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Sunday, July 31

31st July Weekender - lousy GDP, waiting for debt deal

Summary: Developed world-macro situation looks bleak. GDP revisions show that the previous stimulation has been undersized and partly explains the weak recovery. Further action from the Fed is possible, especially in case of new signs of economic weakness.

Views: Stocks: Still bearish on stocks: historically heavy insider selling and margin debt, historically low show of earnings guidance from corporations, historically high portion of corporate earnings vs. GDP, August is historically a weak month, technically a narrow trading range that looks and feels like a downside break is more probable.
Short-term bull factors include beginning of month-effect and possible happy reaction to the imminent debt ceiling deal. Hire me. Should global macro data worsen further, markets might start expecting QE3, so paradoxically the worst news will be the best news.

EURUSD – my gut feeling is that the current range trading since last April is about to end and a breakout is going to happen in the coming weeks. As the pair is currently near the top of the range, I would favor shorting euros near 1.45, with stop around 1.46, targeting around 1.4100 and, long-term-, possibly an eventual breakout even lower. I expect more future strength from safe havens like JPY and CHF, but believe they will take a breather next week. However, in case of central bank interventions in either currency, opportunistic JPY or CHF longs should be taken. Study previous interventions to get the game plan right.

Plans: I’m thinking about putting some of my own analysis here. 1) FX return factors, 2) hedge fund style indices’ price mean reversion and 3) crisis indicators and early warning systems are some recent stuff I've been working on. I am not happy to share stuff that I put value upon, but hey, hire me!

30-page report covering Greece’s economy, Apple, debt ceiling etc. Recommended.

“step-out clause in this scheme that allows any guarantor to withdraw, if market rates on their bonds rise above rates charged to Greece.” Spain and Italy?

As IMF and eurogovs have already committed to PIIGS, it is difficult to force PIIGS bond holders for a large enough restructuring. Also, bond owners now are more heterogeneous than in past crises.

“It seems preferable either not to back a debt restructuring at all, resulting in a probable default by Greece, or alternatively, to explicitly back a more credible debt restructuring proposal, which would lead to much lower post-exchange discount rates, and thus to much lower bailout costs.”


Money getting tighter in U.S., which is the exact opposite of what is needed

Krugman wonders why people are still listening to Greenspan and why he still wants to speak.
The Malevolent Ex-Maestro – Krugman / NYT
How insurance improves living standards – Felix Salmon column Reuters

Mortgage industry fights new rules that might force banks to use common sense and underwriters to hold a min. 5% of risky underwritings. Key spokesperson: David Stevens, the president of the Mortgage Bankers Association, still last March the federal housing commissioner at the Department of Housing and Urban Development. A true case of the revolving door policy…

Citigroup’s notes: debt ceiling impasse is a vaudeville compared to the tragedy that could await

An Economy at Stall Speed, Is There a Recession in Our Future?, What I Told the Senators, Escalating Eurozone Interbank Liquidity Crisis: Dollar-Euro Impact?, Time for Friends, Fish, and Wine
An Economy at Stall Speed – John Mauldin via The Big Picture

As the duration of a lot of public debt is low, it is hard to inflate it away. Also roll overs are a constant pain. A lot of this relates to Europe’s situation as well – and soon other parts of the world.

Tri-party repo market still vulnerable and one of the biggest possible origins of future systemic risk. Lots of quotes from Financial Stability Oversight Council’s reports. I’ve previously linked to some FSOC-papers.

Downward revisions to past and recent U.S. GDP growth estimates were bad, but old news. The recession was deeper than previously thought and the stimulation of the economy was smaller compared to the true output gap. First link a good roundup of views from several sites. Then John Mauldin’s letter that also discusses other things. Other GDP-related articles follow.
US GDP: It was all worse – New$ to use
An Economy at Stall Speed – John Mauldin via The Big Picture
GDP Report: What It Tells Us About the Debt – The Curious Capitalist / Time

“Not that much extra, mostly necessities, especially given the crisis”

“The poor stay poor and the rich stay rich. That’s how it goes, everybody knows.”

BOE’s Haldane takes a stand against high frequency trading
Time to take stock – Macro Business Superblog


Speculation that S&P’s sudden pre-emptive worry is caused by SEC and Dodd-Frank to look into credit agencies’ role in the mortgage crisis

HF leverage decreased prior to crisis, while investment banks’ leverage increased.

“By diversifying its risks, a bank lowers its own probability of failure. However, if many banks diversify their risks in similar ways, then the probability of multiple failures can increase.”

Tax Burdens Around the World – Infectious Greed

Full GS weekly U.S. kickstart

Spain’s default in 1575. Fascinating!

Web site saying Yes or No, with a link to daily Treasury statements. Currently says ‘no’

(PDF) The Dark Side of Optimism – The Conference Board of Review

Friday, July 29

29th JULY

Summary: The two first euro crisis links are really worth the time. I will take a break for couple of days from these regular updates, have a great weekend. I know there are some regular followers, and it would be nice to get some feedback on what you like and what you would like to see here. Send a mail or leave an anon-comment.

System relies on moral hazard, high integration leads to contagion, lack of governance. Authors see three scenarios: all-it-takes, end of moral hazard or limbo, leading to disorderly end game.
Europe on the Brink – Peterson Institute for International Economics

ex-chief economist from IMF: EU just muddling through, not solving anything.

and Krugman comments the above

Merkel can probably push through the latest bailout in parliament, but the inevitable follow-ups are going to be hard sells.
Subscription required: Germany and the euro: Angela the dragon non-slayer – The Economist

Should the Greek bonds be impaired on balance sheets or not?
Greece as a test for auditors – alphaville / FT

Large part of Germany’s boom is because of demand from the periphery. Nasty feedback cycle that has now collapsed.

Roundup of headlines from NYT, WSJ, CNBC

Rich world governments can’t stop stimulating but can’t add to debt either. Either option could lead to nasty negative feedback.
Running out of options – The Economist

America and Europe are flailing because their leaders are failing. They seem to be too small for the tasks at hand, too petty, and too myopic.”

Fed blog article highlights the U.S.’s GDP diff to real potential GDP and suggests full recovery will take a long time.
Are We There Yet? – Economist’s View



The road to investment losses… – Economic Musings

Experimental markets, elusive equilibrium/steady state and the connection to behavioral finance

Thursday, July 28

28th July LATE

Taboos still left: Eurobonds and reintroduction of national currencies
Europe’s Last Taboos – Project Syndicate

“ seem to be seeing is disaster on the periphery and the Japanification of the core. And I can’t say they’re wrong.”
Eurofail – Krugman / NYT

Nouriel Roubini’s good, concise column: “...quite generous to banks, and does not provide enough enhanced debt sustainability to Greece.”

Long and  somewhat technical piece that is of interest to only headstrong FI people trying to understand Greek bond swap.
A Greek bond swap oddity – alphaville / FT


Highlights Nomura’s piece on what has happened to sov bonds after the AAA’s gets downgraded: yields fall (But is U.S. different?)
Chart of the EveningStone Street Advisors

Chinese credit rating agency says will cut US rating in any case early next week

Long story, briefly: if they can’t solve this when it is peanuts, how can they solve the debt/fiscal mess when in a decade or two it has become serious?

PIMCO’s chief executive and co-chief investment officer
Financial Stability Oversight Council’s 2011 Annual Report actually makes good points (warning about ETF’s, HFT, structured notes, collateralized commercial paper, repo market). I think I’ll read this.

High level of margin debt, just like during previous market tops. I know, I posted the same chart yesterday. But you didn’t check that, did you?
2007 deja Vú? – the trader

Implied volatilities are bearish?
IV Skew Updated - MacroStory

India’s former finance/foreign/defense minister says nothing interesting but admits, as the headline says, that the road currently traveled will not accommodate future growth     
Asia’s BRICs Hit the Wall – Project Syndicate

Highlights from Citi’s piece point to Central and Eastern European countries being at most risk. How about all those cheap CHF mortgages for households?
Emerging Europe and eurozonitis – beyondbrics / FT

“Emerging markets are almost entirely the source of this increased demand, with China accounting for 41 percent of demand growth over that time period, the IEA forecast says”

July 28th EARLY

Notice the search box in the upper right corner on this page. It opens up a selectable tab, which allows you to search all the pages linked from here. Cool, eh?

Summary: yields up, stocks tumble, banks get hit by bad news from the past and the future. Traders postponing holidays to watch the U.S. and probably after that to watch the euro show. Long time to Christmas.

View: Surprised to see that Fed agrees with my previous view on housing, and MS agrees with my yesterday’s private chat with a Head of X on the current ignorance of household debt over the more pressing sovereign trouble. I also don’t like the rising correlations of S&P 500 constituents to the index and am bearish for the next months. Hire me.

Charts of household and non-financial corporation debt levels in euro area countries. Even Germany is deleveraging, but Finnish household are still acting like it’s 1999.

Hoi polloi are not happy with 40% youth unemployment. I wish lots of luck with implementing any kind of austerity programs.

Probably banks will have to recognize large balance sheet impairments on the Greek bond holdings. Includes Citi’s comments and a graph on who holds how much and which maturity.

This should probably be put in ‘Diversion’ J


Includes links to Fed and BIS papers on topic + a Fed presentation. Good read for people not familiar with shadow banking. I guess that makes it everybody.

MS’s report highlights household leverage
Around the world, in leverage – alphaville / FT

New paper surprisingly agrees with my yesterday’s gut feeling call of when housing turns around

ISDA’s FAQ on what, when and who says a credit default has happened (hint from

CAD strengthening, CAD-US yield spread falling: this could continue for a while
Hide in Canada? – Humble Student of The Markets

Credit Suisse Q2 net down 52%, axing jobs, Statement and Report, via FT

China is starting to export inflation and this comes at an inconvenient time for the global macro cycles.

China should move from investment-led model to consumption driven model.

Yes says the post.

Correlation of S&P 500 constituents to the index are rising, again just like in 2nd half 2008, 2nd half 2010. I don’t like the stock market right now.
More S&P 500 correlation – Portfolio Probe

Illiquid assets exist to illustrate high yields to non-knowledgeable and to pay large commissions to providers.
The Costs of Illiquidity — II – The Aleph Blog

The Evolution of Overconfidence – Infectious Greed

Wednesday, July 27

July 27th LATE

Summary: Debt ceiling show continues, Spain/Italy yields up and stocks down to pre-meet levels. U.S. macro disappoints again, big time.

View: When the U.S. situation is cleared, there is no excuse for the euro yield uptick. Then the markets will become really worried. Hire me. I’m still bearish on Brazil.

How come the IMF already warns that they will lower their participation the next time PIIGS come begging, as our beloved eurocrats are publicly fully convinced that everything is now ok? Tons of articles coming out on the euro situation and now everybody and their grandmothers know that euro is a goner.

I think we are reaching a tipping point – anyone long PIIGS risk cannot later explain that they had “sound positions and the unexpected just happened”. Participants will start dumping their holdings right now, since there is no excuse anymore to be caught holding them.

Joke of the day: “With the IMF and the ECB assuming that Greece will have a sustainable primary surplus from 2012, Greece is likely to “master” its debt after implementing economic policy changes”  – German Finance Minister Wolfgang Schaeuble

Holiday season in Europe at least leaves contradictory statements from eurocrats away from the picture. But sometimes

“Bankers and many journalists convey the impression that we face a choice between a full sovereign bailout and a catastrophic banking crisis.”

…but in the same comm he told the joke of the day above, so take his opinion with a lot of salt.

EFSF is massively vulnerable to sovereign default correlation, as we all know, and the stresses are starting to become apparent even in the senior tranches.”

Cumber’s chief economist is polite and thinks at least eurocrats are admitting something, and going in the right direction – but very vaguely doubts if that will be enough.

Ecuador went through a debt buyback in 2008. Well written, with good points: “Only the probability of a default – and the goal of avoiding even deeper haircuts – can induce investors to liquidate their positions at a discount. But the buyback can succeed only if the market perceives it as the last chance before a unilateral debt restructuring.”
 A Greek Catch-22 – Yeyati / Project Syndicate

Interesting – IMF announces that next time they will lower their participation.

In 1979 Treasury missed bill payments because of the debt ceiling show. Dollar dropped only 0.6%.

End futile wars, stop bailouts, prosecute the guilty and repossess their loot, slash pensions, end Bush tax cuts.

ex-Assistant Secretary of Treasury is not saving words. Basically he lists the same points as Big Picture above.
An Economy Destroyed – Paul Roberts via CounterPunch

“Read the writeup, ignore the rating.”
Downgrade Jitters – The Aleph Blog

Before Dodd-Frank CRA’s were exempt from selective disclosure regulations. Now they are not exempted, but are still doing it.

Former member of the monetary policy committee of the Peoples' Bank of China talks about the inflation situation.
China’s Inflation Muddle – Yongding / Project Syndicate

Roach and Roubini: Chinese Have Lost Confidence in America’s ‘Dysfunctional Economic Stewardship’ – EconoMonitor

China’s SMEs: hurting – beyondbrics / FT

China’s plan is to rely on consumers in the future.
Read China’s Lips – Roach / Project Syndicate

Has links and discussion on the household debt situation.

Hedge funds closing to escape Dodd-Frank, family office is the new hedge fund
SAC's Steve Cohen To Close Flagship Fund – Institutional Investor

Ritholtz’s presentation on investing, market cycles and price drivers has few entertaining slides

When 10% of population holds an unshakeable belief, majority will adopt it.

July 27th EARLY

Summary: eurosclerosis, debt ceiling overhang continue, lots of regulatory news. Artemis vol report today's most interesting link.

Shows PIIGS exposure breakdown by country and quarterly evolution

Larry Summers interview


Royal Bank of Canada’s report is pessimistic

Now that there is no risk-free anymore, ideas for purchasing power-preservation
Where to Hide? – The Aleph Blog

Leonhardt’s ‘farewell’ column takes a step back and looks what we know and don’t know about the economy. Bottom line is that there is little consensus in economics how to solve the biggest problems and virtually no political will.


“a system to monitor the behavior of high- frequency trading firms and hedge funds under new reporting standards for the most active market participants”

So now even SEC is a sad panda.

Basel: “sovereign risk should be included in incremental risk capital charge”


“Only solution is higher rates”

Foreign investment in Brazil market dives 70% in first half of 2011, India’s FDI inflows falling
London headlines – beyondbrics FT

Includes a link to Artemis Vol Report

VG short blog on the % of companies that provide no earnings guidance. When the crisis began, the % increased, and during the last 12m bull the % decreased. Now, in Q2, the number suddenly rose to a higher level than ever – this could be bad for stocks and a very interesting indicator for other uses.
No Guidance Is Better Than Bad Guidance – Bespoke Investment Group

One chart: Comparison of 2010 asset allocations of pension funds in different countries. Australia and US equity-heavy, while Koreans have almost zero eq risk.

“The dirty secret of the retail asset management business at brokerage firms is that their profits depend on treating you badly.”

There’s zero accountability in economics – Dean Baker opinion / Reuters
Economic specialization is a feature, not a bug – Larry Summers opinion / Reuters

Douglas ‘Dilbert’ Adams

Tuesday, July 26

July 26th LATE

View: Not much will happen in broad U.S. economy before housing picks up. That is why everybody is so anxious about the housing starts, building permits, new home sales, blah blah. Every tick pushes people to argue that house prices have finally bottomed/still falling/stabilized/politicians’ indecision has made them more volatile. My gut feeling for a major turn in housing is 3-5 years. Just because at that time, everybody in the market will know that housing sector is a dead horse and parents are teaching their kids never to get large mortgages.

$1B outside money, almost $24b of Soros family money.

Nice looking charts from 1995 to now showing how large margin debt and bull peaks go hand-in-hand.

“ISDA is rapidly deteriorating to rating agency status when it comes to credibility”

Long and detailed look at the earnings cycle and where we are now. Bearish.
Converging On The Horizon – Crestmont Research via The Big Picture

Nice charts, quick read

Low yields push people to dubious investments.

Recommended, some very pretty and effective tricks

Practicioners vs. academics connection has been lost, but will it be found?