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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