big Picture
To many in both politics and business, the
triumph of the self is the ultimate expression of democracy, where power has
finally moved to the people. Certainly the people may feel they are in charge,
but are they really? The Century of the Self tells the untold and sometimes
controversial story of the growth of the mass-consumer society in Britain and the United States. How was the all-consuming self created, by whom, and in whose
interests? (episodes
60 mins.)