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Wednesday, August 31

31st Aug Late – Stealth Collateral Damage

Summary:  Today’s earlier post was rich in Euro Crisis links. Now the three Financial Crisis links are really worth the time, and the Nomura research piece (second link) is worth it if you can access it.

MoreLiver’s rules of the game
  1. Never trust a politician with pompous catchphrases or terminology (stability, solidarity, etc.)
  2. It is not going to be different this time, regardless of whatever they try to tell you.
  3. When markets try to tell you something, do not blame the markets nor go to denial. The markets will keep coming back, until you fall down.
  4. When it looks it might not work, it will not work.
  5. Ideology and idealism are not good substitutes for common sense and sound theory.
Views: As I know something about Finland, a word of advice to readers: before the last elections the politicians absolutely promised “no more money to PIIGS without collateral”. If they eat their word, they will be destroyed in the next elections and would actually have to get real jobs. Not happening.

Joke of the day: Angelo Mozilo, June 26, 2008: “Bank of America will reap the benefits of what we have sowed.” – Bank of America paid $2.5 billion to buy Countrywide, but writedowns and legal costs have pushed the estimated cost of that purchase to more than $30 billion.

The balance sheet of the central bank is terrible, and one reason why they oppose bond haircuts.

Government agrees to EFSF increase, but parliament and court still ahead.

What will Merkel promise to get the EFSF increase accepted in the parliament?

LIBORs on the rise

Includes longer background on the negotiations

Banks took €49.4bn loans from ECB. Greek banks are in pains as there is uncertainty whether the Greek government bonds will continue being accepted as collateral by the ECB.   

“entirely brand new black-swan risk, an overnight funding squeeze”
The overnight Black Swan – alphaville FT

Research note from Nomura, very nice summary and list of drivers for “back to school”-period

“Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households”

Interesting thoughts on the origins of stock correlations. Conclusion: “when correlations get too high, act against the direction of the market.”
On High Correlations – The Aleph Blog

Tracks online price data, calculates a daily price index. An almost real-time inflation measure.

The risk of Swiss Franc turning into a carry funding currency given negative interest rates
Carried away in Switzerland – alphaville FT

Spoofing – market manipulation case of SwiftTrade.
28 Day-Traders Later – alphaville FT

Video of a rollercoaster ride up and down the housing prices.
Case Shiller Rollercoaster – The Big Picture

10 years after, 38 past articles from the magazine.

31st Aug Early – PIIGS-hit II: Revenge of the Hellenic Banks

Christian Noyer, joke of the month
Summary: Latest suggestion is to use the Greek bank stocks as collateral for the bailout “loans”. Eurocrats publically in total denial of the banking crisis. Very good euro links today, and the Scholes lecture video posted under diversion is worth the time.

Views: Range trade: Buy EURUSD at-the-market 1.4440, stop 1.4370 target 1.4520. The news just keep getting crazier every day. I’m speechless. Perhaps I’ll comment something later today.

Joke of the Day: "Either she had been misinformed by her staff at the IMF - that's a possibility- or she did not have French banks in mind” – Bank of France governor Christian Noyer rejecting IMF chief Lagarde’s statement that EU banks are in urgent need of recapitalization. Read this for more Noyer-laughs.


EFSF vote in German parliament is moved – new date 29th

Very good euro crisis commentary

“clear causal chain produced by a series of missed opportunities.”

Banks’ buying spree after adoption of euro, then full transfer to less risky (sov’s), which has become most risky. Check mate.
Euro splurge! – alphaville FT

We all know why.

“The squabbling over the Greek bailout shows just how unlikely it is that Europe can solve its greater problems.”
Is the Greek bailout falling apart? – The Curious Capitalist / TIME

EFSF suggests Greek bank share would be used as collateral.
Greek Tragedy: Is This A Joke? – Also Sprach Analyst

EU budget in works: Poland wants "bold" budget 2014 to 2020 to boost growth
Nothing was done during the bull market. ”There are no good solutions now.  Bail out this, bail out that. Eventually there will be a fail of some sort.  I just don’t know what, when or how.”
Missed Opportunities – The Aleph Blog

Repo markets going silent

If the Zero Hedge’s version is not suitable for your sense of self, FT’s take on GS research note:
Goldman’s Q(E3)&A – alphaville FT

Just because I’m a fan of the Saturday Night Live sketch ‘more cowbell’
No More Cowbell – Advisor Perspectives

Economist from Dutch central bank: moral hazard ahoy.

After the rumors, confirmation of the ExxonMobil & Rosneft co-op.

Morgan Stanley calculates the external funding needs over the coming years and compares them to current FX reserves. Many other countries look dangerous as well.
Myron Scholes video presentation, recommended.
Quantitative Finance and the Intermediation Process – Lindau meet of Nobel laureates

Joseph Stiglitz video lecture: macro models, monetary authorities, market liberals have failed. Capital controls would lessen contagion risks and thus lower volatility
Imagining an Economics that Works – Lindau meet of Nobel laureates

NBIM Financial Research Conference’s opening speech by central bank governor

On the risk aversion of Nobel Committee, future of econ etc.
Nobel conclusions – Economics Intelligence

The Limits of Engineering – of two minds

An essay from Der Spiegel translated. Arab Spring’s European version coming?

Tuesday, August 30

30th Aug - PIIGS-hit on Buffett's birthday

Happy birthday, Warren Buffett! Here’s the mandatory cake. I have these cheeseburgers and a Diet Coke, it would be an honor to discuss the incredible opportunities currently emerging in the international debt market and the high volatility of index puts. Just five minutes, please, here, let me help myself into your bathtub.

Summary: Italian bond auction was not that hot, and Europe started to rot again. U.S. consumer confidence was bad, but that was more or less expected the way things have been. Funny how everyone else but Rehn and Trichet are worried about the eurobanks. Or actually sad.  Read the first two Euro Crisis links, especially the second one. It is obvious that there is still tons of PIIGS-hit (© MoreLiver 2011) in the balance sheets of the European banks, and it will hit the fan some day. By the way, Czechs just released their own stress test results. They were real men and not some wimpy van Rompuy-kind of eurocrats, they actually marked down PIIGS debt to zero!

Views: Another Arab Spring-type of a moment brewing in Belarus?

Bean counters complain that PIIGS-hit is not accounted for at going price                                         

’cause a 30 per cent loss on assets equivalent to 8 per cent of Core Tier 1 would have reduced capital by, oh, 2.4 per cent. (BNP posted a Core Tier 1 common equity ratio of 9.6 per cent).

With comments from 5 banks

Klaus Regling, CEO of EFSF interviewed

Deutsche Bank’s idea of “Eurobonds” that could circumvent the EU Treaty issues. Stealth Eurobond?

These I raise my hat to – when the Czechs stress test, they mark PIIGS to zero!

“European politicians signaled Tuesday that there is no quick fix to the row over Finland's insistence on receiving collateral for taking part in Greece's second bailout, even as the European Commission insisted talks were yielding progress.”

“It’s 2008 all over again”. No new points, but ok summary. This will be read in Washington, D.C.

“It’s our aim to come out of this stronger than we went into it, as we did during the banking crisis. I said that in 2009, and look at where the economy is in 2011. This can be achieved again.”

“Euro must be saved, breakup bad”-article. This has already been seen.
Europe’s Shaky Foundations – Project Syndicate

“Slowing Growth in Europe Increases the Risk of a Double Dip”-report.

Thanks to whistleblower, enough ammo to terminate the SEC and construct a new regulatory watchdog for Wall Street free of obvious conflicts of interest.

1) Extension of QE to e.g. private sector securities, 2) much larger QE with a specific yield target 3) change in Fed’s policy targets.

Negative real bond yields. If we can think of any investments we can make over the next seven years that have a return of zero% or more, it would be foolish not to borrow this money and make them.

Robert Shiller: Raise the taxes, raise public spending and create a government agency for public works, to be launched when economy warrants them (like now), just like in 1941.

Only a day after RBS said they don’t want to help them raise money. I suggested then that perhaps this was not only because of RBS’s good soul but perhaps the unmarketability of just another “El Presidente”-country’s bonds

Exxon Mobil executives meeting Putin, top managers from Rosneft in a Black Sea resort

September Investment Outlook

“what will be most important is just handful of decisions that have a disproportionately large impact on the outcome of the portfolio.”

How the banks and the neoliberals got away with it, again, and managed to put the blame on evil governments.

5 minute video for people who do not know what they are

Interesting article – the data comes too late, is revised a lot and the policy mechanisms have a delayed effect, making navigating the crisis very hard.

Text and 1hr video of a talk with Jaron Lanier
Here’s an intro to and a summary of the talk for lazy or busy people:

CIA’s report on the fiasco is now public after 50 years.

30th Aug EARLY - CEE no euro, hear no crisis

Summary: ECB signals easier monetary policy, Trichet and Rehn lie that European banks have sufficient capital and liquidity, BoA and Iceland went to China for money. The CEE countries are increasingly becoming disinterested in the euro process. A while back Polish and Czechs have criticized the euro as the reason for the current crisis, and have stated they have no interest in joining a transfer union and are not in a hurry to decide at the moment.

Joke of the Day: "There is no liquidity or collateral shortage for the European banking system" – ECB’s Trichet speaking to European Parliament yesterday

Nice roundup of the euro situation, and not the first time I’ve liked Simon Derrick’s pieces.
Morning Briefing – BNY Mellon

Czech participation in the euro zone as "not an issue," blamed the euro for the financial crisis now roiling Europe.

Trichet and Rehn state that banks have sufficient liquidity and capital.


WSJ and CNBC both note the high corr and talk to GS, Credit Suisse about it

30min video interview on Wealthtrack, talks about feedback loops, bearish on stocks, housing
Deep Thought from Robert Shiller – Pragmatic Capitalism

The upmove in stocks is not confirmed by a drop in VIX – probably the low-volume move higher is just correction.

Has a scribd-link to the book “The Essays of Warren Buffett”

Recommended: has a link to a pdf file collecting all his posts to a book.


China-Icelandic markets in everything – Marginal Revolution

Monday, August 29

29th Aug LATE - Risk on - for a day?

Summary: Risk on: Stocks rally, yields rally, USD, CHF and JPY weaker. Greek stocks went bananas after the bank merger. ECB has lightened up on bond buying. I have not bothered to put in links to the negotiations between Finland and everyone else on the Greek collateral, as the bailout will happen just as planned. Instead, there is a big list of interesting reads on the stock market. In the “Other”, there is a link to an interesting study finding seasonal patterns in mutual fund flows.

Views: Both US bond yields and stock market are approaching resistance levels. A lot of this is risk-on appetite after the Jackson Hole (a rave party to central bankers, though only IMF partied hard) and Irene (which didn’t rock at all). Temporary?

Joke of the Day: After the previous Portugal is not Greece, U.S. is not Portugal, Greece is not Italy, we now have "the ECB is not the Fed", from Monsieur Trichet.

Joke of the Day II: "Any institution that requires society to come in and bail it out for society's sake should have a system in place that leaves its CEO and his spouse dead broke" – Warren Buffet 2011, followed by W.B.’s own bailout of BoA after U.S. had bailed it out once.

Political leaders dismiss the need to force-capitalize banks

“European elites must decide if they want the euro to survive”, "We have a simple choice: Solidarity or the collapse of Europe.", Poland will not join euro until it’s earthquake-proof.

“If the euro area is to be saved, it will not be enough to reshape other members in its own image. Germany will have to change, too.”

Only €6.651bn of bond buys last week, “but purchases take 2-3 days to settle, meaning the weekly figures do not necessarily give the full picture”. Estimate of Greek bond holdings €45bn

ING: “Credibility is the reason why central banks fret about losses, not solvency. Finally, we should not kid ourselves into thinking that siphoning off losses to the central bank makes them disappear. One way or another, losses incurred by the central bank will end up on the taxpayer’s plate,”

If the GDP would be deflated with CPI, the recession would already be confirmed

Selected paper clippings from the rave party for central bankers
The Jackson Hole papers – alphaville FT

“In the absence of policy intervention, the path of least resistance for equities is down”
Not too late to buy the long bond – Humble Student of The Markets

Quantitative Desk Strategies report from 22nd August: high correlations, volatility structure, depression-like pricing suggest bottom near.

Stock correlations very high, good points why (ETFs, less structured products)

Very good charts from J.P. Morgan Funds.
Deploying Corporate Cash – The Big Picture

Is the S&P500 Cheap? – The Big Picture

Royal Bank of Scotland does not want to do business with Belarus. A bank with a soul or a country with bonds nobody wants?
Belarus: RBS jumps ship – beyondbrics FT

The seasonal return pattern in stocks is confirmed by mutual fund flow data. It is stronger in Canada (up north) than US, and reverse in Australia, suggesting that seasonal affective disorder is behind it.
Upside in bonds limited: “The natural constraints of an investment style or strategy can be too easily ignored.  Your due diligence processes should involve looking for and thinking about those constraints at every turn and your selection of managers should be limited to those that admit that they exist.”
bond math – The Research Puzzle


Jeffrey Sachs’ piece. “The mad pursuit of corporate profits is threatening us all.”
The Economics of Happiness – Project Syndicate

29th Aug EARLY - Gameplan changed, or end of the world?

EURUSD is happy higher. Breakout coming?
Summary: Huge amount of material to read, even after the two updates during the weekend. European situation is escalating: EFSF trouble, euro interbank crisis, and strange rumors that forced increase of eurobanks’ capitalization is in the works. I added a new subpage "Best", I'll put some of the more timeless and more interesting links from the daily posts there.

Views: Maybe the rumors were leaked to test the idea, and against that backdrop the recent uptick in EURUSD could be explainable. Currency pairs over the past few weeks have suggested we are not anymore in the "risk-off" mode, but at the same time stock markets have not rallied. Either the correlations are breaking down, or the best the bond- and stock markets can do in "risk-on"-mode is to stay unchanged. So it's either a catastrophe waiting to happen or the game plan has changed.

Without citing sources, Sunday Times said officials from the ECB and EC are considering offering central guarantees over certain types of debt issued by banks.
Barclays looks at data and suggests that bank funding trouble is NOT contained to only few names. The banks have just been careful not to go after more expensive funding – but that cannot last forever.

European debt crisis worse, banks in problems, money markets seizing up. “This time it will be different”, as there is not enough money to bail out everyone.

On Sep 23 Germany votes on the EFSF expansion

“Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga.”

Very good roundup by the author of “Europe on the Brink”.

Nasty: Trichet was saying nothing important on anything important at Jackson Hole

Probably not worth your time, main point is that ECB has been too hawkish all the time.
Europe’s Big Mistake – The New Yorker

Roundup of the Jackson Hole meeting

Highly recommended bullet point list. There is not a single point here that I would disagree with.

An article on Washington Post after the Buffett’s bailout of BoA. Suggestion is “Go Swedish”

Trade did not remain as open as is often suggested – and this points to increased dangers of protectionism if crises escalate.

Banks officially complain about the planned capital requirement increases – my view: there is no limit how evil and full of moral hazard the banks can be.

Goldman Sachs’s weekly charts package is definitely worth a look.

Most of the so-called software companies are actually something else
The “software company” bubble – This is the Green Room


Summary of HSBC’s report “Can Asia Save the World”


Interesting way to chart an industry – worth checking out
Mobile phone market dynamics – Can Turtles Fly

Sunday, August 28

28th Aug - Weekend Readings II

Summary: Categories getting blurred as feedback effects are getting stronger. I believe my choice of trying to bloglink “everything” is now a good choice, though this is a lot of work. Beginning week, euro interbank markets and the U.S. payrolls on Friday (followed by a presidential address) will be watched closely. Long weekend coming up because of the U.S. holiday on Sep 4th, so I expect position adjusting towards the end of the week. This might be either a risk-on or risk-off event, depending on the then-current taste and feel.

also take a peek at FT’s beyondbrics, for EM calendar, to be published later on Sunday.

Greece’s second- and third-largest lenders merge. This might mitigate risks of banking runs escalating.

As funding becomes more short-term, the amounts to be rolled become larger. One way out of the mess is exploiting low share prices and buying deposit-rich retail banks.

Full copy of Goldman Sachs’ “The Charts That Matter Next Week” included. Good look at the interest rate markets as well.

IMF head at Jackson Hole: “World economy entering a dangerous new phase driven by sense that policy makers do not have conviction to take decisions that are needed.”, followed by a to-do list
The world economy: A call to arms – Free exchange / The Economist

At the Jackson Hole symposium, ECB head does not surprise

Efficient: light balance sheet, risk of failure. Stable: heavy balance sheet, capital not at work.

John Mauldin’s latest sees recession, ponders the euro crisis and notices the Fed demographics paper. Nothing new to my followers.
The End of the World, Part 1 – Advisor Perspectives

Optimistic scenario for U.S.: full recovery not until 2017, but even a drop from the projected 3.5% p.a. growth to 3.0% would push the date to 2020.

Has a link to the annual survey of tech trends in FX by Streambase

In reference to the posts here

Very interesting article

nice video of the universe
The Known Universe – The Big Picture

Why Are Finland's Schools Successful? – Smithsonian / September

Coming in second or third and out-competing the original innovator is the win.